The first link in the blockchain transaction log, after the now-notorious bitcoin, contains a text message. It reads: ‘The Times 3 January 2009 – Chancellor on brink of second bailout for banks,’ referring to the headline of a front-page article in the British newspaper.
This short but evocative statement encapsulates the turmoil faced by citizens and governments in the wake of the global financial crisis. It was included to prove the date of birth of the world’s first bitcoins, but also to explain what drove the mysterious Satoshi Nakamoto to invent Bitcoin in the first place.
In 2008, Nakamoto published a paper outlining his hopes that this new currency would release the digital world from the shackles of central banks and financial institutions.
Previous attempts to create an entirely online currency had been hampered by the ‘double spending’ problem: with no tangible material being exchanged, digital tokens could be duplicated and spent again and again.
To get around this, a trusted third party, usually a financial institution, was required to process online payments in the same way as physical ones.
Nakamoto’s genius innovation was the application of an algorithm, now known as the blockchain, which acts as a permanent ledger of all bitcoin transactions.
Unlike an opaque central bank, the blockchain is maintained by, and visible to, anyone who trades bitcoins. The blockchain was the missing piece of the puzzle of creating a decentralised digital currency.
Revolutionising financial services
Since 2009, bitcoin’s rise has been stratospheric, with a single coin trading for a record $4,616 in August this year. However, design features – such as a 21 million cap on the number of bitcoins that can be mined – limit its potential to be adopted as a mainstream currency.
Hence, as a tool to dismantle centralised financial systems, the reach of bitcoin is limited, but the potential of the blockchain seems boundless.
Professor Michael Mainelli was an early advocate of the blockchain’s potential; his consultancy Z/Yen developed an early version of the technology almost two decades ago.
In an interview with World Finance, he stated that he expects the blockchain to upend many of the record-keeping processes the financial industry is built on. “In financial services, it can really do four things: identity documentation and agreement exchanges, and possibly tokens and cryptocurrencies,” he added.
According to Mainelli, while bankers initially greeted bitcoin with scepticism and fears of hacking, this had dissipated by 2014 as cryptocurrencies proved surprisingly robust.
Since then, industry interest has turned to the underlying ledger: “Around 2016, people started saying ‘no you idiot, it’s the blockchain’, as everybody sees that this currency they thought would fall over technically hasn’t.”
Nakamoto’s genius innovation was the application of an algorithm, now known as the blockchain, which acts as a permanent ledger of all bitcoin transactions
Furthermore, Mainelli sees cryptocurrencies as a sideshow to the fundamental changes the blockchain will bring: “Even if it is the future for payments, the big money savings are going to be in paperwork. There are lots of areas where banks have got enormous vaults full of paper, and that’s where I see a lot of this having a huge effect.”
The future of the blockchain
There is a danger, however, of expecting too much too soon from the blockchain; like the infrastructure behind the internet, the blockchain is a foundational technology.
Where disruptive technologies such as autonomous cars cause rapid change in one industry, foundational technologies lay the groundwork for entirely new products and industries.
This brings genuine economic upheaval, but can take decades: for example, it took about 30 years for the likes of Google and Amazon to emerge from the technological developments that made the internet possible.
In an interview with World Finance, Professor Tim Watson, Director of the WMG Cyber Security Centre at the University of Warwick, described how some firms are so determined to lead the blockchain revolution, they haven’t stopped to consider how to use it.
“Blockchain technology is like a package holiday, and often when people try to use the blockchain, they actually only need parts of it… There’s lots of talk about the mechanics and not enough stepping back to understand ‘what is this stuff?’,” he said.
Even when the long-term benefits of the blockchain are considered properly, the uprooting brought about by foundational technologies is often met with resistance, as Mainelli pointed out: “8,000 years ago the Sumerians were acting as a central third party. This is trying to change a very old structure.
“There are a lot of vested interests who are going to fight this tooth and nail. I don’t think they’ll win ultimately, but they could make what should be a two-to-five-year process a 20-year process.”
There is also the fact that embedding technology into social structures requires more than clever programming, as Watson stressed: “We need people who can understand how to build well-governed societies. We’ve got lots of experience and we need to translate it into this new cyber-physical cognitive realm.”
Ultimately though, he added that, despite the complex long-term issues and the frenzied short-term hype, the blockchain may eventually realise Nakamoto’s ambitions: “Some very serious people are working on this – not because it’s flavour of the month, but because they can see that this is going to transform society.”