What Does Bitcoin Have to Do with Blockchains?
A common point of confusion arises from the association of cryptocurrency with blockchains. While they certainly are related, many people mistakenly assume that bitcoin and blockchains are the same thing. But blockchain is the technology that underlies and enables bitcoin (and other cryptoassets). In fact, the first blockchain was built specifically to make bitcoin possible (bitcoin was the first widely adopted cryptocurrency and the subject of Satoshi Nakamoto’s whitepaper). You can think of bitcoin as the first application of the blockchain space. Its debut offered the world a decentralized currency, outside of any nation-state, that could be traded from one person to another without the assistance of any financial institution. The first block generated by a blockchain is shown in Figure 3-1.
Figure 3-1. The “genesis block,” the first block generated by the bitcoin blockchain on January 3rd, 2009, contained a single transaction. Embedded into this block was the text, “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks,” referring to a headline in The Times on that date. The act of mining this “genesis block” resulted in the creation of the first 50 bitcoin, which were awarded to the miner for solving the cryptographic puzzle. This first miner is believed to be Satoshi Nakamoto. At the time, bitcoin had no recognized value.
WHO IS SATOSHI NAKAMOTO?
In short: we don’t know. We do know that in October of 2008 someone (an individual or a team) using the name Satoshi Nakamoto published a whitepaper on a cryptography mailing list describing bitcoin for the first time. In January 2009 Satoshi released the first bitcoin software, launched the network, and mined the “genesis block” of 50 bitcoins. In mid-2010, Satoshi handed over control of the code and transferred related domains to various members of the growing early bitcoin community—and then disappeared from public view. Except for test transactions, the estimated 980,000 bitcoin that Satoshi mined in those early days has never been spent (this is traceable on the public ledger). At bitcoin’s December 2017 peak, Satoshi’s bitcoin was worth over 19 billion dollars.
Satoshi’s online footsteps have been endlessly scrutinized by amateur detectives all over the world. Timestamps for every forum post have been charted in an attempt to analyze Satoshi’s time zone. Writing analysis experts have dissected the language used in the whitepaper and posts. A dozen or so suspects have been identified, but to this day, it is still a mystery who launched this new technology on the world.
The Many Roles of Cryptoassets
Cryptoassets is an umbrella term used for any asset (currency, financial instruments, physical assets, digital goods, etc.) whose existence and ownership are cryptographically secured by a distributed ledger. Cryptocurrency, tokens, and digital coins are types of cryptoassets.
Cryptoassets are at once one of the most ingenious, important, and confusing elements of the blockchain space, primarily because a single cryptoasset can play many roles. They may be known most commonly today as a speculative investment or even called a new asset class.vii But you can also consider them a resource used to send value or a tool used to pay for transactions on a blockchain. Let’s break down some of the active functions cryptoassets can play in the system:
Aligns incentives of participants:
Incents maintenance of the network: miners who contribute to network security by running nodes and producing blocks of transactions may be rewarded automatically, via the network’s rules and typically through newly “minted” cryptocurrency or token. This helps the network run smoothly without central control.
Incents protection of the network: if miners are rewarded in cryptocurrency or tokens, they (and any other holders of that asset) theoretically have a disincentive to hack it, and are incentivized to protect it from being hacked. The value of the asset would immediately plummet in a successful hack (if widely discovered), and the hack would be self-defeating. Its existence gives everyone skin in the game.
Incents user actions: Cryptocurrency or tokens can be leveraged in many ways to reward a wide range of individual and community behaviors and actions. Ideally, the value of these assets should loosely represent the value of a network (although in these early days, this is yet to be proven). The more of a particular asset a person holds, conceptually, the more incented they are to invest time and attention in growing the network, and thus increase the value of their holdings. And various incentives and rewards can be creatively designed into the token “economy” to shape actions and behaviors. When thoughtfully designed, this may be a powerful tool in creating ecosystems with the potential to be sustainable and successful long term.
Facilitates exchange of value
Cryptoassets can be exchanged for things of value on the network, or for other cryptoassets.
Pays for compute cost
Cryptoassets can be used to pay for the compute cost of a transaction, again helping the network run smoothly without central control.
WHO ARE THE MINERS?
