Blockchain was first introduced in 2008 as the distributed ledger behind bitcoin transactions. The technology has since taken on a life of its own, with interest coming from many quarters.
Governments, businesses and other organizations are researching and deploying blockchain technology to meet a variety of needs -- most of which have nothing to do with digital currency. Blockchain offers security, immutability, traceability and transparency across a distributed network. This makes it well suited to use cases that have become difficult to support with traditional infrastructure.
A blockchain is a type of database that is a public ledger for recording transactions without needing a third-party to validate each one. The blockchain is distributed across a peer-to-peer (P2P) network. It is made up of data blocks that are linked together to form a continuous chain of immutable records. Each computer in the network maintains a copy of the ledger to avoid a single point of failure. Blocks are added in sequential order and are permanent and tamperproof.
A blockchain starts with an initial block -- often referred to as the Genesis block -- that records the first transactions. The block is also assigned an alphanumeric string called a hash, which is based on the block's timestamp. Blocks are added to the chain sequentially. Each block uses the hash from the previous block to create its own hash, thus linking the blocks together.
Blockchain also uses a computational process called consensus to validate a block's authenticity before it can be added to the chain. As part of this process, the majority of nodes on the blockchain network must agree that the new block's hash has been calculated correctly. Consensus ensures that all copies of the distributed ledger are in the same state.
Initially, blockchain provided a distributed public ledger to support the cryptocurrency bitcoin. Blockchain made it possible to record bitcoin transactions without the need for a central authority to establish trust in a trustless environment. Not only did this make transactions more efficient, it also eliminated the costs associated with third-party verification. Blockchain also provided greater transparency, traceability and security over conventional approaches to handling distributed transactions. Although the blockchain history is relatively short, its effect has already been widely felt.
1979-2007: Creation of blockchain and the early years
Many of the technologies on which blockchain is based were in the works long before bitcoin appeared. One of these technologies is the Merkle tree, named after computer scientist Ralph Merkle. Merkle described an approach to public key distribution and digital signatures called "tree authentication" in his 1979 Ph.D. thesis for Stanford University. He eventually patented this idea as a method for providing digital signatures. The Merkle tree provides a data structure for verifying individual records.
But Merkle was not the only one to help set the stage for blockchain. David Chaum described a vault system for establishing, maintaining and trusting computer systems by mutually suspicious groups in his 1982 Ph.D. dissertation for the University of California, Berkeley. This was a system that embodied many of the elements that make up a blockchain. Chaum is also credited with inventing digital cash, and in 1989, he founded the DigiCash corporation.
In 1991, Stuart Haber and W. Scott Stornetta published an article about timestamping digital documents. The article proposed a solution for preventing users from backdating or forward-dating electronic documents. The goal was to maintain complete privacy of the document itself, without requiring record-keeping by a timestamping service. In 1992, Haber and Stornetta updated the design to incorporate Merkle trees, which enabled multiple document certificates to live on a single block.
During these early years, there was plenty of other activity that also helped make blockchain possible. For example, this era saw the rise of the P2P network, a concept popularized in 1999 by the now defunct Napster. Some would argue that Napster was not a true P2P network because it used a centralized server. However, the service still helped breathe life into the P2P network, making it possible to build a distributed system that could benefit from the compute power and storage capacity of thousands of computers.
The concept of proof-of-work (PoW) was also introduced in this era to verify computational effort and deter cyberattacks. This gave way to hashcash, a PoW algorithm that provides denial-of-service counter measures. Adam Back introduced hashcash in 1997 to limit email spamming. Then, in 2004, Hal Finney introduced reusable PoW, a mechanism for receiving a non-exchangeable -- or non-fungible -- hashcash token in return for an RSA-signed token. The PoW approach plays a vital role in bitcoin mining.
2008-2009: Bitcoin and blockchain get their start
In 2008, Satoshi Nakamoto published a white paper introducing the concepts behind bitcoin and blockchain. Nakamoto is thought to be a pseudonym used by the individual -- or group of individuals -- who proposed the technology. Blockchain infrastructure would support secure, peer-to-peer transactions without the need for trusted third parties such as banks or governments, according to white paper. Nakamoto's true identity remains a mystery, but there has been no shortage of theories.
The bitcoin/blockchain architecture introduced in 2008 built on technologies and concepts from the previous three decades. Nakamoto's design also introduced the concept of a "chain of blocks." This made it possible to add blocks without requiring them to be signed by a trusted third party. In fact, Nakamoto defined an electronic coin as a "chain of digital signatures," where each owner transfers the coin to the next owner. According to his white paper, this is done by "digitally signing a hash of the previous transaction and the public key of the next owner and adding these to the end of the coin."
