Читать книгу The Truth Machine: The Blockchain and the Future of Everything - Paul Vigna, Michael Casey J. - Страница 9
ОглавлениеIt might surprise you to read this, but the most subversive, controversial, anti-authoritarian idea in the world of finance, an idea so powerful every government on the planet is trying to figure out whether to co-opt it or outlaw it, the dream of the most fervent libertarian, dark-Web denizens, is a ledger.
Like, an accounting book.
The genesis of that subversive idea was, of course, Bitcoin, which, when boiled down to its most basic concept, is founded on the upkeep of a digitized ledger, a record of exchanges and transactions. What makes this ledger so radical, so controversial, is the way in which this record of transactions, known as a blockchain, is created and maintained. Bitcoin, released in 2009 by a person or persons using the pseudonym Satoshi Nakamoto, was designed to be an end-around to the banks and governments that have for centuries been the guardians of our financial systems. Its blockchain promised a new way around processes that had become at best controlled by middlemen who insisted on taking their cut of every transaction, and at worst the cause of some man-made economic disasters.
You probably bought this book expecting to read crazy, wild ideas about our digitized future … and here we are, giving you ledgers. But ledgers have been integral in underpinning the development of civilization for millennia. The trinity of writing, money, and ledgers made it possible for human beings to do business beyond kinship groups and thus form larger settlements. And while the contributions of money and writing are well appreciated, ledgers tend to be known only by those who studied the dry science of accounting.
The advent of the first ledger technology can be traced back to roughly 3000 BCE, in ancient Mesopotamia (modern-day Iraq). Of the tens of thousands of clay tablets the Mesopotamians left behind, most are, well, ledgers: records of taxes, payments, private wealth, worker pay. The famous Code of Hammurabi—the Babylonians’ system of law—was written on one of these ledgers, but most of the kings had their own rules set out as well. The rise of these ledgers matched the rise of the first large-scale civilizations.
Why have ledgers been so important throughout history? Exchanges of goods and services have defined the expansion of societies, but this was possible only if people could keep track of the exchanges. It wasn’t so difficult for everyone in a small village to remember that someone had killed a pig and to trust—a word we’ll encounter throughout this book—that all who ate of it would find some way to later repay the hunter, perhaps with a new arrowhead or some other thing of value. It was another to manage these cross-societal obligations across a larger group of strangers—especially when moving outside of kinship boundaries made it harder to trust each other. Ledgers are record-keeping devices that help deal with those problems of complexity and trust. They help us keep track of all the multiple exchanges upon which society is built. Without them, the giant, teeming cities of twenty-first-century society would not exist. That said, ledgers are not truth itself—not in an absolute sense—for when it comes to matters of value, an element of judgment and estimation is always present in the recording process. Rather, they are tools for getting closer to the truth, to an approximation of it that’s acceptable to all. Problems arise when communities view them with absolute faith, especially when the ledger is under control of self-interested actors who can manipulate them. This is what happened in 2008 when insufficient scrutiny of Lehman Brothers’ and others’ actions left society exposed and contributed to the financial crisis.
Money itself is intrinsically linked to the idea of a ledger. Physical currency like gold coins and paper money are, similarly, record-keeping devices; they too aid with societal memory. It’s just that rather than existing within a written account of transactions, a currency’s record-keeping function is abstracted into the token—the gold coin, the dollar bill. That token is communally recognized as conveying some right to goods or services that the bearer has earned from tasks performed in the past.
Once human beings started to engage in exchanges of money across distances, tokens’ capacity to play this record-keeping function broke down. There was no way for the payer to physically deliver the tokens to the payee without having to trust a courier who might well steal it. The solution came with the advent of a new form of ledger-keeping known as double-entry bookkeeping, an approach that was pioneered, as we’ll discuss lower down, by a clique of Renaissance bankers. In adopting this bookkeeping, they thrust banking into the payments business and, for centuries, helped to greatly expand the capacity for human exchange. It’s not an overstatement to say that this idea of banking built the modern world. But it also amplified a problem that had always dogged ledgers: can society trust the record-keeper?
