When the news broke in the summer of 2021 that El Salvador would become the first country to recognize a cryptocurrency — bitcoin, in this case — as legal tender, most people found themselves falling into a few distinct camps. The first group consisted of crypto enthusiasts, people who had spent the better part of a decade preaching the gospel of crypto and felt vindicated as the world finally caught on. Another group consisted of skeptics and critics, those who felt that the potential of the blockchain technology which underlies cryptocurrencies was being greatly oversold. The third group was made up of those who had never heard of blockchain, bitcoin, and cryptocurrencies and wondered what all the fuss was about. It is for this third group, especially, that I am writing this.
The best place to start is with money. The idea of a purely digital currency was first presented in a research paper by computer scientist and cryptographer, David Chaum, all the way back in 1983. There was, however, always one stumbling block — the so-called ‘double-spend’ problem. As Peter H. Diamandis and Steven Kotler put it in their book, The Future is Faster Than You Think, “In a nutshell: If you have a dollar bill and give it to your friend, then your friend has the dollar bill. If you have a digital dollar bill and give it to a friend — if the core of the currency is nothing more than ones and zeros — then what’s to stop you from giving that friend a copy of the dollar bill and keeping the original for yourself”. We can see how this presents a problem. This system is sufficient for information exchange, but if we want to exchange something whose value is derived from scarcity, then something must change. What was needed, then, was a mechanism by which we could ensure that one would not spend the same digital dollar several times, and this is where blockchain technology comes in.
Simply put, a blockchain — quite literally a chain of blocks — is an open, distributed ledger that records information and makes it nearly impossible to modify. It is ‘open’ and ‘distributed’ because every node on the network holds a copy of the ledger and can see every transaction. This is the peer-to-peer network and it’s just one of the elements that ensure the security of the blockchain network. The other two elements are hashing and the consensus mechanism, usually proof-of-work (PoW). Each block contains a unique identifier — its hash, along with that of the previous block. The rest of the information depends on the type of block. For example, a bitcoin block would contain the public identifiers of the sender and the recipient as well as the amount being transferred. Any change to the information stored in a block also changes its hash. Since the blocks are arranged in a chain, a change in one block’s hash would disrupt the chain, thereby invalidating the subsequent blocks. Theoretically, one could still recalculate the hashes of all subsequent blocks, but this process would be both very slow and computationally expensive. And, since there must be consensus to ratify the transaction, these changes must be applied on a majority of nodes on the network, all without anyone else noticing it. Needless to say, this would be extremely difficult, though not impossible.
As mentioned above, consensus is fundamental to blockchain technology and is what allows cryptocurrencies to offer a real alternative to our middle-man reliant banking systems. They solve the double-spend problem by requiring global consensus from other networked nodes that also store a record of all transactions and validate any new ones. The three most popular consensus mechanisms are proof-of-work (PoW), proof-of-stake (PoS), and delegated proof-of-stake (DPoS), even though PoW remains by far the most widely used. The original Bitcoin paper, authored by one or many people under the pseudonym Satoshi Nakamoto, appeared online in November 2008, and since then, other cryptocurrencies such as Ethereum, Cardano, and the cult favorite, Dogecoin, have risen to prominence promising greater security, anonymity, or faster transactions. What they have in common is that they seek to shift the balance of control away from financial institutions and government agencies to the nodes on the P2P network. In theory, this would result in faster, irreversible transactions, especially internationally, without the need for a middle-man to ratify them at a cost. And, all these benefits would be available to anyone with an internet connection, potentially providing financial services and e-commerce access to the hundreds of millions of unbanked people around the world.
While most of the buzz surrounding blockchain technology has been tied to its cryptocurrency applications, many see potential uses beyond that. One such use comes via programs known as smart contracts. These programs are designed to control assets recorded on the blockchain to guarantee predictable behavior, acting as a faithful arbitrator between parties that may or may not know each other. They could, for example, ensure that certain payments are made, such as royalties to creators, once certain milestones have been reached. Some have suggested storing health records in blockchain ledgers with smart contracts to ensure that only relevant data is shared between patients and healthcare professionals. In this age of heightened concern surrounding data privacy, this can be extended to general, public use, allowing citizens to aggregate all of the personal information collected by their various devices and online platforms and control how much of it is shared and who with. The third (Data Empowerment and Protection Architecture [DEPA]) layer of the so-called India Stack[i] is an already existing example of this. And, because of the transparency that blockchain offers, anyone could check the parameters of the smart contract to make sure that it behaves as desired. Another application whose popularity surged in the last year is that of NFTs. An NFT, or non-fungible token, is a token that represents unique ownership on the blockchain. As such, it would serve as proof of ownership of a digital artifact such as a piece of art. To be clear, the art itself does not reside on the blockchain, but its ownership information does where it is open for anyone to see. And, because of the blockchain’s inherent security, these records would be nigh immutable. Beyond that, many have suggested using blockchain technology for digital identity, potentially facilitating secure, online voting such as is being developed by Agora, supply chain tracking, document notarization, and car odometer tracking (Bosch).
Despite all this, there are still many who believe that the blockchain’s revolutionary potential has been exaggerated. I will explore, here, some of the arguments that have been raised. While there is a lot of excitement, especially in the NFT space, about how blockchain technology could be used to ‘guarantee ownership’, the reality is that to do so would require additional technologies above and beyond the blockchain ledger itself. As Stephen Wilson notes in his article[ii], Blockchain only does one thing well, “blockchain does just one thing: it establishes the order of entries in a distributed ledger so as to prevent double-spend without an empire”. What it doesn’t do, however, is verify the contents of the ledger. For example, an NFT can be minted and sold online, but blockchain has no mechanism to ensure that the person who mints the NFT owns it[iii], or whether or not the real owner has been coerced or manipulated into selling, or, in the case of artworks, if the piece is not a forgery. Two parties can even mint the same NFT on different NFT marketplaces, making it difficult to ascertain which of the two the real owner is. With that in mind, we must ask, then, whether the claim that NFTs guarantee ownership holds any merit. In reality, to do so would require additional processes beyond what blockchain technology can presently offer.
