The two have been indelibly linked since they were first conceptualised a decade ago in Satoshi Nakamoto’s famous white paper.
Mainstream media outlets typically give a starring role to bitcoin as the notorious tradable cryptocurrency, and blockchain as the mere platform underpinning the digital asset.
Nakamoto had a more fundamental role for blockchain in mind when he (or she, or they – no one really knows) proposed an electronic cash system that would allow online payments to be sent directly from one party to another - without going through a financial institution.
The aim in essence was to create a trust-less, decentralised environment where transactions in a cryptocurrency - bitcoin - are validated almost instantaneously by a network of computers and cryptographically stored in a shared database. An immutable, distributed ledger. Ladies and gentlemen: the blockchain.
The idea was revolutionary and caused an uproar in the circles of establishment. Here was a system that proposed to move the entire infrastructure of international payments away from banks, monetary authorities and the global SWIFT network. And put it all in the hands of some geeks with computers? Unthinkable!
And yet, the concept caught on. The timing of Nakamato’s white paper couldn’t have been more perfect, coming at the tail end of 2008 as the global financial crisis took hold and brought the financial system to its knees. As governments in the world’s biggest economies announced billions of dollars of taxpayer-funded bailouts for their banks, people were left wondering: If the modern banking system has let us down, surely there must be another way?
Against that backdrop, it’s no surprise that some started to take seriously a proposal for a payments model that doesn’t rely on a central authority. But how would it work?
Quite simply, by incentivising a network of computers, or nodes, to expend power solving complex algorithms in order to log transactions on to a block, which is then chained to other blocks that were generated chronologically before it. The problem-solving process is known as mining. By expending their computer power, and thereby demonstrating proof-of-work, the miners are rewarded with newly created bitcoin. Ladies and gentlemen, the blockchain!
The concept held much promise, but has been mired in controversy. The anonymity afforded by the cryptographic process drew druglords and criminals to bitcoin. Memory limitations placed on the bitcoin blocks restricted the scalability of the system, causing blockchain transaction fees to soar and eventually divided the community of engineers developing the technology.
The establishment looked on with glee as the bitcoin world contorted and sought to implode upon itself. Central bankers, bank chiefs, investors and heads of state lined up to lampoon and deride the cryptocurrency industry. Environmental lobbies warned about how the electricity needed to mine bitcoin had reached Ireland’s output. Shady initial coin offerings boomed as cryptomania sent prices of the assets soaring, prompting regulators in some countries to ban new ICOs and curb trading.
And yet through it all, curiosity persists about what blockchain technology can offer the world. New cryptocurrencies underpinned by more scalable protocols such as Bitcoin Cash and Litecoin have sprung up. Ethereum introduced the world to a cryptocurrency with a smart contract capability. International banks, previously critical of cryptocurrencies, are seeing value in how blockchains can expedite and secure transactions such as trade settlement, trade finance, invoicing and securitisation.
Blockchain seems to have found a home in at least one industry: gambling. Fast-growing demand for cryptocurrency-based gaming has seen a variety of online providers pop up over the past five years or so. Gamblers are drawn to the perceived anonymity offered by blockchain technology, as well as the faster withdrawal and deposit times, and lower transaction fees.
Fast-growing demand for cryptocurrency-based gaming has seen a variety of online providers pop up over the past five years or so.
Cloudbet was one of the first to recognise the utility that bitcoin could bring to gambling, accepting its first bitcoin bet back in 2013. And others have apparently caught on. Based on one estimate, almost 4 million bitcoin have been wagered since 2014 - that’s about US$32 billion in current prices (mid-May 2018).
The future of blockchain in other industries? While the signs are positive, it’s still too early to tell. Two things are certain: Satoshi Nakamoto’s original dream for complete decentralization will probably not come to pass, nor will the established financial system disappear quietly into the sunset. The eventual outcome for blockchain is hopefully somewhere in between. One industry - bitcoin gambling - is already an innovator in the sector. Perhaps others may follow.