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CHAPTER 1

The Hype and the Hope

What has blockchain ever done for us? Its first decade has been turbulent,
fascinating, full of promise, fraught with danger, riddled with duplicity,
and ultimately inspiring. Its inextricable link to Bitcoin has generated
a high degree of skepticism over the contribution blockchain can make
to our world, matched only by the fervor of advocates who believe that
blockchain and cryptocurrency can drive fundamental changes in work-
ing practices and meet societal challenges.
This book seeks to inform, not to evangelize. We will look at the evo-
lution of cryptocurrency from its origins in cryptography to its birth in
the fires of a global financial crisis, and through the first decade of digital
cash. We will examine the niches where blockchain, the technology that
underpins cryptocurrency, can be an effective solution to other prob-
lems, where it is already being employed, and how to decide whether it is
an appropriate path to take in resolving challenges in your business and
industry. We’ll reflect on the mistakes that have been made in rushing to
adopt blockchain where hype overtakes practicality, in the hope that we
can learn from a checkered history. We’ll also explore the real innovations
that are happening, the things that could not be achieved without block-
Copyright © 2020. Business Expert Press. All rights reserved.

chain and cryptocurrency, and the future impact that experts foresee.

Decrypting the Jargon

One of the challenges of any emerging technology is the new vocabulary

that develops to explain its features. The jargon surrounding blockchain
and cryptocurrency is no exception.
Blockchain is technically a subset of Distributed Ledger Technology
(DLT), but the term has become ubiquitous. Due to common mis-
conceptions and a lack of trust around blockchain and cryptocurrency

Baucherel, K. (2020). Blockchain hurricane : The origins, application, and future of blockchain and cryptocurrency. Business Expert Press.
Created from rmit on 2023-08-30 15:05:41.
2 Blockchain Hurricane

in the public eye, DLT often has more positive connotations when
presenting software solutions in a business setting, but the two terms
are often used interchangeably, and both of them will be used in this
book. A distributed ledger is, quite simply, a record of transactions (like
an accounting ledger), which is held simultaneously in several places.
This is not the same as multiple users having access to a single database:
the strength of a distributed ledger is that there are many identical
copies that are all updated with the same transactions as they occur. It
means that transactions can be entered to the ledger by any party, and
if all the holders of copies agree that the transaction is valid (or strictly
speaking reach a consensus), it will be incorporated in every instance
of the ledger.
The entries into the ledger rely on cryptography to make the detail of
the transactions confidential to the casual observer, and to enable autho-
rized users to check the integrity of the records they hold. Any informa-
tion to be recorded on the ledger is processed to produce a hash, a unique
string of letters and numbers that represents the original content. This
cannot be deciphered by anyone who does not have the key to the encryp-
tion, in the same way that end-to-end encryption in communication apps
such as WhatsApp and secure e-mail systems ensures that only the sender
and the recipient can read the content. If you have a record that purports
to be identical to the original, then comparing the hash of the informa-
tion you hold against the hash held in the blockchain provides irrefutable
proof that the record you hold is, or is not, genuine.
Here are some of the common terms used to describe the aspects and
Copyright © 2020. Business Expert Press. All rights reserved.

functions of blockchain and the world of cryptocurrency.

• Records are decentralized and administrative functions are dis-

intermediated: there is no central agency, for example a bank,
making entries into a database under its sole control.
• Transactions posted to the ledger are immutable: once they
have been validated, you cannot go back and make changes.
This is essential to maintain trust in the records.
• The transactions held in the ledger have positional integrity.
Each block is timestamped and linked to the blocks before
and after it.

• The various methods of agreeing transactions to the satisfac-

tion of the whole community are consensus mechanisms, of
which there are many, some more effective than others.
• Using a consensus mechanism renders the blockchain trustless.
That doesn’t mean that the records cannot be trusted, rather
that there is no need to place your trust in any third party.
• A blockchain may be public, private, or permissioned depend-
ing on its structure and degree of decentralization.
• The code within the blockchain that executes transactions
is known as a smart contract, which is ironic as it is neither a
contract, nor particularly smart.
• The ledger is transparent: participants can see all the trans-
actions that have been posted. Anyone can access public
blockchain records, for instance the Ethereum blockchain can
be viewed on Etherscan.io. It is also possible to see the smart
contracts that govern transaction behavior. This is import-
ant to maintain confidence in the integrity of the recorded
transactions but comes with its disadvantages, most notably
in the context of commercial confidentiality, which might be
compromised by public access. In a permissioned or private
blockchain, of course, only those participants to whom access
is granted can access the records.
• Participants in a blockchain are nodes. They may be full nodes,
which hold a copy of the entire distributed ledger, or light
client nodes, which transact but do not hold all the records.
Copyright © 2020. Business Expert Press. All rights reserved.

• Cryptocurrency is the blanket term for digital cash, and

noncrypto currencies are known as fiat currencies. Strictly
speaking, this term refers to those currencies whose value is
set by their issuing government (rather than being backed by
reserves), but it has become generic in this context.
• Public blockchains and cryptocurrencies should adhere to five
core principles: to be open, public, neutral, censorship-resis-
tant, and borderless.

As the picture unfolds other concepts will emerge, but for now, let’s
start at the very beginning.

