The Truth Machine: The Blockchain and the Future of Everything

Copyright

HarperCollinsPublishers

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First published in the US by St Martin’s Press 2018

This UK edition published by HarperCollinsPublishers 2018

FIRST EDITION

© Paul Vigna and Michael J. Casey 2018

Cover photograph (Locks) © Tatiana Popova/Shutterstock.com

Cover design by Rob Grom

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Paul Vigna and Michael J. Casey assert the moral right to be identified as the authors of this work

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Source ISBN: 9780008301774

Ebook Edition © March 2018 ISBN: 9780008301781

Version 2018-03-01

Dedication

For Liz, Jenny, Sarah, and Di

—MC

For my mom and dad

—PV

Contents

Cover

Title Page

Copyright

Dedication

A Note from the Authors

Preface

Introduction: A Society-Building Tool

1. The God Protocol

2. “Governing” the Digital Economy

3. The Plumbing and the Politics

4. The Token Economy

5. Enabling the Fourth Industrial Revolution

6. The Old Guard’s New Makeover

7. Blockchains for Good

8. A Self-Sovereign Identity

9. Everyone’s a Creator

10. A New Constitution for the Digital Age

Notes

List of Searchable Terms

Acknowledgments

Other Books By

About the Publisher

A Note from the Authors

Throughout this book you will see a distinction between “bitcoin” written with a lowercase “b” and “Bitcoin” with an uppercase “B.” The former refers to bitcoin’s status as a currency, the latter is a reference to the overarching system and protocol that underpins that currency and other uses for the Bitcoin blockchain ledger.

Addressing an inconsistency in popular parlance, we generally employ three distinct usages of the word “blockchain”: “The blockchain,” which refers to Bitcoin’s original distributed ledger; “a blockchain”— or, pluralized, “blockchains”— to cover a variety of more recent distributed ledgers that share Bitcoin’s chain-of-blocks structure; and “blockchain technology,” referring to the overall field. We also use “distributed ledger technology” to encompass both blockchain and non-blockchain distributed ledgers. We mostly avoid the popular construct of “blockchain” as a non-countable noun. We view a blockchain, like any ledger, as a distinct, identifiable thing, not a process. The book’s title uses the definite article form to acknowledge the catalytic role that the original Bitcoin blockchain played in unleashing this field.

Preface

In The Age of Cryptocurrency, we explored the digital currency bitcoin and its promise of a fairer global payments system, one that functions without banks and other financial intermediaries. As that book was going to print, Bitcoin’s wider application—how its core operating system can help resolve problems of trust between individuals and businesses when they trade assets, enter into contracts, assert claims to property, or share valuable or sensitive information—came to the fore. Within companies, governments, and the media, a groundswell of interest, including a fair bit of hype, turned toward what became known as “blockchain technology.”

In resolving longstanding problems of trust and enabling a community to track its transactions without entrusting that record-keeping process to a central intermediary, the blockchain idea promised a way to bypass the various gatekeepers who control society’s exchanges of value. It could, for instance, let a neighborhood of “prosumers”—households that both consume power and produce it with solar panels on their roofs—trade energy among themselves within a decentralized marketplace and without a profit-driven utility company setting the rates. Similarly, property owners, buyers, and mortgage lenders would not have to trust an unreliable government registry as the only record of deeds and liens when a more trustworthy one could be built on an immutable database managed by a decentralized network with less risk of corruption, human failure, or theft. These are just some of the many new applications that attracted people’s attention to this innovative idea.

The zeitgeist of public awareness had two big impacts on our lives. The first was that one of us—Michael Casey—got so excited about blockchain technology’s potential to change the world that he quit a twenty-three-year career in journalism to work on it full time. Less than six months after The Age of Cryptocurrency was published, Mike left The Wall Street Journal for MIT’s Media Lab. The lab’s frenetic director, Joichi Ito, who is commonly known as Joi, had recognized parallels between Bitcoin’s emergence and the software development he’d witnessed during the early days of the Internet. Sensing a similar enthusiasm for a new, decentralizing architecture, Ito hatched a plan to bring powerful academic and financial resources to the vital task of developing this nascent technology. The result was MIT’s Digital Currency Initiative, a center where leading academics and students in the fields of cryptography, engineering, and finance could collaborate with Fortune 500 strategists, innovative startups, philanthropists, and government officials to design the digital architecture of a new “Internet of Value.” When Mike received an offer to join this initiative, he saw a once-in-a-lifetime opportunity to get in on the ground floor of an economic revolution.

