The rise of Bitcoin and its nearly 1,300 imitators has resulted in a slew of new terms entering the popular lexicon. Words like “fiat currency,” “hard fork,” “bag holder,” and “blockchain.” Of all the crypto-terminology that’s come to the fore, perhaps none is more essential to an understanding of what cryptocurrencies are than “blockchain." Because without the blockchain there is no Bitcoin, Litecoin or any other imitator or wannabe cryptocurrency. So just what is a blockchain anyway?
A History of the Blockchain
When people hear the word blockchain, their thoughts tend to drift toward those Escher posters where the stairway somehow keeps going up even though it doesn't. In other words, they think they're kind of magical and maybe beyond the ability of non-programmers to understand. In reality though, the idea is pretty simple and we'll get into it in a few moments. First though, a bit of background.
It's 2008. The global financial meltdown is in full swing. Credit markets have frozen. Millions of people are having their homes pulled out from under them, and in New York, an extraordinary meeting is taking place. At that meeting, the US treasury secretary tells the men who run the nation's biggest banks that they will accept hundreds of billions of dollars in newly printed money from the federal government in order to cover toxic assets and prevent the entire world from plunging into a depression. No refusals will be tolerated. Sign on the dotted line.
In Japan, a programmer going by the name of Satoshi Nakamoto (to this day no one knows his true identity) is paying attention. To him, the crisis is at least in part the result of currencies being controlled by central banks that enabled the system to be corrupted by a few incredibly powerful players. He longs for a currency that is free to find its own value, free of regulation, free of the possibility of corruption. He puts his mind to work and 31,000 lines of code later, Bitcoin is born in early 2009.
The concept that enabled Bitcoin is called the “blockchain” and Nakamoto was able to use it to solve the biggest problem that had plagued earlier attempts to create virtual currencies: duplicate spending.
A virtual currency had never gotten off the ground because programmers hadn’t figured out how to prevent people from spending the same virtual money over and over again. Nakamoto harnessed the power of the blockchain concept to create an incorruptible ledger that kept precise records of every Bitcoin transaction. This eliminated the possibility of double-spending and provided cryptocurrencies the shove out the door they needed.
As of this writing, a single Bitcoin is worth more than $10,000 which is powerful testimony to the effectiveness of Nakamoto's concept.
So What is a Blockchain?
A blockchain is a digital database, or more accurately a secure digital ledger, that allows for the accurate accounting of a virtual currency like Bitcoin. Every time a transaction occurs that transaction is verified and added to the encrypted data cluster called the block. Each transaction, in fact, creates a new block that includes all previous information about the currency plus the new transaction. This new block in the chain now becomes the block of record and expresses the current state of the currency.
Anyone who tries to re-spend their Bitcoins won't be able to. In essence, it would be like trying to withdraw money from an empty bank account using an ATM card. The transaction will be denied. By solving the double spending problem, Nakamoto freed the concept of the cryptocurrency from the drawing board and set it loose in cyberspace.
Let's assess the situation...
As you can see the blockchain comes with a robust set of pros and cons which raise questions about its long-term viability. One of the most credible threats comes from governments with almost unlimited funding behind them and a vested interest in seeing cryptocurrencies fail and their fiat currencies thrive. At first, Bitcoin and its offspring were considered a kind of novelty. But as valuations soared and more merchants began to accept them, cryptocurrencies began to attract the unwanted attention of regulators. They of course state that they're only trying to protect decent folks, but in reality, they're angling for a way to wrest control of cryptocurrencies from the people before the dollars or yen they currently control become worthless.
Another problem is logistical. At the moment there are some 12 million people in possession of Bitcoins and millions more holding other copycat currencies. The number of Bitcoin transactions has grown from a few dozen a day at the start to more than 200,000 per day now - with a high of nearly 500,000 transactions on December 14, 2017. Transaction speed is already an issue but if the currency is to truly go global and become an everyday boundaryless unit of money the blockchain may need to accommodate a billion transactions per day. Maybe more. Is it realistic to think the blockchain can withstand that level of activity? The only real answer is "no one knows."
Blockchain technology has opened eyes, created enormous wealth and pointed the way toward a possible future where money is freed from a corrupt and predatory banking system. Whether it winds up being all that or falls victim to concerted government efforts to kill it remains to be seen.