It’s the Block Chain, Stupid

What does it mean to say that you “have” a Bitcoin?

The answer to this question makes Bitcoin itself – the controversial e-cash system – look like just a sideshow. Sure, there’s a real monetary system in Bitcoin; actually, there are lots of them, from Riecoin to Freicoin and on and on. New Alt-coins are invented every day, and Bitcoin really does have the potential to disrupt the entire financial sector. It’s just that this disruption is arguably smaller than other disruptions that the Bitcoin protocol could cause. Bitcoin, the currency, is just the leading edge of a greater revolution enabled by the invention that underlies Bitcoin. This invention is called the block chain.

If it were easy to describe block chain technology, there would be hundreds of summaries of how it works in your local papers, on the web and in magazines. Bitcoin enthusiasts keep trying to explain this stuff, but it’s really a losing battle for a public that’s only half-interested. The key thing to know about the block chain is that it makes immaterial data behave like a material object.

You can possess a Bitcoin. You can trade it, or some fraction of it; you can use it to pay for things. You can stick a label on it that points to something else (say, a mortgage) and if you “have” that Bitcoin, you also have the mortgage.

This is radically different from the way in which you “possess” say, a piece of software. You may have a license for Microsoft Word, and a copy of Word on your computer; or you may have the license but not the software, or an unlicensed copy of the software. The software itself is infinitely copyable and has no more individual identity than an electron. Any copy is identical to any other copy, so in that sense software isn’t like a “thing” at all. This is important, because if software and data don’t behave like things, they can’t really be bought or sold like things – much less act like those unique pieces of matter we call money.

This is the shaky ground upon which software purchasing is built. Licenses and the issue of who has authority to decide ownership have always been an issue in the Internet economy. With Napster, it became an issue for music. With the Pirate Bay, it became an issue with movies, e-books, TV shows – essentially all media, because anything that can exist digitally can be copied, and therefore no longer quite fits into scarcity-based business models. Licensing and Digital Rights Management schemes attempt to impose some kind of scarcity on digital materials. They’re an attempt to bring traditional economics into the Internet. They don’t work very well.

The block chain changes everything. It enables the creation of unique virtual objects. These objects could be the coins of a new currency. They could just as easily be software licenses, business agreements, or even software scripts that execute on the block chain the way that traditional computer programs execute on a physical computer.

If you can create a unique “coin” with the block chain, you can also create, for instance, a unique vote. You could use the block chain to implement a distributed electoral system independent of any central authority. There is such a system, currently in development, called BitCongress. If citizenship itself is registration of an identity with a central brokering authority, then managing citizenship is another activity that can be fully decentralized by the block chain.

Decentralized, as in: nobody controls the process once it’s set in motion. Bitcoin cannot be legislated or policed out of existence because it has no center of power to attack. It’s a peer-to-peer system with no central servers or administrators. Fully decentralized citizenship would be the same. Such citizenship would, for instance, be irrevocable by any means other than a violation of the terms of the agreement undertaken between the citizen and the citizenship block chain. So, among other things, the block chain allows the creation of virtual nations whose citizens share an irrevocable association based on some negotiated characteristic – beliefs, behaviors, even genetic traits. Such an idea is both exciting and potentially nightmarish; either way, it’s powerful. And it goes way beyond just money.

The block chain is both transparent and self-administering. It obeys only its own publicly visible, pre-established laws. This makes it incorruptible in a way that no central authority can be.

Before we get too giddy with the possibilities, though, a reality check is in order. When William Gibson described Cyberspace as a “consensual hallucination experienced daily by billions… in every nation,” he might as well have been describing the block chain. The Bitcoin protocol does not actually make virtual objects into objectively real things; things that have a reality independent of us the way that rocks and trees do. What really happens is that everyone who uses the block chain agrees to treat them as if they do. Thus, the coins and agreements and votes in the block chain are exactly as real as the Emperor’s New Clothes. They are real to us because they are real to the block chain, and only because of that. If we were to abandon the block chain protocol, all of those coins and agreements and votes would also go away.

The promise and the vulnerability of the block chain therefore lie in the hands of those who decide to believe in them, or to not believe in them. In this sense, Bitcoin is the greatest threat to the potential of the block chain. The Mt. Gox exchange failure, Bitcoin’s famously volatile price, and its association with organized crime all threaten an innovation whose potential reaches far beyond the currency itself.

For the block chain to grow up, it may have to outgrow Bitcoin. But this might not be such a bad thing.

Photo: Zach Copley via Photopin cc

the author

Karl Schroeder

Karl is head of strategic foresight at Idea Couture. See Karl’s full bio here.