Blockchain

• 1. Introduction

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  Blockchain, a ledger built from linked blocks of records, began as a tidy idea and has grown into a very large file. In August 2014, the bitcoin blockchain, which holds every transaction ever made on that network, reached 20 GB. By 2024 it had passed 600 GB. Copies of that growing file sit on many computers at once, and no centralized official copy exists. So how can a list of records resist rewriting when nobody is in charge of it? Who dreamed up the design, and why does a pseudonym take the credit for it? And has a technology once billed as world-changing delivered, or does the evidence tell a more complicated story?

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• 2. Paper Trail

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  In 1982, the cryptographer David Chaum proposed a blockchain-like protocol in a dissertation titled Computer Systems Established, Maintained, and Trusted by Mutually Suspicious Groups. No famous product grew out of it. The next step came in 1991, when Stuart Haber and W. Scott Stornetta described a cryptographically secured chain of blocks. Their aim was modest. They wanted document timestamps that nobody could tamper with.

  In 1992, Haber and Stornetta teamed up with Dave Bayer and added Merkle trees. This made the design more efficient, because several document certificates could be gathered into a single block. Their company, Surety, has published its certificate hashes in The New York Times every week since 1995.

  The year 2008 brought the decisive leap. A person or group using the name Satoshi Nakamoto conceptualized the first decentralized blockchain. Nakamoto timestamped blocks with a method resembling Hashcash, so no trusted party had to sign them. A difficulty parameter was added to steady the rate at which new blocks join the chain.

  Nakamoto implemented the design the following year as the core of the cryptocurrency bitcoin, where it serves as the public ledger. Bitcoin was released as open-source software in 2009. It became the first digital currency to solve the double-spending problem without a trusted authority or a central server.

  The name came last. Nakamoto's original paper used the words block and chain separately, and by 2016 they had merged into the single word blockchain. Even Hashcash was borrowed. Adam Back designed it in 1997, but the underlying idea came from a 1992 paper about combatting junk mail.

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• 3. How the Chain Holds

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  Block 0, known as the genesis block, anchors every blockchain. Each later block holds a batch of valid transactions, hashed into a Merkle tree. It also carries the cryptographic hash of the block before it. That link confirms the integrity of the previous block, and so on all the way back to the start. A block is usually digitally signed as well.

  Sometimes two blocks are produced at the same moment, and the chain briefly forks. Every blockchain therefore has an algorithm for scoring competing versions of history. Peers keep the highest-scoring version they know of and pass improvements along. Blocks that lose out are called orphan blocks. Bitcoin treats the chain with the most cumulative proof-of-work as the valid one.

  Nothing is ever guaranteed forever. Yet each new block built on top of an entry makes it exponentially less likely to be superseded, until the probability becomes very low. This is why the pace of block creation matters. Since 2022, Ethereum has set its block time at exactly 12 seconds. Bitcoin averages 10 minutes.

  Ownership works through a pair of keys. A public key, a long and random-looking string of numbers, serves as an address on the blockchain. Tokens sent across the network are recorded as belonging to that address. A private key acts like a password to the assets held there.

  The design has a known weak point. In a so-called 51% attack, one entity gains control of more than half of a network and can then manipulate that blockchain record at will, allowing double-spending. A related risk is creeping centralization, because the computer resources needed to process more data keep getting more expensive.

  Another question is finality, meaning confidence that a freshly added block will never be revoked. Most protocols, whether proof of work or proof of stake, offer only probabilistic finality. The deeper a block sits, the less likely it is to be reverted. Some Byzantine fault tolerance protocols claim absolute finality through a vote by validators. In Ethereum's Casper protocol, validators who sign two different blocks at the same position forfeit their stake, a penalty called slashing.

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• 4. Public Versus Private

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  Because every early blockchain was permissionless, a controversy has dogged the definition of the word. Must a blockchain be open to anyone, or does a private system with approved verifiers count too? Proponents of private chains say the term fits any structure that batches data into time-stamped blocks. They compare it to multiversion concurrency control in databases, which stops two transactions from changing one object at once. A blockchain likewise stops two transactions from spending the same output.

