十 区块链Ⅱ：真相的机器

区块链的黄金承诺:夸大其词还是数字未来值得信赖的关键?

In the early hours of Friday, 17 June 2016, an unknown thief, or thieves, pilfered more than $60 million of a digital currency.1 It wasn’t bitcoin they made off with but a rival cryptocurrency called ether, or eth for short.

Within hours of the online ‘heist’ kicking in, the alarm went off. ‘EMERGENCY ALERT!’ a community organizer wrote in the DAO slack channel.* ‘The DAO is being attacked. It has been going on for 3–4 hours. It is draining ETH (the cryptocurrency ETHER) at a rapid rate. This is not a drill.’ People in chat rooms responded instantly: ‘Oh shit’, ‘Uh oh’, or as one anonymous person wrote, ‘:fire: :fire: :fire: :fire: NOBODY PANIC :fire: :fire: :fire: :fire:’2 It was as if somebody had set a bomb under the Bank of England. The target was the DAO, a particular entity in this case, but one that takes its name from the general acronym, Decentralized Autonomous Organization.

The DAO started out as a radical social experiment. Could a company run itself without executives, managers, a board or any type of chief? Could smart computer code make decisions and autonomously run the organization in place of individuals? And could a blockchain sit under it all as its digital ledger?

On 30 April, over a month and a half before the attack, the DAO fund (daohub.org) was launched as a crowdfunding campaign. The stated mission was: ‘To blaze a new path in business organization for the betterment of its members, existing simultaneously nowhere and everywhere and operating solely with the steadfast iron will of unstoppable code.’

Think of the DAO fund as a venture capital firm of sorts: Kleiner Perkins meets the crowdfunding platform Kickstarter. Decisions, however, are not made by a handful of venture capitalists or any one person. It is a chiefless venture–software sitting on a network–with thousands of founders.

Initial interest in the DAO surpassed the expectations of Christoph and Simon Jentzsch, two tech-savvy German brothers who wrote the fund’s code. Every day, more and more money poured in, although the contributions were not in pounds or dollars, or even bitcoin, but in an alternative virtual currency, ether (more on that later). Approximately 11,000 people invested the equivalent of $150 million within a month through a ‘crowd sale’.3 It turned out, at the time, to be the largest crowdfunding effort in history. But even its inventors had some worries about its operation early on, and outside observers expressed concerns about its governance model once investments started pouring in.

For every one ether invested, DAO tokens were issued, proportional to the investment, which acted as an internal currency that gave all investors voting rights (notably different from equity shares) on which start-ups to back. For example, Mobotiq, a French electric vehicle start-up, was one of the companies up for funding. The Jentzsch brothers’ tech venture, Slock.it, was also in the mix.4 The wisdom-of-the-crowd set-up was designed so that the good ol’ boy investor network would not make all the decisions: the code was designed automatically to fund projects that received the highest number of cumulative votes. The decentralized nature of the fund supposedly meant that no Madoff-like character could run off with all the money. Things didn’t go quite according to plan.

To understand what went wrong for the DAO and led to its eventual downfall, it is important to realize there is not just one blockchain technology–that is, the original bitcoin blockchain Satoshi created–but many other distributed database platforms. When it comes to trust, however, the principle behind them all is the same: a digitally decentralized, shared ledger that relies on users to power the network by confirming transactions. This means that people who have no particular confidence in or knowledge of each other can exchange all kinds of assets without having to go through a trusted third party such as a lawyer or bookkeeper.

It’s why the blockchain is likely to disrupt industries like law, banking, real estate, media and intellectual property–industries that typically involve layers of complex processes and lots of ‘middlemen’ to handle matters of trust. ‘The practical consequence [is] for the first time, there is a way for one internet user to transfer a unique piece of digital property to another internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer,’ says Marc Andreessen, inventor of the internet browser Netscape. ‘The consequences of this breakthrough are hard to overstate.’5

Kick-started by the bitcoin blockchain, many other decentralized ledger technologies are now springing up, custom-built for different purposes. One of those blockchains is called Ethereum, created by Vitalik Buterin, a twenty-three-year-old programming wunderkind. Buterin is also the mastermind behind the general concept of decentralized autonomous organizations, to run on Ethereum. ‘Instead of a hierarchical structure managed by a set of humans interacting in person and controlling property via the legal system,’ explains Buterin, ‘a decentralized organization involves a set of humans interacting with each other according to a protocol specified in code, and enforced on the blockchain.’6 That’s the geeky theory. He, and the others, didn’t count on how that might play out in practice.

The very first DAO launched on Ethereum on January 2016 was called Digix, a platform designed to trade gold bullion receipts peer-to-peer. The DAO fund, the Jentzsch project, was the second flagship project to launch on Ethereum. Like the brothers, Buterin was keen to see it work but he didn’t think it would raise $150 million in a matter of weeks. In other words, he hadn’t expected that it would get so big, so fast. Before long, the DAO fund had simply become ‘too big to fail’, but who would rescue it when things went south? And how did it come off the rails?

Vitalik Buterin was born in Moscow, but left Russia aged six to be raised in Toronto. He is tall and, notably, very thin. Typically, he sports geeky T-shirts with slogans such as YOU READ MY T-SHIRT. THAT’S ENOUGH SOCIAL INTERACTION FOR ONE DAY. His voice is flat and measured. When he speaks, his piercing blue eyes frantically dart around, as if he is trying to avoid focusing on just one person or one thing. If Hollywood were going to cast a nerdy genius alien landing on earth to refashion the world, they would cast Buterin.