But Nakamoto's white paper was just the beginning. In 2009, bitcoin went from concept to reality.
- Jan. 3, 2009. Nakamoto mined the first bitcoin block, validating the blockchain concept. The block contained 50 bitcoins and was known as the Genesis block -- aka block 0.
Learn more about bitcoin mining here.
- Jan. 8, 2009. Nakamoto released Bitcoin v0.1 to SourceForge as open source software. Bitcoin is now on GitHub.
- Jan. 12, 2009. The first bitcoin transaction took place when Nakamoto sent Hal Finney 10 bitcoin in block 170.
- Oct. 12, 2009. The #bitcoin-dev channel was created on Internet Relay Chat for bitcoin developers.
- Oct. 31, 2009. The first bitcoin exchange -- Bitcoin Market -- was established, enabling people to exchange paper money for bitcoin.
- Nov. 22, 2009. Nakamoto launched the Bitcointalk forum to share bitcoin-related news and information.
Nakamoto set up the system so there would never be more than 21 million bitcoin. More than 18 million have already been mined. Based on the current rate of mining, bitcoin should reach the 21-million limit sometime around 2140. In the meantime, their value continues to grow, despite continuous fluctuations in price. In October 2009, a bitcoin was worth less than 1 cent. Today, each bitcoin is worth more than $35,000 (USD).
2010-2012: Bitcoin and cybercurrency take hold
On May 22, 2010, bitcoin made history when Laszlo Hanyecz paid 10,000 bitcoin for two Papa John's pizzas. The pizzas were valued around $25, a trade that would now be worth more than $350 million.
Not long after, a programmer named Jed McCaleb launched Mt. Gox, a Tokyo-based bitcoin exchange. Mt. Gox was short for Magic: The Gathering Online eXchange -- a carryover from a fantasy card game. At its peak, Mt. Gox handled more than 70% of all bitcoin transactions. But in August 2010, a hacker exploited a bug in the blockchain code and created more than 184 billion bitcoin in block 74,638, tarnishing bitcoin's reputation. Nakamoto published a new version of the bitcoin software, but by the end of the year, he disappeared from the bitcoin scene completely.
Despite Nakamoto's disappearance, the bitcoin trajectory continued at a steady pace. By the end of January 2011, one-quarter of the 21 million bitcoin had been mined. And by early February 2011, the value of a bitcoin was equal to the U.S. dollar. Shortly thereafter, Jed McCaleb sold Mt. Gox to Mark Karpelès. And soon after that, bitcoin reached parity with the Euro and British Pound Sterling. Later that year, WikiLeaks started accepting bitcoin donations. However, Mt. Gox was hacked and bitcoin was stolen, causing an artificial drop in value and resulting in suspension of trading. Then in October 2011, Litecoin was released, representing one of the earliest bitcoin spinoffs.
By 2012, the taste for cryptocurrencies was well established. The bitcoin price hovered around $5 for most of the year, with many fluctuations up and down. Early that year, Mihai Alisie and Vitalik Buterin launched Bitcoin Magazine and published their first issue in May. The Bitcoin Foundation was also established to promote bitcoin and improve public perceptions.
That same year, Coinbase raised more than $600,000 in its crowd-funded seed round, leading the way to become one of the top bitcoin exchanges. In addition, Chris Larsen and Jed McCaleb founded OpenCoin. This led to the development of the Ripple transaction protocol for currency transactions and real-time payments.
2013-2015: Ethereum and blockchain rise to fame
When 2013 arrived, bitcoin was well-established and continued on its upward trajectory. In February, Coinbase reported selling $1 million worth of bitcoin in a single month at more than $22 each. By the end of March, with 11 million bitcoin in circulation, the currency's total value exceeded $1 billion. And in October of that year, the first bitcoin ATM launched in Vancouver, B.C.
But it wasn't all good news for digital currency. Both Thailand and China banned cryptocurrencies. The U.S. Federal Court seized Mt. Gox's funds in the U.S. And the FBI shut down Silk Road, confiscating 26,000 bitcoin.
Despite these setbacks, one of the most important events in blockchain's history occurred. Vitalik Buterin, co-founder of Bitcoin Magazine, published a white paper that proposed a decentralized application platform. This led to the creation of the Ethereum Foundation, which launched in 2014. Ethereum paved the way for blockchain technology to be used for purposes other than cryptocurrency. It introduced smart contracts and provided developers with a platform for building decentralized applications.
