When the banking system went into meltdown in 2008, an intriguing glimpse of an alternative future appeared. On 31 October, an unknown cryptographer who went by the name of Satoshi Nakamoto launched what he described as “a new electronic cash system that’s fully peer to peer, with no trusted third party”. The name he assigned to this new currency was bitcoin.
Since then, the world has been divided into three camps: those who think that bitcoin must be a scam; those who think it’s one of the most interesting technological developments in decades; and (the vast majority) those who have no idea what the fuss is about.
I belong in the second camp, but I can see why others see it differently. Those of the scam persuasion, for example, see the absence of any central authority, the wild fluctuations in the value of bitcoins (they were worth more than $1,000 in November 2013, around $235 at the moment), the mysterious collapse of one of the big bitcoin exchanges, the hacking of some of the digital “wallets” in which people keep their bitcoins and so on. And if the sceptics had any doubts, the news that Rand Paul, the libertarian US politician now running for president, is willing to take campaign contributions in bitcoins tends to confirm their suspicions that it’s just a fantasy.
But I can also see why laypeople are baffled by bitcoin because the thing that makes it work – the “blockchain” – is based on the kind of arcane cryptography that, like the peace of God in the Bible, passeth all understanding. As such, it looks like a species of black magic and something that is therefore best avoided.
All of which is understandable but unfortunate, because the technology underpinning cryptocurrencies such as bitcoin may turn out to be both transformational and benign in ways that we are just beginning to appreciate.
Why? Well, in essence a blockchain is really a way of using cryptography to certify that a particular token is the property of, or is inextricably connected to, a particular entity. In this particular case, the token is a bitcoin (or part thereof) and the entity is an individual (or an organisation). The blockchain is a dynamic (ie continuously updated) database of who owns (or is connected with) what.
In the real, physical world, we have lots of such databases – think of bank accounts or land registries – but they are records maintained by agencies and organisations, which means that they can be altered, corrupted or lost. So we have to trust the institutions that maintain them, which means trusting outfits like the banks that have just been fined £3.7bn for rigging foreign exchange markets. A blockchain, in contrast, is a public database that is continually maintained and updated by software running on thousands of computers all over the world. And since every change of ownership is publicly logged, the need to trust a (centralised) institution is replaced by the need to trust a highly decentralised network.
In the beginning, the blockchain was used to enable transactions in bitcoins and to ensure that a coin could not be spent and re-spent by its original owner. But as awareness of the currency spread, people have realised that the blockchain idea could be applied in other areas where trustworthy and transparent records of ownership are lacking. The most interesting case I’ve seen so far surfaced the other day when the state of Honduras, one of the poorest countries in Latin America, announced that it was going to use a blockchain to build a permanent and secure land title registry. This is significant because one of the problems that bedevil many – if not most – developing countries is the absence of reliable or uncorrupt land registries.
Another intriguing example is provided by ascribe, a startup that enables artists to register a legal claim to the copyright on digital works they have created. The company time-stamps those claims on to the bitcoin blockchain. When artists transfer, their rights (eg by selling the work) the blockchain confirms that they are transferring the copyright (in the form of a licence) to the new owner.
At the moment, it’s difficult to say what the future of bitcoin will be. These new applications of the blockchain idea suggest that, in the long view of history, the project’s main contribution to society may not be currency reform but as a powerful enabler of other vital economic, legal and social processes. In the meantime, I’m saving up to buy my first bitcoin.