A Simple Explanation For Why Blockchains Matter
Look beyond the dog coins and expensive JPEGs
Blockchains and cryptocurrencies are not easy things to get your head around. When teaching some classes earlier this year on crypto, it took me a long time to work out where to even begin trudging through the maze of terminology and concepts so students could understand the legal issues at play. Of course, most people (and my students were no exception) associate blockchains with daredevil cryptocurrency speculation or bizarre-looking pictures of apes, neither of which help give a sense of whether blockchains are fundamentally useful or not.
Here’s my best shot at explaining why I think blockchains do matter and represent an important technological breakthrough.
Zooming out for a moment, one way of thinking of human progress across history is in our creation of institutions that allow us to live harmoniously with one another, even when the vast majority of people who share a city or country are strangers. The legal system is a great example where everyone agrees to follow a certain set of rules to keep society functioning. You don’t need to carry a weapon for self-protection in the streets, because you can generally trust institutions like the criminal law and police to keep you safe. That saves you from needing to trust in the good intentions of every stranger you might run into in a dark alley.
The world economy is essentially built on a similar foundation of trust, enabled by effective institutions. If you sign a contract to perform a service for someone else for a certain sum, and they don’t pay up, you can take them to court to get your money. You don’t need to trust the other person - they might be a total stranger - but you will be willing to do business anyway because you trust that the legal system will enforce your contract. Reliable institutions are a necessity to unleash social and economic activity. When institutions are corrupt or broken, as seen in many places around the world, people become nervous about engaging in exchanges that would otherwise be mutually beneficial.
With this context in mind, blockchains can be understood as a new technology for facilitating trust between strangers.
Specifically, what blockchains do is provide a platform for interactions over the internet where the rules are hard-wired into code. This means you don’t need to trust a stranger on the other side of the world in order to securely interact with them on a blockchain application. You don’t need to trust a middleman like Stripe or Paypal in order to transact money over a blockchain, and you don’t need to trust a court system to ensure that agreements are properly complied with. Contracts programmed into a blockchain will instantaneously execute when their conditions are met, meaning there is little scope for another party to run away with your money (the boring term for this is minimising counterparty risk).
Cryptocurrencies are the archetypical example of what can be built on this kind of secure digital infrastructure. If you sell your car for a bitcoin (not advisable), the blockchain will verify that the bitcoin has actually been sent to you - you don’t need to trust that the other person has sent it, and you don’t need to rely on a middleman like a bank to verify the transaction. This quality is why blockchain and crypto are often described as ‘decentralised’: the technology provides trust as an inbuilt feature, rather than needing to rely on third parties. It also means that cryptocurrencies like bitcoin or ether are built on code rather than precepts issued by a central bank.
Put simply, blockchains are trust machines, and they’re flexible too. Modern blockchains are ‘Turing-complete’, meaning they can theoretically be programmed to perform any conceivable task. This enables a wide variety of collaboration and interaction without the need for a third party to provide trust assurances.
This basic foundation has produced a huge amount of innovation, much like contemporary institutions enable many new forms of economic activity. Since the relatively recent invention of the modern blockchain in 2015, we have seen:
globally accessible financial applications including borrowing, lending and derivatives (sometimes termed decentralised finance or DeFi)
new kinds of organisations (DAOs) built on smart contracts rather than a traditional structure like a company or a charitable trust
the bundling of rights to digital art or items, for instance as non-fungible tokens (NFTs)
While these specific applications all have their own complexities, you don’t really need to understand any of them in order to have a reasonable sense of what blockchains do.
One important caveat to the above is that this is an early-stage technology with a lot of teething issues. While blockchains provide inbuilt security and facilitate trust, a nasty cottage industry has sprouted up trying to scam people out of their money before they reach the security of a legitimate blockchain. The learning curve I described at the start of this piece extends to the user experience, too. At this point in time, blockchains are not easy or intuitive to use. None of these issues, however, are insurmountable.
The promise of the blockchain is compelling, and a lot of smart people are working towards building that vision of globally accessible infrastructure for facilitating trust over the internet. Combustible cryptocurrency prices and NFT dramatics are sideshows: blockchains are here to stay.