Bitcoin tackled this problem by reimagining the ledger itself. It confronted the problem that bankers themselves are not necessarily to be trusted and might rip you off with hidden fees and opaque charges. Bitcoin did this by, for the first time, entrusting responsibility for confirming and maintaining the ledger of transactions to a community of users who checked each other’s work and agreed on a common record to represent their shared approximation of the truth. A decentralized network of computers, one that no single entity controlled, would thus supplant the banks and other centralized ledger-keepers that Nakamoto identified as “trusted third parties.” The ledger they collectively produced would become known as the blockchain.
With Bitcoin’s network of independent computers verifying everything collectively, transactions could now be instituted peer to peer, that is, from person to person. That’s a big change from our convoluted credit and debit card payments system, for example, which routes transactions through a long sequence of intermediaries—at least two banks, one or two payment processors, a card network manager (such as Visa or Mastercard), and a variety of other institutions, depending on where the transaction takes place. Each entity in that system maintains its own separate ledger, which it later must reconcile with every other entity’s independent records, a process that takes time, incurs costs, and carries risks. Whereas you might think that money is being instantly transferred when you swipe your card at a clothing store, in reality the whole process takes several days for the funds to make all those hops and finally settle in the storeowner’s account, a delay that creates risks and costs. With Bitcoin, the idea is that your transaction should take only ten to sixty minutes to fully clear (notwithstanding some current capacity bottlenecks that Bitcoin developers are working to resolve). You don’t have to rely on all those separate, trusted third parties to process it on your behalf.
The key architectural feature of Bitcoin and other cryptocurrency systems that lets these peer-to-peer transactions happen is the distributed nature of the blockchain ledger. That decentralized structure is made possible because of a unique software program that uses strong cryptography and a groundbreaking incentive system to guide the ledger-keepers’ computers to reach consensus. It does so in a way that makes it virtually impossible for anyone to change the historical record once it has been accepted.
The result is something remarkable: a record-keeping method that brings us to a commonly accepted version of the truth that’s more reliable than any truth we’ve ever seen. We’re calling the blockchain a Truth Machine, and its applications go far beyond just money.
To see how the blockchain’s “God’s-eye” view could be valuable, let’s turn the lens away from Bitcoin for now and onto the traditional banking system. It’s there that we can see the problems blockchains are supposed to solve.
The Trust Bubble
On January 29, 2008, the Wall Street firm Lehman Brothers reported its financial statement for the fiscal year of 2007. It had been a good year for Lehman, despite some rumblings in the stock market and a downturn in the housing market, which had been red-hot for years and a major source of revenue for investment and commercial banks. The firm, founded 167 years earlier in Alabama and one of the bedrock institutions of Wall Street, posted record revenue for 2007, $59 billion, and record earnings, $4.2 billion. The amount was more than twice what the company had brought in and earned just four years earlier. Lehman’s “books” had never looked better.
Nine months later, Lehman Brothers was out of business.
Lehman Brothers is often Exhibit A in the breakdown of trust in the twenty-first century. A lion of Wall Street, the firm was revealed to be little more than a debt-ravaged shell kept alive only by shady accounting—in other words, the bank was manipulating its ledgers. Sometimes, that manipulation involved moving debt off the books come reporting season. Other times, it involved assigning arbitrarily high values to “hard-to-value” assets—when the great selloff came, the shocking reality hit home: the assets had no value.
The crash of 2008 revealed most of what we know about Wall Street’s confidence game at that time. It entailed a vast manipulation of ledgers. The recorded value of the assets those ledgers were supposed to track—including those havoc-causing credit default swaps—turned out to be largely vapor. The shock of Lehman wasn’t so much that it happened, but that even most experts trusted the ledgers so completely until it was too late.
Governments and central banks around the world spent trillions to clean up the mess, but all they really did was restore the old order, because they misdiagnosed the problem. The accepted wisdom was that this was a crisis of liquidity, in which the market broke down due to a lack of short-term funding. If you’ve ever been short a couple of hundred to cover your monthly bills, you understand what this looks like. The reality is, banks were sitting on trillions of purportedly valuable assets they could not even remotely value in the real world. They’d simply assigned poorly substantiated values and put them on their books. We all believed them because we trusted them. We trusted what the ledgers told us. The real problem was never really about liquidity, or a breakdown of the market. It was a failure of trust. When that trust was broken, the impact on society—including on our divided political culture—was devastating.
