A blockchain is a distributed database that maintains a continuously growing list of ordered records called blocks. By design, blockchains are inherently resistant to modification of the data — once recorded, the data in a block cannot be altered retroactively.
By next 10 or 15 years, we will probably be seeing, many cryptocurrencies and blockchains. Cryptocurrencies such as Bitcoin are driven by advances in core technologies along with a new, open architecture — the Bitcoin blockchain. Like the internet, this technology is designed to be decentralized, with “layers,” where each layer is defined by an interoperable open protocol on top of which companies, as well as individuals, can build products and services. There are many competing technologies, so it’s important to specify which blockchain you’re talking about and blockchain technology is strongest when everyone is using the same network, so in the future we might all be talking about “the” blockchain.
Bitcoin is the bright beginner application for the blockchain. Bitcoin drives adoption of its underlying blockchain, and its strong technical community and robust code review process make it the most secure and reliable of the various blockchains. It’s likely that some form of Bitcoin will persist. But the blockchain will also support a variety of other applications, including smart contracts, asset registries and many new types of transactions that will go beyond financial and legal uses.
We might best understand Bitcoin as a microcosm of how a new, decentralized, and automated financial system could work. While its current capabilities are still limited (A low transaction volume compared to conventional payment systems), it offers a compelling vision of a possible future because the code describes both a regulatory and an economic system. For example, transactions must satisfy certain rules before they can be accepted into the Bitcoin blockchain. Instead of writing rules and appointing a regulator to monitor for breaches, which is how the current financial system works, Bitcoin’s code sets the rules and the network checks for compliance. If a transaction breaks the rules (for example, if the digital signatures don’t tally), it is rejected by the network. Even Bitcoin’s “monetary policy” is written into its code: New money is issued every 10 minutes, and the supply is limited so there will only ever be 21 million Bitcoins, a hard money rule similar to the gold standard (a system in which the money supply is fixed to a commodity and not determined by government).
This is not to say the choices Bitcoin currently offers are perfect. In fact, many economists disagree with Bitcoin’s hard money rule, and lawyers argue that regulation through code alone is inflexible and doesn’t permit any role for useful discretion. What cannot be disputed, however, is that Bitcoin is real, and it works. People ascribe real economic value to Bitcoins. “Miners,” who maintain the Bitcoin blockchain, and “wallet providers,” who write the software people use to transact in Bitcoin, follow the rules without exception. Its blockchain has remained resilient to attack, and it supports a robust, if basic, payment system. This opportunity to extend the use of the blockchain to remake the financial system unnerves and enthralls in equal measure.
The existing financial system is very complex at the moment, and that complexity creates risk. A new decentralized financial system made possible with cryptocurrencies could be much simpler by removing layers of intermediation. It could help insure against risk, and by moving money in different ways could open up the possibility for different types of financial products. Cryptocurrencies could open up the financial system to people who are currently excluded, lower barriers to entry, and enable greater competition. Regulators could remake the financial system by rethinking the best way to achieve policy goals, without diluting standards. We could also have an opportunity to reduce systemic risk: Like users, regulators suffer from opacity. Research shows that making the system more transparent reduces intermediation chains and costs to users of the financial system.
Bitcoin was first created as a response to the 2008 financial crisis. The originating community had a strong libertarian and antiestablishment spin that it could become standard fare for established players like large companies, governments, and central banks.
