In this book, you will learn about the amazing world of blockchain. Blockchain is a technology that pretty much took the world by storm in 2017, and it shows no signs of slowing down. Bitcoin, blockchain, and cryptocurrency are words that almost everybody knows these days. These words have entered peoples' minds through mainstream media, which has finally paid some attention to this exciting new technology.
In this chapter, we will cover the following topics:
- An introduction to blockchain
- The key features of blockchain
- The impact of blockchain in industries
- The impact of blockchain on the internet
What, exactly, is blockchain? Blockchain is a rapidly increasing list of records that are linked to each other via cryptography. In simple terms, a blockchain is a record of a particular transaction that is encrypted, secured, and linked to other transactions.
When blockchain started out, it didn't gain much ground. However, by 2017, it was hard not to pay attention to a market that had increased in value by around 50 times over the course of 12 months, from around 15 billion US dollars in January, 2017, to over 830 billion US dollars on 7 January, 2018.
These are eye-watering numbers, but they only represent the value of publicly traded cryptoassets (meaning the currencies that are in circulation), and not the entire supply! A lot of the supply is still locked away and kept by the founding teams, which helps to make Bitcoin as secure as it is now. You will learn more about this in later chapters of this book.
Just like with the internet stocks in 2000 (and pretty much every single asset that has ever existed), blockchain has gone through the boom and bust cycle of markets driven by greed and fear.
Every market participant has probably heard the following terms thousands of times:
- FOMO: Fear of missing out
- FUD: Fear, uncertainty, and doubt
These terms correctly describe the psychology of the crowds that drive the roller coaster situation in the markets. This is especially amplified in markets dealing in new technologies, where people speculate on the future of such new technologies and startups, especially when these markets are public and global, which means that anyone, from anywhere in the world, can take part 24/7! That's the main reason for the incredible volatility that we have seen in cryptoassets.
- In December, 2017, Satoshi Nakamoto, the publicly unknown founder of Bitcoin, became one of the 50 richest people in the world, with a net worth estimated at around $20 billion, all based on his or her Bitcoin holdings.
- In January, 2018, the cofounder, executive chairman, and former CEO of Ripple, Chris Larsen, made an even bigger jump, becoming the fifth richest person in the world! His holdings in Ripple's cryptocurrency, XRP, were valued at approximately $60 billion. This catapulted him ahead of people like the founders of Google, Larry Page and Sergey Brin, and the founder of Oracle, Larry Ellison. Only Amazon's Jeff Bezos, Microsoft founder Bill Gates, Berkshire Hathaway's Warren Buffett, and Facebook's Mark Zuckerberg were ahead of him at the time.
Since its peak in January 2018, the market capitalization has gone down to the 100-200 billion USD range. While such a fall may be disappointing for some, we should still be reminded of the 15 billion market cap in January 2017. This is still amazing growth in a very short period of time, which has hardly been observed in other industries throughout history.
The cryptoassets and blockchain market is quite possibly the fastest growing industry that the world has ever seen. This has to do with the speed at which information travels nowadays, which is also unprecedented.
So, why is blockchain such a big deal? What is Bitcoin? What are cryptoassets?
The preceding questions were asked by everyone when blockchain was new to the market. Quite often, they were given complicated answers, involving terms such as distributed database, cryptographic keys, hash functions, game theory, consensus protocols, and so on.
But, if you think about it, people were once baffled by terms such as domain name, website, bandwidth, and download. The main point is that blockchain technology is set to reshape the future, and will soon be a part of everyday life, just like the internet is.
Just like the internet, anyone can get involved in blockchain! We've seen people with diverse backgrounds, from all corners of society, getting involved with blockchain and cryptoassets. From the Wall Street tycoon to the average person, and even people with questionable reputations, everyone can enjoy the benefits of blockchain. On top of that, everyone involved has something to say about the glories or the evils of the technology. Even high-profile individuals and world leaders are trying to steer public opinion, in one way or another.
One of the positive effects of all of the media noise that started with the skyrocketing prices and brought blockchain to the mainstream domain, was that it attracted a lot of talent to this space. Thousands of developers and business people have joined the industry and focused their efforts on building blockchain projects. All of this new energy must lead to substantial results and value creation, which will justify some of the hype and market valuations that we have seen. But such fundamental developments and value creation don't happen overnight. They take a lot of time and effort.
The key features of blockchain—security, transparency, decentralization, immutability, and programmability, are combined in a platform, which doesn't need any central authority in order to process transactions, value, and information transfers. By doing so, in a direct, peer-to-peer way, blockchain creates a completely new paradigm for global business.
No wonder there are so many heated opinions and discussions about it; and, oh boy, can it get overwhelming! What this shows is how important this technology is, and what it can bring to the world.
While we call it the internet of money, we should remember that blockchain is a layer on top of the internet that is highly effective and efficient for storing and transferring values in a decentralized way.
During the boom of 2017, we saw all sorts of projects and companies claiming to use blockchain for pretty much everything; this just shows an attempt to ride the hype wave. There were even cases such as the New York-based soft drinks company Long Island Iced Tea, which rebranded itself to Long Blockchain Corp, only to see its shares rise by nearly 500%. Such actions definitely don't help anyone, as the company was promptly investigated by the Securities and Exchange Commission (SEC).
Some of the other developments in the blockchain community were the multiple forks in the largest cryptoasset, Bitcoin, which we saw recently. Forks are basically splits in the network, resulting from differences in the software protocol being run by its participants.
We have seen various actors trying to drive their own versions of Bitcoin forward, and this has resulted in the creation of Bitcoin Cash, Bitcoin Gold, Bitcoin Diamond, Bitcoin Private, and Bitcoin Satoshi's Vision (SV), among others. Such developments may partly result from a desire to improve the protocol, but they also result from greedy attempts to achieve more control and extract more value from the internet of money. Effective governance of decentralized systems in the presence of multiple (and sometimes, contradictory) interests that have to be balanced is one of the most difficult problems that need to be solved going forward.
