Blockchain technology has been around since the early ’90s, but Bitcoin was the “killer app” which really brought it into the mainstream.
Bitcoin made its debut shortly after, and arguably as a reaction to, the 2007 financial crisis. Someone under the pseudonym Satoshi Nakamoto published a paper proposing and describing the very first decentralized application. This application, Bitcoin, was to allow people to make electronic payments without the need for a trusted central party, like a bank.
It’s not so much that blockchain makes trust easy. It’s that it makes it obsolete. It substitutes consensus-based shared permanence for flawed human memories or records vulnerable to manipulation. It’s astronomically harder and more expensive to hack a large blockchain than to hack any centralized system.
It’s astronomically harder and more expensive to hack a large blockchain than to hack any centralized system.
Ever since, Bitcoin has grown in popularity, and its value has risen dramatically. At first sight, it isn’t obvious what the reasons behind this surge in popularity are. Bitcoin (much like all decentralized applications backed by blockchain technology) is significantly slower, more expensive, and harder to scale than its centralized counterpart.
The reason for this is because blockchain technology enables something that, until recently, we just didn’t have the technology to do. Something that might just make this trade-off worthwhile. This something is censorship resistance. As Adam Ludwin neatly lays out:
Censorship resistance means that access to decentralized applications is open and unfettered. Transactions on these services are unstoppable.More concretely, nothing can stop me from sending Bitcoin to anyone I please. Nothing can stop me from executing code on Ethereum. Nothing can stop me from storing files on Filecoin. As long as I have an internet connection and pay the network’s transaction fee, denominated in its crypto asset, I am free to do what I want.
How does blockchain work?
Blockchain is a technical term that reflects its underlying data structure: it is literally a chain of blocks. These blocks group transactions together and connect to other blocks. It really is that simple. Then, instead of there being a single database on a server somewhere, controlled by a particular entity you’re forced to trust, each participant in the network has a copy of this chain of blocks. Hence, the blockchain is commonly referred to as a distributed ledger.
Here’s a simplified example from the Bitcoin blockchain. When Alice wants to send 10 Bitcoin to Bob, she broadcasts a message on the network with this transaction. If the network agrees that she has the 10 Bitcoin to send, this transaction will be inserted into a block, and everyone incorporates this block onto their version of the ledger. Effectively, everyone reaches the agreement that Alice owned at least 10 Bitcoin, then made Bob the new owner of those 10 Bitcoin.
Let’s look at it in a bit more detail. Once Alice’s transaction is broadcast, miners all over the network will see it, validate it (by confirming Alice does have the 10 Bitcoin), and incorporate it into a block they’ll try to mine. Mining is akin to participating in a lottery: miners try their luck at inserting a block into the blockchain by attempting to solve a cryptographic puzzle. Their chances of winning are proportional to the amount of computing power they control. If they win, they get rewarded with some Bitcoin. Through clever use of cryptography and game theory, this seemingly wasteful process is what keeps the network safe.
This is why miners have no incentive to include fraudulent transactions in the blocks they’re creating, as these blocks would be rejected by the network since every participant checks them for validity as well.
Here’s a brief example of how the network is kept safe. Miners make money through Bitcoin rewards, issued when a block they produced is accepted into the network. Bitcoin is only valuable as long as its network is safe, popular and useful, so the interest of Bitcoin holders is to keep the network as such. Additionally, aside from it being incredibly difficult, tampering with the network is at odds with the interest of Bitcoin holders, as a successful attempt is likely to massively devalue the currency, making their holdings worthless. This is why miners have no incentive to include fraudulent transactions in the blocks they’re creating, as these blocks would be rejected by the network since every participant checks them for validity as well. A block with invalid transactions, instead of a reward, amounts to significant wasted electricity costs and a reputation hit.
Four fascinating use cases
Cryptocurrencies like Bitcoin are but one use case of blockchain technology. There’s been significant movement in this space, with high-profile projects such as Zcash and Monero. One of their USPs is privacy — each uses its own approach to transaction obfuscation, making payments much harder to trace. Ripple is another cryptocurrency: banks such as UBS and Santander are already exploring its possibilities as a solution for faster settlements.
Currency sure is an interesting use case, but there are plenty of other notable examples of products and services being built on blockchain technology. Let’s go over 4 examples.
Supply chain solutions
Supply chains are a large part of the world’s economic engine, and as such a large target to aim new technological efforts at. For example, Provenance enables provenance transparency in supply chains. Their technology allows brands to track and trace the history of their products all the way from the source.
IBM partnered with Nestlé and Walmart to explore food safety solutions based on the same idea of tracking and tracing. Maersk and Microsoft are working on an insurance solution for shipping.
One example I find particularly interesting is SweetBridge which, in particular, is enabling automatic liquidity provisioning (essentially, taking a loan from yourself based on blockchain collateral) to combat supply chain capital inefficiencies.
Prediction markets
Prediction markets are a personal favorite of mine. They’re betting markets created to bet on the outcome of future events. Prediction markets have traditionally not lasted for long before being ordered to shut down, and many believe it’s because the political accountability they could enable is undesirable to the ruling elites.
Prediction markets could enable a new, technocratic and accountable form of government known as Futarchy. As Robin Hanson, its proponent, puts it:
Betting markets are our best known institution for aggregating information.
The implication here is that better decisions (both in the public and private sphere) can be made with the help of prediction markets. Augur and Gnosis are two projects using blockchain technology to deploy censorship-resistant, trustless prediction markets.
Token-curated registries
Token-curated registries are an economic and game-theoretical framework for encouraging incorruptible list curation. As Mike Goldin from ConsenSys puts it:
A token-curated registry uses an intrinsic token to assign curation rights proportional to the relative token weight of entities holding the token. So long as there are parties which would desire to be curated into a given list, a market can exist in which the incentives of rational, self-interested token holders are aligned towards curating a list of high quality. Token-curated registries are decentrally-curated lists with intrinsic economic incentives for token holders to curate the list’s contents judiciously.
Essentially what this means is that blockchain technology enables a new way of producing high-quality, trustworthy lists. For example, the upcoming Ocean Protocol, a data marketplace, uses token-curated registries for assessing the reputation of data sources.
Voting
Voting is a process that is largely still executed on paper, or electronically but through centralized systems. Anonymity guarantees are limited. Election fraud is alive and well.
Blockchain technology can help by decentralizing the system and eschewing the need for trust. Combined with zero-knowledge proofs, a cryptographic protocol, we can avoid voter fraud and achieve perfect voting anonymity that is, knowing that you voted, the total vote count, but not who you voted for). Computerphile has a great explainer video on zero-knowledge proofs, if you’re interested.
Want to know more?
Blockchain technology introduces permanence and immutability into the digital world. We built a tool for everybody to experience this immutability in a tangible and intimate way. The results were surprising and ranged from fascination to shock. Here is what happened.
Forever on the Chain_Blockchain technology introduces permanence and immutability into the digital world. What are the implications?_medium.com
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Many thanks to Charles Ulin, Frederik Eichelbaum, Jack Kinsella, João Gradim, Lukas Egger, Nele Wollert, Paulo Köch, Paulo Pereira, Sean Perkins and Vanessa Costa for reading drafts of this.