draw power from the public utility grid, or make a phone call. And they invoice us for that privilege.
This system was inherently incompatible with the nobody’s-in-charge, distributed framework of the Internet. The Net was designed to let anyone publish and send information, at near-zero cost, to anyone else anywhere. That opened up vast new economic opportunities, but it also posed unique challenges for trust management. The person you’re dealing with might now have a picture of a dog as their avatar and use the moniker “Voldemort2017.” How do you know they can be trusted to deliver on whatever contractual agreement you’re entering into? Star ratings, at services like Yelp and eBay, have tried to step into the breach, but these are easily gamed by fake identities and fake reviews, much as Facebook “likes” can be. When it comes to high-value transactions, they cannot be trusted. Well, when Internet companies discovered they couldn’t resolve those challenges, they were forced to invite centralized entities to intermediate on our behalf. It was perhaps a necessary solution, but a flawed one that is now exposing a host of other security and privacy concerns.
The distributed system made it easier for crooks to misrepresent their identities. They could also duplicate, forge, or counterfeit valuable information. So, when entrepreneurs pioneered e-commerce in the mid-nineties, they struggled to design an online payments model that wouldn’t expose customers to fraud. Unable to assure customers and merchants that their bank account and credit card data were safe, they at first focused on privacy-protecting forms of electronic cash, the concept that Satoshi Nakamoto would tackle with Bitcoin. If cash were digital, they reasoned, people could make online payments without revealing personal identifying information, just as they did with banknotes. In pursuit of that goal, the aforementioned “Cypherpunks”—a loose association of programmers with a fiercely libertarian bent who were obsessed with using cryptography to protect privacy online—and other Internet adventurers toyed with private cryptocurrency concepts, while banks and governments stealthily experimented with sovereign currency-based e-cash. (In The Age of Cryptocurrency, we reported on one little-known e-cash pilot that the U.S. Treasury Department explored in conjunction with Citibank.)
These early digital currencies were bedeviled by the “double-spend” problem mentioned above—rogue users could always find ways to duplicate their currency holdings. Overcoming this was vital because, whereas we might happily make a copy of a Word document and send it to someone, digital counterfeiting of this kind would destroy any monetary system’s inherent value. Technologists tried to make a system to verify that people weren’t double-spending, but it proved much harder than you might think.
In the end, prior to the existence of Bitcoin, the e-commerce industry settled on a workaround: Firms such as Verisign pioneered a model for issuing SSL (Secure Sockets Layer) certificates to verify the trust-worthiness of Web site encryption systems. Meanwhile, card-issuing banks beefed up their anti-fraud monitoring efforts. A version of the “trusted third party” was added to our complicated system of global value exchange. It was another jury-rigged solution that meant that the banking system, the centralized ledger-keeping solution with which society had solved the double-spend problem for five hundred years, would be awkwardly bolted onto the ostensibly decentralized Internet as its core trust infrastructure.
With customers now sufficiently confident they wouldn’t be defrauded, an explosion in online shopping ensued. But the gatekeeping moneymen now added costs and inefficiencies to the system. The result was high per-transaction costs that made it too expensive, for example, to sustain micropayments—extremely low payments, maybe as little as pennies, that otherwise promised to open up a whole new world of online business models. That nixed a dream of early Internet visionaries, who saw that idea feeding into a global marketplace where software, storage, media content, and processing power would be bought and sold in fractional amounts to maximize efficiency. The compromise also meant that credit cards, once an elite-only instrument, became an integral, even necessary component of e-commerce infrastructure, making banks even more relevant to our payments system. Under this model, the banks charged merchants an interchange fee of around 3 percent to cover their anti-fraud costs, adding a hidden tax to the digital economy that we all pay in the form of higher prices.
Meanwhile, other aspects of Internet governance had to be entrusted to centralized entities as well. These include the domain name system (DNS) managers and hosting service providers, companies whose servers occupy URLs—those specially assigned areas of the World Wide Web around which we navigate our Internet surfing—and host the files that make up the clients’ Web sites that point to those Internet addresses. Anyone who has set up a Web site has dealt with such outfits. All of them charge fees. The more files and pages that need hosting, the more they charge.
All these solutions worked for those who could afford them. But, inevitably, the added transaction costs translated into barriers to entry that helped the largest incumbents ward off competitors, limiting innovation and denying billions of financially excluded people the opportunity to fully exploit the Internet’s many possibilities for advancement. It’s how we’ve ended up with Internet monopolies. Those with first-mover advantages have not only enjoyed the benefits of network effects; they’ve been indirectly protected by the hefty transaction costs that competitors face in trying to grow to the same scale. In a very tangible way, then, the high cost of trust management has fed the economic conditions that allow the likes of Amazon, Netflix, Google, and Facebook to keep squashing competitors. Just as important, it has also meant that these monolithic players have become all-powerful stewards of our ever-growing pools of vital, sensitive data.
The Internet’s Missing Piece
This was not the dream conveyed in the Cypherpunk manifesto of Tim May and his fellow band of libertarian advocates for cryptography, privacy, and an online world of individual empowerment. Those geeky rebels of the 1990s Bay Area wanted an Internet that was free of both government and corporatist control, a decentralized online economy where self-expression was devoid of censorship, where anyone could transact with anyone else under whatever identity they chose. Ideas like Ted Nelson’s ill-fated Xanadu project, which never achieved anywhere near its lofty vision of a global network of independent, self-publishing, interlinked, fully autonomous computers, envisaged a network in which far more processing power and data was placed under the control of individual owners’ computers. They were ideas that were far ahead of their time, conceived at a moment when resource, economics, and political realities simply weren’t compatible with them.
But then, in 2008, with the Cypherpunk community seemingly having lost its mojo, along came Bitcoin—an idea for cryptomoney that was straight out of their playbook, even though few by then expected it would work. Now, the question of identifying who controlled the data didn’t matter. Its integrity could be assured by a decentralized network that constantly updated itself through a process of unbreakable consensus. Once Bitcoin’s implications were apparent, the revelation came as a bolt of lightning to many who’d been involved in building the Internet’s early architecture. These people included Marc Andreessen, the venture capitalist and co-creator of the first commercial Web browser, Netscape, who told authors Don and Alex Tapscott that people like him suddenly recognized it as “the distributed trust network that the Internet always needed and never had.”
As Andreessen and others in Silicon Valley’s moneyed classes started to throw money at developers working on Bitcoin and its clones, the sheer breadth of what Bitcoin’s underlying blockchain technology might achieve became apparent. For many of the new technologies that innovators are rolling out today, designers are thinking about how blockchain concepts will be part of the general enabling framework:
Internet of Things solutions will require a decentralized system for machine-to-machine transactions;
Virtual reality content creation, by which future imaginary worlds will be collaboratively produced by writers and coders, could use a blockchain system for divvying up royalties via smart contracts;
Artificial intelligence and Big Data systems will need a way to assure that the data they