Going back to the key benefits of distributed ledgers, removing middlemen and quick and efficient transaction settlement are definitely right at the top. This can enable lots of interesting use cases, from payments and money transfers to property registers and capital markets. Such infrastructures can be public or private, the main differences being in the level of trust embedded in the system. A public network that is open to everyone, where parties don't know each other, needs a different level of security and a different consensus mechanism than a private, permissioned network, where parties are vetted before they are allowed to join. This will be discussed in detail later on.
Blockchain has the potential to fix many problems on a global scale, and to impact many industries.
There is a large number of industries that have become stagnant, centralized, and inefficient, thereby proving unable to grow economically in their current state, create value, or solve existing problems. In the case of such industries, what we need is a technological revolution, and blockchain is ready to lead the charge!
The financial sector will be among the first to be disrupted by blockchain technology. The previous major technological innovations in the financial sector, the ATM and the credit card, were introduced way back in the 1950s and 60s.
Not only that, but according to the World Bank, their most recent study found 2 billion people who are unbanked. That's over a quarter of the entire global population! As you can imagine, this stunts global economic progress significantly. Not to mention that the unbanked people, who are mostly from developing countries, are at a clear disadvantage. It is difficult enough to increase productivity and trade within their own country, let alone transacting with the rest of the world. Many people consider the fees for sending money overseas for these populations unfair. Money transfer services, such as Western Union and MoneyGram, were charging 10% on average in 2008, and 7.5% in 2016. Blockchain technology can disrupt the status quo and bring this to a halt.
It can bring new, efficient solutions—not just for money transfers, but also for global trade finance, clearing and settlement, insurance and securities trading, and many more financial services and products.
But, it's not just the client facing side of finance that blockchain technology can improve. It can also streamline compliance and regulatory functions, such as anti-money laundering (AML) and know your customer (KYC).
Blockchain technology can also be applied to accounting and auditing, healthcare, the media, consumer goods, logistics and supply chain management, power and utilities, the internet, and even the government. We will delve into these areas in Chapter 10, Blockchains Focused on Specific Sectors and Use Cases. For now, let's give you a little taste of the ingenious ways that some companies are trying to apply blockchain, in order to change peoples' lives for the better.
Do you remember the awful Chinese infant formula scandal in 2008?
300,000 babies fell victim to melamine being added to baby formula. Melamine is a chemical used to produce plastics, which you'll find in your everyday whiteboard. When added to milk, the chemical appears to contain higher protein content, which was a dirty trick that led to many infants being hospitalized.
The effects of this scandal were felt worldwide, and they destroyed the reputation of China's food export industry! At least 11 countries refused to import dairy products from China. Chinese retailers would travel to Australia and other countries to buy huge stocks of their baby formula. And the Chinese government even executed several individuals involved in the scandal. Sadly, this is not an isolated incident. Many other companies use illegal and immoral ingredients in their foods and other consumer products, often being discovered after it's too late.
That's where blockchain technology can come into action. It can help to remedy and prevent counterfeit consumer goods. A startup called WaBi is working on resolving these kinds of problems. By combining blockchain and radio-frequency identification (RFID) technologies, they can track and verify the authenticity of all ingredients and components used in consumer goods.
Another example comes from a company called Everledger, which is working to resolve the long-standing issue with blood diamonds. Their aim is to track the origin of each diamond and record it on an immutable blockchain database.
Similarly, other startups are aiming to solve the problems of counterfeit art and other luxury goods with blockchain technology.
Gradually, distributed ledgers will become a part of our everyday lives in many different areas, helping to improve the way that we make payments and investments, the way that we register our properties, how we verify our identity, and even the way that we vote in elections.
Blockchain can also reform the internet, by bringing in web 3.0 and more.
A less centralized internet with more peer-to-peer interaction will discourage large internet monopolies and circumvent gatekeepers. Decentralization can empower consumers and producers alike, by giving them more control over their personal data and a level playing field in online business. It can also increase the role of prosumers, people that both consume and produce goods and services in a system. Some examples include decentralized social networks, and marketplaces, where participants are rewarded for contributing content or sharing and consuming resources at the same time. This is a next-level sharing economy, enabled by distributed applications.
Fully-programmable blockchain networks enable such distributed applications and peer-to-peer marketplaces. We have recently seen many startups trying to build more efficient markets for scarce resources, such as electricity, computer processing power, file storage, and advertising. Whether blockchain technology can be applied successfully to add value to such projects is a matter of scalability, user interfaces, and user experience.
Interoperability with other systems (and the internet as a whole) is also very important, and there are projects trying to build such protocol infrastructures in an efficient way. More importantly, the protocols are the sets of standardized rules adopted worldwide for using in computer systems to communicate with each other. Protocols, such as HTTP and FTP, have formed the base layer of the internet. Such protocols are now being developed for distributed computing systems, such as blockchain. The interaction of these new technologies and the concept of a shared economy is expected to deliver the vision of web 3.0.
This chapter introduced the basic facts and the latest developments around blockchain technology. You learned about the great opportunities and benefits that can arise from adopting and applying this technology around the world. You also saw some cases of misuse and inappropriate practices, trying to take advantage of the market hype, which will need to be remedied by market participants and regulators.
In the rest of this book, we will go deeper into each of these topics. The book will show you, in detail, how the technology works, as well as its pros and cons. We will delve further into blockchain applications, potential challenges, the solutions to those challenges, and how the technology is expected to evolve in the future. So, let's step into the world of blockchain together!