The world has been swept up by the idea of blockchain cryptocurrencies like Bitcoin, Ethereum, and Tether in the past few years, but information and explanation can be scarce online.
Cryptocurrencies are built on the blockchain technology proposed by the pseudonym Satoshi Nakamoto in a 2008 white paper. Blockchain is a distributed financial account where groups of transactions, or “blocks,” are verified and connected to a historical record of transactions in a “chain,” hence the term “blockchain.”
Satoshi Nakamoto, in the original Bitcoin Whitepaper, said, “We propose a solution to the double-spending problem using a peer-to-peer distributed timestamp server to generate computational proof of the chronological order of transactions.”
The double spending problem was the issue that prevented a digital currency prior to blockchain technology. Basically, if an individual creates two transactions at the same time there is no way for the currency verification process to decide which is valid. Blockchain solves this by assigning value only to the transaction which is verified first and continues only that version of the chain.
“However, there is also another, equally important, part to Satoshi's grand experiment: the concept of a proof of work-based blockchain to allow for public agreement on the order of transactions,” said Vitalik Buterin, author of the original Whitepaper on Ethereum.
Blockchain technology has given rise to multiple applications and cryptocurrencies. Among these is Ethereum, a platform which supports the two most valuable cryptocurrencies outside of Bitcoin. It is a series of Decentralized Finance apps and Smart Contracts which hope to tackle some of the oldest problems of economics, such as transaction costs and public goods.
The promise that this decentralized and verifiable system creates shows there are potential risks to exist. The most immediate risk is government involvement in one of two ways: regulation enacted to remove the anonymity of the transactions and verifications, which is a route that has been explored since the popularization of cryptocurrencies in 2018, or the adoption of blockchain technologies by government entities, which would undermine the advantage cryptos maintain in that the need for government entities is eliminated. This idea has been explored by the United States Federal Reserve.
Lael Brainard, who sits on the Federal Board of Governors, said, “Conducting research and experimentation related to distributed ledger technologies and their potential use case for digital currencies, including the potential for a CBDC [central bank digital currency].”
One of the less discussed and more important threats to blockchain technologies is obsolescence. The rapid pursuit of Quantum Computing Technology has the potential to change the entire industry of cryptography and computer security. Blockchain is built on classic cryptographic technology and the processing speed of quantum computers. This could leave blockchain obsolete or much less efficient, in a system that already struggles with efficiency.
“We don't use these Quantum Proof Alternatives yet, because in many cases they’re five to ten times less efficient” said Vitalk Buterin, the founder of Ethereum, on the “Lex Fridman Podcast.”
Blockchain is new technology that represents a growing portion of our world, if you have not encountered it yet, you certainly will in the future, and it is best to know what it is when you do.