The second impact is the book you are reading. In The Age of Cryptocurrency, we focused primarily on a single application of Bitcoin’s core technology, on its potential to upend currency and payments. Since the book’s publication, though, we have learned there’s a risk in writing about technology: it changes, while the words on the page do not. So much has changed in three years, in fact, that we were compelled to write another book. The Truth Machine expands the conversation we began in 2015 and takes it to a level higher. It explores how Bitcoin’s technology and its various offshoots point to a general redesign of social organizations, fostering many more alternative applications.

In the modern economy, to control information is to control the world. This is seen in the ever-growing influence of tech behemoths like Google and Facebook, constantly accumulating data that’s pertinent to who we are and how we interact with each other. In this twenty-first-century economy, power is defined by whoever has authority to collect, store, and share data. Currently, that authority is centralized. It is concentrated among a narrow number of giant tech companies. If you’re wondering why that’s problematic, just think of the influence that Facebook’s hidden algorithm, which prioritizes the company’s business model above all other objectives, has had on our politics. In incentivizing the creation and sharing of often-dubious information to trigger dopamine releases among social networks of like-minded people, its algorithm played an instrumental role in the bombshell U.S. elections of 2016.

The ideas behind the blockchain have now unleashed a struggle to turn that structure of concentrated power on its head, to figure out how the capacity to control and manage information might shift to a decentralized system that no one controls. It lets us imagine a world that’s not dominated by Google, Facebook, or, for that matter, the NSA, one where we, the people, the core components of global society, get to say how our data is managed.

We felt it was important to get that message across. The Truth Machine is our attempt to convey it.

Introduction

A SOCIETY-BUILDING TOOL

Sixty miles east of Amman, in a 5.6-square-mile block of dry, stony ground carved out of the Jordanian desert, lies the UN High Commission for Refugees’ Azraq camp. Teeming with 32,000 desperate Syrians living in pre-fabricated shelters—rows and rows of white, corrugated steel cabins arranged in a military-like grid—Azraq poses the logistical challenges of a small city. Yet UNHCR and the other aid agencies that give the refugees food, shelter, and a modicum of hope can’t count on the kinds of institutions and infrastructure that normal cities use to ensure order, security, and functionality for their residents.

All refugee camps are, by definition, short on what political scientists call “social capital,” the networks of long-established relationships and bonds of trust that allow communities to function, to engage in social interaction and exchange. But Azraq can seem especially devoid of it. There are police in Azraq, but they are Jordanian. They are not of the people, not of the community. And while the crime rates in Azraq are lower than those in nearby Zaatari camp, where 130,000 Syrians live in conditions that a UN review once described as “lawless,” this hot, dry, stony place is hardly welcoming. When Azraq was set up in 2014 as an alternative to Zaatari’s chaos, refugees complained that it lacked life. Electricity was sparse, which meant they couldn’t charge their cellphones, cutting them off from family and friends. The lack of a functioning, trustful community also heightened the refugees’ fears of being abducted by the extremist organization Islamic State. Many initially refused to move to Azraq camp, and although the numbers have increased more recently, Azraq is still far below the 130,000 capacity for which it was built.

It’s fitting then that this pop-up city, in real need of some functioning social capital, is now the scene of a radical experiment in new models of community governance, institution-building, and the management of resources. At the heart of that effort is blockchain technology, the decentralized ledger-keeping system that underpins the digital currency bitcoin and promises a more reliable, immediate way to trace transactions. The World Food Program (WFP), a UN agency that feeds 80 million people worldwide, is putting 10,000 Azraq refugees through a pilot that uses this system to better coordinate food distribution. In doing so, the WFP is tackling a giant administrative challenge: how to ensure, in an environment where theft is rampant and few people carry personal identifying documents, that everyone gets their fair share of food.

Among those participating in this project was forty-three-year-old Najah Saleh Al-Mheimed, one of the more than 5 million Syrians forced to flee their homes as the brutal, ongoing civil war has all but destroyed their country. In early June 2015, with mounting food shortages and reports of girls being kidnapped by militias in nearby villages, Najah and her husband made the drastic decision to leave her hometown of Hasaka, where their families had lived for generations. “It was an ordeal that I pray to God no human will ever witness,” she said in an interview conducted on our behalf by WFP staffers working in the Azraq camp.

