Understanding the story which has led to the current adoption of cryptos is essential to understand the present state and future direction that they may be taking. In this chapter I will outline all the most important milestones since the precursor to Bitcoin entered the scene, BitGold.
While there were other projects which developed some of the requisite technologies for the blockchain, BitGold was the first to practically resemble a cryptocurrency. BitGold is the brain child of Nick Szabo, who outlined the benefits of a decentralized blockchain over current currencies, suggesting the combination of PoW consensus methods, one way algorithms and ledgers spread out over many servers, all of which are shared characteristics with Bitcoin. Nick was even talking about the implementation of Smart Contracts and “smart properties”, referred to as digital assets nowadays, since 1995. The creation of a “trustless” currency free from manipulation of governments is an ideological one and the basis upon which BitGold and BitCoin were founded. This is an important point as we try and predict governmental reactions to the growth in cryptocurrencies. We must consider whether governments consider this an ideological or economic threat and whether it is more pragmatic to adopt and adapt or to ban and regulate.
Nick is perhaps the most knowledgeable person to talk to about cryptos. You can contact him on Twitter @NickSzabo4 or read up on his blog Unenumerated where he talks about everything under the sun, not just cryptos.
Come 2008 A person under the pseudonym of Satoshi Nakamoto released their Whitepaper titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” and in January 2009 the Bitcoin client came online and available to download. Satoshi Nakamoto mined the first block to be created “The Genesis Block”. Hal Finney was the first person to download the client and was the recipient of the first transaction made on the network from Nakamoto. Nick Szabo and Wei Dai (creator of b-money, a precursor alongside BitGold) were among the first supporters.
Nakamoto is estimated to have mined around 1 million Bitcoins making him the largest shareholder and one of the richest people in the world. Nobody knows the real identity of Nakamoto who has disappeared and has had no role in Bitcoin for years, at least not under their original pseudonym.
Gavin Andreson became the lead developer at the Bitcoin Foundation and is the closest thing to a public figurehead amongst the developers working on Bitcoin’s code.
Early in its life an indirect purchase of two pizzas for 10,000 BTC has become a thing of legend given how much that would be worth now.
On 6 August 2010 a major vulnerability in the protocol was detected and 184 billion additional bitcoins were created. The transactions were spotted and erased and the bug fixed resulting in a “forked” version of the blockchain. To date this is the only hack that has ever occurred on the network.
In 2011 other cryptos started to appear although Bitcoin retained the majority of the market share.
RipplePay was started in 2004 but it wasn’t until 2011 that the creators saw the potential of the blockchain technology and designed a different consensus method which didn’t rely on PoW. This was to make it much more efficient. However, it didn’t adhere to the ideology of decentralisation and still relied entirely on the trust between banks. It established its own niche as a legally compliant tool directed towards banks and took second place behind Bitcoin by market cap.
In September 2011Vitalik Buterin co-founded Bitcoin Magazine. Whereas Bitcoin’s original intention was solely based on its use as a currency, Vitalik saw the opportunity to implement a crypto with a much wider range of uses. In late 2013 he created Ethereum, a crypto that looked to implement more utility through smart contracts. Ethereum saw a meteoric rise in the first half of 2017 and displaced Ripple to take second place behind Bitcoin according to market cap.
Many other competing cryptos have been created over the past couple of years, each of which looks to establish dominance over its particular niche. Ultimately the market dominator will be determined by its usefulness, technology, network effects and community involvement. It is yet to be seen if any of these new cryptos can establish themselves as the new market leader.
In October 2012 BitPay reported having over 1,000 merchants who accepted Bitcoin as payment and in November WordPress started accepting Bitcoin.
In 2013 things started to pickup. Coinbase reported selling over USD 1,000,000 worth of Bitcoin in a single month.
Mt. Gox and Other Exchange Hacks
Wild price swings occurred during a brief split in the blockchain (when two sets of ledgers disagree with each other), during which time the exchange Mt. Gox halted trading causing a sharp sell off. US Government regulators started to take notice when Financial Crimes Enforcement Network (FinCEN) declared miners were Money Service Businesses (MSBs) and therefore liable to the same regulations. In April, 2013 Mt. Gox had trouble processing the transaction volumes causing delays and more wild price swings. Only a month later FinCEN seized accounts associated with Mt. Gox as it hadn’t registered as a money transmitter.