Changing Worlds

This is not the first time that a new technology has generated a polarized
opinion. In 1995, Newsweek published an article about another emerging
movement that was taking the world by storm. Writing on “Why the
Web Won’t Be Nirvana,”1 Clifford Stoll said: “I’m uneasy about this most
trendy and oversold community. …[it] beckons brightly, seductively
flashing an icon of knowledge-as-power...” He discounted the “internet
hucksters” and their predictions that we would one day be reading books
and newspapers over the internet, educating our kids, catalogue shopping
online with a point and a click, ordering airline tickets, making restaurant
reservations. Could you, quarter of a century ago, have conceived of the
ease with which we have come to read, browse, and transact online? Now
try to visualize a near future where creators receive enough automatic
micropayments for the use of their work to make a good living, where
gamers have a viable career as digital asset managers, where you have
control of your personal data and can choose who uses it and for what
purpose, where you share electricity you generate among your neighbors,
and where the provenance of the food you consume and cosmetics you
use can be determined with the click of an app on your phone. This is
what excites the pioneers in the blockchain and cryptocurrency space and
inspires innovators to explore and harness new technologies.
Similar excitement gripped industrialists and investors in the early
days of rail travel. The world’s first steam railway ran from Stockton on
Tees to Darlington in northeast England. Financed by a consortium of
Copyright © 2020. Business Expert Press. All rights reserved.

industrialists who raised £120,000 for its construction—the equivalent

of over $2.5 million today—it opened in 1825 and at full speed ran at a
dizzying 15 miles per hour. The steam engine Locomotion took two hours
to draw 36 wagons of freight and passengers along the eight miles of
track. The investors of the 19th century had a vision, but could not have
conceived of the rapid change wrought by the expansion of the railways
across North America, and today’s bullet trains, maglev, hyperloop, or the
Channel Tunnel between England and France.
Blockchain is often compared to the internet, not in function but
in its potential to disrupt, to deliver unexpected change. In 1989 a very
small community of people were using the nascent World Wide Web.

Academics and employees in geographically diverse organizations had for

many years used bulletin boards and message systems, often embedded
within early ERP software platforms, as a direct alternative to physical,
written mail, or telephone calls. It was a difficult medium for the layman
to access, something we have forgotten in these heady days of one-click
connection, and in this there are direct parallels with blockchain. Mikko
Hyponnen of cybersecurity specialists, F-Secure, recalls the complex
instructions they had to give to enable people to access their website,
carefully explaining the need for internet access (most often achieved by
dialing a provider through a modem), a TCP/IP stack, and a browser.2
Netscape, one of the earliest applications that we would recognize as a
modern browser, did not exist and Windows did not have Transmission
Control or Internet Protocols built into its software, but for early adopt-
ers the new experience was worth the inconvenience.
Just over a decade later, March 2000 saw the bursting of the “dot com
bubble” and early speculative internet developments fell by the wayside.
Even at that time we could not have imagined the likes of Twitter and its
social media peers, nor our eventual reliance on the internet to deliver
information to us through video, audio, and community forums. Some
science fiction writers over the years came close, including David Brin in
his 1990 novel Earth,3 which featured a dynamic global web of informa-
tion, citizen surveillance, and wireless connections to wearable technol-
ogy, among other things. We originally used the internet to streamline
two-way communication with people we knew and to read brochure web-
sites that replicated the printed word. The things we were accustomed to
Copyright © 2020. Business Expert Press. All rights reserved.

doing could be achieved more quickly online and there were cost savings
to be made. Innovation started out as a linear process before leaping the
void to unimagined functionality.
Blockchain is in the same position now. Ten years after the inception
of Bitcoin, the first boom-and-bust cycle of cryptocurrency mirrored the
dot com journey. Speculative applications all but disappeared from the
landscape as the ready money of the early days dried up, leaving the way
clear for serious business models with longer term potential. There are still
barriers to access and adoption although these are falling rapidly as orga-
nizations, notably cryptocurrency exchanges and blockchain game devel-
opers, innovate for ease of onboarding and develop applications with a

seamless user experience. The main players in the space, I believe, have
not yet emerged. And like the pioneers of the internet or the engineers
behind the first railways we simply cannot foresee some of the societal and
behavioral changes that await us.

The Blockchain Journey

Our journey begins with the launch of the first decentralized digital cur-
rency in 2009, something that researchers had been creeping toward for
many years. The encryption techniques and the linking chain structure
which underpin the Bitcoin blockchain were innovations standing on the
shoulders of giants, but the eventual breakthrough published in Satoshi
Nakamoto’s white paper delivered a new way of working. For the first
time, Bitcoin demonstrated the creation and maintenance of a ledger in
which transactions could be processed and recorded without the involve-
ment of a central processing agency. It established a system where every-
one has a copy of the ledger, everyone agrees that the transactions have
been recorded accurately, and no-one can change the records.
Where will this decentralized, transparent, trustless, immutable tech-
nology take us, with its complex consensus mechanisms and carefully
constructed smart contracts? Blockchain has spawned champions and
detractors in equal measure since developers took the first tentative steps
beyond decentralized currency. In the years between the publication of
the original Bitcoin whitepaper by the pseudonymous Satoshi Nakamoto
in 2008, and the launch by Vitalik Buterin’s team of the Ethereum Virtual
Copyright © 2020. Business Expert Press. All rights reserved.

Machine in 2015, blockchain was essentially the preserve of cryptocur-

rency evangelists and developers. In 2017 this changed as cryptocur-
rency prices began to rise and mainstream media picked up on the story.
The subsequent bull and bear markets attracted attention for their get-
rich-quick potential and the schadenfreude of paper losses. Blockchain
and crypto have exploded into the public consciousness, but perception
varies wildly.
In the minds of some commentators, it is the silver bullet that will
come to the rescue when there seems no other way to solve difficult polit-
ical and business challenges. Others are less convinced. In October 2018,
British and American politicians were exposed to both ends of a polarized

spectrum. At the British Conservative Party conference, the then Chan-

cellor of the Exchequer, Philip Hammond, was asked about possible
solutions for a frictionless land border between the United Kingdom and
European Union on the island of Ireland in the event of Brexit.4 “There is
technology becoming available,” he replied. “I don’t claim to be an expert
on it, but the most obvious technology is blockchain.” At the same time
on the other side of the Atlantic, Professor Nouriel Roubini of Stern Busi-
ness School testified to the U.S. Senate Committee on Banking, Housing,
and Community Affairs: “Crypto is the mother of all scams and (now
busted) bubbles, while blockchain is the most over-hyped technology
ever, no better than a spreadsheet/database.”5
Of course, the truth lies somewhere between the two. Roubini’s scorn
for the scams and bad practice which characterized the early rush for
unregulated investment in blockchain projects was valid, but his com-
plete dismissal of cryptocurrency and blockchain ignored the widening
adoption of crypto as a valid means of exchange, and the introduction
of effective distributed ledger applications to solve genuine problems in
multiple sectors worldwide. Hammond’s hope for a fast solution to a
political impasse came at a time when blockchain was more about unreal-
ized potential, possible use cases, pilot projects and proof of concept than
effective, scaled applications. With a tight political deadline looming and
an electorate to impress his statement smacked more of desperation than
practicality, and according to the BBC’s Rory Cellan-Jones, it did not
reflect the more practical opinions in the corridors of Whitehall. Block-
chain is on course to help with smoothing the passage of goods around
Copyright © 2020. Business Expert Press. All rights reserved.