From the time Buterin was a small child, it was clear he had an extraordinary gift for mathematics and science; he just loved numbers. He could solve complex problems and clearly explain his thinking to other children and grown-ups. His father, Dmitry Buterin, who studied computer science, bought his son his first computer when the boy was four.7 Microsoft Excel soon became Buterin’s favourite ‘toy’. ‘I remember knowing, for a while, for a long time, that I was kind of abnormal in some sense,’ he says. ‘When I was in grade five or six, I just remember quite a lot of people were always talking about me like I was some kind of math genius. And there were just so many moments when I felt like, okay, why can’t I just be like some normal person and go have a 75 per cent average like everyone else.’8

He first learned about bitcoin one day in February 2011, from his father who had a small software start-up of his own. He was seventeen at the time and had recently quit playing World of Warcraft for hours on end. Perhaps he was looking for his next big fix. Maybe it was the cryptographic algorithms that appealed to him. One thing was clear, Buterin wanted to get his hands on some bitcoins. There was only one problem: he neither had the cash to buy them nor the computing power to mine them. So he figured out another way to earn them. He started writing for a blog, Bitcoin Weekly, where he was paid five bitcoins per post, worth around $4 apiece at the time. In September 2011, he co-founded his own magazine, Bitcoin Magazine, with a Romanian programmer called Mihai Alisie.9 ‘The industrial revolution allowed us, for the first time, to start replacing human labour with machines,’ Buterin wrote in the magazine. ‘But this is only automating the bottom; removing the need for rank and file manual labourers… Can we remove the management from the equation instead?’10

Through his writings and conversations with early enthusiasts, Buterin realized that bitcoin’s underlying blockchain technology was going to be a much bigger deal than the currency itself. That it represented more than just a way of tracking money. He believed it could be used as a powerful tool to re-architect financial, social and even political systems all over the world.

And so at the age of nineteen, in the typical pattern of entrepreneurial tales, Buterin dropped out of college. Using a pile of bitcoins he had earned and that had now significantly appreciated in value, he went round the world. He travelled from bitcoin conferences in San Francisco and Los Angeles to meet-ups in Israel, Amsterdam, London, Barcelona and dozens of other places. He spoke extensively to programmers and dabbled in a few coding projects here and there. All the time, he was trying to figure out how best to make a significant contribution to this growing quasi-cyber-religion.

Huddled around laptops with other early enthusiasts, Buterin would raise question after question. How could they make the system inclusive and open to everyone? How could they create a new economy in which anyone could participate on their own terms? Could companies be run by autonomous algorithms instead of directors? He was not on a technological crusade so much as a mission to upend current power structures. And the rallying cry was decentralization, a situation where users, not governments, banks or big companies are in control. ‘Ultimately, power is a zero sum game,’ Buterin says, ‘and if you talk about empowering the little guy, as much as you want to couch it in flowery terminology that makes it sound fluffy and good, you are necessarily disempowering the big guy. And personally I say screw the big guy. They have enough money already.’11

He didn’t just want to disrupt the big financial institutions. Imagine a marketplace where people can buy and sell anything from artwork to books to honey directly to each other without intermediaries. In other words, imagine Amazon without Amazon (the company, the middlemen and the fees). Similarly, imagine Uber without Uber, a network where drivers could directly offer rides to passengers.12 Buterin wanted to create a technology that could redistribute power, away from the rent seekers and incumbent middlemen and back into the hands of the people creating value. His vision was the ultimate techno-libertarian promise of creating decentralized marketplaces that nobody owns.

Following the siren call of Satoshi, Buterin released a white paper in November 2013, outlining the plans for his new technology called Ethereum and a currency called ether.13 The paper is full of technical jargon outlining the problems of the original blockchain, including the key issue of scalability. The blockchain Satoshi created has a built-in hard cap of one megabyte, or about 1,400 transactions per block, that is processed and added to the blockchain roughly every ten minutes.14 This works out around three to seven transactions per second. To put that in context, Visa handles more than 1,700 transactions per second in America alone.15 In other words, the bitcoin blockchain is not fast or big enough to handle large volumes of transactions.

The other problem Buterin identified is that Satoshi deliberately designed the original programming language to limit what the blockchain could do–its job was only to store and transfer value. I can send you a bitcoin, you can send it to me. It was not intended as a general software platform on top of which other applications could be created. Imagine the original blockchain as a pocket calculator that can only do a set number of things; Buterin wanted to create the equivalent of a smartphone.

Indeed, the young entrepreneur is sometimes hailed as the next Steve Jobs, although he himself prefers comparisons to Linus Torvalds, the creator of Linux software. Either way, Buterin is most definitely a ‘crazy one’: a round peg in the square hole, not fond of rules and with no respect for the status quo, as the famous Apple ad goes. It seems, however, that Buterin isn’t trying to create a multi-billion dollar company that will bring him a windfall IPO payday. Ethereum is currently set up as a non-profit foundation based in Zug, Switzerland. And Buterin is its chief scientist.

His vision is to build ‘the Lego of cryptographic finance’, to give people the building blocks to create all kinds of digital services right out of the box, such as Transactive Grid, a distributed energy market that enables people to buy and sell energy directly from each other.16 There’s also the likes of Ujo Music, which is working to create a platform for musicians to register digital rights, and to be paid directly, without labels, iTunes and other middlemen. Grammy award-winning singer-songwriter Imogen Heap was the first artist to release her single, ‘Tiny Human’, on the Ethereum blockchain.

Ethereum is based on a stripped-down, Turing-complete programming language known as Solidity. It is simple enough that developers can easily build decentralized apps (‘DApps’ for short) on top of it. ‘Instead of creating a device that just does a specific number of things, you have a device that understands and supports this programming language and whatever people want to do can potentially be implemented,’ Buterin explained in an interview with The Economist.17 There are other projects, such as BitCloud, BitAngels and QixCoin, trying to achieve a similar goal. But Buterin, like Jobs, is pretty convincing when he argues that Ethereum is the open blockchain worth getting behind.

