The hype over blockchain has picked up steam and enterprises rush to apply blockchain to their industry or even just add it to their initiatives of the year. Blockchain becAme a buzzword of 2018 and seems to be buzzing pretty well in 2019 so far, as well. The blockchain appears to be part of the digital transformation strategies of high-profile executives.
Is blockchain a good investment for your business at the moment? There’s no definite answer as it can incur much criticism from blockchain opponents or enthusiasm from its supporters.
Decide it for yourself by looking into the core of blockchain technology and understanding some current trends in blockchain application development. It is also essential to know the history of blockchain which starts with the incredible takeoff of cryptocurrencies.
Blockchain evolution process reminds me of a beautiful quote attributed to Mahatma Gandhi saying that popular movements pass through four stages:
“First they ignore you. Then they laugh at you. Then they attack/hate you. Then you win.”
Ignore stage: how the first cryptocurrency and blockchain emerged.
Perhaps, no one would ever begin bustling about blockchain unless bitcoin came into the spotlight in 2008. This was the time when the first cryptocurrency got its name starting Bitcoin evolution phase when the only use case of Blockchain was about enabling crypto transactions.
Its mysterious creator Satoshi Nakamoto (a person or a group of people) published his nine-page whitepaper “Bitcoin: A Peer-to-Peer Electronic Cash System”, which described the underlying principles of Bitcoin and its pivotal Blockchain technology. The latter was defined by Don & Alex Tapscott, founders of Blockchain Research Institute, as “…an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.”
Bitcoin blockchain was born as an anarchistic dream to initially resolve the double-spending problem, bypass governmental control, and centralized regulation.
However, in its early days, bitcoin, not talking about blockchain, did not receive much attention from society. But why was something that revolutionary ignored until 2013 when it hit the mainstream? First off, participation in bitcoin transactions required an installation of sophisticated software with difficult to understand interface, cryptographic operations with public and private keys, protocol basics, etc.
It is no wonder that common users did not bother to get into crypto. Firstly, they saw no point in having it, if fiat money already did the job; and secondly, there was little trust to currency looking like created out of nothing by a gang of anonymous cyber-anarchists.
Another reason could be the fact that bitcoin didn’t have the actual value and in 2008 and 2009 — zero dollars by that time.
Cryptographers and IT experts were the primary audiences that could actually evaluate the real price of bitcoin. However, for average people who were used to the currency that already had value, bitcoin was non-existent at that time. Bitcoin Blockchain was ignored – only a close circle of true enthusiasts of a new e-cash system knew about the day (January 3, 2009) of mining the first genesis block that laid the foundation of the bitcoin chain.
Neither a big event was the first transaction made by Satoshi Nakamoto nine days later who sent 100 bitcoins to a software developer Hal Finney interested in the new technology. That was only the beginning of bitcoin mining history.
We may call it an IGNORE stage.
Laugh stage: how bitcoin acquired its digital value.
Before 2010, bitcoin had never been traded, only mined, it was impossible to assign a monetary value to the units of the emerging cryptocurrency. There was no way to buy or sell bitcoin, make peer-to-peer payments outside the blockchain community network – cryptocurrency had not been adopted yet by foreign exchanges, banks or any other payment service providers. Web-based exchange platforms, applications, or marketplaces did not exist. Neither there was a chance to pay for your online or offline purchases with BTC.
Two Papa John’s pizzas actually provoked the shift in bitcoin value history and a step to being associated as a real-world currency.
In May 2010, a programmer from Florida Laszlo Hanyecz placed an offer at the online Bitcoin forum asking whether anyone is ready to trade two large pizzas for 10,000 bitcoins (about $41 at that time). It was a profitable deal for the recipient of bitcoins who in reality paid $25 for the pizza.
This was the first BTC transaction for actually a physical item, estimated in $39,514,758 as of February 21, 2019.
Although this movement drew mainstream attention supported by a community of true enthusiasts, the new digital values (or tokens) made people only smile about an opportunity to exchange them for fiat money. However, nine months after the pizza day, bitcoin blockchain reached its first milestone mark (1 BTC = $1).