the world, but not in the short term, and not in isolation.

Behind the Crypto Headlines

Many people follow the stories about volatile cryptocurrency trading
without any appreciation of the hive of activity that surrounds the tech-
nology beneath. The rise and fall of cryptocurrency prices and associated
scams and snake-oil salesmen make for more lurid headlines. What often
goes unreported is that this gold-rush fundraising with new cryptocurren-
cies (altcoins) and tokens was largely responsible for oiling the wheels of
rapid, global, and largely collaborative development. A lot of good work

has been going on under the radar to refine and expand upon Bitcoin’s
original mechanism for decentralized, trustless, transparent transactions.
Beneath the hype, there are highly respected professionals developing new
ways of working, and a growing number of distributed ledger applications
are ticking quietly away under the hood of regular software platforms.
Multinational enterprises are putting the structure in place to revolution-
ize financial technology, supply chain management, utilities, and health
care. Individual states, federal bodies, and sovereign nations are establish-
ing legal frameworks for the protection of investors and the use of block-
chain in asset registries, identity, and credentialing. The United Nations
has a blockchain for social good agenda centered around its multi-UN
agency platform,6 where it invites you to imagine:

that 2.5 billion unbanked people will be included in the global

financial system; that foreign workers will not lose $50 billion
collectively per year when sending money to their home across
the border;

that people will know about the life story of a product when
they buy it; people who created the product, the places that were
involved, the material used etc.;

that people will live without fear that their land might be appro-
priated by someone who comes to the door with a gun in their
hands;
Copyright © 2020. Business Expert Press. All rights reserved.

that artists will gain autonomy over their copyrighted material

and build direct relationships with fans;

that patients will have control over their personal medical records;

that foreign aid will reach its intended beneficiaries without losing
30 percent of its entirety.

that every single person on earth will have an ID and get access to
education, health, and other social services.

This is a powerful vision of the kind of future that many advocates

believe can be facilitated by evolving blockchain technology.

Legitimacy of Cryptocurrency

The positive outlook of the United Nations is a far cry from the murky
reputation that has haunted cryptocurrency in the past as a tool for crim-
inal activity and malpractice. For anyone whose computers have been
infected by ransomware which locks their data down and demands pay-
ment in Bitcoin, crypto is synonymous with criminality. This was rein-
forced in the public perception by its extensive use on Silk Road, the
dark net marketplace, which was active between 2011 and 2014. Over
9 million Bitcoin transactions were recorded on Silk Road during that
time, and toward the end of its operations its escrow accounts were hacked,
although much of the lost Bitcoin was recovered. Ironically, B itcoin itself
is an innocent party here. The Bitcoin blockchain is entirely transparent
and pseudonymous, not anonymous: every wallet could, in theory and in
practice, be linked to a real-world identity, making Bitcoin considerably
more traceable than cash.7 In the case of the 2017 WannaCry ransomware
attack, for example, all the ransom payments are visible on the Bitcoin
block explorer for anyone to see.
The blockchain tells a story, too. For a high-profile worldwide attack,
the fact that only 338 victims in total paid the WannaCry ransom under-
lines the sterling work of the cybersecurity professionals who stopped the
virus in its tracks (thanks in part to quick action by malware researcher
Copyright © 2020. Business Expert Press. All rights reserved.

Marcus Hutchins8) and helped users to repair the damage done by the
ransomware without making any payment. Examining the records of one
of the three wallets that were used to collect the ransoms, you can see
133 receipts of Bitcoin, which at the time each equated to $300, and the
withdrawal of the whole amount in two transactions several months later.9
The funds were transferred to a wallet in a privacy currency, Monero,
where real transaction details are protected by obfuscating the data: six
false records are attached to every real transaction, making it harder to
follow a trail. This kind of anonymous cryptocurrency is much harder
to police, being the digital equivalent of used bank notes. Tarring every
digital coin with the same brush is unfair.

Another accusation leveled at cryptocurrency, especially during the

rapid price rises of 2017, is that it is a Ponzi scheme, a pyramid, a scam to
defraud innocent investors by paying out returns for early adopters from the
investments of those late to the party. As the prices have settled back to real-
istic levels and both volume and regulation have improved there is much less
talk of fraudulent practice and a greater understanding of the reliability of
mainstream digital currencies. At the time, however, this inaccurate impres-
sion was so prevalent that a joke currency “PonziCoin” was created in 2018
by a California developer. The white paper for PonziCoin laid out in clear,
unequivocal language that the smart contracts would pay out the first inves-
tors from the proceeds of later investments until the money ran out. To the
amazement and horror of the team behind the prank, people actually started
putting cash into the scheme. They quickly disabled the ability to invest
and allowed the smart contracts to run their course. In a statement on their
website, the developers gave a warning to people caught up in the hype:10

We hope everyone had a good laugh :) But we have to shut down.

This was a parody art performance/joke. I did not “run off” with
the money, I never sold any of my PonziCoins, and the contract
was drained from other users withdrawing. Please be careful when
investing in shady cryptocurrencies, especially ones that look
like pyramid schemes—it’s a zero-sum game and money doesn’t
appear out of thin air.

