The idea of a blockchain began to form in the early 1990s but it was Satoshi Nakamoto who incarnated the first working blockchain in 2009 with the launch of bitcoin.
A blockchain is a type of digital ledger for recording transactions, and is sometimes called a distributed ledger, as the growing record of transactions - or blocks in a chain - is stored on thousands of different servers, and updated simultaneously every ten minutes. Imagine a set of bitcoin transactions taking place between midday and 12.10 in the afternoon on any given day. Each of those transactions is verified by miners looking to earn bitcoins, which are awarded to the successful miner for confirming the latest block of transactions. When the new block of transactions is confirmed, it is broadcast to the network of different nodes that are running the bitcoin software, confirmed, and added to the previous chain of transactions. Because the transactions are verified by the mining process, there is no need for a trusted third party such as a bank to verify the transactions.
The bitcoin blockchain had been growing since 2009, and despite continuous attacks by hackers - including an extended but failed assault by security guru Dan Kaminsky - it was proving to be immutable and resistant to censorship. Around 2014, the new narrative ‘blockchain good, bitcoin bad’ arrived into the world of bitcoin. Banks looking at bitcoin mostly felt queasy. Why encourage something that was potentially a competitor to the payments and banking system? Banks and consultants began to push the idea that the real innovation in the bitcoin ecosystem was not the cryptocurrency itself but the underlying technology of blockchain.
Vitalik Buterin, an early proponent and supporter of bitcoin, had been working hard on developing the first cryptocurrency, and began to see the shape of what some called blockchain 2.0. Late in 2013, when bitcoin was still largely known for its connections to Silk Road, Buterin proposed that bitcoin needed more functionality for developing applications, but when the idea failed to get traction in the developer community, Buterin began working on his own application, which he called Ethereum. His vision was to develop a project that was both a cryptocurrency and software development programme. During 2014, the project raised funds through a crowdsale of Ethereum’s native cryptocurrency Ether. Buterin’s instinct proved correct: other developers began using Ethereum as platforms for launching cryptocurrencies through Initial Coin Offerings or ICOs.
Banks, payment businesses, and consultants sat up and paid attention, sensing a way to get involved in non-bitcoin blockchain projects, free from worries that they might be inadvertently promoting bitcoin. Blockchain advocates started appearing at banking conferences, suggesting that banks could have their own blockchains!
Banks - which have always been alive to threats to their business model - gathered into consortiums to experiment with blockchains. By September 2015, the R3 consortium had gathered 21 major banks including Barclays, Goldman Sachs, Crédit Suisse, UBS, JPMorgan, Citi, Bank of America, RBS and Deutsche Bank. Other banks including Wells Fargo and Dutch bank ABN Amro joined the Hyperledger project, led by the Linux Foundation and supported by IBM, Intel and Cisco.
Ripple, founded by Chris Larsen, offered a digital currency blockchain for real time gross settlements between banks that would otherwise use the standard SWIFT system for settling balances between banks. Ripple’s ledger was owned by a private company, and the system was centralised as opposed to bitcoin’s distributed ledger. Bitcoin is sometimes called a permissionless blockchain, as anyone can join to mine bitcoin or make payments. Ripple is not permissionless: access to the network is restricted to approved parties, and the tokens used in the Ripple system were created at the beginning of the process.
In the scramble to beatify blockchain, several commentators noted echoes of the banking industry’s approach to the early internet: open internet bad, closed internet (intranet) good. This time around, banks decided that not only was blockchain good, it was positively revolutionary. Financial author Chris Skinner, a regular speaker at financial events, was one of the first to notice the new mantra. Midway through 2015, he wrote on his website:
“I’ve been tweeting a while that bankers are all repeating the mantra Bitcoin Bad, Blockchain Good. This rallying cry is now so strong that if you challenge it – is bitcoin really that bad? – everyone quashes the discussion. I’m now of a mind that the majority quash such discussion because they really don’t know what bitcoin is about.
… So here are two test questions for all of you reading this and thinking Bitcoin Bad, Blockchain Good.
One, have you actually read Satoshi Nakamoto’s white paper?
Two, can you explain to me exactly why the blockchain is good?
I don’t do this, as I don’t want to embarrass anyone, but I’m guessing that 99% of the Bitcoin Bad, Blockchain Good people would answer no to both questions.”
Yet the mantra filtered out from the conference circuit into the financial press, and bankers repeated it with relish. Bitcoin supporters greeted the pronouncements with equanimity: most of those decrying bitcoin had a lot to lose if the project kept growing.
The collective pronouncements of banking insiders on bitcoin and blockchain in 2015 set the template for the following three years. Willem Buiter, chief economist at Citi, explained: “You must not confuse the general concept of a decentralized ledger for trading ownership claims with the specific application of this decentralized ledger that we started with, which was bitcoin.” JPMorgan Jamie Dimon, a persistent opponent of bitcoin, got visibly annoyed anytime he was questioned about the cryptocurrency, declaring it “stupid”, “a fraud”, a “terrible store of value”, but useful if you are “a drug dealer, a murderer, things like that”. And Blockchain? “Blockchain is real.”
A host of financial experts offered the opinion that blockchain’s remarkable powers had sadly been wasted on bitcoin, which was variously described as a scam, a ponzi scheme, a modern Tulip Mania or South Sea Bubble. “It’s just disgusting,” said Charlie Munger, business partner of Warren Buffett. “It’s noxious poison.” But while the critics had been focused on the undoubted shortcomings of the bitcoin projects, they largely failed to notice that excited supporters were busily building an infrastructure for the industry. With an eye on history, several entrepreneurs figured that it was better to sell mining equipment than to do the mining themselves - and vast profits awaited.