One would need to have the attention span of a newt to be surprised by what has happened – and is still happening – with bitcoin, the so-called cryptocurrency. Non-newts are immediately reminded of the tulip mania that swept the Netherlands in the 1630s. At the peak of that bubble, in February 1637, a single bulb was selling for 10 times the average annual income of a skilled craftsworker. Robert Shiller, a Nobel laureate in economics speaking at Davos, brought up the Dutch bubble when asked about bitcoin. The tulip analogy holds, he said, but: “The question is: did that collapse? We still pay for tulips even now and sometimes they get expensive. Bitcoin might totally collapse and be forgotten, and I think that’s a good likely outcome, but it could linger on for a good long time; it could be here in 100 years.”
The downside of the media feeding frenzy around bitcoin is the way it obscures the fact that the technology underpinning it, the blockchain, or the public distributed ledger – a database securely recording financial, physical or electronic assets for sharing across a network through transparent updates of information – is potentially very important. This is because it may have more useful applications than supporting speculative bubbles or money laundering. In 2016, for example, Mark Walport, the government’s chief scientific adviser issued a report, arguing that the technology “could transform the delivery of public services and boost productivity”.
Which indeed it could, but that would be small beer if the messages I’m picking up from across the tech world are accurate. For the real significance of blockchain technology might be its capacity to retool the internet itself to make it secure enough for modern use and return it to its decentralised essence, in the process possibly liberating it from the tech companies that currently have a stranglehold on it.
How come? Well, one can think of the internet as having three distinct layers. At the bottom is the physical layer – the pipes, cables, routers and switches through which our digital bits travel. At the top is the content layer, which is where all the stuff that obsesses us lives – the web pages, status updates, YouTube videos etc.
In between these two is the protocol layer – consisting of the protocols, ie, the technical conventions that determine how the various devices operating on the network interact. An example is the simple mail transfer protocol (SMTP) that handles email.
The strange – miraculous, even – thing about the protocol layer is that it remains largely outside of corporate control. None of the protocols is proprietary; everything in the layer is in the public domain. The people who work on the protocols belong to the internet engineering taskforce (IETF), an open standards organisation run by tech-savvy volunteers (though their work is usually funded by their employers or sponsors).
The protocol layer is the key to the internet. It determines not only what it is, but also how it works. It’s what guarantees the network’s intrinsic, decentralised nature. The layers above and below it – content and physical – are now dominated by giant corporations that, through consolidation, exploitation of network effects and market dominance, have eroded the decentralised nature of the internet. They would dearly love to do the same to the protocol layer.
For its part, the protocol layer has its problems. One is that it is underresourced: maintenance and development of the protocols for a global network are critical responsibilities, yet are being carried out mostly by volunteers. But a bigger problem is that protocols that were developed for the nascent internet in the period 1973-1983 are not necessarily fit for purpose in the network we now have. In particular, since they evolved at a time when every user of the network was a known and trusted source, they made little or no provision for encryption and authentication, which meant that every communication on the network was about as secure as a holiday postcard.
An initial coin offering (ICO) is when a new cryptocurrency company offers a portion of its tokens for sale all at once to jumpstart trading, raise funds for continued development and earn a return on investment for its founders.
The name is analogous to an IPO, or initial public offering – the moment a privately-held company first lists its shares on a public stock market. But, as financial regulators will tell you, the similar names doesn't mean they have similar legal statuses, and companies running ICOs have to be very careful not to imply they're selling an investment in their business.
Still, that hasn't stopped some companies making a killing by offering their cryptocurrencies for sale. Filecoin, a blockchain-based data storage company, raised $237m in its September ICO, while Tezos, which aims to create a competitor to more established cryptocurrencies such as bitcoin and Ethereum, raised $232m in July. Still, the prize for chutzpah has to go to Bancor, which raised $153m in its June ICO for its cryptocurrency that powers a decentralised application for running ICOs.
Up to now, most of us have resorted to ad hoc tools for overcoming the weaknesses of internet protocols: using WhatsApp or PGP for secure messaging, SSL for e-commerce, TOR for anonymous browsing and so on. The question that computer scientists working on blockchain technology are now beginning to ask is whether their technology might be useful for retrofitting security and authentication to the internet’s protocol layer. If it can, then we will be into an entirely new ball game.
It may be, therefore, that the most useful byproduct of bitcoin mania turns out to be a safer, more secure internet. That would not only be a good thing, but also be par for the technological course. Speculative bubbles are good for innovation, though not in the way investors imagine.
The reason we are all able to have smartphones now, for example, is because the ubiquitous connectivity needed to make them work was provided by the folks who lost their shirts building fibre networks during the 1995-2000 internet boom. Every bubble, it seems, has a silver lining.