The authorities swore in the wake of the crisis that they had a handle on the problem—they passed legislation to bring the banking sector to heel and rein in Wall Street’s worst speculative habits. But to many in the public, it seemed they’d done little more than save the banks and corporations. Anger festered and turned into the Tea Party and Occupy Wall Street. Through all of the years since, the general public’s trust has never been restored. Look no further than the election of a reality-show TV star to the U.S. presidency. It may have felt good to cast that protest vote for Donald Trump and stick it to the elites, but it seems pretty clear—to us at least—that all Trump was offering was the same old warmed-over economic ideas with a dash of hot sauce. We are no better off now than we were in 2008.
By various measures, the U.S. economy has recovered—at the time of writing, unemployment was near record lows and the Dow Jones Industrial Average was at record highs. But those gains are not evenly distributed; wage growth at the top is six times what it is for those in the middle, and even more compared to those at the bottom. That’s a dynamic that’s been building for decades, but it was made worse by the financial crisis, as well as the policies imposed since then to prop up the financial markets in which the rich hold their assets. It’s one reason people both within and outside the United States believe they’ve been shortchanged by the institutions that had throughout the twentieth century delivered progress and prosperity. This is clear in Pew Research’s ongoing longitudinal study of trust in government in the United States, which puts trust near historic lows (about 20 percent in May 2017). A separate survey by Gallop showed that only 12 percent of U.S. citizens trusted Congress in 2017, down from 40 percent in 1979; that about 27 percent trusted what they heard from newspapers, compared with 51 percent thirty-eight years earlier; and that 21 percent trusted big business, down from 32 percent.
At the time of writing, even traditional Republicans are wondering (1) how on earth Donald Trump was ever elected president, and (2) why so many people seem to fall prey to blatant disinformation and conspiracy theories. Trump’s manifestly a liar, someone who lies even when evidence disproving the lie is readily available. But here’s the bigger problem: in a world where trust has eroded sharply, where our government doesn’t work, and where companies that once guaranteed jobs for life are now either outsourcing them or hiring robots, Trump’s lies can seem minor in comparison to the more systemic breach of trust voters are feeling. Once-trusted news organizations are now thrust into competition with dubious online purveyors of disinformation, with both being accused of peddling “fake news.” The public’s store of trust in institutions is being depleted, and without resolving that breakdown, our democracy will continue to deteriorate at the hands of politicians and media that tell them what they want to hear.
Trust—particularly trust in our institutions—is a vital social resource, the true lubricant of all human interaction. When it works, we take it for granted—we wait our place in line, follow road rules, and assume everyone else will do the same. The trust behind these interactions is not present in our conscious minds. But when trust is lacking, things really, really break down. Today, it’s seen most starkly in places like Venezuela, where people have lost faith in the stewardship of their government and its money, leading to hyperinflation, goods shortages, starvation, violence, rioting, and massive social upheaval. But it’s evident in more subtle ways across the Western world. As government officials and central bankers seek to boost investment and create jobs, printing more money or bestowing more favor on connected players as they go, citizens everywhere are calling foul on the whole enterprise. It brought the United States Donald Trump and the United Kingdom Brexit. But it also created economic dysfunction. If people don’t trust our economic systems, they don’t take risks; they don’t spend. The loser is economic growth and development.
This trust problem is intrinsically connected with ledgers and record-keeping. To comprehend that, we’ll explore the little-known story of a Franciscan friar with a love of math who developed a system that fueled Europe’s explosion out of the Dark Ages more directly than the Medici bankers who financed that growth. From there, we can draw a line all the way forward to Lehman Brothers and show how a better accounting system, such as blockchain, could be the answer to society’s deep funk.
Truth, Trust, and “the Books”
How is it possible that a business could earn $4.2 billion one year and be out of business the next? The reason is not just because Lehman Brothers was manipulating its ledgers but because it was taking advantage of the trust invested in it by shareholders, regulators, and the public at large. On the accounting side, Lehman resorted to myriad tricks to bolster its books, those all-important financial documents that investors and other stakeholders depend upon to ascertain the risk of dealing with an institution. Lehman’s accountants would move billions of dollars’ worth of debts off the bank’s balance sheet at the end of a quarter and stash them in a temporary accounting facility called a repo transaction, a device that’s supposed to be used to raise short-term capital, not hide debt. When it came time to report, the company didn’t appear to be overly indebted. Once the report was in, the company brought the debt back on the books. Really, it was as if the company was maintaining two sets of books—one it showed the public, one it kept private. Most people accepted what was reported in the public-facing books, Lehman’s version of “the truth.” Just how severely skewed Lehman’s books were would become clear in September 2008. But the problem really started with the public’s trust, in the blind faith given to the company’s numbers. And that problem—quite literally one of faith—goes way, way back.