Things finally imploded in February, 2014 when Mt. Gox filed for bankruptcy protection after 744,000 Bitcoins were stolen.
Bitstamp, the largest European exchange was feared to have been hacked in 2015 when the exchange went offline amid fears of security issues. Fortunately trading resumed as normal after their security measures were upgraded.
In August 2016 Bitfinex was subject to a hack and around $60m (120,000 BTC) were stolen.
This should be a warning not to keep your funds on exchanges unless you’re planning on trading frequently.
Governments Start Taking Notice
In July, 2013 Thailand banned Bitcoin on the premise that it had no legal backing. Other governments started voicing their opinions with a mixed response although it seems that more and more governments are taking a favorable approach towards cryptos. Singapore, Japan and UAE have been very positive towards the technology and even Thailand has changed its mind. Although it is illegal in China to purchase any real world goods with cryptos and financial institutions are banned from using them a strong developer community is developing around the use of blockchain technology in other areas (as I’ve mentioned, cryptos don’t necessarily have to be currencies). It seems then that access to the Chinese market will largely depend on being compliant and creating cryptos that can synergize with FIAT currencies.
Bitcoin ATMs and More Merchants
At the end of 2013 the first Bitcoin ATMs rolled off the production line in Vancouver, Canada. By September 2016 there were 771 ATMs worldwide. In November 2016 the Swiss Railway operator SBB upgraded their ticket machines to become Bitcoin ATMs
The university of Nicosia started accepting Bitcoin as payment for their tuition fees and Overstock announced it would accept Bitcoin as well.
At the start of 2014 Zynga, the gaming giant, started trialling Bitcoin for in-game purchases. That same month, The D Las Vegas Casino Hotel and Golden Gate Hotel & Casino properties in downtown Las Vegas announced they would also begin accepting bitcoin
In the same year Microsoft started accepting Bitcoin as payment for its Xbox games and Windows apps.
As of August 2015 there were an estimated 160,000 merchants accpeting Bitcoin payments and Barclays announced they would be the first UK high street bank to accept Bitcoin.
In April 2016 Steam, the largest online pc game retailer, started accepting Bitcoin. In July Uber switched to Bitcoin in Argentina after the government blocked credit cards from dealing with the company.
The Appearance of Smart Contracts
Although Nick Szabo discussed the idea of Smart Contracts back in 1996 it wasn’t until Vitalik Buterin created Ethereum in 2015 that they were implemented successfully. This marked an important milestone in the crypto world. Cryptos went from being an obscure currency to a currency with revolutionary utility. In very little time other cryptos appeared on the scene with competing visions of how to implement these smart contracts. It is still very early days in its development and so there are likely to be many speed bumps along the way. Who will win out nobody knows but there is one case which we can learn from:
One of the first Dapps built on the Ethereum blockchain was a Decentralized Autonomous Organisation or the DAO. It raised $150 million in a crowdfunding campaign but in June 2016 $50 million was stolen by an anonymouse hacker. It was suggested that the community agree to reverse the transactions and create what is known as a hard fork (when two sets of ledgers disagree with each other and instead of overwriting each other decide to continue on as separate groups). This was extremely controversial as it went against one of the central tenants of “immutability”. The Ethereum team went ahead and reversed the transactions causing a split into Ethereum and Ethereum classic which continues to hold substantial value today. A further two hard forks were required at the end of the year due to more hacking attempts.
The lesson to be learnt from this is that it is very difficult to write Dapps and Smart Contracts as even a small bug in the code might be exploited to steal a large amount of money and destroy trust. Ethereum continues trying to improve security and prevent this from happening in the future. Other cryptos attempt to solve this problem by limiting what Dapps and Smart Contracts are able to do. There is a compromise to be had between flexibility and security. One thing for sure is that we can expect more issues down the road but this goes hand in hand with cutting edge technology.
