This distributed and decentralized recordkeeping system underlies Bitcoin, but many advocates and developers see way bigger opportunities. What is the blockchain and how does it work?
Brito: My name is Jerry Brito and I’m the executive director of Coin Center. Coin Center is an independent nonprofit public policy, research, and advocacy center that’s focused on the public policy issues that face bitcoin and the blockchain. Essentially, we want to keep it open and free for innovation, and what EFF [Electronic Frontier Foundation] and CDT [Center for Democracy and Technology] are to the Internet we are to the blockchain.
So talking about the blockchain, how many of you here have heard of the blockchain? So the blockchain is essentially, as David said, the ledger: the database that underpins the bitcoin peer-to-peer network. And bitcoin is something that people think about as digital currency. And they do it because it is a digital currency. But it’s so much more than that. It also powers this database called the blockchain. And the thing is that ledgers underpin much of the information infrastructure that we rely on today. All the services you use, all the software that you use—at root, many of them, most of them are going to be databases. If you think about money, money is essentially a database. Your balance—at a bank, on a credit card, a PayPal—is essentially an entry in a ledger. Identity is essentially an entry in a database that’s held by some company. Domain names are essentially a big ledger. ICANN controls the root ledger, and registries like Verisign control other ledgers that point the domain to the IP address.
So these are all ledgers, and today ledgers are centralized and closed. They’re centralized,meaning that a particular company owns and controls these particular ledgers. And they’re closed, meaning that only those companies are the ones who can access, make changes, and add entries to those ledgers. And they’re closed for a very good reason: for security. If they were open and anybody could access and make changes to the ledger, well, you can imagine what would happen. I know that maybe, if I had access to PayPal’s ledger, I’d add a few zeros to my balance. So we don’t allow that. We keep them closed. But this means that use of these ledgers is going to be permissioned. If I want to send money to somebody, I first have to get an account with a company and I may be denied access to having an account and may be denied making a particular transaction. If I want to get a particular domain name I might be denied.
And you also have to trust the keeper of the ledger: not just trust them to carry out the transaction faithfully that you want, but also that they’ll be there the next day. And also, interoperability can be a challenge. If you think about it, if I want to send you money and I have a PayPal account, well, if you have a PayPal account as well, it’s no problem because PayPal can just make a new entry in their ledger that transfers money from my account to yours. But if I have a PayPal account and you have an Amazon Pay account, well, it’s not interoperable. We need to figure out a way to do that, and that adds friction and it’s also relatively costly.
So wouldn’t it be awesome if we had one universal ledger that we could use for everything and that was accessible to everybody? Well, that is what the blockchain is. The blockchain is a decentralized and open ledger. It’s decentralized, meaning that there’s no one company that owns it. In fact, nobody owns it. It’s a peer-to-peer network, and it is open just like the web is open, just like the email protocol is open. Anybody can access it, and anybody can build on top of it.
So we’ve been talking about ledgers and databases. To really simplify, at base, what a ledger is: it’s essentially a spreadsheet. And if you’ve ever used Google Spreadsheets, you know that you can share these spreadsheets. And when you share a spreadsheet with your friends or colleagues you each have a perfectly replicated copy of the same spreadsheet and you can all see what’s on there and you can all change what’s on the spreadsheet, and when you make a change it’s replicated everywhere else. Well, the simplest way to think about the blockchain is that it is a shared Google Spreadsheet that is shared with everybody in the world. And everybody can see what’s on there. Everybody can see the changes. It is as if everybody has a copy of the same ledger.
Now, here’s a piece of the innovation that makes it secure, that makes it possible to have it be open. It is an append-only ledger. So it keeps an irreversible record of what’s been added before. Essentially, all you can do with the blockchain is add new rows to the bottom of the spreadsheet. You can’t change or modify any of the rows to have come before. It’s not just that you can’t. It’s impossible to cryptographically. And what this means is that while everyone has access to the shared ledger, users are only able to make edits that are honest—because you can’t go back and change a previous balance. All you can do is transfer things. So for example, if I want to send you money, I will add a new row to the spreadsheet that says, “Minus $50 dollars to me and plus $50 dollars to you,” and now this is transferred. But anytime I add a new row to the bottom of the spreadsheet I have to reference a previous row where I was given $50 dollars, and if there isn’t one I can’t send you money.