This is a salient lesson for investors in early stage blockchain projects,

where tokens can be purchased with such ease. There is a reason why in
most jurisdictions investing is regulated to some degree, and if the return
from an investment looks too good to be true, then it probably is.
Ultimately, however, cryptocurrency is simply a form of money.
Author Yuval Noah Harari writes:11

Money is the only trust system created by humans that can bridge
almost any cultural gap, and that does not discriminate on the
basis of religion, gender, race, age, or sexual orientation. Thanks
to money, even people who don’t know each other and don’t trust
each other can nevertheless cooperate effectively.

Cryptocurrency is the natural evolution of the most universal system

of mutual trust ever devised. Its decentralized structure and integral trust
mechanisms ensure its legitimate place in society.

Spending Digital Cash in the Real World

Can you spend cryptocurrency? Of course. The physical wallet in my

pocket currently contains a visa card, which links directly to a crypto-
currency account. I can indirectly pay for coffee and sandwiches with
my crypto holdings. The transaction involves an automated conversion
to the local fiat currency, as do the cryptocurrency ATMs that already
exist to allow withdrawals from crypto accounts to local cash, but it is the
frictionless nature of the exchange that is interesting. One state, the tiny
Pacific state of the Marshall Islands, has introduced its own local cryp-
tocurrency as legal tender, the Marshall Islands Sovereign. In Venezuela,
payment for goods and services from coffee to clothing is increasingly
made in Bitcoin, while the government has started insisting on tax dues
being settled in their own cryptocurrency, the Petro (you can read more
about this in Chapter 3).
Online, I can buy all kinds of goods and services with cryptocurrency.
There are several mainstream cryptocurrency checkout tools available,
including a standard Blockonomics plugin, which takes payment in Bitcoin
on my own WordPress website and deposits the proceeds directly to my
crypto wallet without conversion. Blockchain games such as Cryptokitties,
Axie Infinity, Neon District, Decentraland, Epic Dragons, EOS Knights,
Copyright © 2020. Business Expert Press. All rights reserved.

Gods Unchained, and many others can be played with cryptocurrency.

As the volume of users and transactions increase, the volatility of cryp-
tocurrencies is likely to settle, reducing the current risk and uncertainty that
surrounds them. The rise of stablecoins, a class of cryptocurrency pegged
to the value of a real-world asset or currency, may contribute to more rapid
adoption as a large part of the risk associated with digital currency is elim-
inated. In California, lawmakers introduced a bill in February 2019 to
“remit any cannabis excise tax or cannabis cultivation tax amounts due by
payment using stablecoins.”12 Facebook’s proposed Libra coin introduces
another mechanism for adoption. Commentators including Caitlin Long,
co-founder of the Wyoming Blockchain Coalition,13 believe the reach of

this powerful global social network will provide citizens of developing

nations with access to a store-of-value that is more reliable than their gov-
ernment-backed currencies. The question is not whether we can use cryp-
tocurrency in our daily lives, but how close we are to mainstream adoption.

What’s Actually in the Blockchain?

One of the greatest misconceptions about blockchain is that it is a data-

base holding large volumes of immediately legible information, which
cannot be tampered with. In reality, it is a database holding strings of
encrypted information, and the only reason it cannot be tampered with
is that each block has a fixed position in the chain. Changing the data in
one block means changing the data in all the blocks that follow it, and
that takes more effort to achieve than the benefit that would accrue, if it
is possible at all. Each block is remarkably small, and the transaction data
that is held on chain is rendered down to a single cryptographic hash, or
checksum, of the text, images, or journal entries concerned.
Talk of putting processes “on the blockchain” glosses over these inner
workings, but this is entirely normal. How often do people dig under the
hood and into the code that delivers the software they use day to day?
When you connect to the internet do you think about the functions,
protocols, browser technology, and search algorithms, which display your
Google results? Do you consider the structure and workings of the World
Wide Web, which deliver your seamless communication experience? It’s
rare. Normally the only question that exercises us is the reliability of our
Copyright © 2020. Business Expert Press. All rights reserved.

internet connection and the speed with which we can upload pictures of
cats. At this early stage of distributed ledger adoption, however, it seems
important to review the basic structure of the blockchain. Understanding
this can help in decision making when you are judging the suitability of a
distributed ledger to solve the problem in hand.

Merkle Trees and Hashed Records

Let’s take a Bitcoin blockchain block at random. Block number 575171

was mined on May 8, 2019. Searching for this block reference through
blockexplorer.com14 reveals that there are 2,568 transactions in the block,

which holds only 908,496 bytes of data: just under a single megabyte.
This compact record is made possible by cryptographic hashing.
A cryptographic hashing algorithm is used to convert an entry of any
length into a regular string of letters (upper and lower case) and num-
bers (0–9). Commonly the algorithm used is a Secure Hash Algorithm
2 (SHA-2) function such as SHA-256 (quite simply, an algorithm that
produces a 256-bit, or 32-byte, hash) or SHA-512 (512 bits, or 64 bytes),
but there are many other options to produce the unique string required
for the confidentiality and integrity of data. The importance of this string
is that if the same entry (a document, image, or transaction) is hashed
again using the same algorithm, the string will be identical, and the entry’s
integrity is verified. However, if there has been any change at all, however
small, the strings will not match. Even removing a comma from a sen-
tence in this book will generate a different string when the manuscript
is processed. A simple application of this comparison might be to prove
that a piece of intellectual property has been recorded on the blockchain
on a specific date. Hashing the disputed document and verifying that
hash against the blockchain can prove that it is, or is not, identical to the
original. The first example of blockchain evidence presented in a case in
China in June 201815 used precisely this technique to prove that an article
had been reproduced without permission by the defendants.
In our blockchain, a second round of hashing converts a pair of
strings into yet another unique hash, and this process is repeated pair by
pair until all the entries have been consolidated into one single string.
This hierarchy of hashed strings is a Merkle Tree, and the final string,
Copyright © 2020. Business Expert Press. All rights reserved.

the Merkle Tree Root, appears in the block. (These are named for Ralph
Merkle whose 1979 thesis16 addressed cryptography in public key sys-
tems.) When transactions are verified, as in the Chinese copyright case, it
is actually this root that is the subject of comparison. It is quicker to check
one root than thousands of strings, and if one change occurs within the
strings then the Merkle root would itself change. With me so far? Good.