  Public blockchains have no access restrictions at all. Anyone with an Internet connection can send transactions or become a validator. The largest and best known are the bitcoin blockchain and the Ethereum blockchain. Because the network is open, nobody needs to guard against bad actors with access control, and applications can be added without anyone's approval.

  Private blockchains work the opposite way. One cannot join unless invited by the network administrators, and both participants and validators are restricted. The term Distributed Ledger is normally used for them. A hybrid blockchain mixes centralized and decentralized features. A sidechain runs in parallel to a primary chain, with entries linked to and from it. A consortium blockchain is run jointly by a group of organizations, with examples including Quorum and Hyperledger.

  Opponents of private chains found a sharp voice in Nikolai Hampton of Computerworld. He pointed out that a private blockchain most likely already controls 100 percent of its block creation resources, so no 51 percent attack is even needed. He also noted there is no race to discover blocks faster than competitors. His verdict was that "many in-house blockchain solutions will be nothing more than cumbersome databases." Oracle went a different way in its Oracle 21c database, launching a centralized blockchain table. Centralized designs normally offer higher throughput and lower latency than consensus-based distributed ones.

  Openness has another consequence. A public blockchain lets anyone with the know-how observe and analyse its data. Many people believed cryptocurrency was private and untraceable, and some used it for dark market trading and money laundering. Specialised tech companies now sell blockchain tracking services to exchanges, law enforcement and banks. Some argue this pressure has pushed criminals toward newer cryptocurrencies such as Monero.

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• 5. Pilots and Promises

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  In 2016, The Wall Street Journal reported that the company Everledger was partnering with IBM's blockchain-based tracking service to trace the origin of diamonds. The goal was to prove they were ethically mined. By 2019 the Diamond Trading Company was building its own diamond supply chain product, called Tracer. In 2018, Walmart and IBM ran a trial tracking lettuce and spinach, with every node administered by Walmart and hosted on the IBM cloud. Mercedes-Benz and its partner Icertis built a prototype to pass contractual and ethical obligations down to suppliers beyond the first tier. The carmaker also tracks the emissions of climate-relevant gases from its battery cell manufacturers.

  Banks showed interest too. A September 2016 IBM study found that banks were adopting distributed ledgers faster than expected. In 2017, UBS opened a lab dedicated to exploring financial uses. That same year, the German bank Berenberg called blockchain an "overhyped technology" with many proofs of concept but very few success stories. Meanwhile the technology opened new ways to raise money, including initial coin offerings and security token offerings that tokenize assets such as company shares and real estate.

  Some efforts reached into the internet's naming system. Namecoin, a cryptocurrency forked from bitcoin in 2011, supports the .bit top-level domain, which ICANN does not sanction. In 2015, only 28 websites used .bit out of 120,000 registered names. OpenNIC dropped Namecoin in 2019 over malware and potential legal issues. Ethereum's naming service backs domains such as .eth, .luxe and .kred.

  Smart contracts promised to execute agreements without human interaction or a trusted intermediary. Yet a 2018 staff discussion at the IMF concluded that "no viable smart contract systems have yet emerged." Their legal status was unclear because so few people used them.

  One legal milestone did arrive in China. In 2019, the Hangzhou Internet Court first accepted blockchain as a method for authenticating internet evidence, and other Chinese courts have since followed.

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• 6. Digital Pets, Banned Games

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  In November 2017, a game called CryptoKitties launched on Ethereum. Players bought virtual pets as non-fungible tokens and bred them to produce offspring with combined traits. In December 2017, one virtual pet sold for more than US$100,000, and the game made headlines. Then came a strain. In early 2018, roughly 30% of all Ethereum transactions were for the game, causing significant congestion.

  The appeal for publishers is easy to see. Players already earn and trade items such as character skins, and blockchain games let them swap those items for cryptocurrency, then for money. Trading virtual items for real-world currency is a legal risk in countries where games resemble gambling. That has led to gray market problems such as skin gambling, so publishers have mostly avoided paying players real money.

  By the early 2020s, no blockchain game had become a breakout success. Many focused on speculation over traditional gameplay, which limited their appeal and made revenues hard to predict. Axie Infinity had limited success during the COVID-19 pandemic, and plans for metaverse content refueled interest in GameFi in the second half of 2021.

