Do you ever feel like you’re being watched? By big corporations? The government? Banks? Companies you’ve never even heard of? Escaping from that all was the original promise of the first cryptocurrency. Bitcoin.
The beautiful anonymity of cash, but cash that wasn’t printed by governments. Instead, it was made by a bit of code powered by citizens of the internet, and you could trust it.
Today, anyone can buy cryptocurrency. Just a few signups, type in your credit card number, and trade in your money for digital cash. Bitcoin got so popular, that by the end of 2017, it was as valuable as the big banks it stood against.
And with a few more steps, you can use Bitcoin to buy what the majority of Bitcoin is spent on illegal services. Virtual currencies can pose challenges for law enforcement, given the appeal, they have among those seeking to conceal.
There are now thousands of cryptocurrencies, like Ethereum, Litecoin, Ripple and even a Dogecoin. You can buy them on exchanges, and you can mine them.
Dogecoin started off in 2013 as a joke based on an internet meme. Well, Dogecoin now is worth about half a billion dollars in market cap, which just blows everyone’s mind.
Add them all up, and people had bet half a trillion dollars on something. So what are they betting on?
The world’s largest bank account is in our bank. That account belongs to the US government. Bitcoin doesn’t constitute legal tender. It’s probably the biggest innovation we’ve seen since the internet.
Any money is counterfeit, unless issued by the federal government. The fundamental promise of Blockchain is decentralization. The only thing that’s worse, than having a few people control the currency, is having absolutely nobody controls a currency.
To understand cryptocurrencies, you have to go back to an earlier form of digital money. Diners Club was the first-ever credit card, and it advertised itself as the ticket to a new modern lifestyle. In the 1960s, the executives at Diners Club talked about how cash was not sufficiently modern. It couldn’t interface with our fast-moving world.
Credit cards were a revelation. By 1970, half of the American households had one. They freed us from carrying around cash, everywhere. And in the age of Amazon, Google and Uber, there’s no need for cash at all. Until there is.
For as long as we’ve been tinkering with computers, on any mass scale, there’s been a dream of digital cash. A cash that would function like cash, in the sense that it’s non-traceable, anonymous, instant, free to use, and, yet, would be able to interoperate with computer networks.
In countries that have dictators or other negative influences on the transactions in the country, they can choose not to allow certain types of transactions, they don’t want to, and people can’t spend their money freely.
A way to buy and sell things online without Big Brother watching. That’s a lot harder than it sounds. It’s actually a problem that flummoxed computer scientists for decades. It even had a name The Byzantine Generals Problem.
A group of generals, each commanding a portion of the Byzantine Army, encircle a city. They must decide whether to attack or retreat. But whatever they decide, the most important thing is that they reach a consensus.
But the consensus is difficult to reach because the generals in this army also can’t trust each other, just like we can’t trust each other online. A general might say they plan to attack, when they actually plan to retreat.
And just one dishonest general means everyone else dies in battle. The generals had no choice, but to route all of their battle plans through a central authority. That’s also why a site like Amazon needs to check with your bank, to make sure you’re good for the money, you promise to pay.
The internet at large was built upon a paradigm, that everyone was a trusted user. Essentially, a government official or a researcher at a university. And this technology was built with that fundamental set of assumptions baked-in, from the early days of the internet, till now.
It doesn’t end there. A lot of what we do online is exchange things of value with each other. And since we needed third parties to store and verify everything, the internet filled up with huge third parties, like Google, Facebook, Instagram, Twitter, PayPal, etc.
The key point here is that value exchange is not just money. It is anything of value. You are not Facebook’s customer. You are Facebook’s product. We’ve been effectively paying, all these large behemoths, with our data, and that doesn’t always go well.
Still, there wasn’t much of an alternative without a solution to the Byzantine Generals Problem. And then, someone came along and solved it. Satoshi Nakamoto. But who is Satoshi Nakamoto?
This person actually doesn’t exist. It could be a woman. It could’ve been a group of people. But we know that the real Satoshi Nakamoto doesn’t want to be found, and we may never know who did, but they unleashed a cryptocurrency that you could buy online and then spend as freely and anonymously as if you were using cash.
Satoshi’s innovation, that powers Bitcoin and all cryptocurrencies that came after it, is called blockchain. A blockchain is a ledger of transactions, much like a bank maintains, but copies of that ledger are distributed among computers all over the world, automatically updated with every transaction.
