KLINT FINLEY GREGORY BARBER
BUSINESS
07.09.2019 08:00 AM
The WIRED Guide to the
Blockchain
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.
https://www.wired.com/story/guide-blockchain/
you ask, blockchains are either the most important
D E P E N D IN G ON W H O
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 60,000 computers 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.
Who paved the way for blockchains?
DigiCash (1989)
DigiCash was founded by David Chaum to create a digital-currency system that enabled users to
make untraceable, anonymous transactions. It was perhaps too early for its time. It went
bankrupt in 1998, just as ecommerce was finally taking off.
E-Gold (1996)
E-gold was a digital currency backed by real gold. The company was plagued by legal troubles, and
its founder Douglas Jackson eventually pled guilty to operating an illegal money-transfer service
and conspiracy to commit money laundering.
B-Money and Bit-Gold (1998)
Cryptographers Wei Dai (B-money) and Nick Szabo (Bit-gold) each proposed separate but similar
decentralized currency systems with a limited supply of digital money issued to people who devoted
computing resources.
Ripple Pay (2004)
Now a cryptocurrency, Ripple started out as a system for exchanging digital IOUs between trusted
parties.
Reusable Proofs of Work (RPOW) (2004)
RPOW was a prototype of a system for issuing tokens that could be traded with others in exchange
for computing intensive work. It was inspired in part by Bit-gold and created by bitcoin's second
user, Hal Finney.
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 that would be
impossible to censor. These new-age apps, advocates say, would be
more answerable to users and outside the control of internet giants like
Google and Facebook.
Unless, of course, Facebook runs away with the idea itself. In
June, Facebook announced Libra, a new blockchain that will support a
digital currency. Unlike the thousands of anybodys who run Bitcoin
nodes, it will be controlled by an association comprised of just 100
companies and NGOs. Libra is certainly a challenge to central banks,
not least because it’s a privately controlled monetary system that will
span the globe. But replacing government with corporations is not
exactly the revolution that enthusiasts imagined blockchain would bring.
So far, the crypto community is divided on whether Libra is a good
thing. Some see Facebook’s effort as a corruption of a technology
designed to ensure that you don’t need to trust your fellow users---or
any central authority. Others are celebrating it as the moment that
blockchain goes mainstream.
Other so-called “private” blockchains, like Libra, are growing in
popularity. 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
using current technology, of course, but the behind-the-scenes process
of transferring ownership of those assets can take days. Some
technologists believe blockchains could help with that.
Blockchains also have potential applications in the seemingly boring
world of corporate compliance. After all, storing records in an
immutable ledger is a pretty good way to assure auditors that those
records haven't been tampered with. This might be good for more than
just catching embezzlers or tax cheats. Walmart, for example, is using
an IBM-developed blockchain to track its supply chain, which could help
it trace the source of food contaminants. Many other experiments have
emerged: Voting on the blockchain. Land records. Used cars. Real
estate. Streaming content. Hence the phrase “xxx on the blockchain” as
a catch-all for the enduring hype cycle. The question is, if one
organization (say, Walmart) has control of the data, did it really need
blockchain at all?
It's too early to say which experiments will stick. But the idea of creating
tamper-proof databases has captured 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 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.
What's an "ICO"?
Ethereum and other blockchain-based projects have raised funds through a controversial practice
called an "initial coin offering," or ICO: The creators of new digital currencies sell a certain amount
of the currency, usually before they’ve finished the software and technology that underpins it. The
idea is that investors can get in early while giving developers the funds to finish the tech. The catch
is that these offerings have traditionally operated outside the regulatory framework meant to protect
investors. Since the first tidal wave of ICOs in 2017, the SEC has said that virtually all violated
securities law. Newer companies are increasingly looking for regulatory loopholes: a more common
practice these days to raise money the traditional way (through VCs) and “airdrop” coins to users
for free.
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. A number of
"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.
Blockchains had other limitations, too. The security protocols that allow
people to trust blockchain systems without a central overseer are
notoriously slow (not to mention energy-intensive). Ethereum gave
developers the tools to write applications, but the tech couldn’t yet
handle the fancy graphics of your new decentralized computer game or
the volume of users needed to make your open social network useful.
Dozens of competitors have since hatched out of academic labs and
start-ups, each purporting to have a novel technical solutions.
Ethereum is working on scaling up its technology too. But so far, no
clear winner has broken through.
That sluggishness also gave an opening to corporate blockchains. Even
as cryptography geeks plotted to use blockchains to topple, or at least
bypass, big business, the big guys began their own experiments with
blockchains. Many corporate 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 regulators. Private
blockchains are also substantially faster because they don’t require the
intensive security protocols used by Bitcoin and Ethereum. Tech firms
like IBM and Intel offer private blockchains to companies interested in
things like supply chain tracking.
Recently, there’s also been renewed interest in using private
blockchains to fulfill its initial use case: buying things. While the dream
of using Bitcoin as a medium of exchange has largely died out, due to
high transaction costs and extreme volatility, some have been
interested in using private blockchains to support “stablecoins”---
cryptocurrencies pegged to real-world assets. JP Morgan recently
announced Quorum, its private blockchain, would start supporting such
a coin. And then, in June, Facebook announced Libra.
The Future of Blockchain
Despite the blockchain hype---and many experiments---there’s still no
"killer app" for the technology beyond speculation and (maybe)
payments. 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, projects like Facebook’s Libra, which is supposed to launch
in 2020, indicate the technology is here to stay, but perhaps not in the
form its early champions imagined. Libra is designed to enable users to
make payments, with a “stablecoin” that will be backed by a number of
real-world assets. The idea is to initially support things like cross-border
payments and in-app purchases. But it could also be the starting point
for building out all sorts of blockchain-based applications. For example,
Facebook says it’s interested in exploring things like digital identity tied
to the Libra blockchain. At some point, you might use that identity to log
in to apps, open bank accounts, apply for jobs, or prove that your
emails or social-media messages are really from you.
Those services could also be built on one of the original “public”
blockchains, which continue to evolve. Ethereum is currently trying to
move from the slow, energy-intensive security scheme it has historically
been to a sleeker approach that could make the platform more useful.
Bitcoin has the Lightning Network, an experimental technology that
enables cheaper payments by cutting down on some of the intensive
computations. Even Facebook has promised to begin moving Libra
toward a truly decentralized model within the next five years, pending
technological breakthroughs.
Advocates are particularly excited about the possibility of building other
financial services directly on the blockchain, an area known as
“decentralized finance,” or DeFi. Smart contracts could be used to issue
peer-to-peer loans, for example, without an overseeing authority, or
even handle more complicated applications like insurance. Some
believe blockchains can also 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.
