How important will blockchain be to the world’s economy?
The Long Island Iced Tea Company, as its name suggests, was in the business of selling beverages. And not as many as it might have liked: it lost nearly $4m (£3.2m) in the third quarter of 2017.
Then the company announced that it would henceforth be known as the Long Blockchain Corporation. Would it stop selling beverages? No. Would it sell beverages using Blockchain? Maybe. It would do something to do with Blockchain. Maybe. Probably.
What is Blockchain? And what does it have to do with Long Island Iced Tea?
Blockchain is the technology which underpins Bitcoin and other digital currencies. It is a database of financial transactions which is saved on multiple computers and which constantly grows as new transactions or “blocks” are added to it, forming a continuous and public chain of data.
Blockchain may still be in its infancy, but venture capitalists are already pouring billions into start-ups with more clearly defined plans than the Long Island Iced Tea Company’s. Even Facebook is getting involved.
And billions more are being raised in the regulatory grey area of initial coin offerings, where companies raise money by selling digital currency to investors.
Enthusiasts say Blockchain could become as disruptive as the internet, comparing the technology to the World Wide Web in the 1990s. At that time, many people were clear it would become important – but few really understood it, or foresaw its potential and limitations.
So what problem is Blockchain trying to solve, and should we believe the hype?
50 Things That Made the Modern Economy highlights the inventions, ideas and innovations that helped create the economic world.
Let’s start with a deceptively simple question: what stops me from spending the same money twice?
When money meant physical tokens, it was easy. I can’t give the same one to two different people. But long ago we realised that lugging coins around is no way to run an economy. It is easier to trust third parties to keep records of who has got what.
You give me goods, and I instruct the record keepers to shuffle their numbers accordingly.
How do you know I have not given the same money to someone else? You trust the bank, or MasterCard, or PayPal, to guarantee that cannot happen – because their systems will not allow it.
But there can be drawbacks.
These third parties – intermediaries – need paying. And the more retailers who use a service such as MasterCard, the more attractive it is to customers. The more customers who use it, the more attractive it is to retailers. This is known as a “network effect”.
It can make these intermediaries very powerful. If they fail, the whole system collapses.
What if we didn’t need them? What if the financial records which lubricate the global economy could somehow be communally owned and maintained?