The innovation at the heart of bitcoin is called the blockchain. Again, let’s use some analogies.
Blockchain is like a checkbook. Imagine a global checkbook, a global accounting ledger, where everyone can see all the debits and credits. It’s a completely open book, so everyone can confirm that the checkbook is balanced at all times. The blockchain is similar, with computers worldwide constantly recording who’s bought and sold bitcoin (and other blockchain assets).
This “distributed ledger” means that no one person, company, or government controls the blockchain. Like the internet, this financial accounting is distributed. This is profound, as it means no one can “cook the books,” and everyone has transparency into the complete history of each bitcoin.
Blockchain is like the Internet. Like the internet, blockchain is distributed worldwide, across millions of computers. This means that no government can completely shut it down. Like China, they can regulate it, but the genie is out of the bottle. No one can completely put it back.
It is unlikely that governments will make bitcoin illegal, because the innovation and financial opportunity would simply move elsewhere. If the U.S. government were to outlaw the Internet, the next Facebook would simply get created in Russia. But it is likely that it will become more regulated. Today it’s like the Wild West.
Blockchain is like Android. Like the operating system on your smartphone, blockchain is a technology upon which you can build other apps. People are excited about blockchain because it can be used for so many applications that currently require middlemen: banks, loans, mortgages, real estate, identification, insurance, and on and on.
Again, these are imperfect analogies, but they give you the gist. But here is blockchain’s biggest contribution to the human race: blockchain has the power to create scarce digital assets.
Most digital assets can be freely copied, at zero cost, with no loss in quality. Let’s say you’re a Bob Dylan fan. You’ve got everything Dylan has ever recorded, every cover, every bootleg, nicely organized in MP3 files on your hard drive. You meet another Dylan fan, and ask, “Do you have the Springsteen Kennedy Center cover?” He says no, so you email him the file. And while you’re at it, you zip up your entire Dylan collection, transfer it to your cloud drive, and share it with your new friend.
You’ve just ripped off Bob Dylan by stealing everything he ever recorded. Look at him up there. Look how sad he is. But that is how digital assets work.
Blockchain is different. Because the “shared checkbook” — or global ledger — has to keep track of everything, we can’t just make free copies and give them away. It’s as if Dylan recorded a copy-proof album, then only made 100 copies. Anyone who wanted to listen to those copies would have to buy it from someone who already owned it. You can see how the price would increase astronomically.
In this respect, bitcoin is an improvement on traditional currency. Governments can freely print money whenever they feel like it, thus devaluing the current supply. (If Dylan suddenly released another 500 of his “limited edition” albums, the value of each album would deflate.) There will only be 21 million bitcoin, ever.
Scarce digital assets are a real innovation. They make possible all kinds of things: new types of money, deeds, wills, corporations, and legal structures. The times, they are a-changin’.