Ethereum is designed to allow developers to spawn blockchain-based offerings that fall into three main categories or ‘buckets’. The first bucket is based on being able to transfer any kind of asset–from shares to concert tickets–in a fast and transparent way on the blockchain. For example, Colu, a Tel Aviv-based start-up founded in 2014, has developed a mechanism to inject every bitcoin with a ‘dye’ that adds extra data to transactions. Think of it as colouring the cryptocurrency with information about ‘real-world’ assets, such as the ownership history of a car, which sticks to the coins as they are transferred and stored on the blockchain. Colu creates the equivalent of a digital ID for the asset that can be transferred directly between people, instantly and securely.

The second bucket of applications uses the blockchain to track the supply chain of products, from their provenance to the hands of the customer. Take pharmaceutical drugs. According to Havocscope, which tracks black markets around the world, drugs are the most counterfeited products. It is estimated that people pay $200 billion a year for drugs, from Viagra to diet pills to flu medicine, that are not what they say they are.18 And the consequences of a cancer sufferer taking drugs they think are genuine but are counterfeit duds can be dire. Accenture is currently experimenting with using blockchain technology to create an open and trusted record of where drugs have come from and to track closely what happens to them across the supply chain. It is one example among many of using the blockchain as a kind of truth machine.

The DAO fund falls into the third, and perhaps most ambitious, bucket of blockchain applications: smart contracts. A smart contract is essentially a digital agreement, whether it’s for a loan, job or an investment, which lives on the blockchain. The main difference between it and a traditional contract is that the clauses are not written in English and executed by lawyers. Instead, smart contracts are written in code, with preprogrammed clauses that automatically execute themselves following a set of instructions that work on a principle of ‘If this happens, then do this. If that happens, then do that…’ In other words, the contract is self-fulfilling and carries out what it has been coded to do. For example, my will could be turned into a smart contract, with the rules of how assets should be transferred enshrined in code. Family power plots, squabbles and lies over who gets what would be a battle with, well, a computer program. It’s not currently legal but it could be one day. (Even so, it won’t replace lawyers altogether. Say the language of my insurance policy was unclear, it would still need a qualified human to make a judgement.)

Self-executing smart contracts need to know there will be a clear outcome. Take gambling. From a young age, I learned about odds and probabilities through betting. (I know, it’s a unique approach to teaching your child mathematics.) My family are by no means gamblers but it’s a bit of a tradition to back a horse in the Grand National or to pick which side will win the football league. I have such fond memories of sitting in our lounge, huddled around the television, cheering my horse to win and willing my dad’s to fall at one of the fences. It made for some wonderful family banter. Now, say I place a bet with my dad on who will win the Wimbledon men’s tennis tournament. I pick Rafael Nadal; he picks Roger Federer. We agree on odds and assign a certain amount of ether to a smart contract. On the day of the match final, the system would check the final score of the game via the web and distribute the funds to whoever placed the right bet. We would not need to rely on a bookie. But as the DAO theft demonstrated, smart contracts are only as good as the people who program them: the code will always be susceptible to human error and/or avarice.

On 17 June 2016, an anonymous hacker (or group) exploited a loophole in the DAO fund smart contract. Essentially, there was a programming mistake in the code that allowed a DAO shareholder to create an identical clone fund (known as a ‘child DAO’) and then freely to move money. And that is exactly what the hacker did: the equivalent of approximately $60 million in ether was drained out of the original fund into the clone.19 ‘I have carefully examined the code of the DAO and decided to participate after finding the feature where splitting is rewarded with additional ether,’ the hacker wrote in an open letter explaining the loophole. ‘I have made use of this feature and have rightfully claimed 3,641,694 ether and would like to thank the DAO for this reward…’20

‘Rightfully claimed’ is the key phrase. It wasn’t fraud. Blockchain purists and even some lawyers argued that the hacker was rightfully entitled to the stolen riches. ‘I am disappointed by those who are characterizing the use of this intentional feature as “theft”,’ the hacker added in his letter. He wasn’t a Madoff character, duping people. It was clearly the fault of the code in the smart contract that ran on the Ethereum blockchain.

When it became clear that nearly a third of the DAO’s funds had disappeared, people on online forums were calling out for one person in particular: ‘Where is Vitalik?’ one person asked, ‘Vitalik, our alien overlord, please save us.’ Buterin happened to be in China at the time, figuring out with others in the Ethereum Foundation how to proceed.21 ‘DAO token holders and Ethereum users should sit tight and remain calm,’ Buterin wrote on the Ethereum Foundation’s blog after the attack.

A very contentious ethical debate followed the heist. Should the community respect the rule of the smart contract and accept the unfortunate consequences? Or should they figure out a way to retrieve the ‘stolen’ funds?

The attack couldn’t be reversed but there was another rule programmed into the contract that would provide a possible remedy. The code imposed a waiting period of twenty-seven days before any money could be paid out of a new fund. So the attacker couldn’t do anything with the $50 million for almost a month. ‘It’s like stealing the Mona Lisa,’ says Stephan Tual, the COO of Slock.it. ‘Great, congratulations, but what do you do with it? You can’t sell it, it’s too big to be sold.’22

The Ethereum team, including Buterin, proposed something called a hard fork. It is technical jargon for essentially rewriting history or changing the rules. It is, ultimately, a last-resort solution. Buterin proposed creating an entirely separate version of the ledger that wouldn’t have the original loophole. ‘It’s a one-time fix to a one-time problem,’ Buterin said. But first he had to convince the majority of people in the Ethereum network–more than 51 per cent–it was the right way forward.

