Bitcoin is a decentralized digital currency and peer-to-peer payment system, invented by the pseudonymous Satoshi Nakamoto. Its records are popularly known as a blockchain, transactions are recorded in blocks, each block cryptographically linked to previous blocks, making a chain back to the very beginning. Bitcoin is the name of the currency, as well as the network and protocol supporting it. Bitcoin has no borders or central organization. Since it’s 2009 release, many other cryptocurrencies have been created, as well as other forms of distributed ledger technology (DLT).
In the Beginning
The quest to produce digital currency began in the 1980’s. Although Bitcoin arose outside the sphere of academia, the principles of cryptography to which it’s indebted have roots in research from that time. Those who first attempted to deploy digital currency faced many challenges. Any that achieved a measure of success were brought down under various charges. However, these early attempts informed the eventual creation of Bitcoin.
Along Came Bitcoin
“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve.” – Satoshi NakamotoBitcoin is a decentralized, open-sourced, semi-anonymous payment network that anyone can freely join and participate in. Every Bitcoin transaction is broadcast to the entire network where miners record it in a block. Each block begins with code for creating new coins to reward miners for maintaining the network. A block also contains a cryptographic hash linking it to the previous block, creating a chain back to the beginning. Hash functions are a conventional technique for identifying information by creating a unique string of text for any set of data run through them.
The qualifications for producing a Bitcoin hash are extremely difficult, yet verifying the hash is easy and proves the integrity of the data it identifies. Miners continuously attempt to calculate a hash for transactions they have recorded. Whenever a miner solves a hash, they collect the reward and broadcast the block to the rest of the network. That process is known as proof of work (PoW). Once receiving a completed block, miners stop the hash they were working on and verify the new block before adding it to the chain and beginning a new one. In some cases, two blocks are created at nearly the same time. In such cases, there can be temporarily two different chains competing for dominance. Whichever produces another block first breaks the tie, the network following whichever chain which has the longest PoW record. In this way, the producer for each block is selected randomly with plenty of competing observers to make sure it was recorded correctly.
In order to attack a PoW network, one would need to gain over 51% of the hashrate. Any party gaining 51% of the hashrate could censor transactions, or double spend coins. To do so would require securing or controlling a great deal of expensive mining hardware. Today Bitcoin mining is accomplished with hardware specifically designed for performing that task, called ASICs (Application Specific Integrated Circuits). It would be prohibitively expensive to attack an ASIC mined coin, and devalue the entire currency, along with the hardware required to attack it.
To summarize: The miners are competing to solve the cryptographic challenge and gain rewards for block production while verifying data, recording transactions, and linking every transaction back to the beginning. Bitcoin maintains its security because the entire network co-operates to validate transactions, produce blocks, and keep a record of the blockchain.
Beyond Currency
Once Bitcoin was proven secure, and gained a measure of adoption, other cryptocurrencies followed suit; a task made easier by Bitcoin’s open source foundation. If blockchain is viable for securing digital currency transactions, imagine all of its other potential uses. Second Generation blockchains explore that potential, beyond currency.
In 2013, Vitalik Buterin suggested that Bitcoin should include its own scripting language. However, the Bitcoin community is resistant towards any protocol change, any that do occur only happen after much scrutiny. As a result, Vitalik began working to create a new blockchain called Ethereum, which was the first to have programmable tokens. The Ethereum network is a distributed virtual machine that runs the code stored in its transactions, each node running an identical copy of the virtual machine, executing transactions in parallel. That self-executing code is known as a “smart contract.” For example, a smart contract could define instructions for the token to be delivered to another account, or returned to its creator, depending upon the circumstances. This innovation allows users to participate in a variety of programmable agreements without the need for a mediating authority.
Ethereum’s smart contracts facilitated an explosion of Initial Coin Offerings. ICOs are a popular fund-raising and token distribution method of new cryptocurrencies. ICOs allow participants to be the first to own a new coin, the issuers typically seeking funds for development. The Ethereum protocol has also enabled the development of over 1000 decentralized applications (dApps). However, dApps are still in an experimental phase and few have gained adoption. Ethereum’s smart contracts allow anyone to explore the capabilities of blockchain, without having to create their own. Ethereum has been used to create job boards, provably fair gambling applications, digital collectibles, provably rare digital art, document authentication, and marketplaces. The most popular dApp has been CryptoKitties, a game where users collect, breed, and trade digital cats. CryptoKitties was so successful that it caused massive congestion on the Ethereum network during December 2017, which resulted in record high transaction fees, and nearly brought the system to a halt.
