It's super secure and slightly hard to understand, but the idea of creating tamper-proof databases has captured the attention of everyone from anarchist techies to staid bankers.
DEPENDING ON WHO you ask, blockchains are either the most important technological innovation since the internet or a solution looking for a problem.
The original blockchain is the decentralized ledger behind the digital currency bitcoin. The ledger consists of linked batches of transactions known as blocks (hence the term blockchain), and an identical copy is stored on each of the roughly 200,000computers that make up the bitcoin network. Each change to the ledger is cryptographically signed to prove that the person transferring virtual coins is the actual owner of those coins. But no one can spend their coins twice, because once a transaction is recorded in the ledger, every node in the network will know about it.
The idea is to both keep track of how each unit of the virtual currency is spent and prevent unauthorized changes to the ledger. The upshot: No bitcoin user has to trust anyone else, because no one can cheat the system.
Other digital currencies have imitated this basic idea, often trying to solve perceived problems with bitcoin by building new cryptocurrencies on new blockchains. But advocates have seized on the idea of a decentralized, cryptographically secure database for uses beyond currency. Its biggest boosters believe blockchains can not only replace central banks but usher in a new era of online services outside the control of internet giants like Facebook and Google. These new-age apps would be impossible to censor, advocates say, and would be more answerable to users.
Meanwhile, despite the fact that bitcoin was originally best known for enabling illicit drug sales over the internet, blockchains are finding acceptance in some of the world's largest companies. Some big financial services companies, including JP Morgan and the Depository Trust & Clearing Corporation, are experimenting with blockchains and blockchain-like technologies to improve the efficiency of trading stocks and other assets. Traders buy and sell stocks rapidly, but the behind-the-scenes process of transferring ownership of those assets can take days. Some technologists believe blockchains could help with that.
The First Blockchain
The original bitcoin software was released to the public in January 2009. It was open source software, meaning anyone could examine the code and reuse it. And many have. At first, blockchain enthusiasts sought to simply improve on bitcoin. Litecoin, another virtual currency based on the bitcoin software, seeks to offer faster transactions.
One of the first projects to repurpose the bitcoin code to use it for more than currency was Namecoin, a system for registering ".bit" domain names. The traditional domain-name management system—the one that helps your computer find our website when you type wired.com—depends on a central database, essentially an address book for the internet. Internet-freedom activists have long worried that this traditional approach makes censorship too easy, because governments can seize a domain name by forcing the company responsible for registering it to change the central database. The US government has done this several times to shut sites accused of violating gambling or intellectual-property laws.
Namecoin tries to solve this problem by storing .bit domain registrations in a blockchain, which theoretically makes it impossible for anyone without the encryption key to change the registration information. To seize a .bit domain name, a government would have to find the person responsible for the site and force them to hand over the key.
Bitcoin’s software wasn’t designed to handle other types of applications. In 2013, a startup called Ethereum published a paper outlining an idea that promised to make it easier for coders to create their own blockchain-based software without having to start from scratch, without relying on the original bitcoin software. In 2015 the company released its platform for building “smart contracts,” software applications that can enforce an agreement without human intervention. For example, you could create a smart contract to bet on tomorrow’s weather. You and your gambling partner would upload the contract to the Ethereum network and then send a little digital currency, which the software would essentially hold in escrow. The next day, the software would check the weather and then send the winner their earnings. At least two major "prediction markets" have been built on the platform, enabling people to bet on more interesting outcomes, such as which political party will win an election.
So long as the software is written correctly, there's no need to trust anyone in these transactions. But that turns out to be a big catch. In 2016 a hacker made off with about $50 million worth of Ethereum's custom currency intended for a democratized investment scheme where investors would pool their money and vote on how to invest it. A coding error allowed a still unknown person to make off with the virtual cash. Lesson: It's hard to remove humans from transactions, with or without a blockchain.
Even as cryptography geeks plotted to use blockchains to topple, or at least bypass, big banks, the financial sector began its own experiments with blockchains. In 2015, some of the largest financial institutions in the world, including JP Morgan, the Bank of England, and the Depository Trust & Clearing Corporation (DTCC), announced that they would collaborate on open source blockchain software under the name Hyperledger. Several pieces of software have been released under the Hyperledger umbrella, including Sawtooth, created by Intel for building custom blockchains.
The industry is already experimenting with using blockchains to make security trades more efficient. Nasdaq OMX, the company behind the Nasdaq stock exchange, began allowing private companies to use blockchains to manage shares in 2015, starting with a company called Chain. Similarly, the Australian Securities Exchange announced a deal to use blockchain technology from a Goldman Sachs-backed startup called Digital Asset Holdings to power the post-trade processes of Australia’s equity market.
The Future of Blockchain
Despite the blockchain hype—and many experiments—there’s still no "killer app" for the technology beyond currency speculation. And while auditors might like the idea of immutable records, as a society we don't always want records to be permanent.
Blockchain proponents admit that it could take a while for the technology to catch on. After all, the internet's foundational technologies were created in the 1960s, but it took decades for the internet to become ubiquitous.
That said, the idea could eventually show up in lots of places. For example, your digital identity could be tied to a token on a blockchain. You could then use that token to log in to apps, open bank accounts, apply for jobs, or prove that your emails or social-media messages are really from you. Future social networks might be built on connected smart contracts that show your posts only to certain people or enable people who create popular content to be paid in cryptocurrencies. Perhaps the most radical idea is using blockchains to handle voting. The team behind the open source project Soverign built a platform that organizations, companies, and even governments can already use to gather votes on a blockchain.
Advocates believe blockchains can help automate many tasks now handled by lawyers or other professionals. For example, your will might be stored in a blockchain. Or perhaps your will could be a smart contract that will automatically dole out your money to your heirs. Or maybe blockchains will replace notaries.
It's also entirely possible that blockchains will evolve into something completely different. Many of the financial industry's experiments involve "private" blockchains that run on servers within a single company and selected partners. In contrast, anyone can run bitcoin or Ethereum software on their computer and view all of the transactions recorded on the networks’ respective blockchains. But big companies prefer to keep their data in the hands of a few employees, partners, and perhaps regulators.
Bitcoin proved that it’s possible to build an online service that operates outside the control of any one company or organization. The task for blockchain advocates now is proving that that’s actually a good thing.