Bitcoin has seen an astonishing number of highs and lows in its brief life – a single bitcoin is worth about £170 at the time of writing, down from more than £820 in November 2013 – while a number of legal and security challenges mean it hasn’t yet broken into the mainstream for payments. But there’s one part of the Bitcoin story that could have more wide-reaching effects in our world than the financial side: the blockchain.
“What’s interesting isn’t the currency itself, but rather the underlying technology, the blockchain.”
“What’s interesting about Bitcoin isn’t the currency itself, but rather the underlying technology, the blockchain,” explained Primavera De Filippi, research fellow at the Berkman Center for Internet & Society at Harvard Law School, speaking at Nesta’s FutureFest in London. “It’s the decentralised public ledger that relies on cryptography in order to ensure that every transaction is valid.”
The way it works makes the blockchain an ideal way to ensure transparency and integrity when the two parties involved in any business don’t trust each other – one person can send another a bitcoin without knowing a thing about the other, and the system ensures the transaction takes place as promised. And since it’s decentralised, no individual controls it; it acts as a virtual, trusted middleman.
Such features make it an intriguing alternative to everything from banks to Silicon Valley tech giants, advocates argue, with De Filippi comparing the decentralised freedom it offers to similar hopes for the internet in its early days. The blockchain principle could become the engine behind new financial systems, smart contracts and even democracy itself. However, the complicated nature of the system means there’s a lot of work that has to happen before this all becomes a reality.
Blockchain explained
Basically, the Bitcoin blockchain tracks who sent how many bitcoins where. If Bob sends bitcoin #123456 to Susan, it’s marked in the blockchain.
That record isn’t held in any single place, but copied to every Bitcoin user, each of whom holds the entire transaction record for themselves. You can add to the ledger, but you can’t remove anything – there are far too many copies with which to meddle. Transactions are validated by proof of work (that is, the mining at the heart of Bitcoin), with the coins dished out to reward people for validating transactions.
Blockchain fans see it as a way to ditch the middleman, to get rid of the Silicon Valley firms that hold a single copy of our online “transactions” and take control of it for ourselves. Bob could send a message to Susan, or a sum of money, or anything else, and the record would verify it, without the need for a third party, such as a bank or email provider.
Smart contracts
This is the idea behind smart contracts, which act like a computer program: if this, then that. If the first person pays the fee, then the second person gets the product.
De Filippi describes such activity as “automated transactions between humans and machines, or between multiple machines, which are automatically executed and automatically enforced by the underlying code of the technology”.
One such transaction is betting: everyone places their bets in a secure, neutral account, and the program doles out the winnings once the results are in. It’s been suggested that everything from mortgages to online shopping could be managed via smart contracts, with the blockchain ledger executing the hand-off of money and goods in a neutral manner. Car rentals or leases could be managed in the same way: while you’re making your payments, your digital ignition key will continue to work; if you don’t, it will be disabled.
Such smart contracts could benefit the sharing economy. At the moment, this is held back by the fact that we don’t trust each other, so have to run our transactions and negotiations through a trusted third party – more often than not a major American firm.
De Filippi said that a blockchain “can be used for performing automated transactions in a trustless environment, in a language that is both computable and unambiguous,” and that could include anything from basic legal contracts and notarisations to financial trades.
Blockchain programming
“Such programs can be used to create government systems which are… more transparent and potentially more democratic.”
It’s capable of going much further, however. “When we combine multiple smart contracts together, we can create decentralised autonomous organisations, which can be considered autonomous agents, both in that they’re independent and also that once they’ve been deployed on the blockchain, they don’t need the creator and no longer need to listen to them,” she said. “They’re self-sufficient, in that they can charge users for the service they provide in order to pay for the processing they need.”
Such programs can be used to provide distributed and secure data storage, and even to build distributed applications, such as filesharing or social networks. They could also create “government systems that are generally more flat, more transparent and allow for potentially more democratic and participatory decision-making,” she added. An electoral blockchain could let votes be registered in a simple, secure and transparent way, with a contract on the other side for the end result to be delivered.
It could even change how apps and services are run, noted Vitalik Buterin, founder of blockchain platform Ethereum. Imagine an app that’s built but gets shut down after it’s bought by a larger company, leaving its users cut adrift. If the program had been designed in a decentralised way, it couldn’t be shut down. “A blockchain is this magically decentralised computer that’s going to keep running your program faithfully for as long as it exists. You have no ability to change it,” said Buterin.
Blockchain: the downsides
Although he runs a firm based on the idea, Buterin admits that “the journey of decentralised tech is complicated”. As appealing as it is to “get rid of the evil middlemen,” Buterin noted that there’s value in the firms that stand between us and our transactions, pointing out that payment systems let us reverse charges in the case of scammers, for example.
There are other potential downsides to relying on blockchains too. At the heart of our human interactions are ideas such as equity, mercy and compassion, De Filippi noted, and we can’t code for such ideas. That makes it difficult to delegate decision-making to a machine. Plus,
“If a piece of code takes off and we can’t stop it, what happens if it starts damaging other systems, or even us?”
We need to make sure our tools don’t start manipulating the world around us, making us their tools, she warned.
“What can we do?” asked De Filippi. “First of all, don’t panic. The future is right here, right now, and we just have to take a look at it. Technology can be used for both good and evil. We have the possibility to shape the future… I think it’s important that we continue to be aware of the potential drawbacks it could bring to society, so that we can all watch better to avoid this from happening.”
Examples of Blockchain in the real world
Lighthouse is essentially a bitcoin wallet with a built-in contract: you pledge coins to a project, just as you would on Kickstarter. If enough people put forward funds, the project goes ahead, and the funds are handed over.
Ethereum was started by 21-year-old Vitalik Buterin. It’s a decentralised app publishing platform that uses units called Ether to pay for contracts to keep services running, including voting, registries and contracts.
This service doesn’t use a blockchain, but does employ a similar ledger system to make applications for financial trades and payments. The idea allows individuals and businesses to move money securely and instantly around the world.
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