Double-entry accounting was popularized in Europe toward the end of the fifteenth century, and most scholars believe it set the table for the flowering of the Renaissance and the emergence of modern capitalism. What is far less well understood is the why. Why was something as dull as bookkeeping so integral to a complete cultural revolution in Europe?
Over nearly seven centuries, “the books” have become something that, in our collective minds, we equate with truth itself—even if only subconsciously. When we doubt a candidate’s claims of wealth, we want to go to his bank records—his personal balance sheet. When a company wants to tap the public markets for capital, they have to open their books to prospective investors. To remain in the market, they need accountants to verify those books regularly. Well-maintained and clear accounting is sacrosanct.
The ascendance of bookkeeping to a level equal to truth itself happened over many centuries, and began with the outright hostility European Christendom had to lending before double-entry booking came along. The ancients were pretty comfortable with debt. The Babylonians set the tone in the famous Code of Hammurabi, which offered rules for handling loans, debts, and repayments. The Judeo-Christian tradition, though, had a real ax to grind against the business of lending. “Thou shalt not lend upon usury to thy brother,” Deuteronomy 23:19–20 declares. “In thee have they taken gifts to shed blood; thou hast taken usury and increase, and thou hast greedily gained of thy neighbors by extortion, and hast forgotten me, saith the Lord God,” Ezekiel 22:12 states. As Christianity flourished, this deep anti-usury culture continued for more than a thousand years, a stance that coincided with the Dark Ages, when Europe, having lost the glories of ancient Greece and Rome, also lost nearly all comprehension of math. The only people who really needed the science of numbers were monks trying to figure out the correct dates for Easter.
It was only during the twelfth century and the Crusades, when Europeans began trading with the East, that they encountered the mathematics that had developed in the Arab world and Asia. In the thirteenth century, an Italian merchant named Fibonacci made trips to Egypt, Syria, Greece, and Sicily, where he collected numerous mathematical papers. His Liber Abaci, a book filled with integers and fractions, square roots and algebra, showed how this new math had commercial applications, such as currency transfers and profit calculations. Before Fibonacci, European merchants simply couldn’t calculate the things we take for granted today; he taught them how to measure proportions, how to divide, say, a bale of hay and charge accurate prices. He taught them how to divide profits in an enterprise. Fibonacci’s math gave them precision in business matters that people did not previously have.
Fibonacci’s new numbering system became a hit with the merchant class and for centuries was the preeminent source for mathematical knowledge in Europe. But something equally important also happened around this time: Europeans learned of double-entry bookkeeping, picking it up from the Arabians, who’d been using it since the seventh century. Merchants in Florence and other Italian cities began applying these new accounting measures to their daily businesses. Where Fibonacci gave them new measurement methods for business, double-entry accounting gave them a way to record it all. Then came a seminal moment: in 1494, two years after Christopher Columbus first set foot in the Americas, a Franciscan friar named Luca Pacioli wrote the first comprehensive manual for using this accounting system.
Pacioli’s Summa de arthmetica, geometria, proportioni et proportionalita, written in Italian rather than Latin so as to be more accessible to the public, would become the first popular work on math and accounting. Its section on accounting was so well received that the publisher eventually published it as its own volume. Pacioli offered access to the precision of mathematics. “Without double entry, businessmen would not sleep easily at night,” Pacioli wrote, mixing in the practical with the technical—Pacioli’s Summa would become a kind of self-help book for the merchant class.
That a member of the clergy took an interest in double-entry bookkeeping was important, because Pacioli’s method helped the merchants overcome the church’s disdain for usury. The merchants had to prove to the church that their businesses were not, in fact, sinful, that they provided a benefit to mankind. During the Middle Ages, writes author James Aho, “the very thought that a person might be profit-hungry and yet Christian was an outrage.” Double-entry accounting, completely unintentionally, provided a way around this. How? The answer lies in the Book of Revelations, Christianity’s tale of a final reckoning, where it is said:
And I saw the dead, small and great, stand before God; and the books were opened; and another book was opened, which is the book of life; and the dead were judged out of those things which were written in the books, according to their works.
