Barely a decade ago, blockchain was still a niche technology, known only for its role in underpinning Bitcoin – a controversial new form of digital cash or cryptographic currency (cryptocurrency). Few people knew about it, and fewer still understood it.
Today, blockchain is a trillion-dollar industry, with use cases that include many multi-billion-dollar protocols and technology unicorns. It’s the foundation of some of the biggest buzzwords and trends in the online space, including NFTs, DeFi and the metaverse. Blockchain is transforming the way we think about and engage with finance, and even the internet itself – and that’s just the beginning.
Countless words have been written about blockchain technology, many of them seeking to explain this complex technology to the layperson. A blockchain is typically described as a ‘distributed ledger’ or ‘shared ledger’, secured by thousands of computers scattered around the world.
In simpler terms, it’s nothing more than a community-run database: a set of records that is maintained by a large group of users. This makes it fundamentally different to the kind of databases used by conventional Web2 companies like Facebook and Google, where a single company (or in some cases, individual) has full control over the contents.
Think of it this way: imagine you’re in a work meeting, and one person has the job of taking notes. Although everyone trusts them to take that responsibility seriously, there’s the risk that they might make mistakes, or even introduce inaccuracies deliberately (perhaps in order to benefit themselves in some way). Or perhaps that single record gets lost or damaged. That’s the Web2 way.
With the blockchain, it’s more like dozens of people take notes simultaneously, and constantly compare their accounts to make sure everyone’s is accurate. While that means duplicating the same efforts many times, the result is a reliable and trustworthy record that everyone agrees with.
In practice, the information recorded in the blockchain’s decentralised database might be simple financial transfers between users, or it might be far more complex information that can be used for a wide range of different purposes, such as smart contracts (see below).
It’s also worth noting that there are thousands of different blockchains, although people tend to use the term ‘the blockchain’ in a general sense, in much the same way that the term ‘the cloud’ is used to mean remote storage, with files housed in data centres all over the world.
Blockchains as a technology have only existed since 2009. The general idea of the blockchain was formally introduced in the Bitcoin white paper, which was published by the anonymous developer Satoshi Nakamoto in October 2008. (Although the term ‘blockchain’ does not appear itself in the white paper, Nakamoto discusses the idea of chaining together blocks of data, using cryptographic proofs, so that an entry in the database cannot be altered without having to change all subsequent records too.)
The blockchain was proposed as a solution to the so-called ‘double spend problem’. Online financial transactions require trusted intermediaries, because in the absence of a reliable record of accounts, there is nothing to stop users trying to spend the same funds twice.
The use of the blockchain enabled Bitcoin users to transact directly with each other, with their transfers being policed by the entire network of computers rather than a single, trusted third party. This eliminated single points of failure from the process of making online payments, for the first time ever.
Bitcoin arose from the Cypherpunk movement, a group of technology enthusiasts who were concerned about the threat that the rise of the web posed to financial privacy, and who advocated the use of strong cryptography to combat surveillance and control by corporations and governments. Many different versions of decentralised online cash had been suggested and trialled over the years, but Bitcoin was the first successful implementation.
Launched in January 2009, Bitcoin was quickly joined by many other forms of cryptographic currency, or cryptocurrency, though as the first and most decentralised blockchain, it has remained the largest and most popular ever since.
While many of the early blockchains just replicated Bitcoin’s simple financial transfers, later protocols sought to introduce new functionality. The information stored on the blockchain could be used for other purposes besides keeping accounts of user balances. It could also be used to register domain names and create other digital assets. The launch of Ethereum in 2015 saw a new use case: smart contracts, or software that runs on the blockchain, enabling the creation of decentralised applications (dApps) that execute trustlessly, exactly as programmed, and which cannot be shut down.
Blockchain, smart contracts and dApps have begun to disrupt many traditional industries, especially where transparency and trustworthiness are critical.
As the first viable form of peer-to-peer online cash, Bitcoin offers a new paradigm for payments and savings. Cryptocurrencies can be sent anywhere in the world, almost instantly, and at low cost – unlike the legacy banking system, where transfers can take days and cost a hefty commission fee.
Perhaps more importantly, Bitcoin is not prone to inflation in the same way that fiat currencies like the US dollar are. The supply of Bitcoin is fixed and pre-determined by an algorithm. At a time of increasing economic uncertainty and currency devaluations, a growing number of people, companies and even nation states are exploring its benefits as a long-term store of value.
Conventional supply chains are complex, sprawling, opaque and inefficient. A problem or fluctuation in demand at one point can become magnified as it passes along the supply chain – something known as the Bullwhip Effect. Companies including Walmart, Nestle and Unilever are using blockchain to bring greater transparency and real-time trust and responsivity to their supply chains.
The financial services industry is well-known for being exclusive and complex to access. Decentralised Financial (DeFi) products provide services such as borrowing, lending, and asset exchange – all without any middlemen. DeFi is now a thriving application of blockchain technology, with hundreds of billions of dollars locked in different protocols. Unlike conventional financial products, these are transparent and open to everyone.
Video gaming is an enormous use case for blockchain, with blockchain-powered games proving increasingly popular over the last two years. Gaming is a natural application for blockchain, because many games feature valuable items that players work hard to create or win, and may want to monetise. However, some games simply don’t offer the possibility of selling those items, and in other cases users are forced to rely on third party marketplaces that may charge high fees or, worst case, prove insecure. By placing these in-game items on the blockchain as NFTs (non-fungible tokens), it becomes a simple matter to transfer and trade them safely on open, trustless marketplaces.
