Satoshi Nakamoto published his theoretical white paper explaining the mechanism of the bitcoin in October 2008. Although the paper is only 9 pages long, it describes one of the most significant inventions in recent years, the blockchain technology responsible for the authentic clearing of bitcoin transactions.
Many might consider my claim concerning the significance of the technology to be an overstatement. Inventions of worldwide importance are commonly announced on the front page of newspapers, are covered by all news channels, and the inventors will be famous and celebrated, accumulating untold wealth from royalties. By contrast, Satoshi uploaded his description of blockchains to a public site, giving it to the world free of charge without claiming any consideration. It was not carried by the papers or covered by television, and was known only to a dozen cryptographers. The case is made even more mystic by the fact that Satoshi Nakamoto is not a real person, but a genius hiding behind a pseudonym. As things stand, his identity is known only to himself.
Launching the bitcoin program a few months later, Satoshi demonstrated his invention at work. Ignored by the world at large, events were still followed only by a handful of programmers. Nevertheless, the bitcoin was irreversibly set in motion; the first snowflake rolled down the slop to grow into an avalanche later on.
As it were, a blockchain is a virtual general ledger, where all bitcoin transactions are recorded. Each block corresponds to a page in the general ledger, following one another in an orderly chain. Just like the pages making up a general ledger, which only make sense is a specific order.
As the years passed, a few errors needed to be corrected in the program, but the blockchain remained intact and grew increasingly longer. The virtual pages of the general ledger kept growing at a steady rate, and the technology proved to record transactions faster, more reliably and cheaper than anything we had previously known.
The above claim has probably failed to thrill the reader. That is little wonder, though; contemplating self-driving cars or the Mars journey is more likely to leave one speechless. But no one should be misled: the spectacle and significance of inventions are two different things. The invention of double-entry bookkeeping a few hundred years ago did not rock the world either. The invention is nothing spectacular, while its significance is beyond question. The same holds true for the blockchain.
Recognising the potential in the technology is a long and gradual process. One stage was the bitcoin’s price explosion in 2013. Although the bitcoin has no value of its own, the reliability, speed and cheapness of the transactions enabled by it have prompted many to use it. (Some made a point of the technology being anonymous.) Therefore, similarly to the way in which paper notes, worthless in themselves, are attributed with value by virtue of trust and wide recognition, the increased trust in the bitcoin and the spread of its use have also manifested in an increase in value. Ultimately Satoshi, presumably a huge bitcoin holder himself, was probably not the worse off despite the fact that, in the direct sense, he was not paid a single dime for his invention.
The bitcoin has irretrievably become common knowledge, marking the start of explorations into the potential areas of applying the underlying technology. Namely, the blockchain enables any records to be maintained, not only bitcoin transactions. That is precisely what makes the invention so valuable: authentic and reliably up-to-date records are needed in all walks of life.
A number of projects have been launched which, while maintaining the open and decentralised character of the bitcoin, seek to record other things using blockchains. The technology may be used to store data (e.g. to keep encrypted records of medical notes), to maintain a land register, for the clearing of trades in virtual shares and bonds, or as a system for the administration of elections (it enables authentic storage of the votes cast, without the possibility of manipulating the final results). These are only a few random examples of the multitude of potential applications.
At the same time, a vast number of private companies have embarked on developing restricted proprietary blockchains for their own use. Recently, Nasdaq has successfully introduced blockchain clearing to one of its smaller exchanges, reducing the delivery of the shares purchased from days to minutes. They are already working on their next project, which, among other benefits, aims to enable shareholders to vote remotely in general meeitngs. The largest banks in the world have set up a consortium and use a proprietary blockchain to clear transactions among themselves. They expect to save 20 billion dollars a year by using the new technology. In an effort to keep up, Visa is conducting research into the possibilities of using the technology. And the list goes on.
Another interesting example for the development of private blockchains is provided by Digital Asset Holdings, headed by Blythe Masters. Described as a rather ambitious and smart person, J.P. Morgan’s former lead economist is revered or despised, depending on attitude, for the development of a credit derivative called CDS, which caused so much trouble across the globe in the 2008 crisis. She is of the view that today the blockchain should be taken as seriously as the concept of the internet at the beginning of the 1990s.
The significance of the technology has been recognised, the penny has dropped. Everyone is developing their own blockchain, and the time of its use on a massive scale is soon to arrive, which is accepted as a fact today. It is by no accident that last autumn the blockchain made The Economist’s cover story. The front cover reads: “The trust machine. How the technology behind bitcoin could change the world.’
The most ambitious project for the development of a public blockchain is Ethereum, featured in the previous part, a platform suitable for running smart contracts. Among other aspects, the ambition is shown by the fact that the system is designed to be Turing complete. As a reminder, this means that in theory, it is capable of running any task that can be described by an algorithm. Bitcoin transactions can be conceived of as unilateral contracts, wherein by digitally signing the transaction, the party originating the payment voluntarily cedes the amount to the beneficiary. Essentially, the bitcoin system allows only such simple contracts to be made. By contrast, the possibilities in Ethereum are unlimited: due to its Turing complete construction, there are no restrictions on the contracts available.
Consequently, if Ethereum actually works (and that is a strong condition implying a number of things and is not necessarily true), then another project running a public blockchain does not make real sense. Indeed, any special task mentioned previously (and those not mentioned) may be completed using smart contracts, without the need to run a proprietary network to serve the special task (everything can run on the Ethereum network).
Private blockchains are a different case. Obviously, the tasks carried out by those chains could also be performed using Ethereum’s smart contracts. Yet, there are market players who, for a variety of reasons, may find it worthwhile to develop and operate private blockchains of their own. It is possible to put a bank’s bookkeeping on a blockchain, but the public Ethereum is not the most reasonable means of doing so.
However, developing a proprietary blockchain is an expensive deal. For that very reason, some companies (such as IBM) have recently been offering proprietary blockchain services (blockchain-as-a-service) to their customers. In effect, Ethereum is also such a blockchain provider, so from a certain perspective, it is merely a competitor to others. At the same time, it is its open and decentralised network structure that makes a difference. This is why no one, including the operators themselves, can manipulate the blockchain, while the risk of any disruption to the service is zero. Consequently, rather than competing by developing their own blockchains, certain cloud providers (such as Microsoft) rely on Ethereum to build their blockchain services offered to customers. Taking The Economist’s ‘trust machine’ concept further, Ethereum is arguably the most reliable such machine.
In the previous part, I demonstrated how Ethereum can, with its smart contracts, eliminate the lack of trust arising in business relationships, i.e. how it creates trust. This public trust machine, available to everyone, has now been constructed. Indeed, it was started up recently. After a cough, its engine started roaring. And now we expect it to rev up and produce a huge amount of pure trust soon.
The next part will discuss the fuel of the trust machine, virtual oil—that is, ether.