Interpretation: The dead stand before God and open their book. Then God opens his book. The second book. You might call this, oh, double bookkeeping. “Whosoever was not found written in the book of life was cast into the lake of fire.” Through a simple method of accounting, the merchant class was able to perform a trick that had eluded them for a millennium: making it acceptable to engage in the business of making loans. Double-entry bookkeeping, Aho writes, “was itself complicit in the invention of a new ‘field of visibility’: the Christian merchant.”
This deliberate connection between biblical records and accounting records is evident in Pacioli’s writings. His very first instruction in describing his double-entry method directed: “Businessmen should begin their business records with the date AD, marking every transaction so that they always remember to be ethical and, at work, always act mindful of His Holy name.”
Once usury was liberated from the Christian distrust of commerce, people began to take it up. The Medici of Florence came first, turning themselves into vital middlemen in the matching of money flows around Europe. The Medici’s breakthrough was made possible because of their consistent use of double-entry ledgers. If a merchant in Rome wanted to sell something to a customer in Venice, these new ledgers solved the problem of trust between people who lived at great distances from each other. By debiting the payer’s bank account and crediting that of the payee—with double-entry practices—the bankers were able to, in effect, move money without having to ship physical coins. In so doing, they transformed the whole enterprise of payments, setting the stage for the Renaissance and for modern capitalism itself. Just as important, they also established the 500-year practice of bankers creating an essential role for themselves as society’s centralized trust bearers.
The value of double-entry bookkeeping, therefore, wasn’t merely in dry efficiency. The ledger came to be viewed as a kind of moral compass, whose use conferred moral rectitude on all involved with it. The merchant was pious, the banker had sanctity—three popes in the sixteenth and seventeenth centuries came from the Medici family—and the trader discharged his business with veneration. Businessmen, previously mistrusted, became moral, upstanding pillars of the community. Aho writes: “Methodist Church founder John Wesley, Daniel DeFoe, Samuel Pepys, Baptist evangelicals, the deist Benjamin Franklin, the Shakers, Harmony Society, and more recently, the Iona Community in Britain, all insist that the keeping of meticulous financial accounts is part and parcel of a more general program of honesty, orderliness, and industriousness.”
Thanks to mathematical concepts imported from the Middle East during the Crusades, accounting became the moral grounding for the rise of modern capitalism, and the bean counters of capitalism became the priests of a new religion. Most (though certainly not all) people today have a hard time seeing the Bible as literal truth; but they had no trouble seeing Lehman Brothers’ books as literal truth—until the gaping inconsistencies were exposed.
The great irony of 2008 was that our belief in a system of accounting, a belief woven so deeply inside our collective psyche that we’re not even aware of it, made us vulnerable to fraud. Even when done honestly, accounting is sometimes little more than an educated guess. Modern accounting, especially at the big, international banks, has become so convoluted that it is virtually useless. In a comprehensive dissection in 2014, the Bloomberg columnist Matt Levine explained how a bank’s balance sheet is almost impossibly opaque. The “value” of a large portion of the assets on that balance sheet, he noted, is simply based on guesses made by the bank about the collectability of the loans they make, or of the bonds they hold, and the prices that they might fetch on the market, all measured against the offsetting and equally fuzzy valuation of their liabilities and obligations. If a guess is off by even 1 percent, it can turn a quarterly profit into a loss. Guessing whether a bank is actually profitable is like a pop quiz. “I submit to you that there is no answer to the quiz,” he wrote. “It is not possible for a human to know whether Bank of America made money or lost money last quarter.” A bank’s balance sheet, he said, is essentially a series of “reasonable guesses about valuation.” Make the wrong guesses, as Lehman and other troubled banks did, and you end up out of business.
Our goal here is not to trash double-entry bookkeeping or the banks. Were we to, you know, add up all the debits and credits, double-entry bookkeeping has done more good than harm. The goal really is to show the deep historical and cultural roots behind why we trusted this kind of accounting. The question now, in the wake of our fall, is whether a particular technology that allows a different kind of bookkeeping will help us renew our trust in our economic system. Can a blockchain, which is continuously open to public inspection and guaranteed not by a single bank but by a series of mathematically secured entries into a ledger that’s shared and maintained by many different computers, help us rebuild our lost social capital?