Supporters of the hard fork insisted that even though they were in uncharted legal waters, they should turn to traditional English law: a contract should be interpreted by the intended spirit of those who wrote it, not the literal interpretation of the words (‘to the letter’). Did the intent behind the DAO contract trump the hundreds of lines of computer code?

Those who strongly opposed the hard fork argued that it was a blockchain sin, against the mission of Ethereum, which is to be a ‘decentralized platform for applications that run exactly as programmed without any chance of fraud, censorship or third-party interference’. Isn’t the goal of a decentralized network that no one has the power to rewrite history, or else the network itself becomes untrustworthy?

The hacker asserted that smart contracts are their own arbiters: ‘A soft or hard fork would amount to seizure of my legitimate and rightful ether, claimed legally through the terms of a smart contract. Such fork would permanently and irrevocably ruin all confidence in not only Ethereum but also in the field of smart contracts and blockchain technology.’

When it was put to a vote, 87 per cent of the Ethereum network said ‘yes’ to a hard fork.23 The result? The transactions were effectively made void and the millions of ‘stolen’ ether tokens were retrieved and returned to the DAO crowd investors. It was like the hack never happened. But at what cost?

Buterin dismissed the hack as a ‘rite of passage’ for a technology still in its infancy. Other DAO code writers and creators, like Christoph Jentzsch, took a similar view. It was a young concept, he argued, and this DAO, with its massive and rapid crowdfunding, had been forced to run while it was still getting the hang of walking. That may be true, but the fork set a dangerous precedent for Ethereum and its quest to become the trusted operating system of the future.

If certain people can reverse transactions, doesn’t that mean they, not code, are in charge of the system? And if you bend or change the rules once, what happens next time it fails or doesn’t suit you? It’s rather like the government bailing out the banks when risky trades went south. The hard fork was a top-down reordering of events.24

‘Its creators hoped to prove you can build a more democratic financial institution, one without centralized control or human fallibility,’ writes Klint Finley in an article in WIRED. ‘Instead, the DAO led to a heist that raises philosophical questions about the viability of such systems. Code was supposed to eliminate the need to trust humans. But humans, it turns out, are tough to take out of the equation.’25 In other words, even if the maths works perfectly, trust is not simply a matter of code. At the end of the day, the problems of the DAO fund are not just technological but people problems. Humans get in the way.

Andreas Antonopoulos, author of Mastering Bitcoin, calls the blockchain ‘trust-by-computation’.26 Reid Hoffman, venture capitalist and LinkedIn founder, labels it ‘trustless trust’.27 But these terms are a bit misleading–there is still clearly trust involved. You have to trust the idea of the blockchain; you have to trust the system. And given that most people lack the technical know-how to understand how the system really works, you have to trust the programmers, miners, entrepreneurs and experts who establish and maintain the cryptographic protocols. A large dose of faith is required. But it’s true to say that you don’t have to trust another human being in the traditional sense.

So here, with the DAO fund and the hard fork, was a trust stumble. History, however, is littered with high-minded projects that were pushed through–by kings, emperors, inventors, scientists, surgeons–before they were completely ready. Early steel bridges that collapsed, experimental operations that killed the patient, explosions in the lab, re-engineered ships that sank. The short-term results were disastrous but valuable lessons were learned. As polymath Danny Hillis said back in 1997, ‘Technology is everything that doesn’t work yet.’28

Every innovator wants to be first over the line, and it’s no different with the quest for the ultimate blockchain technology. Inevitably, there will be glitches along the way because that’s how innovation comes into being and grows resilient, just as the body develops its immune system by being exposed to bugs and viruses. The blockchain’s enormous potential means developers and investors are taking a classic ‘fail fast, fail forward’ approach. As Ethereum’s story shows, even the odd hiccup and regrettable repair job won’t stop people jumping on the blockchain juggernaut.

Since 30 July 2015, the day Ethereum went live, around 405 DApps have been created on its blockchain.29 To put that figure in context: when the Apple App Store launched in 2008 there were 500 apps available. By 2010, there were 250,000 and in June 2016 there were more than 2 million.30 Investment funding in blockchain-related start-ups has increased globally from an estimated $1.3 million in 2012 to more than $1.4 billion in 2016, according to PwC.31 Much of the interest (and a lot of hype) is focused around how decentralized ledgers can create a shared version of single proof or a digital truth about the identity of assets. ‘I see what you see… and I know that what I see is what you see.’32

Take diamonds, for instance. The round diamond in my engagement ring has an interesting history. When my family, Eastern European Jews, fled Russia in the late 1800s they exchanged their wealth for three or four diamonds. Precious stones were easier than money to hide, and were commonly sewn into the linings of coats or hidden in the soles of shoes. My nana, the late Evelyn Amdur, supposedly had the last remaining family diamond, roughly 2.3 carats, in her possession. She wanted me to have it when I got married, so she asked my then fiancé and now husband, Chris, if he would use it in my engagement ring. He had it designed in a beautiful antique setting. It’s a stunning ring. A few years ago, however, the stone started chipping quite badly, with chips you could see and feel. The stone was meant to be valuable, without inclusions, so it was an odd thing to happen. I started to suspect the stone was possibly not the original family diamond.

Evelyn was like a character in a Catherine Tate Show sketch–funny, frank, slightly crude and with a remarkable talent for fooling people. A couple of years ago, she was sick and it was clear she didn’t have long to live. One day when I went to visit her, I decided to ask her about the ring. She was sitting comfortably in her favourite beige armchair, cup of tea and digestive biscuit in hand, when I raised the sensitive topic. Nana smiled, with a twinkle in her eye, and said, ‘Well, darling, the luxury cruise was very wonderful.’ I never did get a straight answer before she passed away.