  In October 2021, Valve Corporation banned blockchain games from its Steam storefront, including those using cryptocurrency and NFTs. Valve said this extended its policy against games with in-game items of real-world value. Its earlier troubles with skin gambling were speculated to be a factor. Journalists and players responded positively, since blockchain and NFT games had a reputation for scams and fraud among PC gamers. Epic Games, which runs a rival store, said it would be open to such games.

  Several major publishers, including Ubisoft, Electronic Arts and Take Two Interactive, have said that blockchain and NFT-based games are under serious consideration.

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• 7. The Energy Bill

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  In June 2018, the Bank for International Settlements criticized public proof-of-work blockchains for their high energy consumption. Mining, the peer-to-peer computation that validates transactions, requires a great deal of power. Nicholas Weaver of the International Computer Science Institute at the University of California, Berkeley, judged both the online security and the energy efficiency of proof-of-work chains grossly inadequate. The 31TWh-45TWh of electricity used for bitcoin in 2018 was part of his case.

  In 2021, a Cambridge University study put bitcoin at 121 terawatt-hours per year. That was more than Argentina at 121TWh and the Netherlands at 109TWh. Digiconomist calculated that one bitcoin transaction required 708 kilowatt-hours, the amount an average U.S. household consumed in 24 days. By 2022, Cambridge and Digiconomist estimated that bitcoin and Ethereum together used twice as much electricity in a year as the whole of Sweden.

  Public figures weighed in. In February 2021, U.S. Treasury secretary Janet Yellen called bitcoin "an extremely inefficient way to conduct transactions." The following month, Bill Gates said, "Bitcoin uses more electricity per transaction than any other method known to mankind." He added, "It's not a great climate thing."

  The concern shaped later designs. Cardano in 2017, then Solana and Polkadot in 2020, adopted the less energy-intensive proof-of-stake model. Researchers have estimated that bitcoin consumes 100,000 times as much energy as proof-of-stake networks. The biggest switch came in September 2022, when Ethereum converted from proof of work to proof of stake.

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• 8. Measuring the Hype

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  In 2016, Accenture applied the diffusion of innovations theory and concluded that blockchain had reached a 13.5% adoption rate within financial services, the early adopters' phase. Industry trade groups formed the Global Blockchain Forum that year. Reality looked cooler inside companies. In May 2018, Gartner found that only 1% of CIOs reported any blockchain adoption, and only 8% were planning or actively experimenting. In 2019, Gartner reported that 5% of CIOs believed it was a game-changer for their business.

  Money kept flowing anyway. An estimated $2.9 billion was invested in blockchain technology in 2019, an 89% increase from the year before. A 2021 PricewaterhouseCoopers report said it could generate annual business value of more than $3 trillion by 2030. PwC surveyed 600 business executives and found that 84% had at least some exposure to blockchain. On the 29th of June 2019, the economist Tim Harford gave his first broadcast on the technology for the BBC World Service series 50 Things That Made the Modern Economy.

  Standards bodies stepped in as well. In April 2016, Standards Australia asked the International Organization for Standardization to consider blockchain standards. That led to ISO Technical Committee 307, Blockchain and Distributed Ledger Technologies. More than 50 countries take part, alongside liaisons such as SWIFT, the European Commission and the United Nations Economic Commission for Europe.

  Universities studied the technology and its users. In October 2014, the MIT Bitcoin Club gave MIT undergraduates access to $100 of bitcoin each. Catalini and Tucker found in 2016 that when people who typically adopt technologies early were given delayed access, they tended to reject the technology. In 2017, MIT founded a department focusing on crypto and blockchain, and Edinburgh launched what the Financial Times called one of the first big European university blockchain courses.

  In September 2015, the first peer-reviewed journal on the subject, Ledger, was announced, and its inaugural issue appeared in December 2016. Authors are encouraged to digitally sign a file hash of their submitted papers, which is then timestamped into the bitcoin blockchain. It is the same idea Haber and Stornetta had in 1991, turned on the scholars themselves.

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