In leaving behind her home, her assets, her circle of neighbors and family, and her ties to what was once a more coherent Syrian nation, Najah was also losing something extremely powerful that the rest of us take for granted: a societal system of trust, identity, and record-keeping that ties our past to our present, anchors us as human beings, and lets us participate in society. The amalgamation of information that goes into proving that we can be trusted as a member of society has historically depended upon institutions that record and affirm our life events and credentials—bank accounts, birth certificates, changes of address, educational records, driver’s licenses, etc.—and keep track of our financial transactions. To lose all of that, as refugees often do when thrust into “statelessness,” is to be put in a highly vulnerable position, one that’s inherently easy for the worst of the world’s criminals and terrorist organizations to exploit. If you are unable to prove who you are, you are at the mercy of strangers. Among all the work that agencies such as the UNHCR and the WFP do, this core function—the creation of stand-in societal institutions—is just as important as the food they provide. In dusty tent cities filled with dislocated people around the world, these humanitarian agencies must undertake the challenging task of recreating systems of social trust. They are reconstructing societies, building them all over again. And it turns out that blockchain technology provides a tool for doing just that.

It’s in this realm, where human beings must depend on reliable institutions to keep track of their social interactions and provide proof that their claims are valid, that blockchain technology comes into its own. With this system we would no longer have to trust institutions to maintain transaction records and vouch for us, since blockchain-based programs comprise an intricate set of features that result in something that’s never existed before: a transaction record that is visible to all and can be verified at any moment, but that is not controlled by any one central authority. This means two things: nobody can alter the data to suit their own ends, and everybody has greater control over their own data. You can see how this could be an empowering idea for millions of Syrians living a scorched-earth existence.

Just as the blockchain-distributed ledger is used to assure bitcoin users that others aren’t “double-spending” their currency holdings—in other words, to prevent what would otherwise be rampant digital counterfeiting—the Azraq blockchain pilot ensures that people aren’t double-spending their food entitlements. That’s a pretty important requirement in refugee camps, where supplies are limited and where organized crime outfits have been known to steal and hoard food for profit. And it means that refugees like Najah will always be able to prove that their accounts are legitimate. That would end the periodic and disturbing disruption to provisions that many have experienced under the cash-voucher system. In that system, any inconsistency tends to flag a concern to administrators, who often feel compelled to cut off the person’s access to food until it is resolved.

Under this new pilot, all that’s needed to institute a payment with a food merchant is a scan of a refugee’s iris. In effect, the eye becomes a kind of digital wallet, obviating the need for cash, vouchers, debit cards, or smartphones, which reduces the danger of theft. (You may have some privacy concerns related to that iris scan—we’ll get to that below.) For the WFP, making these transfers digital results in millions of dollars in saved fees as they cut out middlemen such as money transmitters and the bankers that formerly processed the overall payments system.

So whenever a refugee spends some level of his or her digital “cash” to buy flour, that transaction automatically registers on a transparent ledger that can’t be tampered with. That ever-present, ever-updating, extremely reliable record-keeping model means WFP administrators can have full visibility of the flow of transactions at any time, even though the WFP has no centralized record of its own. The organization can support a camp-wide payment system without having to take on the centralized role of a bank or payment processor.

By contrast, the UNHCR’s identity program, which is integrated into the WFP’s blockchain solution, is maintained as a centralized database. That has raised some concerns among critics. Such systems are susceptible to hacking because, by accumulating large amounts of data in one big “honeypot,” they offer what’s known as a single attack vector. In this case, such risks could in theory put this particularly vulnerable group of human beings at risk—it’s not hard to imagine the worst if a database of biometric identifiers ever fell into the hands of an ethnic cleansing–minded institution like ISIS. People in the blockchain space, who are often fierce advocates of privacy, are among the most vocal about these concerns, and some are trying to figure out how to use the same technology to decentralize control over self-identifying information so that people aren’t vulnerable to break-ins of these big data honeypots. But until such “self-sovereign” solutions are available, the WFP and the UNHCR have made a determination that the risks are for now outweighed by the benefits of a seamless, cashless system.

According to WFP spokesman Alex Sloan, the pilot has already shown success: it has saved money and created a much more efficient way of dealing with inconsistencies in refugees’ accounts. It’s so successful, in fact, that the agency is looking to extend the service to a larger population of 100,000 refugees. In the not too distant future, Sloan says, 20 million food program beneficiaries who receive disbursements in cash could be eligible for the blockchain program. With the world facing the biggest refugee crisis in history, a result of greed, of the brutal pursuit of self-serving power, and of failed Western policies to contain it, we owe it to these people to bring some security back into their lives—to provide them with a platform of trust upon which to rebuild. Perhaps blockchain technology offers the best chance of delivering that.