Closing the Block

We have now compacted all our records down to a single string of let-
ters and numbers. This string sits in a child block at the very end of the

blockchain. On the blockchain explorer you can see the reference to its
parent, block 575170. Out in the blockchain network computer power
is being fired continuously as participating nodes compete to run a new
cryptographic hash with a twist. To complete the block, the hash of the
contents including an unknown variable must result in a string with a
predefined number of leading zeros: The Block Hash. The computer that
is first to find a possible variable value to deliver a valid Block Hash is
entitled to close the block and open the next one. The calculated variable
is the nonce, and it is recorded in the block header along with the time-
stamp of the solution. This process is known as mining: on the Bitcoin
blockchain a predefined reward is paid to the successful miner, along with
fees for each of the 2,568 transactions in the block.

Immutability

Why do we insist that the blockchain cannot be changed? The answer lies
in the structure of the chain, the contents of the block, and the distrib-
uted ledger. Our block number 575171 contains a reference to 575170.
It will include the Block Hash of 575170 in the calculation of the Block
Hash of 575171. If a single party was to attempt to change any transac-
tion within 575170, its Block Hash and that of all the subsequent blocks
would then no longer match the original details held on multiple copies
of the ledger on all the nodes of the blockchain. It is simply too onerous
to recalculate the hash of all the subsequent blocks to cover up a change,
and someone attempting to do this would never catch up with the pro-
Copyright © 2020. Business Expert Press. All rights reserved.

gression of the valid chain. The math involved is difficult and time-con-
suming, even for the increasingly powerful computer processors used for
the purpose. There are valid concerns that the emergence of quantum
computing would enable processing powers sufficient to recalculate Block
Hashes at a very high speed, but the overarching rule of blockchain secu-
rity still applies: the cost of tampering with the records is greater than the
benefit that would accrue to any bad actor.
Knowing the structure of a simple blockchain enables you to assess
the suitability of the technology for your business challenge more effec-
tively. Where verifiable, timestamped, unchangeable records will stream-
line processes, cut out costs, improve lives, or reduce risk, then there is a

case to consider the use of blockchain. As with every new technology on

the horizon, it is not appropriate for speculative re-factoring of existing
systems unless there is a genuine requirement for the features it intro-
duces. Industry will not have time, at the current speed of development,
to devote resource to the replication of current systems for the sake of it.
When word processors replaced typewriters, it took decades to deliver
the extra functionality we now take for granted. With the speed at which
technology now evolves, we must focus on enhancement.

Where Is Blockchain Taking Us?

Changes wrought by blockchain will be dramatic and disruptive. To take
one example, the disintermediation of processes will be a particular chal-
lenge for agencies. We have already seen the impact of online booking
on travel agents whose business models have moved away from broker-
age and toward delivering added value. As decentralized structures move
users toward peer-to-peer behavior, agents in more complex sectors such
as property sales may find themselves in the same position.
Distributed ledger technology and cryptocurrencies are here to
stay. This book will look in detail at cryptocurrencies and the regulation
that surrounds them (Chapter 3), business applications of blockchain
(Chapter 4), innovations coming from the gaming sector into the
mainstream (Chapter 5), and public sector and government adoption of
distributed ledgers, including the question of digital identity and owner-
ship of our own data. First, though, let’s look back the at the origins of
Copyright © 2020. Business Expert Press. All rights reserved.

blockchain and the rise of the first decentralized currency, Bitcoin.

Baucherel, K. (2020). Blockchain hurricane : The origins, application, and future of blockchain and cryptocurrency. Business Expert Press.
Created from rmit on 2023-08-30 15:05:41.
CHAPTER 2

The Long Road to

Decentralization
The Challenge of a Digital Currency
The weary traveler hoisted a heavy bag over one shoulder and slouched down
the ramp into the spaceport. A barrage of unfamiliar sounds and smells
assailed their senses, interrupted by the hiss of a disinfectant curtain and the
regular sterile tang of CL2. Shaking out a mess of wet feathers in disgust, they
looked around for the nearest bar. A new planet? That called for a cocktail.
For decades writers have dropped their characters into alien lands, both
on earth and around endless fictional universes, assuming blithely that they
have the means and method to settle their bar tab wherever they may be.
The fiscal realities of multiple currencies and foreign exchange are rarely
essential plot twists. The reader is simply invited to assume that the coins
in the traveler’s pocket are either legal tender or made of instantly recog-
nizable precious metals, and that galactic credits are accepted everywhere
without question. Is there a single overblown interplanetary bank issuing
notes and coins of a common currency to the tentacled and furred alike, or
is it more attractive to imagine a digital, decentralized currency? Over the
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many years that galactic heroes have been hanging around in disreputable
bars, researchers and cryptographers have been working toward this vision.
Why was it so tricky to achieve? The classic challenges of creating a
decentralized currency are the prevention of double spending, the secu-
rity of funds and the parties involved, and having reliable proof that a
transaction has happened. They are closely related. Let’s examine a sim-
ple movement of money between two individuals. If one person has a
dollar bill and hands it to their friend, the original holder can no lon-
ger spend that dollar. A physical transfer has taken place. If instead the
holder makes a transfer or payment direct from their bank account, the