Sure, I can go to a jeweller and get an assessment of the diamond’s four Cs–cut, clarity, carat and colour–and know its real value. But that’s not what is important to me. And I do kind of like the idea that my nana, the rascal, sold the family heirloom and went on the trip of her dreams. Even so, I would love to have known the life story of the real stone–its age, its lineage and where it is now. The problem is that the information, like many other valuable items, was stored on a paper record or certificate that has been lost years ago. It is the sort of thing that happens all the time. The blockchain, however, offers a way to capture and keep the history of an item–whether it’s a diamond, a valuable stamp, bottle of wine or piece of art.

Thanks to consumer pressure, we can now find out the source of, say, fair trade coffee from Starbucks or the organic cotton in Gap T-shirts, yet we still know surprisingly little about most of the items we own and use. Was that organic, grass-fed cow really raised on such-and-such free-range farm as claimed, slaughtered at such-and-such abattoir, packaged last week and brought to the supermarket on Wednesday? Or, as in the Tesco scandal, was it contaminated with some horsemeat at some point in the journey from pasture to plate? Is this product what it claims to be? Supply chains and the origins of a product are, for the most part, a dark secret.

Provenance. It’s a word Leanne Kemp, a serial entrepreneur, has spent a lot of time thinking about. ‘It means the history of something, where it came from and where did it go,’ she says in her distinct Aussie accent.33 ‘Who owns it? Who sold it and where is it now?’ Essentially, it’s the life story of an item, and in the world of goods, especially expensive or rare items, provenance matters. The Yapese were right with their fei stones–the value of an item should not be separated from its origin and history.

Kemp, now in her late forties, was born and raised in Brisbane, Australia. She moved to London in the late 1990s and divides her time flying between continents, her work specializing in an unusual blend of technology and the jewellery trade. ‘I’m a technologist. A “super-nerd” who can cut code,’ she says. ‘I used to work in RFID [Radio Frequency Identification] to track the identity of goods as they moved through the supply chain.’ Kemp likes to use a new technology to solve a problem in a way it hasn’t been solved before.

Several years ago, she began to immerse herself in the world of cryptocurrency. From the outset, like Buterin, she was far more interested in the ledger technology than the bitcoin itself. ‘The currency had been on the market for quite some time. The fundamental change occurred in 2014 when the bitcoin network released something called an op return function,’ she says. ‘Basically, it enables you to trade a coin and to hash on to the coin a piece of data. I started to think about what I could do with that functionality.’ Could it be used to track the origins and ownership of, well, anything worth tracking?

Looking into the diamond industry, Kemp discovered that it was plagued by problems like synthetic diamonds, insurance fraud, theft and tampering of paper certificates. Some £45 billion is lost annually in the United States and Europe on insurance fraud alone, and an estimated 65 per cent of fraudulent claims go undetected.34 Then there are the notorious ‘blood diamonds’, precious stones mined in African war zones, often by young children, with the funds from sales frequently used to arm brutal rebel conflicts. By the time Kemp came along, there was at least one certification system, the Kimberley Process, in place to reassure buyers they weren’t buying a diamond with blood on it, but that system was not foolproof and still largely depended on paper trails.

Early in 2015, Kemp sketched the idea for her company on the back of a napkin. She drew the trail of a diamond from a mine to a marketplace to a person’s finger. ‘I sketched the data we could store against the provenance chain of diamonds and that’s where it all started.’ A few months later, she founded Everledger, a London-based start-up that digitally certifies diamonds on the blockchain.

‘We create a diamond’s digital thumbprint or ID,’ Kemp says. ‘Take a three-carat diamond. It will have a serial number inscribed on its girdle during the grading process. There are the four Cs–cut, clarity, carat and colour–but there are forty other attributes, such as angles, cuts and pavilions, which make up that specific diamond.’ The diamond’s ID is enshrined in the blockchain, creating an immutable record for insurers, traders and customers to know the real provenance and movements of a diamond over its entire history. ‘We can apply this technology to solve very big ethical supply chain problems: from ivory poaching to blood diamonds,’ says Kemp, adding that because a diamond moves through so many hands, corruption, scams and rip-0ffs can happen at any stage of its journey from grimy mine to gleaming boutique. ‘Blockchain technologies allow us to bring ethical transparency on a global scale.’

So far, Everledger has digitized the ID of more than 1 million diamonds and has partnered with big financial players including Barclays and Lloyds. The company is also building an anti-counterfeit database. What this means is when a stolen diamond resurfaces for sale on an online marketplace such as Amazon or eBay, it will be much easier for investigators to track its history and return it to its rightful owner.

In a few years, we will get to a point where we are able to check the provenance of all kinds of items before we buy them and find out precisely if they are what they claim. The question is, will customers want to know and will they care? ‘We’ve seen this with organic food, but when it comes to luxury goods, people mostly rely on the trust of a brand such as De Beers to decide what to buy,’ Kemp says. ‘If there was to be a full consciousness of transactions, what would we choose? I don’t know the answer to that yet.’

Everledger is essentially building a platform to track the true identity and reputation of objects. ‘We’re on the next generation of technology where transactional data of objects and assets becomes woven into the web and that’s what I think is the World Wide Ledger,’ says Kemp. The World Wide Ledger (WWL) offers a way to make and preserve truths–the history of assets.

Imagine if this technology had been around in the Second World War during the greatest art theft in history. Art objects of all kinds, deemed suitable to Hitler’s taste, were shipped in freight cars from all over Europe to end up in Germany. It is estimated that more than 650,000 artworks, including Giovanni Bellini’s famous Madonna and Child and one of Edgar Degas’s iconic ballerina paintings, were looted by the Nazis, with many of the works shamelessly stripped from the homes of wealthy Jews who had fled or been sent to concentration camps.