This was the first breakthrough in the bitcoin price history starting the period of BTC’s ups and downs (compare bitcoin historical data) and the era of bitcoin miners. Most importantly, it was a mind shift for those who had treated bitcoin as something that wouldn’t last long. The communities of bitcoin advocates and opponents appeared and attracted the attention of larger audiences – investors and non-tech people.
The time bitcoin increased its digital value, altcoins (alternative digital currencies) started cropping up – Namecoin (the first altcoin that appeared in 2011), Litecoin, Monero, Dash, Factom, Dogecoin, etc. Generally, the first altcoins were simply iterations of bitcoin with some improvements to the mining process time, privacy or transparency issues, e.g., Litecoin offered faster transaction confirmation – 2.5 minutes compared to 10 minutes of Bitcoin.
Since 2011, the number of altcoins has begun growing exponentially, and as of February 12, 2019, you can already find 2014 cryptocurrencies.
Most of such altcoins were based on the codebase of bitcoin and came into the cryptocurrency market with their claim to uniqueness, main idea, goals, and a project development plan. Their creators launched ICOs being backed up solely with an approach described in a white paper and managed to fundraise investors’ fiat money or other virtual currency for the token’s value actually generated out of thin air.
Isn’t it funny how a project with nothing but an idea swiftly makes its way to the top making money out of nowhere? An excellent example of a Laugh stage was Dogecoin’s success. This “parody” cryptocurrency was born in 2013 out of Twitter meme Doge and was a clone of bitcoin, though offering faster and cheaper transaction fees.
Treated even by its founder as a joke, who left the project in 2015, the crypto, however, gathered the most robust community of enthusiasts still having a laudable position (25th place among top 100 cryptocurrencies) with its market cap 239,373,72 as of February.
Some of altcoins actually stood the test of time and, although being laughed at, reached their highest peaks of market cap bringing huge returns to their early investors. At the same time, the buzz around bitcoin and blockchain held up to ridicule. Some companies even started adding “bitcoin” and “blockchain” to their domain names or brand names having no apparent connection to the technology.
But the funniest thing is that they actually thrived on this. For example, LTEA company achieved a 432% increase in its stock shares after a slight change in a brand name and the announcement that the company shifted to blockchain strategies.
That was a LAUGH stage.
Attack/Hate stage: bitcoin’s smudged reputation brought blockchain to the fore.
There are two names associated with the disruption of bitcoin reputation. Mt.Gox, the first BTC exchange that was handling 70% of all the world’s cryptocurrency transactions in 2011. That year it was subjected to continuous hack attacks.
Compromised wallets were repetitively emptied during 2011-2013 resulting in 850,000 bitcoins lost, and bankruptcy of Mt.Gox announced in 2014. The security breach was caused by the lack of encryption of private keys as the Bitcoin 0.4.0 had only wallet encryption and thus, attackers needed only to steal a wallet.dat file.
Another major discrediting factor was the launch of Silk Road, the first online black market for selling/buying illegal drugs, guns, pirated software, etc. The majority of transactions were conducted with bitcoins offering the needed anonymity.
Those were the first ATTACK examples.
Although the encryption methods have been significantly improved since 2011, cryptocurrency fraud and scams are still a pressing issue for bitcoin and other top-ranked cryptos. Inspired with the high returns on the tokens, many people were eager to make quick money in an unregulated world of cryptocurrency. Their increased interest and readiness for investing in virtual currencies allowed many fraudsters and scammers to make a fortune by using different sorts of schemes.
Since the rise of cryptos, the most popular have been pump-and-dump schemes – a deliberate increase of the digital coin’s value (often with a low market cap) in order to attract investments from outside and then, sell the currency at the highest price leading to huge losses among investors.
The latest MIT study showed that such schemes resulted in $7 million of monthly trading volume in 2018.
Pump-and-dump schemes, mostly organized in popular messaging platforms (Telegram, Discord, Slack), are one of the most widespread ways used by speculators to make hay and stay unpunished. For example, in 2018, 3767 pump signals were detected in Telegram only in a 6-month period. This is how hate was born among investors and true enthusiasts involved in the development of the virtual currency.