Anyone, theoretically, could become a miner, and I run across old mining rigs occasionally while visiting the offices of a wide range of technology enthusiasts. (A rig looks like specialized computer equipment, typically lined up on a rack, with wires everywhere.) It has become increasingly difficult to mine profitably, however, as professional operators have moved in, making large investments in high performance equipment, and locating their facilities near inexpensive sources of power around the world (a lot of energy is needed to run all those computers). The faster their computers, the more they have, the greater their chances of winning the race to solve each cryptographic puzzle (and thus getting the cryptocurrency or token reward from adding a new block)—and miners have made billions of dollars this way. Smaller, hobby miners have thus given way to mining farms, which are essentially huge warehouses filled with tall rows of computer-filled racks. The cryptocurrency mining industry (it is now an industry) spans over 100 countries.
Retaining Privacy When the Ledger is Open to Everyone
Clearly, for blockchains to have broad applicability, there needs to be a way to retain more privacy than a publicly inspectable ledger would suggest, even if it is pseudonymous. And in certain industries—such as financial services or health care—this can be a regulatory imperative. There are various technologies and cryptographic approaches that are under development to address the privacy imperative, and much experimentation is being done with securing sensitive data “off chain,” while linking it to an “on chain” record. There is a raging debate in the community over “public” versus “private” or “permissioned” blockchains, with the latter restricting access—and thus not truly eliminating the middleman, but keeping sensitive information from public view.
So What?
How will blockchains be so much better than what we have today? The answer: it depends.
Blockchain technology is only useful where trust is truly a problem—and nowhere else. If parties know and trust each other already, a blockchain is not necessary. If a middleman does not cause friction, a blockchain is not necessary. In fact, this kind of shared ledger technology can be expensive and inefficient for many applications. Especially while the technology is still clunky, it is always better to look everywhere else first to find a solution to your business problem before you look to blockchains. That hasn’t stopped some businesses from experimenting with blockchains when an old-school database would suffice. While these businesses may gain experience, they will not gain a sustainable solution.
That said, there are many places in which blockchains do deliver great promise: where a lack of trust has created a big problem, or using code as a proxy for trust unlocks a huge opportunity. There are many flavors of potential impact to a business, from streamlining internal processes to introducing new blockchain-based consumer services to facilitating collaboration among complex ecosystems.
Blockchains Across Industries
It’s the financial services examples that tend to dominate the
media, but here are just a few compelling examples of how blockchain applications are being tested across industries:
Agriculture
Track provenance of food, from origin to store, preventing food fraud and false labeling.
Ensure safe handling practices from farm to market, and more quickly pinpoint source when food safety has been compromised.
Energy
Standardize clean energy tracking, incentive structures, and production around the world.
Enable distributed energy producers (such as via rooftop solar panels) to efficiently trade energy directly with consumers.
Manufacturing
Ensure the authenticity of components and goods as they flow through the supply chain to prevent, for example, counterfeit drugs from entering the market.
Deliver more transparency to suppliers’ practices and compliance.
Media
Register copyrighted works, and enable owners to more easily protect and track usage of those works.
Make it possible for brands to see if digital media dollars are spent as intended, reducing fraud.
Government
Reduce costs of distributing government services, such as welfare.
Cut fraud and increase the efficiency of public record keeping, from birth records to property ownership.
Retail
Prevent counterfeit goods from entering the system and more easily identify stolen merchandise.
Make warranties easily transferable and keep them current without administrative work.
Real estate
Automate the process of buying real estate, enabling transactions, title transfers, and recording to occur without human intervention.
Enable owners to gain liquidity by selling fractional shares of real estate.
Health care
Reduce friction and increase the security, privacy, interoperability, and regulatory compliance of electronic health records.
Make it possible to contribute data to a study without compromising the identity or privacy of the individual patient.
Education
Fight education credential fraud and enable employers to cut administrative costs of verifying degrees.
Create a universal, trusted, lifelong record of learning that recognizes education outside of a formal degree program, such as online courses.
Transportation
Achieve hyper-visibility to goods as they move through the supply chain when combined with sensors or tracking devices.
Increase the efficiency of managing a global ecosystem of carriers, and accelerate the movement of goods across borders.
Telecommunications
Unlock the promise of ubiquitous 5G access by enabling dynamic, automatic contracts across an ecosystem of access nodes.
Advance IoT connectivity with more secure, reliable, and cost-efficient self-managed peer-to-peer networks.