When the war was over, the Allies put together a special unit of personnel, the so called ‘Monuments Men’, devoted to finding and returning looted art to their rightful owners. Despite those efforts, the art was largely returned to countries, not to individuals. Some 100,000 stolen works of art remain unaccounted for, their current location and owners an enigma.35

It turns out that during the 1950s and 1960s, hundreds of works were sold, at a significant discount, to the Nazis who had stolen them. Perhaps more alarming was the fact that Jews were made to buy back in auctions (or at least split the fees with houses) works they had proved to be rightfully owned by their families. ‘They called them a “return sale”,’ says Anne Webber, the founder of the Commission for Looted Art in Europe, a London-based non-profit.36

Naturally, museums from the Tate in London to the Metropolitan Museum of Art in New York and the Louvre in Paris try to check the ownership history of works on display and in storage, but it is an incredibly complex task. In most instances, the museum has no way of verifying the claims of ownership of plundered property because, just like my diamond, the paper records have either been lost or tampered with along the way. Remarkably, it wasn’t until 2001 that the American Alliance of Museums published the first set of strict guidelines for handling and checking the provenance of Raubkunst, Nazi-confiscated art.37

So how do families, many of whom lost parents in the Holocaust, even know what is missing from their collections? How do you stop people filing fake claims if the true existence of the artwork is unknown? Decades after the war, most attempts at recovering and returning looted art fail, and the knowledge about collections is disappearing as the original owners pass away.

One problem with Raubkunst has been that the art world, like many other industries, lacks transparency. In May 2016, Everledger announced an investment and partnership with Vastari, a company that creates a network between museums and collectors. ‘There are a number of individuals around the world who hold significant collections, say, in Andy Warhols,’ says Kemp. ‘If they could easily track the movement of their artwork, they might be able to realize or release the financial potential of that piece and the public would see it more.’

Kemp is just one of many entrepreneurs around the world recognizing the power of the blockchain to act as a new kind of digital trust broker. And what works for diamonds could also work for, well, fish. Provenance, founded by Jessi Baker, is using the technology to track the supply chain of fish from fisherman to plate. ‘Every product has a story,’ says Baker.38 ‘There is often an enormous gap between advertising and the reality of operations, what goes on behind the scenes. I find it strange that the provenance and production of products has remained so secret for so long.’

It’s not just start-ups thinking this way. Alibaba wants to weed out counterfeit foods–whether soy sauce made using dirty tap water or fake spices unfit for human consumption–by using the blockchain to track products sold on Taobao and Tmall through the supply chain. Retail giant Walmart and IBM have partnered with Tsinghua University in Beijing digitally to track the source, factory information and movement of pork in China on a blockchain. ‘Consumers today want more transparency about where and how a product came to be,’ says Frank Yiannas, vice president of food safety at Walmart. ‘If you shine a light on the food system, that leads to transparency.’39

The transparency Yiannas is referring to holds immense value in industries where lies and falsehoods are rife. Indeed, at the World Economic Forum at Davos in 2017 the agenda was full of presentations with titles such as ‘Blockchain Revolutionizes Global Transactions’ and ‘Employing the Blockchain to Serve Society’.40 One of the much-hyped virtues of blockchain technologies is their potential for emerging markets such as Honduras and Ghana where weak governance and a lack of record-keeping systems means that trust is all too often in short supply. ‘It has the potential to leapfrog billions of people into a new era–in parallel to the way that mobile phones helped them leapfrog over landlines,’ says Mariana Dahan, a senior operations officer at the World Bank.41

Hernando de Soto Polar, a prominent Peruvian economist, has long held a view that capitalism will only thrive in the Third World when people feel that the law is firmly on their side, or even simply applies to them and their personal circumstances. ‘What you have to remember is that people outside the legal system are the majority. There are 7 billion people in the world, and those who are outside the legal system are five billion,’ he says. ‘So this is no marginal phenomenon.’42 One of de Soto’s core arguments is that a lack of clear de facto property rights, not capital, is what has held (typically poor) people back in developing countries for so long.43 An estimated 5 billion people, mostly in the developing world, have difficulty proving they own land, businesses or cars.44 With no legal owners, the assets are effectively walled off from the ‘official’ economy. It adds up to trillions of dollars in locked or ‘dead capital’. If ownership of land and housing is clear, recognized and protected, people will look after what they can control. It also gives people collateral to borrow against.

In Ghana, where it is estimated around 78 per cent of land is unregistered, homeowners will often put a sign outside their house painted with the words ‘This house is not for sale’.45 It is often the only means available to show that a place is occupied. Another big problem that arises from the unregistered land is that people sell what they don’t rightfully own. Government officials, abusing their power, sometimes buy an election vote here and there using fraudulent land titles. Bureaucrats sometimes hack databases to get themselves the rights to a nice beachfront property. So start-ups such as Bitfury, ChromaWay and Bitland are starting to work with governments to collect and organize property records on blockchains, based on the premise that every coin on the blockchain could represent a unique house or land title. If there were an immutable record of land-title information, theoretically at least, dodgy officials would not be able to tamper with the record without leaving a digital trail.

The UK government’s chief scientific advisor, Sir Mark Walport, published a report in January 2016, claiming that ‘distributed ledger technologies have the potential to help governments collect taxes, deliver benefits, issue passports, record land registries, assure the supply chain of goods and generally ensure the integrity of government records and services’.46 Similarly, the Dubai government announced its ambitious plans to go paperless and move all documents on to the blockchain by 2020.

For the moment, the blockchain remains in the realm of enthusiasts, innovators and idealists. It’s still unclear what will be the killer consumer app that takes it into the mainstream. But one thing is certain: the intermediaries and centralized behemoths such as banks and accountancy firms will do their darnedest not to be cut out of the picture by a network of digital ledgers. Indeed, the first industry widely to adopt the blockchain could be the very middlemen Satoshi wanted to replace: finance.

