From Bartering To Bitcoin - An Introduction To Blockchain (With PDF Download)

thisisbenbrick (68)in #life • 6 years ago

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From Bartering to Bitcoin

Part 1

Bitcoin, crypto-currency, and blockchain have all exploded into the public consciousness over the last few years. At the end of 2017 when Google revealed the most searched news stories globally only the devastating Hurricane Irma had more clicks than Bitcoin.

Within Bitcoin is an idea that could fundamentally change the way humans interact with each other: decentralisation.

1999

At the age of 14, Shawn Fanning was posting on message boards under the anonymous handle Napster. In this period he met Sean Parker online, and within a few years, they created a music-sharing program, naming it Napster. It would go on to change the entire music industry.

Napster helped popularise peer-to-peer file sharing – specifically it allowed you to share your music library, and to find and download almost any song shared by the millions of other people using the service around the globe.

The music industry was slow to react, and when it did, it chose lawsuits, led by the Recording Industry Association of America (RIAA) and backed up by artists like Metallica and Dr Dre.

By this point, Napster was in the Guinness Book of World Records as the fasting-growing business of all time.

Changing Times

Industries are scared of change. In 1980 the British Phonographic Industry (BPI) launched the Home Taping Is Killing Music campaign concerned that allowing private citizens to record from radio onto cassette would lead to declining music sales.

The Home Taping logo would eventually be incorporated into The Pirate Bay logo when it arrived on the scene in 2003. More on that later…

The one fundamental flaw with Napster was that it was centralised. Whilst its users were distributed around the world, the website and servers that they relied upon were located in one place. An injunction was placed and Napster was shut down.

2001

The BitTorrent protocol was developed by University of Buffalo student Bram Cohen in 2001, and as of 2016 had 45 million daily active users. It allowed for true peer-to-peer file sharing without a middleman.

To reduce server costs and speed up download times the BitTorrent system allowed files to be split into smaller pieces, which could be downloaded non-sequentially and pieced back together. This method gives it an inherent ability to reduce overheads.

As the popularity of torrenting exploded various websites sprang up offering directories of torrents where you could search the legal and illegal media available for download. The most famous of these was launched in 2003: The Pirate Bay.

Being a centralised website with servers located in Sweden that offered access to illegal content it was inevitably shut down. The BitTorrent protocol remained as popular as ever. Alternatives (and exact copies) of The Pirate Bay are also still prominent online.

Media packed into torrent files are used around the world today by everyone from gaming giants Blizzard (allowing direct distribution of games), to the UK Government (to distribute details on Tax spending).

2009

As the debate raged over distribution of content online and how it should be policed a group was forming made up of activists who believed in privacy-enhancing technology. One of these was the unknown programmer (or perhaps group of programmers), Satoshi Nakamoto.

In 2009 Satoshi released his white paper Bitcoin: A Peer-to-Peer Electronic Cash system detailing a new form of money that could be transferred without banks or intermediaries and with absolute trust in-built in the system. Bitcoin has much more in common with BitTorrent than Napster.

The beauty of Bitcoin lies in the transparent list (known as blocks) that records each transaction. These blocks are linked together into a chain giving birth to the term blockchain.

PART 2 Money

There are three functions that must be fulfilled by a currency:

A store of value – can the money be saved and used at a later date, whilst still being worth the same amount?
A unit of account – can the money be used to value goods and services. Specifically it should be easily divisible into parts (e.g. five 20p coins are always worth £1), and it should be fungible (e.g. one £5 note is worth the same as another £5 note, unlike two 50g diamonds that might be worth vastly different sums).
A medium of exchange – can people use the money to buy and sell products and services from each other?

Money has been around for over 100,000 years – before bank notes we had bartering. People traded everything from livestock and grain to shells and tulip bulbs. These forms of money were lacking when looking at the three earlier functions.

Precious metals were better but often heavy and cumbersome. Banks began to sell notes that allowed you to deposit gold or silver, and claim it back at a later date –notes backed by the precious metals would become known as the gold standard.

During the twentieth century, almost all nations abandoned the gold standard giving birth to FIAT currency – money backed by nothing.

The gold standard helped protect citizens from monetary policy abuse. Without it, countries are able to print money (known as quantitative easing) whenever they want. Too much printing devalues the currency with devastating results, like hyperinflation, where even a wheelbarrow of bank notes is not enough to purchase a loaf of bread.

The current system requires the public to not only trust the banks, but also the bankers themselves. Over the years we have seen these bankers gamble with this money, and in some cases lose it all. The biggest of these losses was the financial crash of 2008, which led to a global financial crisis costing the taxpayer trillions.

Embedded in the very first bitcoin block was a message that signalled the absolute distrust that Satoshi Nakamoto had for the banking system, it read:

The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.

