At this stage, when you say “blockchain,” you get two reactions: eye-rolling and dismissal or excited fervor at the potential for quick money. But it doesn’t have to be either/or. The system that powers Bitcoin could yank power from central banks, build trust into supply chains, and manage ownership in the metaverse, but it could also shrivel into 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 consists of linked batches of transactions known as blocks, with an identical copy stored on each of the roughly 60,000 computers that make up the Bitcoin network. Each change to the ledger is cryptographically signed to prove that the person transferring bitcoins is the actual owner. No one can spend coins twice because once a transaction is recorded in the ledger, every node in the network will know about it.
The upshot: No Bitcoin user has to trust anyone else because no one can cheat the system.
Other digital currencies have imitated this basic idea, often trying to solve perceived problems with Bitcoin by building cryptocurrencies on new blockchains. But some think the real innovation isn’t digital currency but the decentralized, cryptographically secure ledger, believing the blockchain could usher in a new era of online services that would be impossible to censor; transparently track the provenance of fish, minerals, and Rolex watches; and securely digitize voting, contracts and, with the advent of the metaverse, everything else.
Immutable ledgers have benefits in business too. Major banks are testing private blockchains to boost trading efficiency while maintaining trust, corporations are tracking internal compliance, and retailers are cleaning up supply chains. But with a few notable exceptions, these use cases remain limited trials or experiments rather than real shifts to using blockchain for business.
And no wonder. Everything that touches the world of cryptocurrency has a sheen of chaos. The value of bitcoin leapt from $5,600 in 2020 to $48,000 in 2021 before crashing down to $13,600 in 2022; whether it’s soaring or spiraling changes month to month, though its value is unquestionably higher than many expected just a few years ago.
Some cryptocurrencies turned out to be little more than pyramid schemes, while hackers have successfully stolen millions from crypto traders. Even stablecoins pegged to the dollar have stumbled, as have those backed by industry giants—Facebook’s Libra was shut down in 2022 after flailing for years. Meanwhile, ideas like ICOs and NFTs make millions for some and crash amid accusations of fraud before fading from the limelight.
And then scandals like FTX hit. The cryptocurrency exchange collapsed in November 2022, with billions of customer funds missing, and sparked a criminal fraud investigation that has led to the arrest of cofounder Sam Bankman-Fried.
Even before the FTX scandal, the crypto industry was hit by a crisis of confidence, with crashing values sparking layoffs at industry leaders like Coinbase. Some may argue that this is the death throes of an idea that never really found its feet, but it may just be growing pains before cryptocurrencies and the distributed ledger that powers them settle down and find some real purpose.
It’s too early to say which experiments, if any, will stick: decentralized money or corporate compliance? Automated secure contracts or supply-chain tracking? Digital voting or virtual art in the metaverse? Private corporate ledgers or public decentralized blockchains? But the idea of creating tamper-proof databases has captured the attention of everyone from anarchist techies to staid bankers.
The First Blockchain
The original Bitcoin software was released to the public in January 2009. It was open source, meaning anyone could examine the code and reuse it.
And many have. At first, blockchain enthusiasts sought to simply improve on Bitcoin. Litecoin, another virtual currency based on the Bitcoin software, seeks to offer faster transactions. One of the first projects to repurpose the blockchain for more than currency was Namecoin, a system for registering “.bit” domain names that dodges government censorship.
Namecoin tries to solve this problem by storing .bit domain registrations in a blockchain, which theoretically makes it impossible for anyone without the encryption key to change the registration information. To seize 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 less serious in nature—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 coders to create their own blockchain-based software without having to start from scratch or rely on the original Bitcoin software.
That sparked a shift away from currency-only 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 a little digital currency, which the software would essentially hold in escrow. The next day, the software would check the weather and send the winner their earnings. A number of “prediction markets” have been built on the platform, enabling people to bet on more interesting outcomes, such as which political party will win an election.
As long as the software is written correctly, there’s no need 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 intended for a democratized investment system in which investors would pool their money and vote on how to invest it. A coding error allowed a still unknown person to make off with the virtual cash. Lesson: It’s hard to remove humans from transactions, with or without a 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 an “initial coin offering.” In an ICO, creators of new digital currencies sell a certain amount of the currency, usually before they’ve finished the software and technology that underpins it.
The idea is that investors can get in early while giving developers the funds to finish the tech. The catch is that these offerings have traditionally operated outside the regulatory framework meant to protect investors.
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Since the first tidal wave of ICOs in 2017, the US Securities and Exchange Commission has said that virtually all of them violated securities law, while research revealed that nearly half of ICOs from that era failed—no surprise, given so many were outright scams, with developers faking projects and disappearing with funds. The ICO market subsequently crashed, halving in value from its peak to the next year, though they continue to be a fundraising vehicle in the world of crypto.
There’s more to the blockchain than cryptocurrency. Startups are leveraging the ledger technology to track the provenance of everything from fish to diamonds and even watches and whiskey. Everledger tracks luxury goods, such as art and diamonds, and has worked with the Australian government on a pilot to regulate critical minerals. Provenance uses the blockchain to track fish from catch to sale; if a fisherman, distributor, or retailer attempts to alter the origin of a single filet, their actions will be obvious, as each party holds its own versions of the data.
Because of that ability to reveal fraud, blockchain has been touted as a way to secure voting; manage property sales and other contracts; and track identity, qualifications, or even concert tickets. But none of that has yet to go truly mainstream. Walmart Canada turned to blockchain to address payment disputes with freight carriers by automatically sending payments rather than manually reconciling invoices, and the company has since expanded its use of blockchain.
