Category: 2. Rise of Blockchain

Blockchain has the potential to grow to be a bedrock of the worldwide record-keeping systems, but was launched just 10 years ago. It was created by the unknown persons behind the online cash currency bitcoin, under the pseudonym of Satoshi Nakamoto.

A brief history of blockchain:

1991

A cryptographically secured chain of blocks is described for the first time by Stuart Haber and W Scott Stornetta

1998

Computer scientist Nick Szabo works on ‘bit gold’, a decentralised digital currency

2000

Stefan Konst publishes his theory of cryptographic secured chains, plus ideas for implementation

2008

Developer(s) working under the pseudonym Satoshi Nakamoto release a white paper establishing the model for a blockchain

2009

Nakamoto implements the first blockchain as the public ledger for transactions made using bitcoin

2014

Blockchain technology is separated from the currency and its potential for other financial, interorganisational transactions is explored. Blockchain 2.0 is born, referring to applications beyond currency

The Ethereum blockchain system introduces computer programs into the blocks, representing financial instruments such as bonds. These become known as smart contracts.

Bitcoin’s role

Posting their seminal whitepaper in 2008 and launching the initial code in 2009, Nakamoto created bitcoin to be a form of cash that could be sent peer-to-peer without the need for a central bank or other authority to operate and maintain the ledger, much as how physical cash can be.

While it wasn’t the first online currency to be proposed, the bitcoin proposal solved several problems in the field and has been by far the most successful version.

The engine that runs the bitcoin ledger that Nakamoto designed is called the blockchain; the original and largest blockchain is the one that still orchestrates bitcoin transactions today.

The second generation

Other blockchains include those that run the several hundred “altcoins” – other similar currency projects with different rules – as well as truly different applications, such as:

• Ethereum: the second largest blockchain implementation after bitcoin. Ethereum distributes a currency called ether, but also allows for the storage and operation of computer code, allowing for smart contracts.
• Ripple: a real-time gross settlement system, currency exchange and remittance network, based on a public ledger.

For many businesses across various industries, a key to success is a well-functioning, efficient supply chain. Blockchain technology has already been used in multiple industries as a means of keeping tabs on supply chains and ensuring their efficiency. This could eliminate human work and the potential for error from a complex and crucial process.

At this point, blockchain is a technology with an exceptionally broad set of potential uses. Although blockchain is most famous for its connections to the blossoming cryptocurrency world, several other applications have already been explored. Perhaps even more exciting, though, is that new ways of utilizing blockchain emerge every day. As such, whether you are directly involved in the digital currency space or not, it’s essential to develop an understanding of blockchain and how it may be used to transform the business and investment worlds. 

One of the most problematic results of the internet age has been identity security. As diligent as many individuals and organizations are in maintaining their online identities and securing private information, there are always nefarious actors looking to steal and profit off of these digital items. Blockchain technology has already demonstrated the potential for transforming the way that online identity management takes place.

Blockchain offers a tremendous level of security, thanks to independent verification processes that take place throughout member computers on a blockchain network. In digital currency cases, this verification is used to approve transaction blocks before they are added to the chain. This mechanism could just as easily be applied to other types of verification procedures, including identity verification and many other applications as well.

The applications for blockchain and identity management are wide-ranging. For instance, blockchain could potentially be used to aid in maintaining voter information and ensuring proper functioning of the electoral process. Blockchain could be used to securely and efficiently transfer user data across platforms and systems. The technology could also be used to maintain and protect records of real estate ownership, titles, and more.

Smart contracts are often seen as a highly powerful application of blockchain technology. These contracts are actually computer programs that can oversee all aspects of an agreement, from facilitation to execution. When conditions are met, smart contracts can be entirely self-executing and self-enforcing. For proponents of smart contracts, these tools provide a more secure, more automated alternative to traditional contract law, as well as an application that is faster and cheaper than traditional methods.

The potential applications of smart contract technology are essentially limitless and could extend to almost any field of business in which contract law would normally apply. Of course, while highly touted, smart contracts are not a magical substitute for old-fashioned diligence. In fact, the case of the Decentralized Autonomous Organization (DAO) is a cautionary tale and a warning to investors to not assume that smart contracts are any better than the information and organization that a user puts into them. Nonetheless, smart contracts remain one of the most exciting ways that blockchain technology has already extended beyond the cryptocurrency space and into the broader business world.

Traditionally, the transfer of value has been both expensive and slow, and especially for payments taking place across international borders. One reason for this is that, when multiple currencies are involved, the transfer process typically requires the participation of multiple banks in multiple locations before the intended recipient can actually collect his or her money. There are existing services to help facilitate this process in a faster way, but these tend to by quite expensive.

Blockchain technology has the potential to provide a much faster and cheaper alternative to traditional cross-border payments methods. Indeed, while typical money remittance costs might be as high as 20% of the transfer amount, blockchain may allow for costs just a fraction of that, as well as guaranteed and real-time transaction processing speeds. There are hurdles to be passed, including regulation of cryptocurrencies in different parts of the world and security concerns. Nonetheless, this is one of the most promising and talked about areas of blockchain technology application.