The Theory behind Bitcoin

Nakamoto had figured out something that the other digital cash projects up to this point had struggled with – how to ensure money could only be spent once (the double spend problem). Within his code, he also ensured a fixed supply of bitcoin.

Each computer maintaining a copy of the blockchain is called a node. These nodes store every transaction since the first block in 2009. When money is transferred from one person to another, nodes competes to validate the transaction and add the block to the chain. This is known as mining.

There is a substantial reward (which halves every four years) for the miner to validate the transaction – currently 12.5 bitcoin or approximately 80,000 USD. This reward means there is intense competition. The only way to successfully add a block is by solving incredibly complex cryptographic math problems.

Miners ensure that a central authority is not needed - it would take such an overwhelming amount of processing power to attempt to defraud the network (known as a 51% attack) that the system is secure even if not all users are.

Bitcoin has no central authority so decisions on its future are made by consensus. This has seen debates rage on changing block size, removing unnecessary data once validated (known as segregated witness), and implementing a so-called lightning network to lower fees and speed up transactions.

The Benefits of Bitcoin

The decentralised nature of Bitcoin means everyone can look through transactions, wallets, and source code. Trust is inbuilt and secured by its cryptography.

Bitcoin has a fixed supply of 21 million bitcoin. This renders it non-inflationary meaning the currency isn’t devalued by its own printing. When a money supply can be increased out of thin air it can undermine the people who use the currency.

The remittance of money between different countries is a huge business and often used by the poorest people in those countries. Western Union reported revenues of over 5 billion USD in 2017. Western Union fees can be up to 500 times more than using Bitcoin.

Remittance is also incredibly easy with Bitcoin. You don’t need to apply for an account or have a minimum amount of cash – you just need enough technical knowledge to gain and secure your address. Much of the unbanked are excluded from the financial system because they don’t have enough to be allowed access.

Bitcoin is borderless, fast and cheap. The system is running 24 hours a day with no bank holidays.

PART 3 2017

In 2017 the second largest cryptocurrency Ethereum exploded. Behind much of its growth was an interest in its ability to allow smart contracts. Smart contracts would allow money to become programmable, and allow certain supposedly unbreakable frameworks and rules to be applied.

Ethereum also allowed anyone to build on its system and create their own tokens (known as ERC20’s). This led to a frenzy of fundraising to establish new companies whose shares could be tokenised – these fundraisers were known as initial coin offerings (ICO’s).

The money raised in 2017 via ICO’s dwarfed the money raised by traditional venture capital finance models.

Selected Projects & ICO’s

In Asia Pacific, Latin America and Africa efforts are underway to allow zero fee transactions - Wala raised 1.2m USD and is working with Prince Kudra Kalema – a member of the Ugandan royal family. Another project OmiseGo raised 25m USD and plans to scale to 1 million transactions per second (TPS), dwarfing Visa’s 56k TPS.

One of the bigger ICOs in 2017 was led by Justin Sun, a protégé of Chinese Tycoon Jack Ma. Tron raised 70m USD with an aim to decentralize the Internet. Despite criticism, earlier this year Tron bought the BitTorrent client for a reported 140m USD. They plan to integrate tokens with torrenting under Project Atlas.

Decentraland raised 24m USD in 35 seconds to build a virtual reality world where users buy parcels of land – it is strikingly different to the already established Second Life (which generates hundreds of millions per year) where users have no ownership of their land and the servers are centralised.

Brendan Eich the inventor of JavaScript and co-founder of Mozilla and Firefox founded Basic Attention Token (BAT). The ICO raised 35m USD and offers an open source ad exchange and associated web browser called Brave. Users are paid BAT tokens to interact with adverts. BAT is also used to reward content creators.

Decentralisation and the future

The last few years have seen incredible growth, and if you joined late December 2017, incredible losses. The bubble cycle of new technology has been witnessed many times previously, including with the net. The massive speculation on price overvalues the technologys current usage.

Despite the downturn in 2018, there have been many signs that's Bitcoin will stick around. From Bakkt; created by the owner of the New York Stock Exchange and partnered with Microsoft and Starbucks to offer Bitcoin futures trading, to the multiple Exchange Traded Funds (ETF) that up till now have been rejected, but are increasingly looking possible, and will clearly legitimize the space.

The World Wide Web came into existence in 1989 and 20 years later had changed the world. Where will Bitcoin be in 2030, and will it rival or replace the traditional banking system?

Will we see charities where money is programmed to only allow it to be spent on certain things, by clearly defined people, and only when certain parameters are met? Will we see citizens given the right to vote on policies and leadership in a manner that allows no potential for tampering or fraud?

The use of blockchain outside of money and remittance is virtually endless.