Think back to those Byzantine generals. If their orders were recorded on the blockchain, each general would have a copy of every other generals’ battle plans, always up-to-date and 100% verified.
Maintaining this distributed ledger takes a lot of work, but it’s no one’s job to do the work. Instead, the system pays out cryptocurrency to those who volunteer to do it.
For the first time, you have a distributed network to come to consensus about what transactions happened on the network. This allows for a trustless ledger, a ledger where there isn’t a single central party maintaining it, but rather, a network of people maintaining it. That’s an incredibly powerful concept.
Satoshi didn’t just solve the problem of cash on the internet, he had a solution for the problem of trust on the internet, too. Blockchain facilitates an entirely different perspective, which is that no one is a trusted user. It facilitates a new type of interaction that we’ve never before seen possible.
Bitcoin was blockchain’s first trial run. A money system with nobody in control, no laws, and no regulations. That’s a wild experiment, and its timing was impeccable.
Call it a Nightmare on Wall Street when the meltdown in the financial market. The Dow plummets as the financial world is rocked by the biggest bankruptcy in US history. It seems every time you think it’s as bad as it could possibly get, another disaster’s just waiting around the corner.
A lot of people were angry with their governments, and pretty much everyone was furious with big banks. People were very aware at that time that there was something broken with the old, centralized, architecture of money. And it took off. A new money? The press ate it up.
Bitcoin had made it to prime time. Businesses began creating their own cryptocurrencies and selling the coins as a way to raise money, like shares on a stock market. And people treated cryptocurrencies like a stock market too, investing in different ones, trying to buy low and sell high.
And over the last few years, it’s been pretty easy to sell high. You can absolutely make a ridiculous amount of profit in crypto. What you wanna do, is make your money in a concentrated position. Put it into Bitcoin and HODL for now, which means hold on for dear life.
The same way gold’s value comes from people trusting the value of gold. Bitcoin’s value comes from trusting the value of Bitcoin and using that as a place to put existing monetary value.
It kind of just became a huge snowball, and as it was going down a hill it just kept getting more and more steam. In 2010, when one Bitcoin was worth six cents, 50 Bitcoin would have been just enough for a fancy cup of coffee. At its peak in 2017, those same Bitcoin would have been worth $850,000. That’s an expensive cup of coffee.
But in January 2018, cryptocurrencies crashed. It may have been all the reports of suspicious trading and fraud. Some worried the government might swoop in at any moment. Or maybe it was general uncertainty about how much this stuff was really worth.
Whatever the reason, half the value of all cryptocurrencies went up in smoke. But there was an even easier way to lose your money with Bitcoin. Just forget where you wrote down your password. There’s no way to reset it. There are over 2.5 million lost Bitcoin, which at their December 2017 peak, were worth over $20 billion.
The average person doesn’t feel safe controlling their own security for all that money. People are willing to rely on what are in essence banks for their Bitcoin, which in a way, defeats the whole purpose. Even you can easily trade money for cryptocurrencies and vice-versa.
And a bunch of cryptocurrency companies has lost huge amounts of money to hacks and mismanagement. A hack attack at Bitstamp, the world’s largest Bitcoin exchange. MT.GOX lost three-quarters of a million Bitcoins that belonged to users. Tokyo-based Coincheck was hacked by almost $500 million in digital tokens.
The computers working to maintain the distributed ledgers, they’ve been using more energy than many countries. But blockchain is very expensive, and right now it’s kind of slow. Visa’s payment network can process 24,000 transactions per second, and Bitcoin, just 7 transactions per second. Even though giant centralized institutions sometimes abuse our trust, they’re also really convenient.
The question really becomes “What advantages do you get from moving a previously centralized service, like Dropbox or Whatsapp messenger, into a decentralized blockchain, and does it really pay off?”
But people are placing a huge bet that some of these problems will get fixed and that blockchain will revolutionize a lot more than just money. It’s just not clear what that is yet.
We don’t know what’s next. In the same way that we weren’t able to predict Uber in the 90s, we’re unable to predict what new decentralized applications are gonna emerge out of this new infrastructure. Cryptocurrency was only the first experiment, and it may not end up being the revolution people hoped.
We will see regulations start to come in. People will have to start to obey what the government says. Much of this has not happened, yet. We’ve been in a little bit of a Wild West.
We may have code that solves the problem of trust on the internet. We just don’t know if trust is a problem technology can ever truly solve, as long as humans are the ones using it.
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