Another popular method for collecting money fast is a Ponzi scheme. Here’s how it works.
First, a scamcoin should be premined or instamined so that when a coin is launched, the scammers could operate with a good sum of coins and tokens distributed to the early adopters. At the same time, premining and instaming is still a controversial issue as 70% of thriving cryptocurrencies were also premined or instamined.
All this is done to create the coin’s value at the day of its launch, which is announced on the most visited cryptocurrency forums. After the crypto gets enough buzz and support from the community of developers, more and more investors are getting attracted to crowdfunding the project. At the same time, the payouts to earlier investors are performed from the money of new investors.
When the crypto’s value and a number of investments reach a specifically high level, scammers sell their coins, take funds and simply disappear. This is how numerous investors worldwide lost $4 billion to OneCoin scammers – the biggest Ponzi scheme in the history of cryptocurrencies. Another much-talked-of Ponzi scheme is Mining Max that took $200 million from 18 000 investors in more than 54 countries.
But how do people get tricked knowing how the scheme works? Scammers simply learned how to make it plausible, for instance, two scam artists misled investors of My Big Coin (MBC) by using non-existent trading results and fraudulent claims such as “MBC was a gold-backed cryptocurrency”.
Isn’t it a good reason for hate overwhelming naive investors left with nothing?
Numerous scams caused true agitation among officials, lawmakers, and regulators. Especially when the level of ICOs investments in fintech start-ups grew from $26 million in 2014 to $1,27 billion in 2017.
The US and Canadian governments expressed their fraud concerns towards ICO market and “unregulated currency exchange” issuing a warning on ICOs. The U.S. SEC concluded that “at least some virtual currencies should follow federal securities law.” On the contrary, China wasn’t as accommodating and just banned the use of ICOs in 2017.
Although China is believed to be one of the drivers of the bitcoin’s price rise to over $1000 in 2013, the People’s Bank of China ordered to close operators’ accounts connected to digital currency exchanges in 2014. Perhaps, this is the reason why democratic governments keep away from any drastic measures in regards to ICOs, crypto or blockchain start-up investments that may be considered as “the China style.”
Many lawmakers and regulators of the European Union, the U.K., South Korea, Japan, and Switzerland claim to use more harmonized approaches to prevent some pressing issues like money laundering, etc. The majority of crypto enthusiasts considered regulators’ bills and directives as the way to control the technology that by its nature excludes any intermediaries or central bodies supervising transactions.
That was a HATE stage.
The total independence of cryptocurrency from any control or intervention of authorities seemed a real threat not only to the foundations of national financial systems but to the world order.
Cypherpunk anarchistic ideas propagating the freedom from government or its replacement with the disruptive digital currency and its network caused much of concern at the governmental level. Perhaps, this is one of the reasons why the perception of bitcoin has been tainted since its early days and tech giants, as well as officials, turned their eyes to its underpinning technology.
First off, blockchain is a distributed ledger system on which decentralized systems are run aiming to streamline different business processes.
Blockchain technology architecture relies on such key components as a distributed database meaning that there’s no central location for storing data as it is kept in a ledger (e.g., a list of transactions in cryptographically connected blocks); a peer-to-peer network of interconnected computer systems (aka nodes), cryptographic techniques (one-way hash functions, public key infrastructure, Merkel trees), a consensus mechanism (aka protocols that determine the rules of data communication and transmission between devices to achieve consensus on transactions in a low-trust network), and validity rules of the network (e.g., how to define the validity of a transaction).
Technically speaking, the route of a transaction (e.g., digital coins, records, contracts, or other data) being added to the blockchain incorporates all of these components.
So, when a sender transmits his signed transaction to a P2P network, its nodes should validate the initiated transaction and the status of a sender by using specific algorithms. After the transaction is verified, it is combined with other transactions ready for creating a new block with data in a distributed ledger. Once a record is added to the block, it is by design immutable to any further alterations. The transaction is regarded completed when the block is added to the blockchain.
Most importantly, the blockchain technology can help build digital trust as each transaction is transparent and open to all the nodes in the network and is verified by multiple network participants.
