‘The Messiah has come!' proclaim business analysts and cryptographers alike when it comes to blockchain technology, the cryptographic technique used to secure cryptocurrencies like Bitcoin. They believe that once this technology is sufficiently advanced – enabling ‘smart contracts’ powering the newer cryptocurrency Ethereum – it will form the bedrock for rewriting corporate law and restructuring organisations into so-called decentralised autonomous organisations (DAOs), and these DAOs will democratise corporations and governments alike.

How did we arrive at this widely held belief, that blockchain systems are somehow democratic and egalitarian, and certainly more democratic and more egalitarian than the current system?

Blockchain systems are categorised into ‘permissioned’ and ‘permissionless’. In permissioned systems, there exists a closed committee, sitting in a walled garden, entrusted with taking decisions for the rest of the participants. This committee takes decisions about transaction history, is able to censor transactions, holds the power to establish the macroeconomic policy of the system and, among other responsibilities, can print money. In a permissioned system, instead of an open network in which anyone can join and participate freely, voting is performed by this oligarchy – the ruling of few. One example of permissioned blockchains are blockchains that banks are currently experimenting with to support behind-the-scenes transaction clearance. In such systems, the committee taking decisions consists of the participating banks; each bank gets one vote. It is a closed, opaque system controlled by a selected few. Permissioned blockchains are inherently limited in their number of participants and cannot enable an open society. Clearly, permissioned blockchains are not the democracy we’re looking for. Perhaps we can find democracy in permissionless blockchains?

Permissionless blockchains are open and decentralised. In a decentralised system, there is no central party like a central bank applying macroeconomic policy. There is no single party, nor committee, authorised to print new money or judge when it is wise to apply quantitative easing. In an open system, anyone is free to join or leave the network. How, then, can money be created and rules be enforced? The answer is collectively. Money can be created by anyone as long as they follow the protocol rules. These protocols mean that any participant in the blockchain system – which could be you – can attempt to create new money. The system then, using complicated probabilistic methods, chooses one leader out of the participants at random and blesses them with the privilege of creating a specific sum of money, for themselves. Like a wheel of fortune spinning over and over, a different participant is chosen every so often, and this is how new money is injected into the system. However, the chances of being chosen are not evenly distributed – so how does this work in more detail?