At this time, when you say “blockchain,” you do two things: roll your eyes and get fired or enjoy the opportunity to make quick money. But it doesn’t have to be either/or. The system that powers Bitcoin can take power from central banks, create trust in supply chains, and control ownership of the process, but it can also be a void between chaos and hype, a technology in search of a job.
The original blockchain is the underlying ledger behind the digital currency bitcoin. This ledger consists of interconnected groups known as blocks, and an identical copy is stored on the approximately 60,000 computers that make up the Bitcoin network. Every change to the ledger is signed privately to confirm that the person transferring the bitcoins is the owner. No one can spend money twice because once a transaction is recorded in the ledger, every node in the network will know about it.
The result: No Bitcoin user has to trust anyone else because no one can hack the system.
Other digital currencies have imitated this basic idea, often trying to solve the problems seen with Bitcoin by building cryptocurrencies on new blockchains. But some think that the real technology is not a digital currency but a fixed book, cryptographically protected, believing that the blockchain can usher in a new era of online services that cannot be audited; explore clearly the nature of fish, salt, and Rolex watches; and changes to voting, contracts and the advent of the metaverse, everything else.
Variable ledgers also have advantages in business. Big banks are experimenting with private blockchains to improve transactions while maintaining trust, organizations are pursuing internal compliance, and retailers are cleaning up the supply chain. But with a few notable exceptions, these use cases remain experimental or small-scale experiments rather than transformative for business use of blockchain.
And there are no surprises. Everything that touches the world of cryptocurrency is full of confusion. The price of bitcoin jumped from $5,600 in 2020 to $48,000 in 2021 before falling to $13,600 in 2022; whether it is going up or down changes from month to month, although the price is much higher than many expected a few years ago.
Some cryptocurrencies turned out to be little more than pyramid schemes, where thieves stole millions from crypto traders. Even stablecoins pegged to the dollar have stumbled, as have those backed by industry giants – Facebook’s Libra is slated to close in 2022 after many years. Meanwhile, ideas like ICOs and NFTs make millions for some and perish amid fraud cases before disappearing.
Then scandals like FTX hit. The cryptocurrency exchange collapsed in November 2022, billions of customer funds were missing, and it sparked a fraud investigation that led to the arrest of Sam Bankman-Fried.
Even before the FTX crash, the crypto industry was affected by a crisis of confidence, with the erosion of morale leading to the removal of industry leaders such as Coinbase. Some may argue that this is the death of an idea that has never found its feet, but it may be a painful experience in the face of cryptocurrencies and a distributed ledger that make them stable and find a real purpose.
It is too early to say which test, if any, will be followed: dividend payments or corporate tracking? Secure fixed contracts or follow the chain? Digital voting or visual art in the metaverse? Business ledgers or public blockchains? But the idea of creating evidence-free databases has caught the attention of everyone from anarchist techies to staid bankers.
The First Blockchain
The original Bitcoin software was released to the public in January 2009. It was open source, meaning that anyone could look at the code and use it again.
And many have. At first, blockchain enthusiasts only wanted to replace Bitcoin. Litecoin, another virtual currency based on Bitcoin’s software, aims to provide fast updates. One of the first projects to restore blockchain to more than money was Namecoin, a system for registering “.bit” domain names that avoids government scrutiny.
Namecoin attempts to solve this problem by storing .bit domain registrations in the blockchain, making it impossible for anyone without the encryption key to change the registration information. To get a .bit domain name, the government must find the person responsible for the site and force them to hand over the password. Some coins, also known as altcoins, were more limited in nature – most notably the famous meme DogeCoin.
In 2013, the founders of Ethereum published a paper describing a concept that promised to make it easier for coders to create their own blockchain applications without starting from scratch or relying on the original Bitcoin software.
This led people to stop using cash. Two years later, Ethereum unveiled its platform for “smart contracts,” software programs that can enforce agreements without human intervention. For example, you can create a smart contract to bet on the next season. You and your fellow gambler can upload a contract to the Ethereum network and send a small amount of digital currency, which the app will hold in escrow. The next day, the program checks the weather and sends the winner their money. Several “prediction markets” have been built into the platform, allowing people to bet on interesting outcomes, such as which political party will win an election.
As long as the program is written correctly, there is no need to trust anyone in these activities. But it’s as big as. In 2016, a hacker made about $50 million worth of Ethereum coins that are designed to be a democratic system in which investors pool their money and vote on how to sell it. A code error resulted in an unknown person walking away with real money. Lesson: It’s hard to get people off the market, with or without blockchain.
ICO Boom and Crash
And then came the ICO gold rush. Ethereum and other blockchain projects raised money through a controversial transaction called an “initial coin offering.” In an ICO, creators of a new digital currency sell other coins, often before completing the software and technology behind it.
The idea is that investors can get in early while giving developers money to complete the technology. The reason is that these offerings have been operating outside of the policies that protect investors.