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At this stage, Say “blockchain” and you’ll get two reactions: eye-rolling and dismissal, or eagerness to make a quick buck. But it doesn’t have to be. The system that powers Bitcoin generates power from central banks, builds trust in supply chains, and manages ownership in the metaverse, but it can devolve into nothingness amid the chaos and clamor of a technology that needs a use case.
The original blockchain was the decentralized ledger behind the digital currency Bitcoin. The ledger consists of linked sets of transactions known as blocks, an identical copy of which is stored on each of the 60,000 computers in the Bitcoin network. Each ledger change is cryptographically signed to ensure that the person transferring the bitcoins is the rightful owner. No one can spend coins twice because once a transaction is recorded in the ledger, every node in the network knows about it.
The statement: No Bitcoin user should trust anyone because no one can cheat the system.
Other digital currencies are mimicking this basic idea and trying to solve problems often seen with Bitcoin by building cryptocurrencies on new blockchains. But some think the real innovation is not a digital currency, but a decentralized, cryptographically secure ledger, which they believe will usher in a new era of censorship-resistant online services. Transparently tracking the authenticity of fish, minerals and Rolex watches, and securely digitizing voting, contracts and, with the advent of the Metaverse, everything else.
Irregular ledgers also have advantages in business. Major banks are experimenting with private blockchains to maintain trust and increase transaction efficiency, corporations monitor internal compliance, and retailers clean up supply chains. But with a few exceptions, these use cases remain limited experiments or experiments rather than commercial applications of blockchain.
And no wonder. Everything that touches the world of cryptocurrency has an aura of chaos. The price of Bitcoin has dropped from $5,600 in 2021 to $48,000 in 2022 to $13,600 in 2022. It fluctuates from month to month, whether it’s rising or falling, although there’s no doubt that the price is higher than many expected a few years ago.
Some cryptocurrencies have turned out to be little more than pyramid schemes, while hackers have successfully stolen millions from crypto traders. Even stablecoins pegged to the dollar, backed by industry giants, have stumbled — Facebook’s Libra is slated to shut down in 2022 after years of hiatus. Meanwhile, ideas like ICOs and NFTs make millions for some and fall under fraud charges before fading from the limelight.
And then scandals like FTX hit. In the year In November 2022, the cryptocurrency exchange collapsed, losing billions in client funds and sparking a criminal fraud investigation that led to the arrest of co-founder Sam Bankman-Fried.
Even before the FTX scandal, the crypto industry has faced a crisis of confidence, with declining values leading to layoffs at industry leaders like Coinbase. Some might argue that this is the death knell of an idea that never really found its footing.
Is it too early to say which experiments, if any, will continue with decentralized finance or corporate compliance? Automated secure contracts or supply chain monitoring? Digital Voting or Virtual Art in the Metaverse? Private corporate ledgers or public decentralized blockchains? But the idea of creating a disruptive database has caught the attention of everyone from anarchist Texans to staid bankers.
The first Blockchain
The original Bitcoin software was released to the public in January 2009. It was open source, meaning anyone could examine the code and reuse it.
And many have. Initially, blockchain enthusiasts wanted to simply improve upon Bitcoin. Litecoin, another virtual currency based on Bitcoin software, aims to provide faster transactions. One of the first projects to repurpose blockchain beyond currency is Namecoin, a system for registering “.bit” domain names that avoids government censorship.
Namecoin tries to solve this problem by storing .bit domain registrations in the blockchain, which theoretically makes it impossible for anyone to change the registration information without an encryption key. In order to seize a .bit domain, a government would have to find the person responsible for the website and force them to hand over the key. Other coins, also known as altcoins, have been less serious in nature—most notably the popular meme-based DogeCoin.
In the year In 2013, a startup called Ethereum published a concept paper that promised to make it easier for coders to create their own blockchain-based software without having to start from scratch or rely on the original Bitcoin software.
That led to a shift away from currency-only applications. After two years, Ethereum will be able to implement the platform for “smart contracts”, software applications without human intervention. For example, you can 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 small amount of digital currency, which the software would actually handle. The next day, the software checks the weather and sends the winner their earnings. Several “prediction markets” are built into 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 with these transactions. But if this happens, it will be big. In the year In 2016, a hacker stole nearly $50 million of Ethereum, a custom currency meant for a democratic investment system where investors pool their money and vote on how to invest it. A coding error allowed an as-yet-unknown person to mine the virtual currency. Lesson: With or without blockchain, it’s hard to remove people from transactions.
ICO boom and bust.
And then came the ICO gold rush. Ethereum and other blockchain-based projects raise funds through a controversial practice called “initial coin offerings.” In an ICO, creators of new digital currencies sell a limited amount of the currency, usually before they have completed the software and technology that supports it.
The idea is that investors can get in early, giving developers the money to finish the technology. The catch is that these provisions typically operate outside the regulatory framework intended to protect investors.
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