John Lanchester writes for the London Review of Books about blockchain, bitcoin and places the technology in context with the development of money and financial systems. Lanchester is the man who first broke the Libor story and for us has always been the go to writer with his finger on the pulse of 21st century financial issues. We can’t urge you enough to read this, if you feel you need just a little more to understand how the blockchain works.
Here’s a small extract
Bitcoin’s central and most exciting piece of technology is something called the blockchain. This is a register of all the bitcoin transactions that have ever happened. Every time something is bought or sold using bitcoin – remember, that means every time something moves from one place in the register to somewhere else – the new transaction is added to the blockchain and authenticated by a network of computers. The techniques are cryptographic. It’s impossible to fake a new addition to the chain, but it’s relatively easy (by relatively easy, I mean relatively easy for a huge assembled array of computing power) to verify a legitimate transaction. So: impossible to fake but simple to verify. The entities transferring the money are anonymous, and at the same time completely transparent: anyone can see the bitcoin addresses involved, but nobody necessarily knows to whom they belong.
This combination of features has extraordinary power. It means that you can trust the blockchain, while knowing nothing about anyone else attached to it. Bitcoin is in effect a register like the one kept in people’s memory on Yap, but it’s a register that anyone can see and to which everyone assents. For the first time in human history, we have a register that does not need to be underwritten by some form of authority or state power, other than itself – and, as I’ve argued, that register isn’t some glossy add-on to the nature of money, it actually is how money works. A decentralised, anonymous, self-verifying and completely reliable register of this sort is the biggest potential change to the money system since the Medici. It’s banking without banks, and money without money. The next several paragraphs give a short technical explanation of how bitcoin works; if you aren’t interested, see you at the dropped letter.