But it’s still early days for blockchain, with such business applications often described as a solution without a problem. One challenge is that some businesses aren’t excited about the decentralized architecture that’s at the heart of blockchain, instead choosing to act as a central trusted party and control the ledger themselves. When such a “private blockchain” is preferred, a database could perhaps do the trick without the added complexity.
More recently, the idea of tokens has taken off. These are assets that can be traded on a blockchain, most famously as NFTs (nonfungible tokens). Like cryptocurrency, they’re managed, tracked, and traded via blockchains. Unlike Bitcoin and its ilk, they’re unique digital content—anything from a tweet to a song to art or, again, a bottle of whiskey—that can be bought and owned like a painting hung on a wall.
The idea is to confer ownership of a digital item or track ownership of a physical object. Anyone can screenshot and download a digital picture, but whoever holds the NFT actually owns it. That means artists have a new way of selling their work, whether an established artist like Damien Hirst or a digital creator like Beeple, who sold an NFT of his work for $69 million at Christie’s auction house.
The heat around NFTs has cooled—Jack Dorsey’s first tweet sold for $2.9 million in 2021 but was removed from auction after stalling at $14,000 a year later—but they could find their footing in the metaverse, with Nike buying NFT studio RTFKT and selling virtual shoes on the Polygon blockchain.
But when NFTs, ICOs, and digital currencies are successful, the planet suffers. Bitcoin is “mined” by tasking computers with solving equations for no reason other than to show they’ve done the work. In the early days, bitcoin mining could be done efficiently enough with a robust desktop, but the difficulty of proof-of-work equations increases with every bitcoin that’s mined, so the home mining setup long ago gave way to professional, bespoke systems running thousands of high-end graphics cards, often in highly customized data centers built for the task.
All of that eats through incredible amounts of energy and results in equally significant carbon emissions. Bitcoin consumes more electricity annually than the entire nation of Belgium, according to one piece of research from the University of Cambridge. And that’s just bitcoin, with Ethereum chewing through about a third as much. NFTs, for example, require at least 35 kWh of electricity each, emitting as much as 20 kg of CO2 apiece.
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There is a solution: switching from proof of work to proof of stake. Rather than crunching arbitrary algorithms to earn a reward, you “stake” a chunk of cryptocurrency in the network. That buys you a chance of being selected to earn cryptocurrency by validating a block, sort of like a lottery. Try to meddle with the system by changing a block and the network will take some or all of your stake.
Ethereum shifted its original network, Mainnet, to proof of stake in September 2022. Etherum says the change, dramatically dubbed “the merge,” slashes energy consumption by 99.95 percent. It should also make it harder to hack blockchain networks by dominating a chain, known as a 51 percent attack—with proof of stake running Ethereum’s Mainnet, that would cost billions of dollars.
Such benefits may not be enough to convince other blockchains, including Bitcoin, to move to proof of stake, not least because so many miners have invested heavily in computing infrastructure. So blockchains—and the cryptocurrencies and other digital innovations that live on them—will continue to churn through electricity and exacerbate the climate crisis.
The Future of Blockchain
Despite the blockchain hype—and many experiments—there’s still no “killer app” for the technology beyond speculation and (maybe) payments. Blockchain proponents admit that it could take a while for the technology to catch on. After all, the internet’s foundational technologies were created in the 1960s, but it took decades for the internet to become ubiquitous.
ICOs were scammy. NFTs are bewildering. Bitcoin remains too unstable for payments. And FTX shows that chaos still lurks at the heart of cryptocurrency. But there’s no question venture capital investment, art sales, and global finance were, and still are, in need of democratization and decentralization. Blockchain proves there could be another way. And it is maturing, as shown by Ethereum’s move to more sustainable operations.
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Blockchain doesn’t need a killer app: It needs thousands of small useful ones. ICOs could reemerge as a decentralized funding mechanism for local projects. NFTs could evolve into virtual products for the metaverse. And if the crypto Wild West settles down, it could upend who controls the world’s money. Give it time—blockchain might do better out of the spotlight.
Learn MoreThe Future of Digital Cash Is not on the BlockchainIf you want the privacy of paper money, you need something that leaves no paper trail.Public Blockchains Are the New National Economies of the MetaverseThe “fiscal” and “monetary” policy tools of smart contract blockchain platforms may work even better than the economic policy tools of governments.Blockchains Have a ‘Bridge’ Problem, and Hackers Know ItBlockchain bridges are a crucial piece of the cryptocurrency ecosystem, which makes them prime targets for attacks.What's Blockchain Actually Good for, Anyway? For Now, Not MuchNot long ago, blockchain technology was touted as a way to track tuna, bypass banks, and preserve property records. Reality has proved a much tougher challenge.EOS Was the World’s Most Hyped Blockchain. Its Fans Want It BackBlock.One created the EOS blockchain and raised $4 billion in a record-breaking ICO. Now, its members have taken over.Paradise at the Crypto Arcade: Inside the Web3 RevolutionThe new movement wants to free us from Big Tech and exploitative capitalism—using only the blockchain, game theory, and code. What could possibly go wrong?Sure, Crypto Is Crashing, but Everything Is Perfectly FineCryptocurrencies are behaving exactly like the rest of the stock market, but the faithful say that's no reason to jump ship.
This guide was last updated on February 2, 2023. Klint Finley, Gregory Barber, and Nicole Kobie contributed reporting.
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