a distributed computing and decentralized ledger-keeping system to resolve the age-old problem of trust and achieve this open, low-cost architecture for intermediary-free global transactions. It may or may not be the platform that wins out. Perhaps something else will come along and fulfill for the age of cryptocurrency what the Transmission Control Protocol/Internet Protocol, or TCP/IP, pair of protocols did for the age of the Internet. Something will emerge as a standard, base-layer protocol that dictates how all computers everywhere exchange value with each other. Will it be Bitcoin, Ethereum, or something else entirely, perhaps a protocol that allows computers with digital assets on any one of these competing blockchains to trade directly with each other without going through a third party? Such is the threat and opportunity that open-source development offers: anyone can copy and then improve upon your idea. The good news is that boundless energy and innovation will go into figuring out how to iterate upon the ideas that currently exist and will build a potentially better system. That innovation might find its way back into Bitcoin, helping to cement its first-mover advantage. Or it might diffuse the value creation power across a wider array of platforms until something more popular comes along. In the next chapter we will ask such questions as we survey the frenetic pace of invention in the blockchain space.
Building a decentralized economic system for a network of independent, anonymous computer owners in which everyone will work in the interests of the group poses a daunting technical challenge. It’s also a major political challenge. Herding cats comes to mind. It turns out that building a network outside the traditional political system requires a lot of political decisions.
Success for a decentralized cryptocurrency or blockchain network comes down to designing the right rule set—the software protocol—by which participants interact with each other. Satoshi Nakamoto’s Bitcoin breakthrough gave us the first working example of how to achieve this even when large amounts of money, business secrets, and other matters of value are at stake. But as the community of Bitcoin’s users and computer owners has grown and changed, and as newcomers have demanded new functions and more powerful applications, there’s been constant pressure to upgrade and change the protocol to facilitate those needs. The problem is that in a truly decentralized, open-source system where no one is in charge, it’s extremely difficult to get all those people with their far-flung disparate interests to agree on what changes to make.
There are probably several thousand extremely bright programmers and entrepreneurs trying to make this software take off. In some ways, they’re like the Founding Fathers in the United States: they’ve come across something new and intriguing that could change the world, if they could only configure it properly. “All men are created equal” did not just explode, sui generis, on the colonial landscape in July 1776. It was the synthesis of a classical-liberal school of thought that had been developing for decades—and still is, for that matter. The techno-philosophers of the blockchain movement are grappling with myriad iterations of an idea. They just have to find the best ones.
The Cypherpunks’ Holy Grail
The starting point for understanding how blockchains work, as well as the technical and political debates they engender, is the first working blockchain: the Bitcoin blockchain. Bitcoin put the objective of pure, permissionless decentralization front and center. In guiding a community of autonomous users to reach agreement on transaction histories, it showed that software controlled by no individual or corporation could now supplant the “trusted third-party” role that institutional intermediaries such as banks have traditionally played in confirming our financial records. If society is to define a sensible path for adopting, or not, this highly disruptive technology, we must first understand what Bitcoin is and why it matters. So, we’re going to peer under its hood.
Before we do that, however, let’s start with this generic definition of a blockchain: a distributed, append-only ledger of provably signed, sequentially linked, and cryptographically secured transactions that’s replicated across a network of computer nodes, with ongoing updates determined by a software-driven consensus.
What does that mouthful actually mean? Well, let’s break down its key words:
1 “distributed”: the ledger does not reside in one place but in many, with each bookkeeping node independently responsible for up-dating it in coordination with the others. Once one bookkeeper (in this case, a computer) updates the ledger, along with some proof that its work was sound, all others simultaneously upgrade their own versions with that same update. What emerges is a constantly updated, commonly agreed record of truth with no centralized master copy.
2 “append-only”: information can only be added, not removed. This is important because it means no one can go back and doctor the record. What’s been agreed upon as the truth is the truth. There is no room for debate.
3 “provably signed”: blockchains use the public key infrastructure encryption methodology for sharing and controlling information. With PKI, as it’s known, users control two separate but mathematically linked strings of numbers and letters, or “keys.” One is a secret “private key” that only they know, and the other is a public key, visible to all, that’s associated with some form of valuable information. In Bitcoin, that information refers to an amount of bitcoin currency. When the user “signs” their public key with their private key, that action mathematically proves to outsiders that the user has control of the underlying information and can then assign, or send it, to another person’s public key. In Bitcoin’s case, that’s the process by which a person sends currency from their “address” (their public key) to another. (Though it’s not a perfect analogy, you can think of your private key as a secret password or PIN to manage your money and your address as an account.)
4 “sequentially linked and cryptographically secured”: some other tools from the science of cryptography are used to represent entries into the ledger in a way that links them, with a series of unbreakable mathematical locks, into a fully verifiable sequence. This forms a never-ending, chronological series of blocks, or batches of transaction data, whose integrity is protected by cryptography. This structure provides an unfathomably high probability of confidence that nothing in the ledger has been altered from its agreed-upon state.
5 “replicated”: the ledger is copied across participating nodes (as per the distributed pattern described in 1 above).
6 “software-driven consensus”: a program that all the computers run independently sets certain requirements and incentives for them to behave in a way that systematically guides them to reach agreement on which transactions should or shouldn’t be included in each updated version of the replicated ledger. “Consensus” is a key word in blockchain design, as it describes the process by which each participant’s independently managed copy of the ledger is harmonized with everyone else’s in keeping with a commonly agreed version of the truth. It typically boils down to how to get a majority to agree on updates.
Not so complicated, right? Well, if you’re still struggling to understand, never fear, we’ll dig deeper.
A key point to note here is that our generic blockchain definition doesn’t capture the magnitude of Nakamoto’s breakthrough. There are other elements to Bitcoin that, for all intents and purposes, achieved the Cypherpunks’ Holy Grail: a fully decentralized cryptocurrency that no single person, entity, or consortium of members anywhere could control.
The Bay Area–based Cypherpunk community, which fought hard to achieve decentralization for two decades before Bitcoin arrived, knew that any digital system of money would need a common ledger to keep track of everyone’s debits and credits. This was to ensure people weren’t “double-spending”—in effect, counterfeiting—their currency balances. But for the system to be fully decentralized, it had to allow anyone to participate in managing that ledger. It had to be “permissionless,” with a consensus system that no one party could influence. That way, no authorizing entity could block, retract, or decide what gets entered into the ledger, making it censorship resistant.