What Is Blockchain? The Complete WIRED Guide
In this stadium, When you say “blockchain,” you get two reactions: eye rolls and dismissal, or excited fervor at the potential for a quick buck. But it doesn’t have to be either/or. The system that powers Bitcoin could strip power from central banks, build trust in supply chains, and manage ownership in the metaverse, but it could also shrink to nothing amid chaos and hype, a technology looking for a use case.
The original blockchain is the decentralized ledger behind the digital currency Bitcoin. The ledger is made up of linked batches of transactions called blocks, with an identical copy stored on each of the roughly 60,000 computers that make up the Bitcoin network. Any change to the ledger is cryptographically signed to prove that the person handing over bitcoins is the actual owner. No one can spend coins twice because once a transaction is recorded in the ledger, every node on the network knows about it.
The result: No Bitcoin user has to trust another, because nobody can cheat the system.
Other digital currencies have emulated this basic idea, often attempting to solve perceived problems with Bitcoin by building cryptocurrencies on top of new blockchains. But some think the real innovation isn’t digital currency, but the decentralized, cryptographically secure ledger, and believe that blockchain could usher in a new era of online services that would be impossible to censor; track the origin of fish, minerals and Rolex watches transparently; and securely digitize votes, contracts, and with the advent of the metaverse, everything else.
Immutable ledgers also have business benefits. Big banks are testing private blockchains to increase trading efficiency while maintaining trust, corporations are pursuing internal compliance, and retailers are cleaning up supply chains. But with a few notable exceptions, these use cases remain more limited trials or experiments than true shifts in enterprise use of blockchain.
And no wonder. Everything that touches the world of cryptocurrency has an air of chaos about it. Bitcoin’s value rose from $5,600 in 2020 to $48,000 in 2021 before crashing to $13,600 in 2022; whether it is rising or spiraling month-to-month changes, although its value is undoubtedly higher than many expected just a few years ago.
Some cryptocurrencies turned out to be little more than pyramid schemes while hackers successfully stole millions from crypto traders. Even stablecoins pegged to the dollar have faltered, as have those backed by industry giants — Facebook’s Libra was discontinued in 2022 after years of struggling. Meanwhile, ideas like ICOs and NFTs make millions for some, crashing amid allegations of fraud before disappearing from the limelight.
And then there were scandals like FTX. The cryptocurrency exchange collapsed in November 2022, with billions in customer funds disappearing, sparking a criminal fraud investigation that led to the arrest of co-founder Sam Bankman-Fried.
Even before the FTX scandal, the crypto industry was plagued by a crisis of confidence, with plummeting values leading to layoffs at industry leaders like Coinbase. Some might argue that this is the death throes of an idea that never really took off, but it can only be growing pains before cryptocurrencies and the distributed ledger that powers them settle down and find real purpose.
It’s too early to say which experiments will remain: decentralized money or corporate compliance? Automated secure contracts or supply chain tracking? Digital voting or virtual art in the metaverse? Private company books or public decentralized blockchains? But the idea of creating tamper-proof databases has caught the attention of everyone from anarchist techies to serious bankers.
The first blockchain
The original Bitcoin software was released to the public in January 2009. It was open source, meaning anyone could examine and reuse the code.
And many have. At first, blockchain enthusiasts tried to simply improve Bitcoin. Litecoin, another virtual currency based on the Bitcoin software, is trying to offer faster transactions. One of the first projects to repurpose blockchain for more than just currency was Namecoin, a system for registering “.bit” domain names that evades government censorship.
Namecoin tries to solve this problem by storing .bit domain registrations on a blockchain, which theoretically makes it impossible for anyone without the encryption key to change the registration information. To confiscate a .bit domain name, a government would have to find the person responsible for the site and force them to hand over the key. Other coins, also known as altcoins, were inherently less reputable – notably the popular meme-based DogeCoin.
In 2013, a startup called Ethereum published a paper outlining an idea that promised to make it easier for programmers to create their own blockchain-based software without having to start from scratch or rely on the original Bitcoin software .
This sparked a move away from pure currency applications. Two years later, Ethereum unveiled its platform for “smart contracts,” software applications that can enforce an agreement without human intervention. For example, you could create a smart contract to bet on tomorrow’s weather. You and your gambling partner would upload the contract to the Ethereum network and then send some digital currency that the software would essentially hold in escrow. The next day, the software checked the weather and sent the winner their prize. A number of “prediction markets” have been set up on the platform, allowing people to bet on more interesting outcomes, such as which political party will win an election.
As long as the software is written correctly, you don’t have to trust anyone in these transactions. But that turns out to be a big if. In 2016, a hacker made off with about $50 million worth of Ethereum’s custom currency, which was destined for a democratized investment system where investors would pool their money and vote on how to invest it. A coding error allowed a still unknown person to get away with the virtual cash. Lesson: It’s difficult to remove people from transactions, with or without blockchain.
ICO boom and crash
And then came the ICO gold rush. Ethereum and other blockchain-based projects raised funds through a controversial practice called “initial coin offering.” In an ICO, the creators of new digital currencies sell a certain amount of the currency, usually before finalizing the underlying software and technology.
The idea is that investors can get in early while giving developers the funds to complete the technology. The catch is that these offerings have traditionally operated outside of the regulatory framework designed to protect investors.
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