chain boom. The blockchain skeptics have
crowed gleefully as crypto-token prices
have tumbled from last year’s dizzying
highs, but they make the same mistake as
the crypto fanboys they mock: they conflate price with inherent value. We can’t yet
predict what the blue-chip industries built
on blockchain technology will be, but we
are confident that they will exist, because
the technology itself is all about creating
one priceless asset: trust.
To understand why, we need to go back
to the 14th century.
That was when Italian merchants and
bankers began using
the double-entry bookkeeping method. This
method, made possible by the adoption of
Arabic numerals, gave
merchants a more reliable record-keeping
tool, and it let bankers
assume a powerful new
role as middlemen in
the international payments system. Yet it
wasn’t just the tool itself that made way
for modern finance. It was how it was
inserted into the culture of the day.
In 1494 Luca Pacioli, a Franciscan
friar and mathematician, codified their
practices by publishing a manual on math
and accounting that presented double-entry bookkeeping not only as a way to
track accounts but as a moral obligation.
The way Pacioli described it, for everything of value that merchants or bankers took in, they had to give something
back. Hence the use of o;setting entries
to record separate, balancing values—
a debit matched with a credit, an asset
with a liability.
Pacioli’s morally upright accounting
bestowed a form of religious benediction on these previously disparaged professions. Over the next several centuries,
clean books came to be regarded as a sign
of honesty and piety, clearing bankers
to become payment intermediaries and
speeding up the circulation of money.
That funded the Renaissance and paved
the way for the capitalist explosion that
would change the world.
Yet the system was not impervious to
fraud. Bankers and other financial actors
often breached their moral duty to keep
honest books, and they still do—just ask
Bernie Mado;’s clients or Enron’s shareholders. Moreover, even when they are
honest, their honesty comes at a price.
We’ve allowed centralized trust managers such as banks, stock exchanges, and
other financial middlemen to become
indispensable, and this has turned them
into gatekeepers. They
charge fees and restrict
access, creating friction, curtailing innovation, and strengthening their market
The real promise of blockchain technology, then, is not that it could make you
a billionaire overnight or give you a way to
shield your financial activities from nosy
governments. It’s that it could drastically
reduce the cost of trust by means of a radical, decentralized approach to accounting—and, by extension, create a new way
to structure economic organizations.
A new form of bookkeeping might
seem like a dull accomplishment. Yet for
thousands of years, going back to Hammurabi’s Babylon, ledgers have been the
bedrock of civilization. That’s because
the exchanges of value on which society
is founded require us to trust each other’s
claims about what we own, what we’re
owed, and what we owe. To achieve that
trust, we need a common system for keeping track of our transactions, a system that
gives definition and order to society itself.
How else would we know that Je; Bezos is
the world’s richest human being, that the
GDP of Argentina is $620 billion, that 71
percent of the world’s population lives on
less than $10 a day, or that Apple’s shares
are trading at a particular multiple of the
company’s earnings per share?
A blockchain (though the term is bandied about loosely, and often misapplied
to things that are not really blockchains)
is an electronic ledger—a list of transactions. Those transactions can in principle
represent almost anything. They could be
actual exchanges of money, as they are
on the blockchains that underlie cryptocurrencies like Bitcoin. They could mark
exchanges of other assets, such as digital stock certificates. They could represent instructions, such as orders to buy or
sell a stock. They could include so-called
smart contracts, which are computerized
instructions to do something (e.g., buy a
stock) if something else is true (the price
of the stock has dropped below $10).
What makes a blockchain a special kind
of ledger is that instead of being managed
by a single centralized institution, such as
a bank or government agency, it is stored
in multiple copies on multiple independent
computers within a decentralized network.
No single entity controls the ledger. Any of
the computers on the network can make a
change to the ledger, but only by following
rules dictated by a “consensus protocol,”
a mathematical algorithm that requires
a majority of the other computers on the
network to agree with the change.
Once a consensus generated by that
algorithm has been achieved, all the computers on the network update their copies of the ledger simultaneously. If any of
The need for trust and middlemen allows
behemoths such as Google, Facebook, and
Amazon to turn economies of scale and
network effects into de facto monopolies.