So here’s the neat thing: when you have a universal ledger, you no longer have gatekeepers. You no longer need to use a bank to have access to a money ledger. You no longer have to use a registry to have access to a domain name ledger. To use the ledger, all you need is a computer, an Internet connection, and free and open source software that speaks to the peer-to-peer network. It also for the first time allows us to transfer digital assets online and not just copy them as we’ve been able to do before now. Now, for the first time, we can transfer an asset—and this is a breakthrough that is really hard to overstate, as Marc Andreessen has said.
So what can you do with a universal open ledger? Money is the first and sort of most obvious use of such a universal ledger. For example, if you wanted to send money to your friend in Mexico via bank account—you’ve got a bank account, let’s say, at SunTrust here in the US, but your friend in Mexico doesn’t, obviously. He’s got a bank account at his bank in Mexico. So it’s not as easy as making a new entry in SunTrust’s ledger because he doesn’t have an account there. And it’s not as easy as making just one entry over at his bank. You need a bank in between: somebody like JP Morgan, which is called a correspondent bank, where each of these banks have their own accounts. And so you need to have three ledger entries, and this takes days and it can be pretty costly. Imagine that there was one universal ledger where now if you want to send money to your friend or family in Mexico, it’s as simple as you yourself adding a new entry to this universal ledger. And you just say, $50 dollars that I have—that’s been previously sent to me in the ledger—I now send to my friend. And this takes a matter of seconds.
And so there are 2.5 billion people in the world today, according to McKinsey, that do not have access to bank accounts. And they don’t have access to bank accounts because they don’t have access to these intermediaries. But Ericsson predicts that by 2019 almost everybody in the world’s going to have access to smartphones and the Internet. So this trend speaks for itself. You don’t have access to intermediaries, you’re going to have access directly to the ledger. And I think that what we will see is—just like in countries in Africa and Asia skipped over landline and went straight to wireless—I think countries in developing worlds today are going to skip over using intermediaries like banks and go straight to finance on the blockchain.
But money is just the tip of the iceberg. It’s sort of the obvious first thing and that’s why we talk about it. When we talk about bitcoin and blockchain, a lot of it’s money, but it’s so much more than that. So let me give you an example of what else you can use this ledger for.
Let’s think about copyright. So the Internet has been a challenge to IP because it made copying books, movies, and music sort of virtually costless. It removed the scarcity. And the way that we have tried to reintroduce scarcity has been by using digital rights management, DRM. And so basically, you buy a music file from a company, you put it on your device, and when you want to play it your device pings the server owned by the company, and that server checks the ledger to see if you have permission to play that music file. And if you’re on there they say, “Yep, you do.” Back comes a ping saying you can play the song, and you can play it. And if you ever wanted to give that song—you gave it to your friend, you copied it over to him, and he tried to play it—well, he would ping the server, the ledger would be checked, he would not have permission, he couldn’t play the file. And so this worked as well as it did, but what happens if the server goes away, if that company goes away? All of the sudden your music is no longer playable. And this actually happened in the mid-2000s when Microsoft pivoted away from digital music sales, and they gave their customers fair warning so you could burn your music to a CD. But if you hadn’t, you were out of luck. So what if we replace this with a universal distributed decentralized open ledger? Well now, this is never going away. This is a new protocol on the Internet, just like the web, and it will always be accessible. But more importantly: now if you have a friend, and you want to lend him or sell to him the music file, you can—because you just add an entry to the universal ledger that says, “I’m no longer the owner, my friend is.” And now you can no longer play it, and he can.
So we have now introduced scarcity where there was none before. We can now transfer files, not just copy them. And it’s much more than this. It’s not just copyright, it’s not just money. It’s identity. It is crowd funders. There’s an open source project called Lighthouse that does what Kickstarter does, where you can sort of back a project, and the project only collects if it raises its goal, but there’s no company. There is no Kickstarter that takes 5% of the total amount. It’s DNS, domain name system. It’s settlement—NASDAQ, a couple weeks ago, announced that they will begin to settle stock trades on the bitcoin blockchain. It’s notary services. It’s so much more.
So I hope that in this very quick and high level introduction, I piqued your interest about the blockchain enough to go home and learn more about it. But I want you to remember just three things today: the blockchain is open source, it is an open protocol, and it is permissionless. And the thing is that when you have all this openness and all this permissionless-ness, when it’s about money and securities and assets, regulators tend to become interested and ask a lot of questions. And so that’s what Coin Center exists to do: to answer those questions and to make sure that regulators and policymaker’s interests in their consumer obligations and anti-money laundering obligations are met, while we can keep this amazing technology free and open.