As popularity of Bitcoin has grown so have the number of transactions. However, the “block size” of each block (think the size of each page in the ledger) has remained the same. This has led to more and more transactions being backlogged and having to wait to be confirmed on one of the blocks. Priority is given to transactions which have agreed to pay higher transaction fees. Overall this has had the effect of increasing transaction fees and wait times.
There are two main suggestions for solving this scaling issue. One is simply increasing the blocksize which would have an immediate effect. The other is something called Segwit (Segregated Witness) which would allow “side chains” which you can think of as having notebooks which accompany the ledgers where you write down all the smaller transactions.
Both options have their pros and cons. I won’t get too technical here but increasing blocksize has the benefit of immediately solving the issue but also increase the storage space needed which may prevent the average person from setting up their own node and centralize the power in the hands of a few large miners. Segwit relies on further technological advancements such as “The Lightning Network” to move transactions onto these sidechains and allow more functionality such as “atomic swapping” which involves being able to swap different cryptocurrencies directly on the blockchain.
These two solutions have produced a lot of contention and a whole lot of in fighting between developers and miners. This was the reason behind the recent “hard fork” between Bitcoin and Bitcoin Cash which I will explain below.
If we relate back to the banking analogy you can think of a hard fork as being equivalent to a group of the branches breaking off and forming their own bank with a slightly different set of rules but who hold the exact same records up until the time of the split. This means customers of the original bank are automatically customers of the second bank and have the same amount of funds on both accounts. In the case of cryptos the value of those funds fluctuate on the free market and so people were worried that the uncertainty surrounding the split might affect the overall value of their funds across both chains.
At the end of July 2017 over 80% of miners signalled to activate Segwit, as a response a couple of the larger mining pools initiated a hard fork on August 1st 2017 creating BCH (Bitcoin Cash) which increased the blocksize from 1Mb to 8Mb.
Immediately following the hard fork the price of Bitcoin went up to over $4000 and Bitcoin Cash settled around $200-$300 suggesting the large majority maintained their confidence in Bitcoin as opposed to Bitcoin Cash.
Their is still a lot of contention between the two and the debate has still not been fully settled. The majority of miners, who signalled for Segwit, will be further increasing the block size to 2Mb as a combined solution to the side chains but the effects of these has yet to be seen.
Most recently the price of Bitcoin Cash has been increasing and the political atmosphere within the Bitcoin development community is still contentious about implementing the “2x” part of Segwit2x. Further hard forks may occur in the near future.
With the appearance of smart contracts and the popularity of Ethereum a wave of ICOs appeared around June 2017. A lot of money could be made by selecting and investing in the right ones. However it was very risky due to a complete lack of any regulation and zero accountability. Initially a fixed number of tokens were offered at a fixed price. The mania around these ICOs created much more demand than there was supply so people could expect an immediate return after the ICO ended. However many companies started getting greedy and offered open ended ICOs with no hard limit on the amount of investment. Coupled with the failure of a few high profile ICOs people became disillusioned with ICOs which has calmed down the space a bit.
The SEC and other governing bodies are looking to regulate ICOs. Some cryptos are taking the initiative, such as NEM through COMSA, by self regulating ICOs to increase trust in the system and ensure high quality projects.
The Current State and Rapid Rate of Growth
Crypto usage, not only as a storage of value but as a legitimate currency, has increased exponentially and looks set to continue that way. The number of online stores accepting Bitcoin in Japan has increased 4.6 times over the past year, Bitpay reports a 3 fold increase in transactions from January 2016 to February 2017
As of time of writing the daily transaction volume across exchanges has increased from 82 million USD a year ago to 6.5 billion USD. An 80 fold increase in just one year. It is hard to argue against the idea that cryptos are not only here to stay, but set to disrupt industry and the financial system very soon.
However, the current growth trend cannot continue indefinitely. Bitcoin has increased 50,000 times over since 2011. Given its current market cap if it were to continue to increase at the same rate it would reach the entire value of the world’s money supply in 4-5 years. of course, this will not happen barring a complete collapse of our current system and shouldn’t be expected. However, we can continue expecting exponential growth for the industry as a whole for the next 2-5 years after which growth will have to slow as we reach market saturation. This is not to say that the opportunity for exponential growth for individual platforms or tokens will disappear.