centralized banking system makes an entry in one part of the ledger to

indicate money has been withdrawn from the original holder’s account,
and an equal and opposite entry debits the balance to the recipient’s
account. The databases held by each of the participating banks show that
the transaction has taken place and ownership of the money has changed.
We accept that there is no way to duplicate the physical note at the time
of exchange: there is, of course, a constant battle against counterfeit notes
and coins that circulate in the real world, but what we are concerned with
here is that an exchange of perceived value has taken place. We trust the
digital transfer of money because this is subject to the checks and balances
of banking, and we can verify transactions on our bank statements. How-
ever, if we want to make a transaction using a currency that is not part of a
traditional banking system and has no physical form, how is it possible to
confirm that the transaction has been completed correctly? Can we be sure
that the item of value really has moved out of the first account and into
another? After all, it’s not hard to duplicate a digital asset. You can make
a copy of a document, an image, a file or a folder with a couple of clicks
of a mouse and at negligible cost, enabling us to send the same item from
one source to many recipients. A digital, decentralized currency must be
a neutral and honest ledger, which requires a mechanism to mitigate the
risk of fraud, duplication, and counterfeiting. Such a currency also needs
to address the creation and supply of money and be accepted as a symbol
of value without recourse to traditional physical reserves. Bitcoin, the first
real cryptocurrency, met these challenges and succeeded in being the first
neutral, open, borderless, public, and censorship-resistant example of dig-
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ital cash, but the journey was long. Our story begins more than a quarter
of a century before the emergence of Bitcoin, when the internet opened
up the possibility of collaboration and cooperation between geographi-
cally diverse groups who may not have a trust relationship. Reassuringly, it
starts with a new problem that requires a novel solution.

Cryptography Leads the Way

The concept and workings of digital cash were first suggested in 1982 by
David Chaum in his PhD in Computer Science at UC Berkeley. The title
of his thesis,1 “Computer Systems Established, Maintained and Trusted by

Mutually Suspicious Groups,” immediately evokes the trustless multiparty

structure of modern distributed ledgers. The proposal of a working system
that could be trusted by people who did not trust each other was one of
Chaum’s key breakthroughs. He also explains, in what is a very well-writ-
ten and readable paper, that cryptographic techniques will allow data of
any nature and volume to be protected while only a single cryptographic
mechanism needs to be secured. This distinction between protection and
security is important. Chaum calls the secured element a vault: we know
it now as a block in our chain, holding the tiny Merkle root of our hashed
data. Furthermore, he notes that multiple copies of encrypted data would
not compromise security but would enhance survivability: we can com-
pare this to a distributed ledger. The fundamental concepts of the block-
chain are all here, but we are still a long way from the eventual solution.
In a contemporary proposal for blind signatures for untraceable pay-
ments,2 Chaum further addressed the confidentiality of transaction infor-
mation, proof of payment, verification of parties to the transaction, and
protection of any stolen payment media (we would think here of credit
cards, which were at the time uncommon). He defined the functions,
protocol, properties, and auditability of a cryptographically secured blind
signature system. Over the following few years, he published multiple
papers exploring the mathematical underpinning of virtual currency, and
in 1989 founded DigiCash. Thought to be the world’s first electronic
money system, its Cyberbucks moved between users using the Blind Sig-
nature methodology (now commonly known as Chaumian blinding) and
the cash was protected in line with all of Chaum’s cryptography princi-
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ples. This digital currency was ahead of its time, launching at the same
time as the nascent World Wide Web but well before the internet became
established as a consumer tool. There was significant interest in central-
ized digital money at the time from banks worldwide and from the likes
of Microsoft, as this 1994 Wired article explains.3 “The next great leap of
the digital age is, quite literally, going to hit you in the wallet. Those dollar
bills you fold up and stash away are headed, with inexorable certainty,
toward cryptographically sealed digital streams.” Centralized banking
grasped the concept, to the point that most of our transactions in fiat
currency are now effortlessly digital, but DigiCash itself faded away, and
there was still a long way to travel toward decentralization.

David Chaum is still active in cryptography: he founded the Interna-

tional Association for Cryptologic Research, the cryptography group at
the Center for Mathematics and Computer Science in Amsterdam, the
Voting Systems Institute, and the Perspectiva Fund. He is also working
on a new cryptocurrency structure, Elixxir, revisiting his original Blind
Payment principles.

Cypherpunks and B-money

The 1990s saw the emergence of the Cypherpunk movement. Timothy C.

May wrote “The Crypto Anarchist Manifesto” in 1988,4 an eerie predic-
tor of the “social and economic revolution” that the subsequent develop-
ment of cryptography and the internet enabled. A community emerged
from the Cypherpunk group’s mailing list as concerns grew around state
control of strong encryption. In the United States, encryption was classed
as a munition thanks to its vital role in securing communications during
wartime. With the advent of personal computing the technology became
commercially necessary, but government restrictions meant that exported
software could only use 40-bit encryption to secure its user licenses, some-
thing that could be cracked in a matter of days by the average user. The
Cypherpunk movement stood up to National Security Agency (NSA)
attempts to stifle research and classify patents and succeeded in bringing
strong encryption into the public domain. This battle is well documented
in Stephen Levy’s 2001 book, Crypto: How the Code Rebels Beat the
Government Saving Privacy in the Digital Age.5
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On May’s 1992 e-mail to the group,6 reproducing the original man-

ifesto for a new audience, his signature includes word tags that were
obscure at the time but are familiar to us today: encryption, digital
money, anonymous networks, digital pseudonyms, zero knowledge, rep-
utations, information markets, black markets—and collapse of govern-
ments, anticipated in the anarchist vision as a result of the adoption of
these technologies and behaviors. It is interesting to reflect that scandals
broken through WikiLeaks have had a de-stabilizing influence in just this
fashion: Julian Assange, the WikiLeaks founder who also authored the
2012 book Cypherpunks: Freedom and the Future of the Internet7 was a
member of the group.

