Blockchains mean a lot of different things to a lot of different people.
For Bitcoin fanatics, the original blockchain was a way to create a currency that could circumvent and eventually supersede central banks.
For central banks, the blockchain has become a promising way to record their own currencies in an effort to retain their dominant place in society.
For some cryptocurrencies, like Monero and Zcash, the blockchain is a way to ensure total privacy and anonymity. For others it is a way to make anonymity a thing of the past in financial transactions.Beneath all these conflicting goals, the blockchain is just a new way to record data, generally in a communal fashion, with a bunch of people keeping the records, rather than just one central institution like a bank or government.
This basic idea, though, can be configured in countless different ways. And companies, start-ups and governments around the world have been engaged in what sometimes looks like a race to try out as many applications as possible, with billions of dollars chasing the promise.What has not become clear, so far, is whether the blockchain design will really be able to accomplish any of the big promises that have been made for it.
Essentially every big category of project in the blockchain realm has run up against obstacles that have so far barred the way to real breakout success. That has led to a big decline in the price of many blockchain-based cryptocurrencies over the last six months — the price of Bitcoin is down nearly two-thirds from the peak in December.But while we don’t yet know if blockchains will really work in the long run, we are starting to understand the problems they will have to overcome if they want to have a chance at working.The blockchain we know the most about is the original one, linked to Bitcoin. In a simple sense, this blockchain has been a resounding success. Since it began recording every Bitcoin transaction in 2009, the Bitcoin blockchain has more or less seamlessly kept the records of a currency that is now worth over $100 billion — and with no institution or person in charge.
But Bitcoin has so far failed at its goal of becoming a new kind of digital cash, which was the ambition described in the original documentation. So far, almost the only thing Bitcoin has been used for is a speculative commodity, like a digital gold, with lots of trading on the price. (The one place where Bitcoin has been used for regular real transactions is in the black markets.)There are many reasons Bitcoin has not been more useful so far. The monetary policy and economics of Bitcoin — with only 21 million of the coins ever created — are a particularly fascinating question mark hanging over the project. As are the security issues that arise when every holder is responsible for keeping their own password, or private key.
But no problem has been more immediately stubborn than the limits on how many transactions the Bitcoin blockchain can handle. It turns out that when a whole bunch of people are keeping the records for something — as the blockchain design requires — there are limits on how many transactions all those computers can share and store in a set amount of time.
This issue — the so-called scaling problem — is now something that confronts essentially every major cryptocurrency out there. While Bitcoin can handle only around seven or so transactions each second, the second most valuable network, Ethereum, can do only double that, and none of them are getting close to the 50,000 a second that Visa manages.
Developers working on Bitcoin and Ethereum have been building several different solutions that might address this. Most of them involve adding new databases, with more capacity, on top of the ground level blockchain ledgers. So far, though, it’s not clear if these can work without introducing new problems or sacrificing the qualities that attracted followers to these projects in the first place.Ethereum, and a bunch of other valuable cryptocurrencies that have been inspired by it, have a separate set of problems that they will have to figure out.
The creator of Ethereum, Vitalik Buterin, wanted to build a system that would house a virtual currency like Bitcoin, but with the added ability to create programs, directly on the blockchain, that could make some of the currency’s movements automatic. In the simplest type of transaction, the Ethereum blockchain will record money moving between wallets (which are like individual accounts) only in response to a particular event. In one simple type of transaction, for example, money would move between wallets only if a specific team won the World Series. These so-called smart contracts inside Ethereum are now being copied by many other projects.
Ethereum, though, has been dogged by new complexities that smart contracts have introduced into an already fiendishly complicated system. Ethereum smart contracts have been hacked and rigged in unexpected ways that have allowed for multiple thefts of tens of millions of dollars. That is a small minority of all the transactions, but it makes many people worry about whether blockchain smart contracts have, in the language of hackers, created too great a surface area for attack. Some worry that these sorts of smart contracts are just not the sort of thing that a shared database is equipped to handle.Many of the problems facing cryptocurrencies like Bitcoin and Ethereum arise from the fact that these systems are open to anyone with internet access. Anyone can go online and create a wallet and begin helping to keep all the records for these systems that run on so-called public blockchains. That creates a security headache that cryptocurrencies were designed to deal with, but that never goes away. What do you do when North Korea, or some other actor under sanctions, starts moving money on the system?
That kind of question has led most newcomers to the blockchain world — many of them from the corporate and government worlds — to take an interest in newer kinds of blockchain databases that aren’t as open.
The world of private or permissioned blockchains has taken off over the last two years, with projects like Hyperledger and the Enterprise Ethereum Alliance getting a lot of attention (the latter is working on private versions of the Ethereum software).
These systems have fewer people keeping track of any given blockchain. That makes it easier to scale up these systems to handle lots of transactions, because there are fewer computers that have to communicate. It also can make it easier to bar bad actors from getting access to the system because only people with permission have access to it.Companies like IBM and Walmart have said that blockchains, even when they are open only to a select number of people, still can produce more reliable records of information — that everyone can access at any time — than the old systems that relied on a central bookkeeper.
But fans of Bitcoin and other so-called public blockchain systems have mocked these projects. The often-heard criticism is that a blockchain that is being maintained by only a few institutions is less at risk of an attack from the outside but much more at risk if one of the institutions on the inside is compromised, allowing one of the participants to fudge the old records. These private blockchains can lose the resilience to attack that is part of what made blockchains so attractive in the first place.
For now, private blockchains are too new to have gone through the security gantlet that Bitcoin has already passed through. Many private blockchain projects have been tested in pilots — but almost none have entered into real commercial production.
As private blockchains begin to be used daily to track supply chains or copyrights, the other big question is whether they will be economically attractive enough to persuade companies to replace their old database systems — with one person in charge — with the inefficiencies that come with multiple people keeping records.But the Bitcoin blockchain faced much more significant questions when it began — like why would any serious person pay attention to some digital tokens that are worth nothing more than the ledger they are written on.
Now there are lots of serious people paying attention to Bitcoin and everything that has spun out from it — the latest blockchain research center is about to be opened by professors at Stanford University. All those serious people make solving problems a lot easier.