Emergent online technologies often make new millionaires out of early adopters and threaten to fundamentally disrupt long-stable industries. This is nothing new. But one truly 21st-century technology is going beyond the ordinary to fuel black markets, protect financial and physical assets and eliminate middlemen in any number of industries. The most important technology since the internet is called blockchain.
Bitcoin: Promise and Peril
If you have not heard of blockchain, you have probably heard of its most widespread application, bitcoin.
A so-called “cryptocurrency,” it has skyrocketed in value from zero at its inception in 2009, to around $600 a year ago, to a recent high of $5000 per bitcoin in early September. Blockchain technology and the bitcoin currency were developed in conjunction, but think of blockchain like Windows and bitcoin like Excel. Bitcoin runs on blockchain, but a blockchain can run more than just bitcoin.
Bitcoin’s early moments in the spotlight tended to revolve almost entirely around unsavory subjects. With care, one can purchase and spend bitcoin with near-perfect anonymity. This makes it immensely attractive to criminals who need to hide their transactions. Its only rival in terms of its ability to be transferred anonymously is paper currency. And unlike currency, bitcoin can be electronically transferred great distances at very low expense.
Together with Tor, an internet protocol that anonymizes web traffic, bitcoin made possible the Silk Road, the veritable Amazon of illicit drugs, forged documents and other contraband. Upon the seizure of the site and the arrest of its founder in November, 2014, Silk Road was a clearinghouse for tens of millions of dollars in annual drug sales by hundreds of vendors — all paid for in bitcoin, and all delivered to customers’ doorsteps by the United States Postal Service.
In the ongoing battle between law enforcement and hidden websites, the balance of power swings wildly. High-profile seizures of black market sites like Silk Road are regular, but newcomers always fill the vacuum before long.
Though stories like these can serve to introduce large swaths of the public to bitcoin, the promise and importance of blockchain is often lost in the controversy.
A blockchain is a public, distributed ledger which is highly resistant to tampering and alteration. Each “block” of transactions is cryptographically linked to the preceding block, and the complete chain of blocks contains a record of every transaction ever made in a given application. In order for a computer to act as a “node,” for the bitcoin blockchain and participate in the ongoing calculation of transactions, the computer must first retrieve and verify the complete blockchain sequence.
Herein lies the key difference between blockchain and traditional transaction networks. When money flows through a bank, the sender and recipient trust the bank to accurately record those transactions and verify their legitimacy. Even transactions in paper currency involve a certain level of trust in the government issuing that currency. With blockchain, the required trust is distributed among the myriad network nodes — each in complete agreement as to the historical record — and the mathematical rules that govern the system. In fact, blockchain is often referred to as a “trustless” system.
Private organizations can implement their own, private blockchains that operate by their own rules. Many of the world’s largest banks are beginning to get their feet wet with blockchain. They see the potential to reduce fraud by moving away from monolithic, centralized databases that serve as very attractive targets for attack.
IBM is partnering with Walmart, Dole and others to use blockchain to track their food supply chains. Establishing an immutable record of a chain of custody can help track and contain the spread of food-borne illness.
Thus, large corporations see enough potential in blockchain to spin up test projects of a limited scope. The downside risk is quite low for them, as they can easily afford the cost of development. But what about bringing blockchain to the masses of entrepreneurs and tech startups? Blockchain needs a way to attract those with great talent and risk tolerance but limited resources.
Ethereum: Blockchain’s killer app?
Bitcoin has successfully served as a proof of concept for blockchain technology for eight years. Many believe that bitcoin’s story is just beginning. Others have strong doubts as to its ability to process enough transactions to disrupt entrenched financial networks. In any case, bitcoin is not blockchain’s “killer app” — the application that makes everybody aware of a new technology platform and want to get on board.
The killer app may turn out to be Ethereum.
One of the core benefits of the blockchain is that transactions are peer-to-peer. The closest thing to a “middleman” in a blockchain transaction is the computer network itself, and it only skims off just enough to keep itself running. All kinds of businesses can and will be replicated on blockchain. But the work required to accomplish this is great, and the skills required are not widespread. Ethereum aims to greatly reduce this barrier to entry into the blockchain world.
If someone wanted to build a decentralized (blockchain) version of a given service, they would likely spend a great deal of their time and resources on the decentralization aspect relative to building out the actual service — in which their true talents and resources likely lie. To fix this, Ethereum acts as a platform upon which to build decentralized applications.
As the Ethereum platform matures — it went live in 2015 — it will attract projects of increasing sophistication and potential market penetration. Already, one startup, Ujo, is using Ethereum to sell digital music. Another is running a pilot of a ride-hailing app in Israel. Examples such as these are still limited, and their transaction volume remains small. But interest in Ethereum is climbing rapidly, and many more projects are in early development stages.
Whether bitcoin and ethereum can fulfill their promise remains to be seen. But blockchain technology has the potential to disrupt, enhance and transform a great many industries. And its story is just beginning.