The God Protocol
On October 31, 2008, while the world was drowning in the financial crisis, a little-noticed “white paper” was released by somebody using the pen name “Satoshi Nakamoto,” and describing something called “Bitcoin,” an electronic version of cash that didn’t need state backing. At the heart of Nakamoto’s electronic cash was a public ledger that could be viewed by anybody but was virtually impossible to alter. This ledger was essentially a digitized, objective rendering of the truth, and in the years to follow it would come to be called the blockchain.
Nakamoto combined several elements to come up with his Bitcoin. But like Fibonacci and Pacioli centuries before, he wasn’t the only one working on the idea of leveraging the technology of the day to create better systems. In 2005, a computer expert named Ian Grigg, working at a company called Systemics, introduced a trial system he called “triple-entry bookkeeping.” Grigg worked in the field of cryptography, a science that dates way back to ancient times, when coded language to share “ciphers,” or secrets, first arose. Ever since Alan Turing’s calculating machine cracked the German military’s Enigma code, cryptography has underpinned much of what we’ve done in the computing age. Without it we wouldn’t be able to share private information across the Internet—such as our transactions within a bank’s Web site—without revealing it to unwanted prying eyes. As our computing capacity has exponentially grown, so too has the capacity of cryptography to impact our lives. For his part, Grigg believed it would lead to a programmable record-keeping system that would make fraud virtually impossible. In a nutshell, the concept took the existing, double-entry bookkeeping system and added a third book: the independent, open ledger that’s secured by cryptographic methods so that no one can change it. Grigg saw it as a way to combat fraud.
The way Grigg described it, users would maintain their own, double-entry accounts, but added to these digitized books would be another function, essentially a time stamp, a cryptographically secured, signed receipt of every transaction. (The concept of a “signature” in cryptography means something far more scientific than a handwritten scrawl; it entails combining two associated numbers, or “keys”—one publicly known, the other private—to mathematically prove that the entity making the signature is uniquely authorized to do so.) Grigg envisioned his triple-entry accounting as a software program that would run within, say, a large company or organization. But the third ledger, containing the sequence of all those signed receipts, could be verified publicly, and in real time. Any deviation from its time-stamped records would be an indication of a fraud. Picture a fraud like Bernie Madoff’s, in which Madoff was simply making up transactions and recording them in completely fictitious books, and you can see the value in a system that can verify accounts in real time.
Before Grigg, in the 1990s, another visionary had also seen the potential power of a digital ledger. Nick Szabo was an early Cypherpunk and developed some of the concepts that underlie Bitcoin, which is one reason why some suspect he is Satoshi Nakamoto. His protocol has at its heart a spreadsheet that runs on a “virtual machine”—such as a network of interlinked computers—accessible to multiple parties. Szabo envisioned an intricate system of both private and public data that would protect private identities but provide enough public information about transactions to build up a verifiable transaction history. Szabo’s system—he called it the “God Protocol”—is now more than two decades old. Yet it is remarkably similar to the blockchain platforms and protocols that we’ll learn about in the chapters to come. Szabo, Grigg, and others pioneered an approach with the potential to create a record of history that cannot be changed—a record that someone like Madoff, or Lehman’s bankers, could not have meddled with. Their approach might just help restore trust in the systems we use to transact with each other.
Big Math, Openness, and a New Tool for Agreeing on Facts
If communities are to engage in exchange and forge functioning societies, they must find a way to arrive at a commonly accepted foundation of truth. And in the digital age of the twenty-first century, when many communities are formed online, where they transcend borders and legal jurisdictions, the old institutions we’ve used to establish those norms of truth won’t function nearly as well.
Advocates of blockchain solutions say this truth-discovery process is best left to a distributed approach, one over which no single entity has control. That way the approach is not vulnerable to corruption, attack, error, or disaster.