The year 2014 was a turning point for blockchain, as financial institutions and other industries began to recognize and explore its potential, shifting their focus from digital currency to the development of blockchain technologies.
But this didn't push bitcoin out of the limelight. The UK tax authority classified bitcoin as private money. The Mt. Gox bitcoin exchange filed for bankruptcy. And the Bitcoin Foundation vice chairman was arrested for money laundering. Even still, several companies accepted bitcoin by the year's end, including the Chicago Sun-Times, Overstock.com, Microsoft, PayPal and Expedia. Bitcoin's acceptance only added fuel to the blockchain fires.
In 2015, the Ethereum Frontier network launched, enabling developers to write smart contracts and decentralized apps that could be deployed to a live network. Ethereum was on its way to becoming one of the biggest applications of blockchain technology. It drew in an active developer community that continues to this day.
But other important events also occurred that year. NASDAQ initiated a blockchain trial. The Linux Foundation launched the Hyperledger project. And nine major investment banks joined forces to form the R3 consortium, exploring how blockchain could benefit their operations. Within six months, the consortium grew to more than 40 financial institutions.
2016-present: Blockchain goes mainstream
Today, a growing number of industries view blockchain as a valuable technology -- separate from bitcoin or other cybercurrencies. Despite this trend, however, each year from 2016 to present had its ups and downs.
- The word blockchain gained acceptance as a single word, rather than being treated as two concepts, as they were in Nakamoto's original paper.
- The Chamber of Digital Commerce and the Hyperledger project announced a partnership to strengthen industry advocacy and education.
- A bug in the Ethereum decentralized autonomous organization code was exploited, resulting in a hard fork of the Ethereum network.
- The Bitfinex bitcoin exchange was hacked and nearly 120,000 bitcoin were stolen -- a bounty worth approximately $66 million.
- Bitcoin hit a record high of nearly $20,000.
- Japan recognized bitcoin as legal currency.
- Seven European banks formed the Digital Trade Chain consortium to develop a trade finance platform based on blockchain.
- The Block.one company introduced the EOS blockchain operating system, designed to support commercial decentralized applications.
- Approximately 15% of global banks used blockchain technology in some capacity.
- Bitcoin turned 10 this year.
- Bitcoin value continued to drop, ending the year at about $3,800.
- The online payment firm Stripe stopped accepting bitcoin payments.
- Google, Twitter and Facebook banned cryptocurrency advertising.
- South Korea banned anonymous cryptocurrency trading but announced it would invest millions in blockchain initiatives.
- The European Commission launched the Blockchain Observatory and Forum.
- Baidu introduced its blockchain-as-a-service platform.
- Walmart launched a supply chain system based on the Hyperledger platform.
- Amazon announced the general availability of its Amazon Managed Blockchain service on AWS.
- Ethereum network transactions exceeded 1 million per day.
- Blockchain research and development took center stage as organizations embraced blockchain technology and decentralized applications for a variety of use cases.
- Nearly 40% of respondents incorporated blockchain into production, and 55% viewed blockchain as a top strategic priority, according to Deloitte's 2020 Global Blockchain Survey.
- Ethereum launched the Beacon Chain in preparation for Ethereum 2.0.
- Stablecoins saw a significant rise because they promised more stability than traditional cybercurrencies.
- There was a growing interest in combining blockchain with AI to optimize business processes.
Throughout these five years, there was a growing interest in using blockchain for applications other than cybercurrency. This trend continues into 2021 as governments and enterprises look to blockchain to handle a variety of use cases. This includes voting, real estate, fitness tracking, intellectual rights, the internet of things and vaccine distribution. Moreover, multiple cloud providers now offer blockchain as a service, and the demand for qualified blockchain developers is greater than ever.
The future of blockchain technology
Trying to predict the future of any technology is never easy, and blockchain is no different -- especially since its history is so short. However, if blockchain continues on its current path, it affects many industries -- including retail, mining, travel, healthcare, education, agriculture and entertainment. The biggest effect might be in financial services, especially with the growing movement toward decentralized finance, which uses permissioned blockchains to handle complex financial use cases. Governments will also likely continue to embrace blockchain.
As universities, governments and private corporations continue to research and invest in blockchain, the technology will only improve. But they must first address the challenges that blockchain brings -- particularly regarding security, privacy, scalability and interoperability. Blockchain is also not suited to every use case, and business must evaluate deploying it before investing in the technology and putting it into production.
Learn more here about blockchain trends in 2021.