The first sentence of Satoshi’s 2008 bitcoin paper defines it as follows: ‘A purely peer-to-peer version of electronic cash that would allow online payments to be sent directly from one party to another without going through a financial institution.’47 ‘Without a financial institution’ is the key point. But it looks like banking middlemen are going to use the technology to make the exchange of money faster and cheaper. ‘My hunch is that the blockchain will be to banking, law and accountancy as the internet was to media, commerce and advertising,’ says Joi Ito, the respected entrepreneur, professor and director of the MIT Media Lab. ‘It will lower costs, disintermediate many layers of business and reduce friction. As we know, one person’s friction is another person’s revenue.’48

So if financial incumbents can’t be at the centre, why not control the new trust architecture that transactions will flow through? Indeed, patent wars are brewing and the race is on to try to ‘own’ blockchain technologies.

Anyone on Wall Street knows who Blythe Masters is. She is a banker’s banker. Born in 1969, she was raised in southeast England, where she attended the exclusive King’s School in Canterbury. Her accent is cut-glass English: proper Home Counties. During her gap year, before studying economics at the University of Cambridge, she interned at JP Morgan Chase. At the age of twenty-two, she officially joined the bank in the derivatives team in New York. Her rise through the ranks was inexorable. By the time she was twenty-eight, she was managing director, the youngest woman ever to achieve the title in the investment bank’s long history. At thirty, she became head of the global derivatives unit. At thirty-four, she became chief financial officer, joining an elite group the media dubbed as the ‘JP Morgan Mafia’. She became known on Wall Street as ‘Queen of Commodities’.49

In 1989 more than 10.8 million gallons of crude oil from the oil tanker Exxon Valdez spilled into the pristine oceans of Alaska, spreading far and wide. The potential damages were estimated to be upwards of $5 billion. The oil company needed a loan, an enormous one. So in 1994 they went to their long-term bank, JP Morgan. Masters happened to be leading the team managing the financial side of the crisis for the oil company. Exxon were an old client and the bank didn’t want to turn down their request. At the same time, the loan was risky and would tie up a lot of the bank’s reserve cash. Masters came up with what seemed at the time like an ingenious idea: what if the risk of the loans could be sold?

Her thinking was based on the fact that investment banks already swapped bonds and interest rates. So why not swap the risk of defaulting on loans? And so the idea of the ‘credit default swap’ was born and took off big time. Blythe Masters was credited as the mastermind behind the concept. Credit default swaps were meant to reassure investors the risk was hedged if a loan went south. Instead, as we now famously know, it blew enormous holes in the balance sheets of banks and insurance companies such as American International Group (AIG) and mortgage lenders like Fannie Mae, who didn’t have the collateral owed when the underlying credit swaps deteriorated.

During the 2007–2008 financial crisis, Masters had the courage, or some might say audacity, vociferously to defend the bank’s trading activity. She asserted they had done nothing wrong, despite the millions of Americans who lost their homes and jobs as a result of the crisis. If the media needed a target, Blythe Masters had a giant circle on her back. Warren Buffett went so far as to describe the derivatives she masterminded as ‘financial weapons of mass destruction’. She was vilified, some say unfairly, given how many others jumped on board with her and then ran for cover. In April 2014, after almost three decades with JP Morgan, Masters resigned.

Now, she is back, championing not swaps but another potential money-spinner–blockchains. ‘You should be taking this technology as seriously as you should have been taking the development of the internet in the early 1990s,’ Masters told a packed and rapt audience of money managers and investors at a conference held at the Le Parker Meridien Hotel in mid-Manhattan in the summer of 2015. ‘It’s analogous to email for money.’50

Around the time when bitcoin and blockchains were starting to catch the attention of the mainstream investment world, a New York-based start-up called Digital Asset Holdings (DAH) was launched. Blythe Masters was at its helm. The Wall Street veteran is knowledgeable about a common problem many banks face–getting incompatible financial databases to talk to each other. It’s costly, complex and takes time. While it might seem that traders work at Red Bull speed in lightning-paced environments, the technology used to execute trades is remarkably old-fashioned and slow. Lots of phone calls are made, emails traded and even the occasional fax is still sent. It can take up to three days–T3–for stock trades to change hands via clearing houses such as the National Securities Clearing Corporation (NSCC). It’s a process known as ‘settlement lag’. Every hour before settlement happens, when a trade precariously hangs between sale and purchase, increases the risk that the trade won’t go through. Obviously, it’s in the banks’ interest to close that lag time as much as possible.

Blockchains could help reduce the gap of the entire lifecycle of a trade from days to minutes, even to zero. According to a report by Santander InnoVentures, the Spanish bank’s fintech investment fund, by 2022 ledger technologies could save banks $15–20 billion a year by reducing regulatory, settlement and cross-border costs.51

Digital Asset Holdings wants to be the distributed database handling these speedy transactions. And the who’s who of the world’s biggest financial names, including Goldman Sachs, Citibank and Blythe Masters’s old employer, JP Morgan, have ploughed more than $60 million of investment into DAH. Speed and efficiency are not the only qualities that make distributed ledgers attractive to banks. ‘Regulators will like that blockchain-based transactions can achieve greater transparency and traceability–an “immutable audit trail”,’ Masters says.52 In other words, it could help eliminate the kinds of fraud that come from cooking the books. It’s rather ironic that these words come from a woman who spent several months being investigated by the Federal Energy Regulatory Commission for a cover-up of energy-trading strategies. Masters was not cited for any wrongdoing and no action was brought individually against her. JP Morgan paid $410 million to settle and close the case, without denying or admitting wrongdoing.53

On Wall Street, the race is on to embrace or control what could be either its biggest ally or its death knell. Where does the average Joe store their money? In a bank’s current or savings account or a safety deposit. But the blockchain could become a new repository of value.