The Next Generation
Today we’re approaching 10 years since the arrival of Bitcoin. Blockchain has shown its proficiency for managing currency, and is only beginning to explore its potential. In addition to cryptocurrencies designed for a specific purpose, other developers are working towards 3rd generation blockchains. Although each has its own particular goals, they generally seek scalability, sustainability, cross-chain transactions, on-chain governance, and privacy.The top contenders for the next generation of blockchain are EOS and Cardano (ADA). Cardano seeks to create a platform capable of running financial applications such as currently in use every day around the world. Cardano is very much academically driven; regardless of whether it achieves mass adoption, Cardano’s founding company IOHK produces some of the best research in the blockchain arena. Similarly, EOS aims to provide a decentralized operating system that can support thousands of industrial-scale dApps with feeless transactions, inter-blockchain communication, regular usernames and passwords, account recovery, the ability to fix broken dApps, and millions of operations per second. EOS launched it’s platform this June with a number of difficulties, drama, and contention from within the crypto community. Although it hasn’t yet lived up to the hype, EOS is still the 5th ranking cryptocurrency by market cap, and since launch it’s creator Block.One has received a lot more VC funding to continue development. Governance is one of the major issues that EOS still has to figure out, and is one of the most difficult challenges in crypto.
There are also Bitcoin Maximalists who insist that Bitcoin is the best and only cryptocurrency that matters. They claim that instead of building many functionalities into the core protocol, it’s better to scale by building on top of that and keeping the secure payment layer as it is. The most notable effort in Bitcoin’s scaling strategy is the Lightning network, which builds a complimentary network for Bitcoin aiming to produce fast cheap payments. Lightning is a new, but promising, development for Bitcoin and has seen a lot of growth since its launch. There are also efforts to enable private transactions on Bitcoin, another challenging proposition. If Bitcoin overcomes privacy, speed, and transaction cost, that could greatly reduce the value of a number of tokens built to address those problems. In the future, if a second layer dApp protocol was introduced for Bitcoin, that would again consolidate it’s position as the King of Crypto.
Regulatory Matters
Government officials around the globe have been slow to implement cryptocurrency regulations. The United States is a world leader in financial regulation because the Securities Exchange Commission (SEC) will go after anyone doing business with its citizens without heeding their directives. The SEC does not see Bitcoin as a security but believes that most ICOs are. Determining the matter is a 1946 court ruling. Any offering that involves investing in a common enterprise with the expectation of profits from the efforts of another is a security. So far, the SEC has only taken action against blatant scams, and seem to be allowing the technology to mature before enforcing strict regulation.
The G20 has plans to apply global regulation, but is still gathering market information. The European Union is in a similar position and hopes for a united set of international policies. China has banned cryptocurrencies and ICOs altogether but is likely to allow them after completing its regulatory framework. The only easy decision some regulators have made is requiring exchanges and ICOs to know the identity of their customers. This helps to prevent money laundering and the support of illicit practices. Tax laws for cryptocurrencies vary greatly around the world. However, the US, UK, Japan, and Australia all apply a capital gains tax on their sale.
Anticipating strict enforcement, the overwhelming majority of exchanges and ICOs have implemented identity verification policies. Meanwhile, it will require years for global regulators to solidify their positions and build an infrastructure for dealing with cryptocurrency. Most businesses will work to comply with regulations to gain consumer trust and wider adoption. However, there is no way to entirely control cryptocurrency, without controlling the entire Internet. Because of the difficulty in regulating cryptocurrency, the most meaningful regulation must come from within the community.
The Future of Blockchain
Technological change comes with challenging opportunities, as well as great risk. The crypto community is a dramatic reflection of that fact. Some of its innovators will rise to success and change the way the world does business. Others simply seek easy profits from a difficult to regulate market.
Outside of the speculative crypto marketplace, there are scores of traditional corporations working on blockchain solutions for banking, finance, supply-chain management, and more. Some governments, such as Dubai and Estonia are working on their own blockchains to secure and reduce the cost of record-keeping. Others, including the Bahamas, are responding by introducing their own state-backed digital currency. Additionally, a variety of academic institutions are now offering courses in blockchain including Cornell, Berkley, Princeton, Duke, and the University of Cambridge. Nearly every major government, and industry, is working on test pilots, and deciding the best way to introduce blockchain into their infrastructure. The United Nations is putting a lot of money into blockchain research, and is the focal point around the efforts towards a decentralized digital identity platform to serve the 1.1 billion global citizens currently without ID.
Cryptocurrency currently has a $200 billion market capitalization. Practices that took decades to develop and evaluate are experiencing growth and refinement. It’s easy to feel that we missed out by not participating in the early days of Bitcoin. The truth is that bitcoin, blockchain, and cryptocurrency have only just begun to make their impact upon the world.
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