The Cypherpunk community grew throughout the decade and become

a major influence on the development of the cryptocurrencies we know
today. The group featured extremely high-quality technical discussions
alongside the social niceties, distractions, and trolling that arise in every
community. The first recipient of a bitcoin transaction, Hal Finney, was a
participant, and it is extremely likely that the person or persons unknown
behind the Satoshi Nakamoto pseudonym were also Cypherpunks.
Another Cypherpunk community member, computer engineer Wei
Dai, published a post in 1998 reflecting on the need for “a medium of
exchange (money) and a way to enforce contracts” should centralized gov-
ernments become obsolete.8 He suggested solutions for the transfer of
money using a distributed ledger; the creation of digital “b-money”; and
a process for the effecting of contracts. Wei Dai suggested that transparent
transactions should be announced to the whole network to avoid duplica-
tion. He described the minting of new coins through the mining process
and defined the need and possible structure of smart contracts. These
were some of the key missing pieces of the digital cash jigsaw, but another
decade passed before a viable cryptocurrency emerged.
During this period the internet went from strength to strength. The
emergence of the Second Life platform in 2003 was a testbed for virtual
commerce, relying on a native but centralized currency, the Linden Dol-
lar, which could be exchanged for real world cash. Peer-to-peer networks
were established for file sharing, notably BitTorrent’s protocol, which was
launched in in 2005, although the cavalier attitude to music and film
copyright displayed by the likes of Napster (1999–2001) and The Pirate
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Bay (2003 onward) triggered legal action and shutdowns. Twenty-five

years after the first steps were taken on the long road to decentralization,
technology and the public mindset had finally caught up to the peer-to-
peer vision.

Satoshi Nakamoto Versus the Banking Establishment

Although all the pieces of the cryptocurrency jigsaw had been determined
in theory through the collective effort of researchers and activists, early
electronic cash initiatives such as DigiCash did not gain traction. Among
these, possibly the only name we now recognize is that of PayPal, whose

vision of electronic cash turned into the development of a highly success-

ful payment mechanism for traditional currencies, but without all the
features in place to deliver a truly decentralized and reliable exchange
of value.
They say that necessity is the mother of invention, and it took the
mother of all centralized disasters to trigger the creation of the first work-
ing cryptocurrency, Bitcoin.
On August 9, 2007, BNP Paribas froze three of its funds, revealing
that it was unable to value the underlying collateralized debt obligations
(CDOs), bundles of subprime loans that had been rolled into the assets
of the funds. The loan debts in question had been individually classified
according to their level of nonrepayment risk, but then bundled together
as collective assets, traded, shuffled, and cut like decks of cards, and bought
and sold within the global banking ecosystem. Every transaction further
obfuscated the nature of the underlying debts until it became apparent
that it was impossible to place a reliable value on the bundles. The val-
uations upon which the banks had built their castles were not rock, but
sand. Just five weeks later, the ironically named Northern Rock, a British
bank that specialized in high loan-to-value mortgage lending, found itself
unable to offload its subprime bundles to the market. Its request to the
UK government for support triggered a run on the bank as savers queued
around the block at every downtown branch to withdraw their cash.
This was the first high-profile casualty of the torrid 18 months that
followed. A year later, the U.S. government bailed out mortgage

lenders Fannie Mae and Freddie Mac, but Lehman Brothers, Washington
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Mutual, and Wachovia filed for bankruptcy. Iceland’s three largest com-
mercial banks collapsed, taking the savings of offshore customers with
them. The economics editor of the Guardian newspaper, Larry Elliott,
said with hindsight:9 “As far as the financial markets are concerned, August
9, 2007 has all the resonance of August 4, 1914. It marks the cut-off
point between ‘an Edwardian summer’ of prosperity and tranquility and
the trench warfare of the credit crunch—the failed banks, the petrified
markets, the property markets blown to pieces by a shortage of credit.”
The collapse exposed the high levels of risk in the practices of centralized
institutions and our misplaced trust in the banks which played fast and
loose with our cash without any transparency. This turbulence provided

the perfect conditions for realization of a part of the Cypherpunk vision:

circumventing financial institutions when transferring money. As govern-
ments worldwide scrambled to plug financial holes, on October 31, 2008
a paper was published under the pseudonym Satoshi Nakamoto. It was
entitled “Bitcoin: A Peer-to-Peer Electronic Cash System.”10

An Elegant Solution

The emergence of Bitcoin was a watershed moment. Satoshi Nakamo-

to’s blockchain proof of concept realized a decades-old vision by finally
putting in place a working decentralized mechanism for the prevention
of double spending. The jigsaw was complete and a key element, as origi-
nally suggested in a 2005 paper by Nick Szabo proposing a concept called
“BitGold,”11 was the inclusion of a timestamp for each transaction. The
logic behind this is that if there are attempts to process multiple identical
transactions, whether intentionally or coincidentally, then only the first to
be timestamped would succeed and be written to the ledger.
The blockchain structure underpinning Bitcoin enabled security and
transparency of transactions and incorporates the minting and distribu-
tion of coins as each block is created. Some, but not all, of the familiar
concepts from the work of cryptographers and Cypherpunks are present
in the Bitcoin solution. Wei Dai’s suggestion that transactions should be
announced to the network for full transparency was adopted. The peer-
to-peer network ensures distributed responsibility for the accuracy of the
records. The blockchain is a distributed ledger with copies held by mul-
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tiple nodes, ensuring that no single entity either controls the records or
unilaterally confirms the legitimacy of the recorded transactions. The data
that is secured in each block is the Merkle tree root, reflecting Chaum’s
vault, although this was not referenced in the Bitcoin white paper. Digital
signatures are an essential part of the solution, but not, in this case, blind
signatures. This means that the Bitcoin blockchain is pseudonymous
(users could be traced to the real world) rather than anonymous.
Payments of minted rewards and transaction fees are made to the nodes
of the blockchain (the cryptocurrency miners) as each block is closed and
new one opened. This is the incentive to maintain the system, rather than
to defraud it. This cryptoeconomic mechanism is essential to the proper

