Silicon Valley visionary Balaji Srinivasan explains how bitcoin works and why he regards it as revolutionary.

Balaji Srinivasan has called the stateless digital currency bitcoin “the most important technology of the decade.” I ask him to explain why, and he says, in fact, that he’s amped up the description. “I’d update that today,” he tells me, “to say that the blockchain—which is not just bitcoin—is the most important invention since the internet.” My eyes widen, and he says: “Yep. I’m not sure if that’s consensus among Silicon Valley now, but it’s getting there.” The “blockchain,” he will explain, is like the internet of money—with similar decentralizing and liberating potential.

Some of Mr. Srinivasan’s views were distorted in news reports, with the now-defunct Gawker describing him as a “secessionist” (and, for good measure, as “bats— insane”). With evident distaste, he describes the Gawker story as “fake news, avant la lettre,” and notes: “Last I heard, they’d been sued into bankruptcy by profiting from revenge porn. Bitcoin is at $4,000, and Gawker is dead.”

When I ask him to explain the “blockchain,” Mr. Srinivasan starts to roll with relish. “Short version? Bitcoin is a way to have programmable scarcity. The blockchain is the data structure that records the transfer of scarce objects.” I ask him to regard me as a dummy, and to give me the longer version. We can understand bitcoin and blockchain in four steps, he says. “One, cash. When A gives a dollar bill to B, he’s transferring a physical object. B has it, and A no longer does. There’s implicit scarcity in the physical world.” Step 2 supposes that we treat the serial numbers on those Federal Reserve bills as “a form of naive digital cash. Then A emails those numbers to B. Now B has a copy. But A still has a copy!” So if those serial numbers were treated as cash, A can “double-spend” the numbers by sending them to another party, C. This, Mr. Srinivasan says, is the fundamental issue with digital cash: “the double-spend problem. How do we introduce scarcity into the digital system?” The way we resolved this problem before bitcoin, Mr. Srinivasan explains in his third step, “was through the use of centralized institutions called banks. Whenever you use PayPal or a similar technology to send money from A to B digitally, the bank is trusted to debit A and credit B.” This, he says, is how “scarcity” is introduced into a digital system; but it is “inelegant, from a computer-science perspective.

Mr. Srinivasan concedes it’s “a big claim” to say the blockchain is the most consequential technology since the internet. “The internet is programmable information. The blockchain is programmable scarcity.” He elaborates: “All of these previously disparate things—from physical mail to television to music to movies to telephony—basically got turned into packets of information and got remixed by the internet. Plus things that we normally didn’t even think of as information—your Fitbit , your steps, your Facebook settings—became programmable.” It’s fair to say, he continues, “that the internet and all things downstream—search engines, social networks, ride sharing, and so on—have basically been the technological story of the last 25 years.”

The blockchain, Mr. Srinivasan continues, “is a religion that works.” Here’s why: “If you take 10,000 people and put them in a circle and they close their eyes hard and say, ‘Let this plane fly,’ it’s not going to fly. But if they close their eyes hard and say, ‘Let this thing have value,’ and they all value it, they’ve suddenly got a price for it.” They will exchange things of economic value among themselves, and the external world can interact with them. “In the same way that once you’ve got enough people, you’ve got a nation, you’ve also got a currency. So, belief is actually something you can now materialize into currency.”

I steer our conversation, here, toward China, where the government has cracked down hard on digital currencies, banning citizens from exchanging them online. Is this the first major blockchain crisis? Mr. Srinivasan ponders the question before noting that “the Chinese government is actually run by engineers. Hu Jintao was an engineer, as is Xi Jinping. One of the things they do in China is that they actually give seats in government to folks who are successful in technology.” He tells me—“not necessarily in an admiring way”—that there are “probably not many people in the U.S. government who could explain to you exactly what a ‘firewall’ is, but that’s a fundamental instrument of policy in China.” Chinese politicians, he says, are more conversant with the long-term implications of information technology than their American counterparts. But what does China’s crackdown on bitcoin mean? Mr. Srinivasan believes that Beijing is doing something similar to what it did when it deployed the so-called Great Firewall in the early 2000s. “It wanted the internet, but it wanted a controlled internet.” It now has a vigorous and competitive Internet economy, with Alibaba, Tencent and Baidu, “but it also takes measures that Western societies would not, in terms of explicit internet censorship.” If the Chinese government wants the benefits of the blockchain “without the decentralization of bitcoin,” Mr. Srinivasan says, “we might see a ‘Great Blockchain of China’—perhaps a ‘Chinacoin’ issued by the People’s Bank of China.” It may seem too early for “something of that magnitude” to happen, Mr. Srinivasan says, “but sometimes the future happens more quickly than we expect.” An interesting question, he adds, “is whether this ‘Chinacoin’ would just be directly pegged to the renminbi, as seems most likely, or whether it would be freely floating like bitcoin.” A more plausible short-term alternative, in Mr. Srinivasan’s view, may be that “the Chinese government asserts its jurisdiction over the Chinese miners who provide most of the world-wide mining capacity of bitcoin and Ethereum,” the latter an open-source blockchain-based platform. Mr. Srinivasan imagines a “cat-and-mouse game would likely ensue, after which the Chinese government would gain control of a fork of bitcoin and Ethereum chains, but the rest of the world would fork to different versions of those chains.” The Chinese government could even attempt a hostile takeover of bitcoin.

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