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Ethereum

Bitcoin, Blockchain, and Five Years

What’s next?

I first wrote about Bitcoin on this website five years ago today. (Click here). I decided not to buy any at the time because the price had surged to well over one hundred dollars! Clearly it was a bubble. If only I had known that the price would peak at $18,000 a few years later. (Today, the price is about $6,800).

So what’s happened over the past five years? Let’s look at Bitcoin’s benefits and then investigate some of the ways that it has changed our world.

Bitcoin is based on a blockchain stored in multiple locations. This gives it two major advantages: it can’t be erased and can’t be tampered with. Simply put, it’s like writing checks in ink rather than in pencil, using paper that can’t be destroyed. A blockchain can record transactions and ensure that they will always be available as a matter of public record. Bitcoin uses this feature to buy and sell things. Each transaction is recorded forever, meaning that you can’t spend the same Bitcoin more than once.

Bitcoins can also reduce inflation because they can’t be printed at a government’s whim. Instead, they’re “mined” through complex mathematical calculations. The process gradually grows the supply of coins. The money supply grows in predictable ways. This appeals to anyone who worries that governments will artificially inflate their national currencies.

Bitcoin is also anonymous – just like cash. Unlike cash, however, it’s not physical. It can easily be moved around the world as electronic blips. That makes transactions convenient and inexpensive and could conceivably cut out banks as middlemen. This makes Bitcoin attractive to many groups, especially criminals.

So, what’s happened? First, the idea of the blockchain has spread. There’s no reason to limit the blockchain to currency transactions. We can store anything in blockchain and ensure that it never disappears. In other words, we believe that it is more trustworthy than government or financial entities.

As Tim Wu writes, we are undergoing, “… a monumental transfer of social trust: away from human institutions backed by governments and to systems reliant on well-tested computer code.” Wu notes that we already trust computers to fly airplanes, assist in surgery, and guide us to our destination. Why not financial systems as well? A well-organized cryptocurrency could become the de facto standard global currency and eliminate the need for many banking services.

But we don’t need to limit the blockchain to financial transactions. Any record that must be inviolate can potentially benefit from blockchain technology. Some examples:

  • The Peruvian economist, Hernando de Soto, has suggested that we can combat poverty by storing land ownership records in blockchain systems. Land ownership disputes in Latin America can last for centuries. Blockchain could simplify the process and ensure that those who hold title to land can’t be cheated out of it.
  • De Soto’s proposal eliminates the government as the arbiter of land titles. This is part of a broader trend to disintermediate governments. Why should governments be information czars? Better to store our records in blockchain. This could include land titles, personal identification, health records (including our DNA), the provenance of art works, stock ownership, international fund transfers, and self-enforcing contracts.
  • Tim Wu suggests that we’re moving our trust from governments to code. But we’re only part way there. In our first step away from governments, we put our trust in giant Internet companies like Facebook and Google. We’re now discovering that these entities are no more trustworthy than governments. Indeed, they may be less trustworthy. What’s the next step? Many suggest that it’s the blockchain.
  • Meanwhile, afraid of being disintermediated, governments are starting to plan cryptocurrencies of their own. Russia has proposed a digital currency with several former soviet socialist republics. Sweden and China are both interested in their own cryptocurrencies and have established sturdy groups. But the first government out of the gate seems to be Venezuela, driven by a financial crisis. Venezuela’s printed currency, the Bolívar, suffers from inflation rates around 4,000%. So the government has just announced a new cryptocurrency called the Petro, based on the nation’s oil revenues. The government is essentially saying, “We’re incompetent to print paper money but you can trust the Petro because it’s based on code, not a bumbling bureaucracy. We humans can’t interfere with it.” Will it work? Stay tuned.

Of course, we can also use blockchains for less noble pursuits. The blockchain can store any information, including pornography. That’s a problem but it’s the same problem that was faced by myriad new technologies, including VCRs and the Internet itself. Criminals can also use cryptocurrencies for ransomware attacks, and to traffic in contraband or avoid taxes. We can ameliorate these problems but we probably can’t eliminate them. Still, the advantages of the technology seem much greater than the disadvantages.

So … what happens over the next five years? The New York Times reports that venture capitalists poured more than half a billion dollars into blockchain projects in the first three months of this year. So, I expect we’ll see a shakeout at the platform level over the next five years. Today, there are many ways to implement blockchain. It reminds me of the personal computing market in, say, 1985 – too many vendors selling too many technologies through too many channels. I expect the market will consolidate around two or perhaps three major platforms. Who will win? Perhaps IBM. Perhaps R3. Perhaps Ethereum. Perhaps Multichain. Rather than buying Bitcoin, I’d suggest that you study the platforms and place your bets accordingly.

In the meantime, we need to ask ourselves a simple question: Are we really willing to forego our trust in traditional institutions and put it all into computer code?

Disrupting the Lawyers

Filling out unemployment forms.

Filling out unemployment forms.

Last week, I wrote about the process of disintermediation and how it will disrupt banks and bankers. By encrypting transactions and distributing them across a peer-to-peer network, we will no longer need banks to serve as trusted intermediaries in financial transactions. We can eliminate the middleman.

Can we eliminate lawyers as well? You bethca.

We have lawyers for the same reasons that we have bankers: we don’t trust each other. I don’t trust that you’ll pay me; I want your bank to guarantee it. Similarly, I don’t trust that you’ll honor our contract; I want a lawyer to enforce it.

But what if we could create a contract that didn’t need a lawyer to interpret and execute it? We could eliminate the lawyer as an intermediary. That’s exactly the idea behind smart contracts (also known as self-enforcing or self-executing contracts).

First proposed by Nick Szabo back in 1993, smart contracts use software to ensure that agreements are properly executed. Not surprisingly, smart contracts use blockchain technologies spread across peer-to-peer networks. If you think that sounds like Bitcoin, you’re right. Indeed many people think that Szabo created Bitcoin using the pseudonym Satoshi Nakamoto.

So how do smart contracts work? Here’s how Josh Blatchford explains it:

“… imagine a red-widget factory receives an order from a new customer to produce 100 of a new type of blue widget. This requires the factory to invest in a new machine and they will only recoup this investment if the customer follows through on their order.

Instead of trusting the customer or hiring an expensive lawyer, the company could create a smart property with a self-executing contract. Such a contract might look like this: For every blue widget delivered, transfer price per item from the customer’s bank account to the factory’s bank account. Not only does this eliminate the need for a deposit or escrow — which places trust in a third party — the customer is protected from the factory under-delivering.”

Smart contracts, in other words, precisely define the conditions of an agreement — not unlike dumb contracts. They also execute the terms of the contract by automatically (and irrevocably) transferring assets as the contract is fulfilled.

Blatchford wrote his description in VentureBeat – an online magazine that helps venture capitalists identify and invest in leading edge technologies. This suggests that the money to fund smart contract platforms is already flowing.

Indeed, the first smart contract platform – Ethereum – launched in July 2015. Ethereum’s website describes the endeavor as “… a decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third party interference.”

Ethereum seems to be essentially a developer’s platform today. Developers can use the platform to develop applications that eliminate the need for trusted (human) intermediaries. Should lawyers be worried? Not yet. But soon.

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