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Blockchain enthusiasts crave a world without bankers, lawyers or fat-cat executives. There’s just one problem: trust
How? Well, to understand all that, first we need to talk about trust and its place in the fabric of our lives. Trust seems to be in short supply these days, although we have no choice but to rely on it. We trust schools and babysitters to look after our children. We trust banks to hold our money and to transfer it safely for us. We trust insurance companies to pay us should we meet with some disaster. When we make a large purchase – such as a house – we trust our solicitors or an escrow company to hold the funds until the transaction is complete. We trust regulators and governments to make sure these institutions are doing what they are supposed to be doing.
Sometimes, however, our system of trust fails us. There are runs on banks. People lose faith in currencies issued by nation-states. People stop trusting their political institutions because of the chicanery, short-sightedness and general incompetence of the self-interested clowns running the show. The response to this widespread erosion of trust has been varied, ranging from Donald Trump’s (hypocritical) pledge to ‘drain the swamp’, to the promise of so-called ‘blockchain technology’ and its associated cryptocurrencies.
The blockchain is the key to understanding Buterin’s project. A good way to wrap our minds around the concept is to think of its most famous application: Bitcoin. And the best way to think about Bitcoin is not in terms of coins at all but rather as a giant ledger.
Imagine a world in which we didn’t exchange currency, but kept track of who had what on a huge public spreadsheet, distributed across the internet. Every 10 minutes, all the transactions that took place in that slice of time are fused together into a single block. Each block includes a chain linking it to previous blocks, hence the term ‘blockchain’. The end result is a universal record book that reliably logs everything that’s ever happened via a (theoretically) tamper-proof algorithm. We don’t need to trust human bankers to tell us who owns what, because we can all see what’s written in the mathematically verified blockchain.
But Bitcoin is just one version of the blockchain. The fundamental technology has the potential to replace a much wider range of human institutions in which we use trust to reach a consensus about a state of affairs. It could provide a definitive record for property transfers, from diamonds to Porsches to original Picassos. It could be used to record contracts, to certify the authenticity of valuable goods, or to securely store your health records (and keep track of anyone who’s ever accessed them).
But there’s a catch: what about the faithful ‘execution’ of a contract? Doesn’t that require trust as well? What good is an agreement, after all, if the text is there but people don’t respect it, and don’t follow through on their obligations? Which brings us back to the crucial matter of how Buterin managed to piss off so many people.
In the beginning, Buterin was a hero to the crusaders against trust. In late 2013, at the age of 19, he wrote a document, known as the ‘Ethereum White Paper’. In it, he observed that you could hypothetically use the blockchain to store and execute computer programs – hypothetically, any computer program. This gave rise to Ethereum: a blockchain-based platform that supported self-executing contracts. The commands to execute the contract were built into the contract itself, and the contract was sealed into the (supposedly) immutable and universally visible blockchain. No trust necessary. Or so the story went.
This had extraordinary implications – one of which was that entire corporations could be encoded in the blockchain in the form of ‘decentralised autonomous organisations’ (DAOs). None of the usual trusted business partners would be required: employees, managers, human resources officers, CFOs and CEOs would be rendered otiose. No longer would shareholders need to pay massive bonuses to hedge-fund executives ‘trusted’ to make decisions about our money. In theory, at least, those executives could be replaced by a bundle of transparent, pre-set instructions stored in the blockchain.
About 11,000 people ponied up a total of $150 million to take part. What had they purchased, exactly?
On the back of a wave of excitement, Ethereum’s currency, known as ‘ethers’, went up for pre-sale in the summer of 2014. Ethers would serve a dual function as both the ‘fuel’ that powered the computations on the network, and as a medium of exchange, like bitcoins. In short order, the value of ethers started to climb, and the platform reached a ‘market capitalisation’ of around $1 billion after the pre-sale. (Full disclosure: I participated as an investor at this initial stage but have since liquidated my holdings.)…