The World Food Program’s Azraq experiment is just one example of how international agencies are exploring blockchain solutions to the problems of the world’s neediest. In early 2017, a group of blockchain enthusiasts at the UN’s New York headquarters launched a Web site calling on other UN employees to work with them. The group rapidly grew to eighty-five UN staffers worldwide, and they are now working on multiple pilots addressing blockchain for development, in partnership with governments such as Norway’s. At the World Bank, a new blockchain lab was created with fresh funding in June 2017 to explore how the technology could tackle poverty alleviation through incorruptible property registries and secure digital identities. The Inter-American Development, in concert with MIT Media Lab’s Digital Currency Initiative, is looking at how poor Latin American farmers might be able to obtain credit on the basis of reliable, blockchain-proven records from commodity warehouses. Non-profit international organizations such as the World Economic Forum and the Rockefeller Foundation are also diving into this area.

What do these decades-old international organizations see in an arcane digital technology built by the crypto-libertarians and Cypherpunks who gave us Bitcoin? It’s the prospect that this decentralized computing system could resolve the issue of social capital deficits that we discussed in the context of the Azraq refugee camp. By creating a common record of a community’s transactions and activities that no single person or intermediating institution has the power to change, the UN’s blockchain provides a foundation for people to trust that they can securely interact and exchange value with each other. It’s a new, more powerful solution to the age-old problem of human mistrust, which means it could help societies build social capital. That’s an especially appealing idea for many underdeveloped countries as it would enable their economies to function more like those of developed countries—low-income homeowners could get mortgages, for example; street vendors could get insurance. It could give billions of people their first opening into the economic opportunities that the rest of us take for granted.

But it’s not just in developing countries, or in the realm of non-profit charity and development work, that blockchain technology shows potential. Far from it. In the developed world, too, and within the boardrooms of plenty of Fortune 500 for-profit companies, there is a scramble to unleash what many believe could be a major force for economic growth. That’s because the blockchain is seen as capable of supplanting our outdated, centralized model of trust management, which goes to the heart of how societies and economies function.

Until now, we have relied on institutions such as banks, government registries, and countless other intermediaries to sit in the middle of our economic exchanges with each other. These “trusted third parties” maintain records on our behalf so that the rest of us have enough trust in the system to interact, exchange items of value, and, hopefully, build vibrant, functioning societies. The problem is that these fee-charging institutions, which act as gatekeepers, dictating who can and cannot engage in commercial interactions, add cost and friction to our economic activities. They also have a habit of failing us—we can think of the crisis of 2008 as a case of banks breaching their duty to maintain honest records—or of exploiting their toll-collecting power to price gouge and demand exorbitant rents. What’s more, there are plenty of situations in which it’s simply not economically viable for these costly, inefficient institutions to resolve whatever particular trust deficit is preventing people from doing business with each other. So, if we bypass those intermediaries, we will not only save money but also open up previously impossible business models.

The Internet put us on this disintermediating path some time ago, well before the blockchain came along. But it’s worth noting that at the heart of each new Internet application that cuts out some incumbent middleman there has typically been a technology that helps humans deal with their perennial mistrust issues. Who would have thought a decade ago that people would feel comfortable riding in the car of some stranger they’d just discovered on their phones? Well, Uber and Lyft got us over that trust barrier by incorporating a reputation scoring system for both drivers and passengers, one that was only made possible because of the expansion of social networks and communication. Their model showed that if we can resolve our trust issues with technology and give people confidence to transact, those people are willing and able to go into direct exchanges with complete strangers. These ideas are setting us on a path to a peer-to-peer economy.

What blockchain technology says is, “Why stop at Uber?” Why do we even need this particular company, which takes 25 percent from each ride and has a reputation for abusing its “God’s View” knowledge of passengers’ rides? How about a totally decentralized solution, such as the Tel Aviv–based, blockchain-powered ride-sharing application Commuterz? In that case no one owns the platform, which like Bitcoin is just based on an open-source software protocol that anyone can download. There’s no Commuterz, Inc. taking 25 percent. Instead, users own and trade a native digital currency system that incentivizes them to share rides to reduce traffic congestion and lower the cost of transportation for all.

The broad idea is that by deferring the management of trust to a decentralized network guided by a common protocol instead of relying upon a trusted intermediary, and by introducing new, digital forms of money, tokens, and assets, we can change the very nature of social organization. We can encourage new approaches to collaboration and cooperation that weren’t possible before, transforming a wide array of industries and organizational settings. Indeed, the breadth of blockchain’s potential is captured in the breadth of the ideas under consideration. Here is sampling of possible use cases, and it is by no means an exhaustive list: