Hey son, what the heck is Blockchain?
A post to my father
Blockchain technology was conceived of 10-years ago, yet most people are only familiar with the stories of cryptocurrency wealth generated to a few lucky recipients who rolled the dice early. It’s hard to penetrate to the truth of what this is all about.
Those who have sought to make a quick buck off optimism, greed and misinformation have done a great disservice to this technology innovation. The industry as a whole created confusion and skepticism.
But that’s changing. Design is being prioritized. The utility is now becoming understood. This was evident when the CEO of JP Morgan, who formerly was quite dismissive, just this month announced that they are launching their own cryptocurrency to settle transactions.
Many friends and family (particularly my father) are asking me if they should buy cryptocurrencies as an investment vehicle. This area of technical innovation is much more than Bitcoin and investment speculation. Beyond digital currency, Blockchain is a cephalopodic beast that spans so many business domains that it is difficult to perceive where its influence will be felt first. In fact, it appears to be breaking out everywhere… quietly and not just as a digital currency.
With this as background, here are my answers to three questions my father keeps asking:
What is cryptocurrency?
What is bitcoin?
What is a blockchain?
What is cryptocurrency?
Cryptocurrency is money not issued by a central bank or authorized by a government. It's digital money. Just like anything digital, it can flow wherever people need it and across devices. It’s not defined by a country’s borders. It has the exact same value, no matter where you use it. There are no manipulated currency policies, like when the Federal Bank increases or decreases the market supply of paper dollars.
Digital money that can be streamed like music or video has huge implications. When money flows like water, it can be turned on and off based on programmed conditions. For instance, what if you paid for car insurance only when you are actually in the car? Insurance would then be metered, much like energy, but be paid immediately, not at the end of the month. That’s only possible when money is digital and micro-payments of pennies and fractions of pennies can flow without system friction. Those are the types of use cases being explored.
Cryptocurrencies are currently a speculative vehicle for people trading in Bitcoin, Ether, Bitcoin Lite, etc.. We will next need a real market for spending this digital money on goods and services in retail settings. That is happening (see Overstock, NewEgg, Dish, Intuit and Microsoft). What will really accelerate adoption, is when value stabilizes. The market has addressed the need for limited value fluctuation in digital currencies by creating a sector called “stable coins” which are backed by fiat currencies and other stores of value, such as gold. Some examples of those coins are Dai, Tether and USDCoin.
In 2017-18, Cryptocurrencies were associated with a method for companies to raise capital. This was done in a similar manner to how crowd-funding platforms function, such as Kickstarter or Indiegogo. This led to some spectacular speculative exuberance and the creation of instant millionaires who often provided zero in return. It was a bad PR period for the industry and represents a time of hucksterism akin to the late 1990’s when any idea that had a dot com (.com) association with no real revenue stream was funded.
This is one of the reasons the industry feels immature. Rightfully so…
What is bitcoin?
Bitcoin is two things. Stupidly, the founders of Bitcoin didn’t distinguish between the technology and the currency. It was all called “bitcoin.” I was confused by this for about two months.
There are several parts of Bitcoin. The first is the technology system. I’m generalizing them as (1) a peer-to-peer network; (2) a distributed ledger; (3) a consensus mechanism; and (4) cryptographic security. Someone who really geeks out on this stuff may call me out as not wholly correct on my breakout. Sorry, I’m just simplifying. Remember – this is a post for my father & friends…
Dad, you still with me?
The second part is the currency of bitcoin which rides on top of this coordination of different systems and is one of the original cryptocurrencies that I described earlier.
Here is a definition from a book titled, Mastering Bitcoin by Andreas Antonopoulos.
“Bitcoin is a collection of concepts and technology that form the basis of a digital money ecosystem. Units of currency, called bitcoins, are used to store and transmit value among participants of the bitcoin network. Users can transmit bitcoins over the network to do just about anything that can be done with conventional currencies, including buy and sell goods, send money to people or organizations, or extend credit. Bitcoins can be purchased, sold and exchanged for other currencies at specialized currency exchanges. Bitcoin in a sense is the perfect form of money for the Internet because it is fast, secure, and borderless.”
What is a blockchain?
The “Blockchain” is a network. Some call it a protocol; others a platform. It’s really not important. Just think of it as what secures a digital currency transaction. It is a cryptographic method for creating both a permanent, secure record of transactions and for storing that record everywhere.
This is essentially how it works (as I understand it)…
A block is a group of transaction records bundled together into a block of records. A block is “chained” to the block before it and adopts some of its “DNA.” Blocks continue to build on top of the prior block, so you always know the position of each block in the chain. This is what creates security because you can’t change a record, entombed in a block, without changing the block before it and before that… and before that… etc.. It would take a huge amount of computing power and over 51% control of the blockchain network to change a record that is stored everywhere.
Why is the storage part important? Because if it’s stored all over the world, it can’t be altered since there is no one “single source of truth." This is why decentralization is a key word in this space. When information isn’t stored in one place, it can’t be altered. It can’t be manipulated to tell a different story. It’s transparent to the eyes of the world. It’s secure.
You might be thinking that’s not security. Well, in this definition it means that if everyone can see it, then you can’t mess with the truth. That’s a better form of security than hiding and locking away records where no one knows what really transpired. Kind of nifty when you consider the lethal mix of human nature combined with power plus little transparency. History shows that events which are hidden tend to become corrupted.
Why should you care?
Change for the mere sake of change is not what this is about. Ever sector of the world is now influenced by digital technologies – at the grocery store, at the gas pump, at your child’s school. The current architecture is built on centralizing power, inequality and control. I believe this is wrong.
Here are three reasons why I care and why I chose to migrate to this field.
#1 Security
I believe that this technology innovation will provide a better means of protecting our personal data. All our credit card transactions and online behavior is tracked, recorded and stored on centralized servers. That is a honey-pot for hackers with bad intentions. The recent breaches at Target, Marriott, Equifax (the records of 148 million US citizens) or Ticketmaster are clear demonstrations of why centralization of data is no bueno.
Hacking will never stop. It’s just too easy to use a computer to find cracks in database security systems. Program a computer with a task and give it a week. It will find a way in, eventually. Meanwhile, the digital thief is having coffee with friends and enjoying their life. S/he comes home each evening and learns what the computer-friend has found out. That’s much easier than using a gun to hold up a bank. Who wants all those annoying bills piled up in your living room anyway?
The Blockchain method of securing records with math, turning identity into alpha-numeric strings (something I didn’t write about here) and then decentralizing those records is much more secure. That is an exciting development when so much of our lives are digitized.
#2 Identity Ownership
One of the biggest issues in the world today is verifying and owning your identity. That may seem unimportant when you live in a developed, stable country. After all, you have a drivers license, a social security number and your passport. But for those in war-torn countries, proving your identity and your relationship to your family members is very difficult.
Identity is at the root of every part of society - from ownership to capital access to healthcare. When people don't control their identity, it is easy for them to disappear. Blockchain solves this by creating a secure, immutable record that is distributed across the globe proving you are who you say you are.
Another use case is owning your own data - which is your extended identity. Currently, we unwittingly give our data to a consolidated few companies for free. They monetize our data for commercial exploitation. It’s a Faustian bargain that is only recently being openly discussed. That relationship must change.
#3 Community Empowerment
There are a variety of reasons why empowering communities that share not only interest, but dependence, is a really cool outcome of Blockchain technology. We have the opportunity to think and act locally and thereby have a global impact. Blockchain empowers peer-to-peer transactions, as I mentioned before. That enables relationships that are currently monitored, monetized and manipulated (love that alliteration) to remove intermediaries and become direct. In the same way that you buy from your local farmer at a farmer’s market, there are lots of other needs we have that would benefit from a direct relationship.
One inspiring example is the Brooklyn Micro-grid that allows a neighborhood to buy and sell locally generated renewable energy over a peer-to-peer network. If you have solar panels that produce more energy than you need, you can currently only sell the excess to a utility company. But what if you could sell it to your neighbor instead? That is what the company LO3 Energy has done using Blockchain technology. That’s an idea I want in on.
One more thing…
When I was hired by Razorfish LA in 1999 – five years after I was dazzled by a web browser – they had a great way of distilling the potential impact of the Internet. The maxim of the company was brilliant in its reach and foresight – “anything that can be digital, will be digital.”
Blockchain technology is building on top of that prescient quote. It is building a network of trust where there really wasn’t any. That should be evident by the meddling of a foreign power in our presidential election. Trust is really my synthesis of what I’ve read and listened to over the last twelve months. Blockchain-tech creates a new medium of trust. And where is trust arguably most needed? When exchanging value (currency, art, property, your vote, etc.).
I can’t resist… here’s my swing at a maxim for this industry.
“Any value transfer that can be decentralized and immutable, will be.”
I look forward to revisiting this statement in a few years and see how it's playing out. While 2019 maybe a year of less spectacular headlines in cryptocurrency, it will be a good year for the building of the breakout applications in Blockchain. It’s an exciting time to be helping lead the effort.
Thanks for reading, Dad!
Love you.
Resources
Videos
Don Tapscott is a speaker, advocate and author on the subject. He’s super articulate.
A Beginner’s Guide to Smart Contracts – this is provided if you want to nerd out on this super important part of the industry.
Proof of Work vs Proof of Stake – more technical stuff. Don’t watch this unless you’re ready to be stupefied.
Podcasts
This one podcast is great place to start. UnChained has become my go-to for all industry news.
