At this stage, when you say “blockchain” you get two reactions: eye rolls and getting fired or excited about the opportunity to make a quick buck. But not necessarily either/or. The system that Bitcoin runs on can siphon power from central banks, build trust in supply chains, and manage property in the metaverse, but it can also collapse into nothingness amidst the chaos and hype of a technology that is looking for a use case.
The original blockchain is a decentralized ledger of the digital currency bitcoin. The ledger consists of linked batches of transactions, known as blocks, with an identical copy stored in each of approximately 60,000 computers that make up the Bitcoin network. Each change to the ledger is cryptographically signed to prove that the person transferring bitcoins is the actual owner. No one can spend coins twice, because once the transaction is registered in the ledger, every node in the network will know about it.
As a result, no bitcoin user should trust anyone else because no one can fool the system.
Other digital currencies have emulated this basic idea, often trying to solve perceived problems with bitcoin by creating cryptocurrencies on new blockchains. But some believe that the real innovation is not a digital currency, but a decentralized, cryptographically secure ledger, believing that the blockchain can usher in a new era of online services that cannot be censored; transparently trace the origin of fish, minerals and Rolex watches; and securely digitize voting, contracts, and, with the advent of the metaverse, everything else.
Immutable registries also have business benefits. Major banks are testing private blockchains to improve trading efficiency while maintaining trust, corporations are monitoring internal compliance, and retailers are tidying up supply chains. But, with a few notable exceptions, these use cases remain limited trials or experiments rather than a real transition to using blockchain in business.
And no wonder. Everything that concerns the world of cryptocurrency has a sheen of chaos. The price of bitcoin jumped from $5,600 in 2020 to $48,000 in 2021 before dropping to $13,600 in 2022; whether it’s going up or spiraling varies from month to month, although its value is undoubtedly higher than many expected just a few years ago.
Some cryptocurrencies turned out to be nothing more than pyramid schemes, and hackers successfully stole millions from crypto traders. Even dollar-pegged stablecoins have faltered, as have those backed by industry giants. Scales was malfunction in 2022 after years of failure. Meanwhile, ideas like ICOs and NFTs make millions for some and fail amid allegations of fraud before disappearing from view.
And then there were scandals like FTX. The cryptocurrency exchange collapsed in November 2022 when billions of customer funds went missing, triggering a criminal fraud investigation that resulted in the arrest of co-founder Sam Bankman-Fried.
Even before the FTX scandal, the crypto industry was suffering from a crisis of confidence. collapsing values causing layoffs from industry leaders like Coinbase. Some might argue that this is the death throes of an idea that never got off the ground, but it could just be growing pains before cryptocurrencies and the distributed ledger that powers them settle down and find some real purpose.
It is too early to say what experiments will catch on, if at all: decentralized money or corporate compliance? Automated secure contracts or supply chain tracking? Digital voting or virtual art in the metaverse? Private corporate ledgers or public decentralized blockchains? But the idea of creating tamper-proof databases caught the attention of everyone from anarchist techies to solid bankers.
The original Bitcoin software was released to the general public in January 2009. It was open source, which means that anyone could study the code and reuse it.
And many have. At first, blockchain enthusiasts aimed simply to improve Bitcoin. Litecoin, another virtual currency based on the Bitcoin software, aims to offer faster transactions. One of the first projects that repurposed blockchain not only for currency was Namecoin“.bit” domain name registration system to avoid government censorship.
Namecoin attempts to solve this problem by storing .bit domain registrations on the blockchain, making it theoretically impossible for anyone to change registration information without an encryption key. To confiscate a .bit domain name, the government must find the person in charge of the site and force him to hand over the key. Other coins, also known as altcoins, were less serious in nature – notably the popular meme-based DogeCoin.
In 2013, a startup called Ethereum published a paper laying out an idea that promised to make it easier for programmers to build their own blockchain-based software without having to start from scratch or rely on the original Bitcoin software.
This caused a move away from currency-only applications. Two years later, Ethereum introduced its platform for smart contracts, software applications that can enforce an agreement without human intervention. For example, you can create a smart contract to bet on tomorrow’s weather. You and your gambling partner uploaded a contract to the Ethereum network and then sent a small digital currency, which the program essentially held in escrow. The next day, the program checked the weather and sent the winnings to the winner. Several “prediction markets” have been created on the platform, allowing people to bet on more interesting outcomes, such as which political party will win an election.
As long as the software is written correctly, there is no need to trust anyone in these transactions. But it turns out to be a big if. In 2016, a hacker got away with about $50 million worth of user-created Ethereum currency, intended for a democratized investment system in which investors pooled their money and voted on how to invest it. A coding error allowed an unknown person to escape with virtual money. Lesson: It’s hard to exclude people from transactions, with or without blockchain.
The boom and bust of ICOs
And then the ICO gold rush began. Ethereum and other blockchain-based projects have been raising funds through a controversial practice called “initial coin offerings.” In ICOs, the creators of new digital currencies sell a certain amount of the currency, usually before they have finished working on the software and technology behind it.
The idea is that investors can get into the game earlier by giving developers the funds to refine the technology. The catch is that these proposals have traditionally operated outside of a regulatory framework designed to protect investors.