Twenty years ago, discussions over digital currency were confined entirely to the realm of science fiction. At the time, the notion that value could exist digitally and absent management by individuals was not only laughable, it was in many ways a proven impossibility. The problems that blockchains solve were well-documented by none other than Microsoft itself in 1982, but the quest was largely the pursuit of fools seeking the 20th-century equivalent of perpetual motion. When Satoshi Nakamoto announced Bitcoin on Halloween of 2008 in a mailing list of cryptography experts, his work was initially perceived as not much more than an articulate rant by yet another idealist.
Six years after that announcement, the laughter over Satoshi's discovery has long since stopped. While some are still skeptical about Bitcoin itself, the entire reason that digital currency has entered the world of pop culture and finance is thanks to Satoshi's invention of the blockchain.
From an application standpoint, blockchains enable users to own "things" without the need (or ability) for a central party to secure this ledger. The list of "things" that can be secured by the blockchain are varied, but easy examples include company shares, game tokens, dollars, and of course bitcoins themselves. When users in a blockchain network "own" a given item, they are the only ones who can transfer the right of ownership to another person. Each of these transfer operations, once issued by a user, are assembled into "folders" called blocks. A blockchain is a progression of these folders over time, stretching from the blockchain's inception to the present. To understand who owns what, one merely needs to progress through these transfer records.
The revolutionary part of the blockchain process is how miners manage to keep these blocks accurate and tamper-proof. The easiest way for a layperson to understand this security is not in mathematical terms, but in economic terms. When miners attach a block to the Bitcoin network, they don't just place that block neatly to the adjacent block. They glue the block to the prior block by "burning" energy. Yep, you heard that right. Miners are able to defend the Bitcoin network by burning electricity and creating a cryptographic "glue" out of the process. The total amount of electrical energy burned by all the blockchain's miners in a ten-minute period is the "glue" that affixes the newest block to the prior block. The economic cost of burning energy is "proof" that miners have attested to the contents of the block.
This means that in order to undo the newest block that was just created, an attacker would have to use slightly more energy to break that block off the chain than went into the glue that attached that block to the chain. This concept is the primary and revolutionary innovation that powers a blockchain.
Just how much energy is needed to enforce the security of a blockchain? No one is entirely certain. But what is certain is that more is always better, and that the cost of the energy being burned should exceed the benefits that an attacker would receive by interrupting the blockchain service. Estimates as to how much energy is being burned by Bitcoin miners vary wildly, but the amount of electricity would appear to be measured at nearly a million U.S. dollars per day. A logical question to be asked by anyone who understands this process is: Why anyone would burn so much money to secure another person's data? The answer is simple. In exchange for burning electricity, the miners are awarded newly minted bitcoins by the blockchain. At the current Bitcoin market price, the amount being awarded to miners is nearly a million dollars per day.
In this way, blockchains provide programmers with one very simple feature that was never before present in the history of computer science: the ability to declare a truth, globally and without a center of authority, regardless of what anyone else does to change this truth. This concept is known as "immutability." The degree to which a blockchain is immutable is directly proportionate to the energy it consumes. This resistance to tampering is the root of a bitcoin's intrinsic value. A bitcoin is a voucher, redeemable by the bearer at any time, for the tamper-resistant storage of their data.
Given the success of Bitcoin, there are now hordes of speculators, programmers, and companies that are competing to design newer and better blockchains. But with so few experts to evaluate their claims, it is difficult to tell which of these will succeed. While perpetual-motion seekers are in no short supply, thus far the results from nearly all these competitors have been discouraging. And while many wait for a competing blockchain to arise, Bitcoin is continuing to amass support, gain strength, and embarrass its skeptics.
The next article in this series will explore more of these alternate systems at length and discuss the competitors in this exotic new world of immutable value.