Chapter 2
Establishing Potential

Trade is based on trust, which can be difficult to build and easy to break. Who am I trading with? How do I know that I’m going to get what I traded for? Will the other party honor our agreement? In contemporary society, these problems are often solved by intermediaries.

In modern financial systems, massive institutions such as banks, law firms, and brokerage houses guarantee transactions. A consumer orders a shirt online, and the bank confirms to the vendor that the consumer can pay for it. Intermediaries ensure the package is delivered and the payment is received.

It can be easy to forget how complicated these transactions can be. A person can’t buy something until they are certain that the seller actually owns it. At each stage, ownership has to be established—that the seller possesses the goods to be sold and the buyer possesses the means to pay for it. The agreement must be made by both sides and confirmed by the intermediary.

For larger and more complicated transactions, it should be noted, the intermediary could fail. Clerks can make mistakes, documents can be lost, titles can be forged, and officials can be bribed to change records. In the global financial crisis of 2007–2008, banks failed to verify that new owners could pay for the houses they bought.

Blockchain, however, removes this uncertainty. Ownership of an asset is independently confirmed through the blockchain ledger. Since the ledger exists in copies distributed all over the world, it is extremely difficult—if not impossible—to alter it without detection. In addition, if one part of the network fails, the ledger that proves ownership will still exist in other parts of the network. This decentralized network is thus safe from a single person, or regime, seeking to shut it down.

Eliminating the Intermediary

By establishing proof of ownership, the blockchain removes the intermediary, which can bring many benefits. “We pay these centralized entities handsomely for their custodial services, not only in the form of rents they charge but in the control they exert over our lives,” wrote tech journalist Gideon Lewis-Kraus. “The blockchain, in theory, affords us new opportunities to solve complex coordination problems without letting the incumbent coordinators extract so much value in the process.”

Consider something as simple as buying tickets to a sports event. Many people use a popular website to buy tickets. The website establishes that the ticket actually exists, confirms the exchange of the ticket between two parties, and then has a mechanism for delivery. For these services, the website, acting as an intermediary, adds a hefty fee, increasing the cost of the ticket significantly.

On blockchain, however, the ticket would be assigned a public address. The owner holds the private key that gives her access to the address. When the owner sells the ticket, a new address is created for the ticket and added to the blockchain. The new owner receives a new private key that establishes her ownership of the ticket. No intermediary is needed, and no fee is added to the ticket’s cost. As an added bonus, the transaction is virtually instantaneous.

Banks are the ultimate intermediary. Blockchain supporters believe blockchain-based applications could replace vast portions of the current financial system. New companies that need funding could issue tokens rather than stock. Houses could be bought and sold without the extensive due diligence required today.

This illustration shows how two people use each other’s keys to verify ownership and conduct a transaction. To begin, Bob uses a key generation function to transform a big, random number into two keys: a private key and a public key. He uses his private key to encrypt some information and then sends the information to Alice. Alice, on the other end of the transaction, uses Bob’s public key to decrypt the message. Because the two keys were made by the same mathematical function, they are related to each other, so the public key verifies Bob’s private key without revealing it to Alice.

Banking has grown much more convenient over the past two decades with the creation of cash machines and online banking. But the underlying system has changed remarkably little. It still takes twenty-four hours to wire money. The routing number at the bottom of paper checks was first developed a century ago. Even credit card transactions can take several minutes to settle. Many blockchain transactions, in comparison, take seconds.

Another area of the global economy crowded with intermediaries is trade. This system can introduce inconsistencies, lead to errors, and offer opportunities for fraud. In October 2015, a number of Chipotle customers fell ill from E. coli bacteria. As customers fled and the company’s stock price plunged, management frantically searched for the source of the outbreak. The investigation, however, stalled. After five months, the company reported that contaminated meat from Australia was the likely source. They could not be more precise than that.

The problem is that companies work with many suppliers, and these suppliers are often incentivized not to work together. In fact, they often compete for business from the larger company. As a result, information can be inaccessible to other members of the supply chain, or even to the company making the orders. Managers at a number of restaurant chains have no way of confirming the food they receive meets agreed-upon standards.

As conservation biologist Guillaume Chapron stated, “One reason why we have environmental crises, like the overexploitation of natural resources, and pollution, is because the global economy is full of actors who are doing business without much accountability. When you go buy something, you have no idea where it comes from, how it’s made. There are so many intermediaries, and it’s very easy to cheat.”

Blockchain, however, provides a time-stamped log of each transaction. The log is transparent and cannot be changed without alerting all the other people on the network. For example, when transporting food, the information in the log may include storage temperature and location, why the item was moved, and even whether the truck transporting the products shook too much (which can cause a significant loss of shelf life for some products—think bruised apples). As a result, blockchain can allow strangers with different goals to establish trust and work together. The ultimate goal is transparency that does not compromise each company’s competitive information. Moreover, blockchain establishes a standard ledger between parties that covers the details of a transaction from origin to delivery. While this structure by itself won’t eliminate fraud (after all, someone could deliberately enter false records), it establishes consistency in record keeping. Some of the largest companies in the world, such as IBM, Walmart, Carrefour, and Tyson Foods, have explored how they can use blockchain technology.