Also, the results should be collated using the hard-to-crack math of cryptography, which prevents them from ever being overwritten in the future. Here’s how cryptography can achieve what it does: it uses data-protecting codes drawn from a set of possible numbers so large that it’s far, far beyond human imagination. The sheer quantity of possibilities makes it impossibly time-consuming to discover the hidden code through “brute force” guesswork—in other words, by testing and discarding each possible number. Consider that Bitcoin is now the most powerful computing network in the world, one whose combined “hashing” rate as of August 2017 enabled all its computers to collectively pore through 7 million trillion different number guesses per second. Well, it would still take that network around 4,500 trillion trillion trillion years to work through all the possible numbers that could be generated by the SHA-256 hashing algorithm that protects Bitcoin’s data. Let the record show that period of time is 36,264 trillion trillion times longer than the current best-estimate age of the universe. Bitcoin’s cryptography is pretty secure.
Yet this system of honest accounting still needs something more than cryptography to work. It needs to open up its sequenced record of traceable, interlinked transactions to public scrutiny. This means that (1) the ledger should be public, and (2) the algorithm that runs it should adhere to open-source principles, with its source code on view for all to see and test.
At the same time, however, the system must allow sufficient privacy capabilities and protections for individuals and their data, as people won’t use it if their personal identities and proprietary business secrets are open for the world to see. Bitcoin deals with this by displaying only the one-off alphanumeric “addresses” that are randomly assigned to users when they receive bitcoin and which tell you nothing about the identity of the people who control them. But it’s not an entirely anonymous system—it’s better described as “pseudonymous.” In Bitcoin it’s possible, by following transaction flows from one address to another, to trace the fund exchanges to an address where users can be identified—such as when they cash out into dollars at a regulated bitcoin exchange that keeps records of its customers’ names, addresses, and other details. For certain cryptographers who take privacy very seriously, that’s not good enough. So a few are developing alternative cryptocurrencies—examples include Zcash, Monero, and Dash—that add even more privacy protection than Bitcoin. These other cryptocurrencies keep enough information on the ledger so that validating computers can be assured that the accounts have not been corrupted or manipulated, but do a more complete job of obscuring identities.
Whether the solution requires these extreme privacy measures or not, the broad model of a new ledger system that we laid out above—distributed, cryptographically secure, public yet private—may be just what’s needed to restore people’s confidence in society’s record-keeping systems. And to encourage people to re-engage in economic exchange and risk-taking.
For society to function, we need a “consensus on facts,” says Tomicah Tillemen, a director at the New America Foundation in Washington and chairman of the Global Blockchain Business Council. “We need to establish a common reality that everyone can bind to. And the way we’ve done that in developed countries is we have institutions that are in charge of establishing those basic facts. Those institutions are under fire right now…. Blockchain has the potential to push back against that erosion and it has the potential to create a new dynamic in which everyone can come to agree on a core set of facts but also ensure the privacy of facts that should not be in the public domain.”
Bitcoin showed how this idea works in one especially important context: money. By giving currency users a means of agreeing on the “facts” of their transactions, it allowed complete strangers to use an independent currency to pay each other securely over the Internet and still have a high level of confidence that counterfeiting was impossible, even in the absence of a centralized ledger-keeper like the Federal Reserve.
The more powerful revelation, however, was that a group of people could reach a consensus on facts without a central entity arbitrating the process. If we think about this as the Israeli historian Yuval Noah Harari would, in terms of how the power of human social organization comes from our ability to craft meaningful stories that we all believe in—notions of religion, nationality, common currency—we can see how important this is. The history of human civilization is not founded on absolute truths per se—after all, even scientific understandings are subject to revision—but on an even more powerful notion of the truth: a consensus, a common understanding on what we take to be the truth, a society-wide agreement that allows us to overcome suspicions, forge trust, and enter into cooperative endeavors. The best way to think about blockchain technology, then, is not as a replacement of trust—as a “trustless” solution, as some cryptocurrency fanatics damagingly describe it—but as a tool upon which society can create the common stories it needs to sow even greater trust, to build social capital, and to forge a better world.
This empowering idea helps explain the growing enthusiasm—sometimes excessive or misplaced—for blockchains as a solution to, well, just about anything. As people across a diverse range of fields start exploring its potential to disintermediate their industries and create new ways to unlock value, they are seeing in blockchain technology the potential for more than just a cash machine. If it can foster consensus in the way it has been shown to with Bitcoin, it’s best understood as a Truth Machine.
