The Blockchain, Cryptocurrencies and the Cryptoeconomy

In 2008 a mysterious programmer (or possibly even a group of programmers) going by the name of Satoshi Nakamoto published a seminal paper entitled "Bitcoin: A Peer-to-Peer Electronic Cash System" - the contents of which had potentially big implications for the future of the Internet and the way we do business online.

This paper outlined the concept of a new and highly innovative universal payment system which was to be called "Bitcoin". Electronic currencies had been launched in the past with varying degrees of success, but Bitcoin was different in that it was to make use of a decentralised and cryptologically secure ledger called a "blockchain" to record and verify transactions. The idea was that with mathematical algorithms and software controlling the currency there would be no need for any kind of central banking authorities, and a truly independent system of exchange would emerge.

The mathematics behind the blockchain concept are complex and way beyond the scope of any kind of basic introduction. The key point to realise, however, is that a blockchain contains a record of every single transaction that has ever been made in the system, with copies being held across the Internet on literally thousands of computers which maintain its integrity. Between them these computers compile and verify "blocks" of transactions which are strung together in a cryptographically secure "chain" of blocks (hence a "blockchain"). Updating and maintaining the ledger requires work to be performed in the form of intensive mathematical operations for which the owners of the participating computers are rewarded. In the case of the Bitcoin blockchain these rewards are made in the form of Bitcoin payments, and the process of creating blocks is generally called "mining" (since in doing this work the computers are effectively creating new currency units in the same way a real miner digs gold or other valuable assets out of the ground).

Because a blockchain is designed to be cryptographically secure it is considered to be effectively impossible to alter using currently available technology, and so for all present practical purposes the transactions can be considered to be "set in stone" (a property which is often referred to as "immutability"). Multiple identically verified copies are held across the Internet, further compounding the concept of "trust" which is built in to the system. In fact, because the trust lies in the mathematical algorithms and the (generally open source) software controlling a blockchain these kind of systems are often referred to as "trustless" (because no trust needs to be placed in any kind of human institutional authority to maintain the ledger and verify transactions which are held within it).

Spurred on by concerns about how the traditional banking system works (and especially in light of the banking crisis in 2008) a new "cryptoeconomy" emerged, with businesses and individuals buying and selling goods and services using Bitcoin payments - as well as well as some of the other cryptocurrencies which also sprang up on Bitcoin's heels. These included Dogecoin, Ether (on which more will be said below), Monero, Musicoin and ZCash (amongst many others). Most (but not all) of these new cryptocurrencies use blockchain technology similar to that originally specified by Satoshi Nakamoto for Bitcoin, but it is important to remember that blockchains can be used for other applications besides controlling currency ledgers. For instance just about any kind of database can be put on to a blockchain, possible examples being land registries or vehicle registration schemes where records need to be held in a secure but accessible environment in such a way that histories of transactions cannot be altered or otherwise interferred with retrospectively.

There's even more to it than that, however, as in some cases a blockchain can even be thought of as a kind of decentralised computer in itself. The Ethereum project, which was proposed by Vitalik Buterin in 2013, maintains a blockchain system which is called the Ethereum Virtual Machine (or EVM for short). The EVM has been described as being effectively* "Turing complete", which means that it can perform computational operations in the same way that more "traditional" computers can do. Central to Ethereum is the idea of "smart contracts" which can be programmed in advance on the EVM to perform functions on completion of certain conditions in such a way that once triggered cannot be stopped. This means that A could agree to pay B provided X had been done, and once X had been done A's account would pay B's automatically in a way that could not be countermanded or cancelled and without any outside further action on the part of the contract holders being required.

[* = A truly "Turing complete" computer would be vulnerable to the problem of not being able to identify in advance programs which would run forever (the so called "halting problem") but the EVM prevents this by only allowing operations which have been paid for in advance using allocated tokens of pre-paid "gas" (see below).]

The Ethereum project thus offers decentralised computing facilities to anyone who wants to use the system, with processing work on the EVM being paid for as "gas" in units of the Ethereum system's own cryptocurrency (which is called "Ether"). As in the Bitcoin model the Ethereum blockchain was originally maintained by miners who were paid in the system's cryptocurrency (which is in this case called "ether"), though in 2022 maintainance of the main Ethereum blockchain switched from "Proof of Work" to "Proof of Stake", making mining of ether [ETH] effectively obsolete. Whatever the method of creation or how it has been obtained, ether can be used as "gas" to power operations on the EVM or to purchase goods and services elsewhere (ether being used like Bitcoin as a cryptocurrency in its own right).

Besides being used to buy products and services cryptocurrencies can also be traded for conventional "fiat" currencies such as e.g. Euros, pounds sterling, U.S. dollars etc. Such trades can be conducted via online currency exchanges, with exchange rates being effectively driven by supply and demand in real time. As is often the case with new investment opportunities there has been a great deal of interest and trading activity in cryptocurrencies, with speculators buying and selling quickly through the exchanges with the intention of making a quick profit in the short term. This speculative activity has inevitably led to some volatility in the market, though this should not detract the more objective analyst from assessing the pros and cons of the underlying technology of the blockchain and the related emerging "cryptoeconomy" in the longer term.

Like the World Wide Web and Internet before it the decentralised and "trustless" nature of these systems has the potential to disrupt established hierarchies, and could radically change again the way we conduct business online. Whatever happens it will be interesting to see what impact blockchain technology and cryptocurrencies will have on the ongoing development of the Internet and the World Wide Web.

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