Now that you have some grounding in what blockchains are, and a glimpse of how they are being used across industries, let’s explore the setting in which they were birthed. Why is this technology capturing the attention—and even the hearts and minds—of so many people? What is it about this moment that makes this technology so important?
i Although the focus of this book is on blockchains, they are part of a larger category called distributed ledger technology, or DLT. There are many kinds of DLT, and some are betting that other forms of DLT will eventually eclipse blockchains. At a high level, different forms of DLT (whether blockchains or not) can contribute to the shifts described in this book. For simplicity’s sake, I have chosen to use the word blockchains in this book, as this is being used frequently as an umbrella term today.
ii A word of clarification: Since the first blockchain, the bitcoin blockchain, there has been a great deal of evolution, with different people tweaking specs, criteria, and underlying mechanisms to create new versions. To keep things simple, the focus of this chapter is on so-called “public” blockchains that use a methodology called proof of work to drive consensus (which is the approach the bitcoin blockchain uses). See “Consensus Mechanisms Are an Ongoing Battle” for more on consensus mechanisms.
iii This does not mean that attacks won’t happen. In fact, hackers are becoming increasingly sophisticated, and this is an area of great discussion and research in the blockchain community.
iv Smart contracts act as programs, and if there is a bug in the smart contract it could be exploited, just like a bug in any program. We also have a lot to learn about how smart contracts will be treated in the legal system. Over time, we will become much more experienced at developing and using smart contracts that function as intended—contracts in which code can truly stand in as a proxy for trust.
v It appears no one has succeeded in hacking the bitcoin blockchain so far, although bugs have been found and resolved. Of note, however, is that hackers have discovered other ways to steal cryptocurrency—for example, many centrally controlled exchanges used for trading cryptoassets have been breached.
vi In this case, use “the blockchain space” or “blockchain technology.” Saying “I work in blockchain” is like saying “I work in robot” (you might say you work with “a robot” or “the robot” but not “in robot”).
vii They can be used to digitize the value of an asset. For more on this, see “Atomize—and liquify—assets”.
Chapter 4. THE GENESIS OF THE UNBLOCKED CUSTOMER
The Consumer Technology Created
Today’s consumers have more power than ever, and they know it. They type, swipe, and click their way to nearly anything they desire. They put a few words in a search bar to comparison shop across thousands of sources. They summon groceries and gas, dinner and dates—all with a few taps and the help of accurate geolocation services. They expect free shipping. They assume you can anticipate their needs. They expect you to know them, whether they are using their tablet, smartphone, or even a watch. They want to reach you whenever, however, be it via voice, web, chat, email, video, or social media. And if they’re under 40, you can bet they’ll abandon you the moment there’s friction.
Today’s consumers type, swipe, and click their way to nearly anything they desire.
How Did We Get Here?
The industrial revolution marked a shift to factories and mass production, and with this new industrial capacity came a surplus of goods. The answer to this surplus? Using advertising to create markets—which launched a new relationship between a business and its customer. Money flooded into the advertising industry, and spots in newspapers, magazines, direct mail, radio, and television sprang up like dandelions. This relationship was relatively “light touch”—hear about my product, buy it, use it, and buy it again—and these behaviors were encouraged by consistent advertising and the emerging practice of brand marketing.
Maintaining this basic cornerstone of “being heard” became a lot more difficult in the internet era, as shown in Figure 4-1. Channels and information exploded, and all of a sudden it became staggeringly difficult to stand out among all the digital noise. But it got even more complicated: consumers expected you to hear them as they shouted out their gripes and delights about your products on dozens of social channels, review sites, and blogs. Now, the relationship meant not only being heard, but listening—and responding.
Figure 4-1. How the internet triggered new challenges for brands
Whether a young startup or an established brand, companies that have a good relationship with their customers today have recognized the shift in power, and have found a way to deliver to it.
But they are not done.
In his outgoing speech, John Chambers, Cisco’s CEO of 20 years, warned 25,000 listeners that “Forty percent of businesses in this room will not exist in a meaningful way in 10 years . . . companies cannot miss a market transition or a business model or underesti
mate your competitor of the future.”23
Companies cannot miss a market transition or a business model or underestimate your competitor of the future.
John Chambers, Former Cisco CEO
Whether you have a good relationship with today’s customer or not, be warned: the world is about to shift again.
The Internet: Built to Fail
In the 1980s, scientists at European physics lab CERN were struggling to share, track, and collaborate on their research. Tim Berners-Lee, a contractor with the lab, provided an answer: he created the World Wide Web. Tim designed this new platform to be permission-less and free, an open space for creativity, innovation, and free expression that transcended geographic and cultural boundaries. And in many ways, it still is. But something else happened: “free” services that made revenue by harvesting the attention and data of millions of users became the prevailing force on the internet.
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