Even some relatively small companies are already using blockchain. For example, on a ranch in northern Wyoming, a few hundred calves are logged to a blockchain. The blockchain allows the rancher—who raises his animals on open grassland—to prove to customers that his meat is higher quality and is raised humanely. Typically, tracking is a paper-intensive process with multiple places for errors or fraud as cows are traded and moved from one spot to another. Blockchain addresses these challenges in tracking beef.

Blockchain technology may give diners an intimate portrait of the chicken they are about to eat. A chicken can wear a device on its foot that tracks it through the supply chain from farm to plate. Information about each chicken is uploaded to a blockchain. Diners downloading this information via an app to their smartphones could become the new norm. Blockchain could even come to supermarkets—one shopper recalls being able to scan a box of berries and see the family that grew them.

At a conference in New York City in 2018, tuna sushi was served to attendees. Each napkin had a QR code that the attendee could scan with a smartphone. The code then showed them, via blockchain, how the fish was caught off the island of Fiji in the South Pacific, as well as how it was tagged with an ID and tracked as each individual piece was transported over thousands of miles to their plates.

Blockchain can be used for more than just commerce. Environmental causes often fail because supporters are not certain how their donation is being used, or whether a product is genuinely favorable to the environment. One group, Plastic Bank, tries to reduce the amount of plastic that enters the world’s oceans, where it has become a serious source of pollution. Plastic Bank pays individuals tokens for redeemed plastic bottles and other plastic waste. It then resells the plastic at a premium to manufacturing companies, which attracts environmentally aware consumers. Blockchain is essential to each part of this process. It guarantees payment for pieces of plastic, often in societies with no banking or high crime rates. It ensures that the plastic used in the recycled products is actually recycled, assuring the end user their purchase has helped support an environmental cause.

Smart Contracts

As Bitcoin became more popular, a young Russian Canadian named Vitalik Buterin became excited by the potential to apply blockchain technology to a much larger range of transactions. Buterin was the son of a computer scientist from Grozny in Chechnya, a republic in southwestern Russia that was mostly destroyed in the 1990s when Russian troops fought bitter urban battles with separatists. His father immigrated to Canada when Buterin was six, and he inherited much of his father’s disgust for governments and the havoc they could wreak.

“I saw everything to do with either government regulation or corporate control as just being plain evil,” Buterin told a New Yorker reporter, “and I assumed that people in those institutions were kind of like Mr. Burns [Homer Simpson’s greedy boss in The Simpsons], sitting behind their desks saying, ‘Excellent. How can I screw a thousand people over this time?’ ”

Buterin was also attracted to the individuals who were creating a new decentralized system. “Their earlier pedigrees, if they had any pedigrees at all, were in open source—Linux, Mozilla, and cypherpunk mailing lists,” he said. “I found it immensely empowering that just a few thousand people like myself could re-create this fundamental social institution from nothing.”

Buterin admired Bitcoin, but he wanted to do more than simply process transactions based on a digital currency. He wanted to create a peer-to-peer network that accomplished tasks. These tasks were set out in agreements called smart contracts.

Smart contracts can connect to several blockchains and execute agreements without the need for human interaction. Smart contracts could be used for a guaranteed transaction that is based on timing, such as renting an apartment. The renter pays in Bitcoin, which releases a code providing access to the apartment. If the landlord doesn’t send the code by a certain time, then the Bitcoin is refunded to the renter. The smart contract automatically verifies all pieces of the transaction through the decentralized peer-to-peer network. This includes the landlord’s ownership of the apartment and the tenant’s possession of the Bitcoin to pay for it. This process eliminates the intermediaries, such as banks, and saves both the renter and the landlord money and time.

In 2015, Buterin launched the Ethereum platform, which uses a cryptocurrency called Ether to pay the computers on the peer-to-peer network to execute smart contracts. Buterin described his creation as “Android for decentralized apps”—leading him to call the smart contracts “Dapps.” Buterin compared Ethereum to a smartphone that is programmed to perform the apps (or “Dapps”) on its platform. In effect, programmers on Ethereum had access to a decentralized supercomputer.

Buterin speaks at TechCrunch Disrupt, a technology conference, in 2015. Buterin received a fellowship award of $100,000 in 2014 that he used to help fund Ethereum.

“If it lived up to all that Buterin and others imagined,” wrote digital currency experts Michael Casey and Paul Vigna, “the system would amount to a global decentralized virtual machine, one that always implemented users’ coding instructions without any control by any one computer.”

Buterin and many blockchain supporters hoped Ethereum and other blockchain platforms would help address a major problem. Most people’s experiences on the internet were absorbed onto massive platforms such as Google, Facebook, and Amazon. The platforms had started out as places where people could simply carry out tasks, such as “search” or “buy an item,” or connect with another person or group. But over time, the platforms appeared more and more to be dictating these experiences. Through tracking and gathering of data, they used algorithms to deliver information and advertisements to users. Worse, they demanded the user surrender their personal information to have access to the platform. Many hoped that blockchain could eliminate these intermediaries and restore the original promise of the internet.