It is especially important when different parties of the deal do not trust each other but need to ensure that it’s fair. The universal character of this technology allows applying it practically to any industry, and there is already a multitude of blockchain use cases. Hence, the smudged reputation of bitcoin blockchain and other altcoins cannot change the fact that blockchain is genuinely a disruptive technology with the potential to fully transform the norms of data records.
Ethereum Blockchain, Smart Contracts, and dApps
Ethereum blockchain (founded in 2013) is believed to be the most significant iteration of BTC structure and a real push to blockchain technology development. Ethereum started a new era of Blockchain 2.0, giving rise to smart contracts and dApps (decentralized blockchain technology applications, programs or tools).
A co-founder of Ethereum Vitalik Buterin in one of his interviews explained smart contracts as “a computer program that directly controls digital assets…being used in a bunch of applications like insurance, any self-executing financial contracts, systems for crowdfunding, DNS (like already existing Ethereum Name System), etc.”
dApps are run on blockchain or peer-to-peer network which does not require any middleman to control or manage any user’s data. They are open-source, decentralized, rely on consensus mechanism and have no single points of failure (SPOF). Among SPOF examples are a data center with failed generator backup, a service provider that can’t handle a power outage, and even people who may fail to meet their obligations, etc.).
As Ethereum developer’s community is one of the largest in the world – over 250 000 developers, there are plenty of open-source tools for building own smart contracts together with Ethereum’s “object-oriented, high-level language” Solidity and Ethereum Virtual Machine.
At the moment, Ethereum Blockchain is one of the most actively used open-source computing platform for building distributed applications (aka dApps).
There are over 2 000 dApps already launched on the basis of Ethereum platform. A good part of them is still under development and are limited to gaming, gambling or exchanges until the network is enhanced. Another popular dApp development platform is naturally Bitcoin Blockchain. Being the first blockchain generation platform, it also has an active community of developers, tools and frameworks.
However, it is Ethereum that is credited with expanding the vision of blockchain from cryptocurrency to a system which can be applicable to other domains such as identity management systems, supply chain management, energy grid, trade finance, government systems, etc. Ethereum blockchain allows implementing a key purpose of a blockchain – eliminating the need in a third party to regulate any transactions instead verified by achieving a consensus of all the participants in the system.
Traditionally, as it was with bitcoin blockchain, Ethereum blockchain was also attacked at its maturity stage.
A decentralized investment fund DAO that is run by smart contracts has become the cause of all the fuss. After the organization beat the crowdfunding record gathering $150 million dollars, an attacker managed to steal 50 million of ether in June 2016 due to the exploited flaw in the DAO smart contracts software.
To sum up, this could be called the ATTACK or HATE stage.
Win stage: how blockchain has finally gained traction.
Despite the attack, Ethereum blockchain attracted the attention of large enterprises, organizations (MasterCard, Intel, Microsoft, ING, Deloitte, etc.) and start-ups interested in mutual contribution to the creation of “an open decentralized web”. That’s how Enterprise Ethereum Alliance (EEA) was founded in 2017.
Today, it functions as a standards body and a community with over 300 members working on specifications and standards to Ethereum extensions comprising consensus mechanisms and privacy features. It is one of the most influential blockchain enterprise consortia together with Hyperledger, R3, B3i, FISCO, etc.
Although Ethereum, as the second generation of blockchain, outmatches Bitcoin in its maximum network capacity (15 transactions as against Bitcoin’s 3-4 transactions processed per second), Ethereum blockchain does not solve the scalability issue. If blockchain goes mainstream, it should be able to process thousands of transactions per second without any delays.
This limitation in speed and capacity is projected to be solved with the help of a new technology – sidechain, which is a separate blockchain securely attached to the main blockchain with the help of two-way pegs that enable interchangeability of assets.
This allows reducing traffic on the main blockchain and increasing its capabilities as well as the efficiency of transactions processing . Moreover, another generation of public Blockchains 3.0 gains traction claiming to address the existing issues and offering a new approach to protocols (EOS and Cardano), consensus mechanism, scaling layers, etc. This is only the future of blockchain technology, which will also rely on such key technologies as AI and IoT helping to address many blockchain limitations.
