My review of the book Cryptocurrency appeared in the Times:
When the internet started, few guessed how it would develop. I remember reviewing a string of books in the early 1990s arguing that it would lead to atomised and isolated lives, cut off from social contact. Social media put paid to that.
So it is rash to suggest just what the internet has in store for us next. But it is also rash to think we can expect merely more of what we have now. The internet is young and it is now evolving in a virtually autonomous fashion with startling surprises in store. If forced to make a (rash) guess, I would hazard that the next big thing is going to be spawned by bitcoin, or rather the “blockchain” technology behind bitcoin: cutting out the middleman in all forms of commerce.
Meaning what exactly? When you buy a cup of coffee with a credit card, it seems to be an effortless and efficient exchange. Within a few seconds, your credit is checked, your account is debited, the merchant is assured you can be trusted and your coffee is handed over.
Yet, as Paul Vigna and Michael Casey describe in this fascinating book, behind this smooth event lies a sequence of online interactions controlled by a duopoly of card issuers, a handful of big banks, not to mention some currency-controlling central banks, each trousering a fee and each knowing a great deal about you. It is far from frictionless and far from fraud-proof. The “credit” system runs on trust, but trust verified by expensive third parties, who will hand you over to the authorities at the drop of a warrant, or to criminals at the hint of a hack. It is even worse in countries like Argentina, where people do not trust banks, or Afghanistan, where few people use banks at all.
Is there a different way? Is there a way to generate trust among strangers — the elixir of commerce, indeed of money itself — without banks, without lawyers, without third parties of any kind?
This is precisely what the mysterious founder of bitcoin, pseudonymously calling himself Satoshi Nakamoto, set out to do in 2008: “I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party,” he announced tersely. It was no accident that it came to life during the financial crisis. “Satoshi” — who is probably mainly the legal scholar and code-writer Nick Szabo, with a bit of help from the late Hal Finney and a couple of others in the “cypherpunk” movement — had diagnosed the problem and invented a surprisingly robust solution: a cryptographic universal ledger.
If this seems incomprehensible to you, remember so do Alan Turing’s computable numbers to most people, yet they can still use computers. Sentences from Cryptocurrency sometimes read like they were written by Tolkien: “Such is the fate of the billions of nonces produced and discarded as the high-powered mining rigs look for the winning block hash.”
All the same, the effects of this baffling stuff are clear enough. Venture capitalists are investing in firms that install vast, energy-hungry data-farms sited in cool countries (because the computers overheat) with cheap electricity to crunch through the calculations necessary to “mine” virtual bitcoins, which get harder and harder to earn. At the same time people ranging from drug dealers to female Afghan film-makers hoard and trade these bitcoins, thrilled to have a currency that cannot suffer from debauchery by government and that leaves no trace for authorities or criminals to steal.
But the “money” side of bitcoin is only the start. The real breakthrough comes when the blockchain technology behind bitcoin, which is essentially the idea that all transactions are recorded anonymously in a growing ledger open to all, begins to be applied to the creation of firms, and enterprises of all sorts. Imagine setting up a company, buying property, producing goods without ever needing all those tiresome middle-men in suits called bankers, lawyers and brokers. Because the blockchain gives you trust without third-party verification.
Take Ethereum, one of the more promising “blockchain 2.0” start-ups, which aims to be a platform on which anybody can build a business using autonomous “smart contracts”. It was founded just last year by a Russian-Canadian teenager and is based in Zug, Switzerland.
Cryptocurrencies may yet prove as dead an end as Esperanto. Vigna and Casey are cautious, though enthusiastic guides to this strange new world. Being Wall Street Journal reporters, they know how to dig beneath the surface and they also know how to write. The book is full of fascinating stories, from the origins of money to the future of decentralised commerce, from the Mt Gox meltdown to the Silk Road bust. The Silk Road was a bitcoin-based virtual black market being run by a chap calling himself the Dread Pirate Roberts. In October 2013, the FBI arrested Ross Ulbricht in a San Francisco library and charged him with being that pirate. In court he said he was just a very successful bitcoin trader.
My guess is that somewhere in this world of blockchains and cryptocurrencies lies the seed of the next online revolution — one that brings radical decentralisation, autonomous organisations, a cull of brokers and fixers, a new constraint on government and fiat currencies, and a supercharge to the sharing economy. Vigna and Casey think “it’s hard to get away from the idea that these trends point inevitably to an age of cryptocurrency, if not immediately, then a decade or so in the future”.
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