One of the biggest trends in the tech industry, the Metaverse is a catch-all term for the new, immersive and life-like experiences used to deliver online services of all kinds – from telepresence meetings to e-commerce, games, music events and socialising with friends. The metaverse is built on decentralised Web3 technologies, and uses the blockchain for payments, identity management and verification, and much more besides.
The adoption of blockchain technology has seen the rise of a new iteration of the internet, known as Web3. This is not just an incremental change or improvement on existing online services, but a qualitative shift.
Web1, known as the ‘read-only’ web, was characterised by static websites, maintained mainly by enthusiasts and academic institutions on dedicated servers they owned. Web2, the ‘read-write’ web, was driven by corporate giants like Microsoft, Google and Facebook; it facilitated the creation and sharing of user-generated content (including social networking) and saw millions of people on-boarded to the internet. However, because these services were hosted on those mega-corporations’ servers, users gave up control of their personal data, and the convenience of Web2 came at the expense of privacy and centralisation.
Web3, the ‘read-write-own’ web, sees those services decentralised and returned to the control of users. Instead of relying on centralised providers, users can play a part in running and maintaining the services that everyone uses. The trade-off is that they have full sovereignty over, and responsibility for, their personal data – there is no one to manage it for them.
Blockchain is one of the fundamental technologies of the Web3 space. In fact, it is arguably the foundational technology. Other decentralised technologies (such as IPFS) are important, but blockchain enables the decentralisation of core software and the secure ownership, storage, and transfer of digital assets of all kinds. Without blockchain, ‘Web3’ services would really be a collection of conventional Web2 services, linked by and supported by decentralised elements – at best a kind of Web2.5. In short, blockchain is arguably what makes Web3 what it is, and what it promises to become: a free, open, fair version of the web.
Blockchain has countless use cases, but this technology is still relatively poorly understood by the majority of people – just as the internet itself was poorly understood in its early days. Still, there are a number of use cases for blockchain that have come to popular attention and made their way into the mainstream media (sometimes for good reason, sometimes less so).
Bitcoin itself has to be the most famous use case for blockchain, as well as the first. Ironically, the feature that is most criticised about bitcoin, its extreme volatility, is also the one that has caught the most attention. Although BTC is prone to significant crashes, it has also seen a number of blazing bull markets and, over the long term, its value has continued to increase. 2021 saw large institutions invest in bitcoin as an inflation hedge (most notably Microstrategy, which holds almost 130,000 BTC); as inflation continues to rise through 2022, this use case is once again being explored by retail investors.
NFTs were one of the stand-out success stories of the last two or three years, rapidly become a new and sought-after asset class thanks to hugely popular projects such as Bored Apes – which were purchased as status symbols by many celebrities (including Snoop Dogg, Eminem and Gwyneth Paltrow). The phenomenon was embraced by mainstream art institutions, including Christie’s, which sold the most expensive NFT ever created – Beeple’s Everydays – for $69 million in March 2021.
Ukraine funding. When the war in Ukraine began, banks in the country were closed and it was almost impossible to get money to citizens through conventional methods. Cryptocurrency is borderless, permissionless, and trustless, enabling anyone to send cash to anyone else with nothing more than an internet-connected smartphone. Within days of the war starting, users had donated tens of millions of dollars to the Ukrainian government and humanitarian organisations in the country.
Gaming has become a prime use case for blockchain technology. The rise of play-to-earn (P2E) gaming coincided with the coronavirus pandemic, and popular games like Axie Infinity enabled thousands of players in low-income countries to earn a meaningful ‘wage’ during lockdown – in many cases, more than they would have earned through local opportunities, had they still been available.
Blockchain offers a radically different model for online services from conventional technologies. It’s important to recognise that this has both advantages and disadvantages; blockchain isn’t uniformly better than Web2 technologies. Each of its most noteworthy properties is, like other technologies, double-edged: benefits can be seen as problems in certain circumstances. Ultimately, these pros and cons all come down to crypto’s core property, decentralisation.
These can, of course, be disadvantages in certain contexts:
Overall, decentralisation offers enough advantages over the alternatives that blockchain is gaining traction fast. However, more work needs to be done to make these technologies accessible to regular users. It’s likely that in the long run, many people will use blockchain through intermediaries and traditional organisations and products, which will make it more user-friendly and familiar to Web2 users.
The enormous amount of innovation and investment pouring into the sector shows that blockchain is here to stay. From a niche technology that was introduced just 14 years ago, blockchain has become a trillion-dollar industry – and is projected to continue to grow to tens of trillions of dollars in the coming years.
Some of the first applications of blockchain will be invisible to end users. For example, industry is already using blockchains in supply chains and for provenance tracking – something that will raise quality and efficiency for everyone, but that will remain behind the scenes for most consumers. The same is likely to be true of DeFi applications, as mainstream financial institutions start to explore new ways of deploying capital, without customers themselves needing to engage with the blockchain. These options may eventually be offered seamlessly within existing banking apps.
One of the first user groups to adopt blockchain en masse will be gamers, who are already familiar with the concept of digital assets through in-game items. This, as well as popular use cases like trading digital art, will normalise NFTs and make them a part of everyday life.
Eventually, though, blockchain will simply become part of the fabric of the web and the financial system, powering online services of all kinds. The complexity and difficulties that many people associate with using blockchain today will be abstracted away behind convenient user interfaces and applications, in much the same way that email evolved from clunky command-line applications to intuitive web and smartphone apps. In another 10 or 20 years, blockchain will be as unremarkable as TCP/IP – the communication protocols that power the internet itself, but that few people even think about as they go about their daily business online.