The appearance of Blockchain 3.0 projects (Zilliqa, Dfinity, Quarkchain, NEO blockchain, Ultrain, and Exonum as a framework for building decentralized blockchain applications) brings us to the fact that the evolution of blockchain is an ongoing story and its climax is yet to come.
By the way, many of the projects mentioned above are already thriving. For example, a range of dApps run on NEO blockchain together with Smart Economy distributed network for managing digital assets, digital identity, and smart contracts of public and private/enterprise projects.
Furthermore, there are other new players on the market, e.g., Ultrain which is projected to surpass the performance of both Bitcoin, Ethereum and even NEO blockchain. Ultrain is a Singapore-based startup founded and developed by former technical executives, scientists, and engineers of Alibaba, Google, and IBM gathered to create a programmable business system for both dApp developers and enterprise end users.
What factors have set a WIN stage?
As of today, blockchain is “a buzzword of the year” (the latest survey proves that it was the most overrated words of 2018. Blockchain is actively discussed in the media and almost all leading industries have started initiatives towards blockchain adoption.
At the same time, governments across the world have decided to join the game investing heavily in R&D of the blockchain, or distributed ledger technology (DLT). Many governmental institutions around the world have already implemented national pilot blockchain projects in the healthcare (e.g., Estonian Electronic Health Record System), energy sector (e.g., Power Ledger), insurance (e.g., FidentiaX), government services (e.g., E-Auction and E-Vox), etc.
By the way, according to PwC survey, the leading countries that demonstrate the most of initiatives in developing blockchain projects are the U.S. (29%), China (18%), and Australia (7%). However, it is projected that in a couple of years China could outstrip the States and European countries turning into the epicenter of the most significant blockchain projects.
Although the increased flow of virtual cryptocurrencies still disturbs officials, blockchain is highly welcomed as the distributed ledger technology instead. First of all, the government needs it for strengthening patient data protection and improving current security systems vulnerable to breaches and different sorts of attacks. The map of blockchain adoption across the world shows what blockchain initiatives governments have already started implementing.
As to banks and other financial institutions, they are already trading cryptocurrencies in foreign exchange whereas businesses are exploring the prospects of redesigning their processes to move to the blockchain platforms.
Forward-thinking business leaders join different blockchain consortia which unite organizations ready for discovering blockchain opportunities. Today they are divided into business-focused (e.g., GBBC (Global Blockchain Business Council), GSBN (Global Shipping Business Network), banking consortia R3, BankChain, etc.) and technology-focused consortia (Hyperledger, EEA, etc.).
The most prominent umbrella project of Linux Foundation Hyperledger focuses on collaborative development of tools and frameworks for open-source blockchains and distributed ledgers. In 2018, EEA and Hyperledger joined forces becoming associate members who will share a common goal – speeding up blockchain adoption across enterprises. Such consortia collaborations attract large enterprises eager to participate in joint development of blockchain projects.
There are even more facts that prove that blockchain technology gains its traction and has an accurate recognition of a considerable cryptocurrency and blockchain potential – over 500 cryptocurrency exchanges, 25 million crypto wallet users, numerous online crypto magazines, applications and services.
The job market has also been stirred up struggling to meet the growing demand for blockchain developers, which has grown by 3,300% compared to other jobs according to this LinkedIn report.
An interesting fact is that even some haters and opponents of Bitcoin Blockchain begin tapping into this revolutionary technology. For example, JPMorgan, the largest U.S. bank, has recently announced about the launch of their own cryptocurrency JPM coin for accelerating transactions between customers of JP Morgan. That is when two years ago JPMorgan’s CEO Jamie Dimon was publicly criticizing bitcoin as a digital currency calling it “stupid,” “dangerous,” and simply “a fraud.”
This example shows how influential and mind-shifting blockchain technology is at the moment.
We can positively assume that all the factors mentioned above lead to a WIN stage.
While cryptocurrencies and blockchain are at the top of the hype cycle, we must not lose sound view of things – building a real foundation for these technologies still has to go a long way before they reach mass implementation. Despite the tremendous tasks ahead, I believe that in less than a decade, we will see entirely new business models changing the face of the modern world.