Another issue is that of availability. To be able to access and spend their bitcoins or any other cryptocurrency, users require a wallet application and platform such as Coinbase or Crypto.com. Most of these platforms still require a bank account and some form of identity verification (government ID) for users to trade crypto and not all these platforms are open to users everywhere around the world for various reasons. So, unless one could simply mine crypto directly into their wallet (more on that later), they are forced to rely on platforms that are still governed by the same regulatory limitations that cryptocurrencies were designed to bypass.
Wallet applications present another problem because, despite the security advantages that blockchain advocates speak of, from a cybersecurity perspective, any system is only as strong as its weakest link, which often is, unfortunately, the users. Malicious actors could use many methods, from preying on weak and repeated passwords to using social engineering to trick people into sharing either their credentials or sending their assets to illicit, unknown parties. And, since crypto transactions are irreversible and often anonymous, cryptocurrency unwittingly transferred to a rogue element will likely never be recovered. This also connects to the concern about cryptocurrencies enabling cybercrime, both by masking criminals’ identities and because of the irreversibility of transactions, and the uptick in ransomware attacks in the last decade demanding payments in crypto seems to support these concerns.
On the issue of mining, some countries have, in recent years, implemented wholesale bans on crypto mining and trade. Crypto mining involves solving complex mathematical problems to create and add new blocks to the blockchain. Cryptocurrencies reward miners with tokens for the energy expended in performing these computations. But, when it comes to other applications of blockchain technology, this reward must come from elsewhere, hence the “gas fees” charged for minting and trading NFTs by most sites. The reason behind the crypto mining bans is that the process consumes a lot of energy. According to Digiconomist’s Bitcoin Energy Index[iv], one bitcoin transaction uses 2,277kWh of energy — roughly equivalent to the power consumption of an average U.S. household over 78 days. This is because bitcoin mining rigs require powerful GPUs to be left running 24 hours a day, and because these rigs also generate heat, they often require external cooling to stop them from melting. One proposed solution has been to switch the consensus system from proof-of-work which rewards miners for energy expended to proof-of-stake which rewards miners based on how much crypto they hold. This promises faster transactions while also eliminating the need to expend countries’ worth of energy performing redundant calculations. However, it also means that a single miner with a greater stake than other miners could simply sit back and allow their rewards to accrue, thus increasing their iron grip on the network.
The only other term that was as trendy as ‘NFT’ in 2021 was ‘metaverse’, and the two have the potential to intersect in interesting ways. It is widely assumed that blockchain will form the backbone of the trade infrastructure in the metaverse. This would make the budding, new metaverse one of the few places where crypto holders will be able to spend their coins. However, despite all the hype about NFTs selling for tens of millions of dollars, most people recognize that NFTs will need to become cheaper and more functional as opposed to being status symbols and investments for the ultra-rich. This can be seen in the emergence of platforms like The Sandbox and Decentraland which allow their users to create and monetize their digital creations by selling them as NFTs. Decentraland goes even further, hosting events that users can attend in place of in-person alternatives. Some in the crypto space believe that building (meta) games around the collection of NFTs would be one way to drive their collection and trade. One implementation of this so-called play-to-earn model is Axie Infinity, which is “a game about collecting, raising, and battling cute fantasy creatures called Axie”. In this game, players earn tokens and breed Axies that can be traded in the in-game market for cryptocurrency or even real-world money. This is an early form of what many hope will become burgeoning online ecosystems where in-game assets will have value outside of their respective games, and digital assets can be useful beyond just being collected and stored.
Blockchain advocates have hyped up the technology over the last few years, proclaiming that its revolutionary applications will change the world as we know it. It is difficult to say whether or not this will come to pass, but there has been a concerted push from Big Tech companies to usher in a metaverse a-la Ready Player One, and cryptocurrencies will certainly be fundamental to metaversal commerce, even though these companies have yet to truly embrace blockchain technology. Many other companies have rushed ahead to adopt blockchain technologies in other sectors, and it will be interesting to see whether or not these implementations will solve the problems with which they have tasked themselves. As for NFTs[v], the early 2021 hype declined later in the year as many people discovered that the nature of NFTs makes them difficult to resell, as well as that simply making something an NFT did not guarantee that people would buy it. Regardless, while I am neither qualified nor interested in giving financial advice, the numbers speak for themselves — the prices of many cryptocurrencies have been steadily rising, making many people wildly rich in the process, though the chart above shows how volatile they can be. In the end, there seems to be a genuine belief in the power of blockchain technology to usher in a freer, fairer, and more secure web, which means that those at the frontiers of the industry will continue to push for its wider use, making it an increasing part of our lives going forward.
[i] The Internet Country, by Aaryaman Vir and Rahul Singh. https://tigerfeathers.substack.com/p/the-internet-country
[ii] Blockchain really only does one thing well. https://theconversation.com/blockchain-really-only-does-one-thing-well-62668
[iii] An artist died. Then thieves made NFTs of her work. https://www.wired.co.uk/article/nft-fraud-qinni-art
[iv] Bitcoin Energy Consumption Index. https://digiconomist.net/bitcoin-energy-consumption