Unless you’ve been living under a rock you’ve probably heard of Bitcoin. It’s controversial, its unstable, half the world loves it and the other half thinks it’s a fad.

However instead of delving too deeply into Bitcoin itself, I want to discuss the true innovation, the really disruptive breakthrough that Bitcoin represents and why that breakthrough will have such tremendous impact on the future.

The Blockchain

The central innovation of Bitcoin isn’t actually the concept of “e-money.” Payments online or using computers are not a new thing. Indeed, the introduction of the original paper describing Bitcoin acknowledges this fact. By the way, the Bitcoin paper, is such a concise, elegant, and subtle 8 pages of unadulterated genius that literally everyone in the world should read it.

The central innovation of Bitcoin is the idea of using decentralization to create a secure, reliable consensus which no individual malicious actor will have the ability to manipulate.

Bitcoin applies this system to a “distributed ledger” for the purpose of emulating the properties of money. But there’s enormous potential for a wide variety of vastly different applications than just a ledger.

The implications of this completely new type of system are startling, and perhaps alarming to many people.

 

Trust Versus Trust-Free

Before going further I think I should take a moment to dispel some mistaken assumptions that many readers may be having. Words like “trust” have acquired significant emotional attachments, and concepts like “secrecy” and “security” have long been colloquially connected in ways that obscure rather than enlighten. Ideas like “eliminating trust” and of disclosing every single transaction to everyone may be concerning to some readers.

First, despite widespread belief as accepted common wisdom that secrecy is secure, the popular belief could not be more wrong. A secret system is inherently insecure.

Suppose I wanted to write down a note to myself in code because I suspect others may access it. And I do this using an ancient form of code- a Caesarean cipher, of shifting letters around in the alphabet by a specific number of letters:

> Hduob whvwlqj uhyhdov fulwlfdo yxoqhudelolwb lq hakdxvw sruw.

There, my secret message is encrypted, and I have told absolutely no one what method I used. Popular belief says that this seems pretty secure- my secret message looks like total gibberish, and nobody has any idea how to decipher it.

However, the truth of the matter is that because I devised my own secret system, I have also devised a really bad system which a competent attacker can easily crack.

Without going too far down the rabbit hole here, suffice to say that Caesarean ciphers are a classical example of really weak codes, because they can be so easily defeated by frequency analysis. For example, the observation that the letter “e” is by far the most common letter in normal English speech suggests that finding the letter that occurs most frequently is probably “e” and proceeding to test other letters in similar fashion, like a complex game of Hangman.

> Early testing reveals critical vulnerability in exhaust port.

The takeaway here is that secrecy is not security. Vulnerabilities you don’t know about are still vulnerabilities. But if the system is a secret, you have absolutely no way of knowing if your system is garbage.

However, if you tell everyone how the system works, then you have a legion of other people testing whether it’s garbage, and it only takes one of them to show it to you for you to know it’s garbage. But if after a while it seems like nobody can break the system, then we can be reasonably confident it’s OK.

Counter-intuitively, sharing how your system works with everyone in the world is dramatically more secure than keeping it secret.

 

What Does this Have to do with Bitcoin Again?

Bitcoin, or more generally, blockchains, take this same principle and apply it to trust. Instead of having a single centralized authority, such as a person or company, the entire distributed system is charged with verifying that trust. Everyone knows how it works, everyone knows every action and transaction that anyone in the entire network takes.

Formerly, a trusted authority like a bank would stand in between and assure the parties that everything is kosher. Without a trusted authority like a bank, or a government, or some other form of trusted entity somewhere in the mix, nobody could trust that anyone would keep their word.

This trust problem has plagued civilization for as long as there has been civilization. Our entire legal system has, to some extent, developed to mitigate, combat, and address this central problem. Criminal justice, contracts, deeds for property, all stem from this basic information problem of needing some trusted thing somewhere in the world, whether that’s the imposition of justice to deter criminal violations or a lawsuit for when you break your promise in a contract. And our current solution to this trust problem is still imperfect- what happens when those trusted central authorities engage in nefarious activities? Trusted authorities are only as good as they are trustworthy.

What we’re dealing with here in blockchains is another breed of beast never before encountered. A decentralized system with no manager, no leader, no centralized controller of any kind. Which runs autonomously, and which allows two people to convey information to one another, make promises to one another, or do a variety of other things without any possibility of shenanigans, because this amorphous, decentralized blockchain both remembers everything, and is fully capable of acting on its own.

 

The Self-Executing Contract

There are a lot of startups out there, right now, working on some really wild applications for the same tech that underlies Bitcoin. But instead of going into really far-out, exotic applications, I’m going to conclude with some brief food for thought on an extremely rudimentary, simple application, but one with profound implications.

Suppose I place a message in a blockchain which simply states “I hereby promise to pay John Doe the amount of $20 USD to be transferred from X wallet to Y wallet at 2:37 on January 17th, 2033. Signed, [cryptographic signature].”

I no longer actually need to do anything, do I? The swarm will just do as it has been commanded at the specified time, regardless of whatever else I may or may not do.

And I can’t rescind it, or claim I never made that promise, or that the amount is wrong, since literally every other node on the entire planet knows exactly what was written and exactly when it was entered. Not only can I not back out, since the swarm is going to make the transfer no matter what I do, I cannot claim it was in error either because the entire rest of the world has a complete record of irrefutable evidence to the contrary.

This statement is completely capable of fully autonomous self-execution. Now, pair two reciprocal promises and you’ve got yourself a fully self-executing contract where “breach” is not merely unlikely; it is mathematically impossible.