How do typical loans work? A bank assesses the credit score of an individual or business and decides whether to lend money. The blockchain could become the source to check the creditworthiness of any potential borrower, thereby facilitating more and more peer-to-peer financing. How do typical credit cards and money transfer services work? They currently flow through a bank, but the blockchain could handle this exchange of value directly from person to person. Consider traditional accounting, a multi-billion industry largely dominated by the ‘big four’ audit firms, Deloitte, KPMG, Ernst & Young and PwC. The digital distributed ledger could transparently report the financial transactions of an organization in real time, reducing the need for traditional accounting practices. And that is why most major players in the financial industry are busy investing significant resources into blockchain solutions. They have to embrace this new paradigm to ensure it works for, not against, them.54

A San Francisco-based venture called Chain is said to have raised more than $30 million in funding from big names such as Nasdaq, Visa and Citi Ventures to develop open-source code for a distributed ledger. IBM, Wells Fargo, the London Stock Exchange and others have joined forces with Digital Asset Holdings to develop blockchain software that is also open source, making the underlying recipe available to developers. Originally dubbed the Open Ledger Project (and later renamed Hyperledger), the joint efforts are being overseen by the widely respected Linux Foundation.

Goldman Sachs has recently filed a patent for its own cryptocurrency, its own version of bitcoin, called SETLcoin which processes foreign-exchange transactions. It is designed to run on the bank’s own private blockchain. This means the replicated ledger of transactions still sits behind the closed walls of the bank, centralized and guarded. It seems to defeat the very purpose of the technology, which is to create a single indisputable version of the truth, freely accessible to all, that could eliminate the need for the bank entirely. In the patent, Goldman describes SETLcoin as having the potential to guarantee ‘nearly instantaneous execution and settlement’ for trades.55 It would mean all the capital the bank is required to keep in reserve, to hedge against the risk of transactions if they don’t settle, would be freed up.

More than forty banks have a stake in a consortium called R3CEV to come up with shared standards for blockchains.56 The technology will be pretty much worthless if there are multiple versions of the blockchain that can’t work together. R3CEV wants to bring along all the banks and regulators so they can share just one–a ledger that is not controlled by any one person or organization but by many participants. Sure, it’s collaboration, but perhaps not the kind Satoshi had in mind.

Notably, R3CEV has recruited a man by the name of Mike Hearn as its chief platform officer. The former Googler is a big deal in the blockchain world. Hearn spent more than five years working full-time alongside Gavin Andresen, as part of Bitcoin Core, the original group of developers that maintain the open-source code that runs the bitcoin peer-to-peer network.57

Hearn admits he is a ‘tell-it-like-I-see-it kinda guy’. In January 2016, he publicly denounced the future of bitcoin and said it was inherently doomed. ‘It has failed because the community has failed. What was meant to be a new, decentralized form of money… has become something even worse: a system completely controlled by just a handful of people,’ Hearn wrote. ‘The mechanisms that should have prevented this outcome have broken down, and as a result there’s no longer much reason to think bitcoin can actually be better than the existing financial system.’58

Just days after he published the post, Hearn joined the R3CEV banking consortium. ‘The current Bitcoin system, I mean the system we actually use today with the blockchain, isn’t going to change the world at all due to the 1mb limit [the maximum size of a bitcoin block],’ he said in defence of his move. ‘So if I have a choice between helping the existing financial system build something better than what they have today that resembles Bitcoin, or helping the Bitcoin community build something worse than what they have today that resembles banking, then I may as well go where the users are and work with the banks.’

From Buterin to Hearn, it seems that everyone, however different their motives, is in a race to create something like the original Satoshi blockchain, only better. For many, it’s the biggest game in town.

The blockchain raises a key human question: how much should we pay to trust one another? In the past year, I’ve paid my bank interest and fees, some hidden, to verify accounts and balances so that I could make payments to strangers. I’ve spent thousands of dollars on lawyers to draw up contracts because I am not quite sure how another person will behave (and to sort out a few incidents where trust broke down). I’ve paid my insurance company to oversee the risk around my health, car, home and even life. I’ve paid an accountant to reconcile an auditing issue. I’ve paid an estate agent tens of thousands of dollars essentially to stand between me, the prospective buyer, and the current owner to buy a house. It would seem we pay a lot for people to lord over our lives and double-check what’s happening. All these ‘trusted intermediaries’ are part of the world of institutional trust that is now being deeply questioned.

Many of the ideas surrounding the blockchain sound ambitious, risky and radical. Many are being over-hyped, over-funded and will likely fail. What’s not in doubt is that, as the cost of trust plummets because of new technology, the third parties currently paid to facilitate our trust–be they agents, referees, watchdogs or custodians–will increasingly have to prove their value if they don’t want to be supplanted by an ‘immutable’ ledger.

In 1993, enthusiasts such as Al Gore were telling the world about a coming ‘information superhighway’ that would change the world. The internet was a novel concept few had grasped and people didn’t really know what to make of it. John Allen, an early web aficionado, went on TV to try to explain how people would use it: ‘In this world, there’s a table with a big sign on it that says “Football” and there’s 150 or 1,000 jocks all around the world who want to talk about football,’ he said on CBC.59 At that time, Mark Zuckerberg was nine years old. Google was three years from being born. All the other products and companies that would emerge to commercialize the internet and its future potential were not yet clear. Today, it is circa 1993 for blockchain technologies. Even though most people barely know what the blockchain is, a decade or so from now it will be like the internet: we’ll wonder how society ever functioned without it. The internet transformed how we share information and connect; the blockchain will transform how we exchange value and whom we trust.