Apart from Bitcoin, which is almost universally known, there were over 1,300 cryptocurrencies on the market at the end of November 2017. Here we review the top five by market capitalization:

• Bitcoin. Bitcoin was the first cryptocurrency to be traded and today remains the most commonly used. With a market cap of around $180 billion, Bitcoin stands head and shoulders above any other cryptocurrency and is considered the gold standard for this industry.
• Ethereum. Way behind in second place to Bitcoin is Ether. This is the currency token used in the Ethereum blockchain and has a market cap of over $18 billion. Developed in 2015, Ethereum is a Turing-complete programmable currency. This gives it an edge over Bitcoin because it enables developers to build different technologies and apps around it, and it can process complex contracts and programs besides transactions. For these reasons, Ethereum’s blockchain code has been used to launch other cryptocurrencies in 2017.
• Ripple. Ripple has already been used by several banks, including UBS and Santander, because it can track other transactions besides cryptocurrency. Founded in 2012, Ripple has a market cap of $10 billion.
• Litecoin. Litecoin was developed soon after Bitcoin and is similar in form. However, Litecoin has developed new innovations, with a mining algorithm that enables faster payments than Bitcoin and processes that allow many more transactions. Its market cap is in the region of $5 billion.
• Monero. This open-source cryptocurrency has developed an algorithm with enhanced security and privacy features over Bitcoin. Unlike many of the other cryptocurrencies that are based on Bitcoin, Monero was developed using the less transparent CryptoNote protocol. Its opacity and open-source model, however, have counted against it, as consumers are wary that it can be used to cloak the activities of fraudsters and hackers. Accordingly, Monero’s growth has been weak.

Cryptocurrencies are considered to be ‘digital gold,’ largely because they are secure investments and free of political influence. Cryptocurrency exchange involves peer-to-peer transactions. This means one person pays another via a desktop or mobile device, using a downloaded or browser-based app to initiate and authenticate the transaction and transfer the funds. Mobile payments, which share some commonalities with cryptocurrency exchange, are gaining in popularity and are forecast to reach $142 billion in the U.S. by 2019.

Apart from their value as payment mechanisms, cryptocurrencies have provided investors and speculators access to a dynamic and fast-growing market. This has given rise to exchanges like Okcoin, Poloniex and ShapeShift. The cryptocurrency market is also being used for crowdfunding projects to fund startups through ICOs.

Although it’s not possible to predict the future prospects of all of the cryptocurrencies, if the success of Bitcoin is any indication, the cryptocurrency market has a bright future.

— In July 2015, the price of Bitcoin was just over $280; this gradually increased until it reached the $1,000 mark in January 2017.

— Since then, the cryptocurrency has recorded phenomenal growth. By early December 2017 the price of Bitcoin had reached $17,000. The price of another cryptocurrency called ‘Ether’ has also continued to rise in recent months.

Initial Coin Offerings (ICOs) have also played a major role in generating interest in the cryptocurrency market. ICOs use coins or tokens that are similar to shares of a company. These are sold to investors in an initial public offering (IPO) transaction. An ICO can be likened to crowdfunding, using cryptocurrencies as a source of capital for startup companies. Many market experts expect a cryptocurrency crash at some point. With this kind of market volatility, it is inevitable that a regulator like the SEC will want to step in to provide guidance and impose enforcement actions where necessary. We’ll learn more about ICO’s later in this guide.

There are a number of characteristics of cryptocurrency transactions that differ from traditional banking

• It is anonymous. Although the transaction process is transparent in cryptocurrency exchange, none of the parties can be identified. This has attracted the attention of U.S. federal agencies such as the FBI and the Securities and Exchange Commission (SEC), which are concerned about the potential for money laundering.
• It is secure. Cryptography ensures that funds are securely locked in the system, and only the owner of a private key to those funds can exchange cryptocurrencies.
• It is fast and worldwide. The network is global, which means that geographical location is not a barrier to enable a transaction. Transactions only take a few minutes to be mined and confirmed, which makes them much faster than traditional banking mechanisms.
• It is irreversible. Once a transaction has been confirmed and added to the blockchain, it can’t be reversed. There is no recourse in the event that cryptocurrency is sent in error.
• It does away with red tape. Permission is not required to use the cryptocurrency exchange system. It is free to download and free to use.

— In the 1990s, many attempts were made at creating digital currencies using centralized control, but they all failed for various reasons.

— In late 2008, Satoshi Nakamoto developed a peer-to-peer cash system, which he called Bitcoin. This was the first time someone was able to build a secure, decentralized digital cash system.

— Satoshi Nakamoto’s system also prevented double spending, traditionally something that only a centralized server could accomplish. Nakamoto’s innovation became the foundation of cryptocurrency.

— A decentralized network operates on a system of checks and balances, where every entity within the network checks to see there is no attempt to spend the same currency twice. No one thought it was possible to reach consensus without central authority, but the emergence of Bitcoin proved it was achievable.

As a decentralized currency, Bitcoin uses the peer-to-peer network and blockchain technology to issue currency, process exchanges and verify transactions. This makes it free of government interference or manipulation, unlike a fiat currency, which is controlled by a nation’s central bank.

Bitcoins are created by the mining process at a current rate of 25 Bitcoins every 10 minutes. The number of Bitcoins in circulation will be capped at 21 million, which is expected to be reached in 2140. The downside to cryptocurrency exchange is that the value of the currency is entirely dependent on demand from investors, and if the market drops, the value of Bitcoin drops as well.

Additionally, cryptocurrencies don’t represent debt, as money can in traditional banking systems. It is hard currency; as valuable as holding gold coins. However, most cryptocurrencies have set a limit on the supply of their tokens. As mentioned, Bitcoin has set their volume at 21 million.