functioning of Bitcoin: it ensures that value derives from resource scarcity,

rather than being backed by a scarce physical asset or commodity. As the
white paper explains, “The steady addition of a constant of amount of new
coins is analogous to gold miners expending resources to add gold to circu-
lation. In our case, it is CPU time and electricity that is expended.” When
the Bitcoin blockchain was encoded, it included a reserve of 21 million
Bitcoin from which rewards are drawn. The early miners claimed 50 Bit-
coins for each validation, but the reward halves with every 210,000 blocks.
As Bitcoin blocks are timed for creation every ten minutes (although this
interval varies in practice), this means that the halving occurs at approxi-
mately four-year intervals. To maintain the incentive as rewards fall, min-
ers’ earnings will be balanced by increasing transaction fees as the volume
of transactions increases. The third halving in 2020 takes the coins in
issue to 18,375,000 BTC, although many have already disappeared down
the back of the virtual sofa with the inadvertent loss of wallets and hard
drives. It will take many more years to distribute the remaining almost
three million coins thanks to this system of diminishing rewards.
The 21 million coins created cannot be copied or added to, which
allows Bitcoin to function as a store of value. Bitcoin is a genuinely rare
commodity in the cryptocurrency space, and as we see other currencies
emerging on separate blockchain platforms it becomes clear that each
has their own separate function. Bitcoin is the reserve currency for a new
class of digital assets and is now frequently listed alongside the dollar and
the yen in currency tables. Bitcoin is perhaps closer to the much-vaunted
gold standard than fiat currencies: there is no quantitative easing in the
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world of digital currency.

Far from being an artificial currency, Satoshi Nakamoto ensured
Bitcoin could be authentically sustained in the long term. There is con-
stant development and maintenance from the Bitcoin community, and
while the currency has certainly evolved, it has functioned reliably for
more than a decade.
The first transfer of Bitcoin between two parties took place on January
12, 2009, from Satoshi Nakamoto to Hal Finney. This was almost the last
that the community heard of the pseudonymous creator, and the wallet
containing mined Bitcoins from the earliest days remains untouched.

Notoriety and Anonymity

Who is Satoshi Nakamoto? There is considerable speculation on the iden-

tity of the creator of Bitcoin.12 The wording of the white paper seems to
indicate that “Satoshi Nakamoto” was more than one person, and the
influence of the Cypherpunk movement in the construction of the solution
suggests that at least one of those people would have been a member of the
Cypherpunk mailing list. There has been plenty of effort made to solve the
mystery, but most names on the short list of possible candidates have stren-
uously denied involvement. There is circumstantial evidence that Satoshi
was based in Britain or Western Europe. The language of the paper itself is
more British or Commonwealth than American, and analysts have deter-
mined that no posts were made to the Cypherpunk community by the user
between midnight and 6 a.m. GMT. In addition, the curious message hid-
den in the timestamp code in the first Bitcoin block mined, which reads:
“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks,”
shows the date in British format and references the London newspaper.13
Hal Finney, as the recipient of the first Bitcoin transfer, is an unlikely
candidate unless it was a deliberately sneaky move to send money to him-
self. The appropriately named Dorian Prentice Satoshi Nakamoto has
been held up by some media outlets as a possible author, but although he
lived only a few blocks from Hal Finney in California, there is nothing to
link him to either Finney or the Bitcoin project.
Another strong possibility was Nick Szabo, who worked with David
Chaum at DigiCash and who, three years prior to the Bitcoin white paper
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in 2005, wrote about a very similar concept, BitGold. Again, despite cir-
cumstantial evidence of similarities between the two, he has denied any
involvement.
In Estonia, cryptographers Ahto Buldas, Märt Saarepera, and Mike
Gault explored the same system of digital signatures, hashing and time-
stamping while working on digital identity in 2007. The timing of their
work and its similarity with the Bitcoin solution attracted speculation, but
they have not invited attention and like Szabo have denied any involvement.
By contrast, Australian Dr Craig Wright, who worked in partnership
with the late David Kleiman in the very early days of Bitcoin, has put
himself forward as a pretender to the Satoshi crown. Whether Kleiman or

Wright were involved in writing the white paper and developing the initial
code, however, is still unclear. In an interesting twist, Wright applied for
and was granted U.S. copyright on both the Bitcoin white paper and the
Bitcoin code in May 2019, claiming authorship under the famous pseud-
onym. As the Copyright Office explained in a press release following these
registrations,14 it does not investigate whether there is a provable connec-
tion between the claimant and the pseudonymous author, relying only on
the applicant’s statement. A complex series of court cases in the summer
of 2019, which involved a dispute with Kleiman’s estate and, separately,
action against people who claimed Wright was not Satoshi, also failed to
unearth any evidence supporting Wright’s authorship of the paper.15
As no irrefutable proof of identity has been brought into the public
domain by any of the likely candidates (access to the Satoshi wallet being
the most compelling) the crypto community is still divided as to the real
identities behind Satoshi Nakamoto. Is this a bad thing? Aside from satis-
fying our natural human curiosity, most commentators agree it is entirely
in the spirit of Cypherpunks and the Crypto Anarchist movement that
Satoshi’s identity remains unknown. By fading into the background,
and therefore not providing a figurehead, the creator(s) of Bitcoin have
ensured that the solution remains truly decentralized.

Building on Bitcoin
What kind of transactions can you record in a block? Bitcoin itself works
on a form of triple entry bookkeeping where the double entry of sending
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and receiving a payment is confirmed by a third entry: a digitally signed,

cryptographically sealed receipt from the network. Each transaction on
the Bitcoin blockchain is processed using a model known as UTXO, or
Unspent Transaction Output. Accessing your “wallet” using its public and
private keys is actually the process of unlocking the coins to which you
are associated. If the keys are mislaid, you cannot open the lock. When
initiating a payment, you are unlocking a UTXO and telling the net-
work to take the amount of coins you specify from the total available.
The balance, in other words the unspent amount, is sent back to you
by the network as a new UTXO, which will be unlocked for the next
transaction. It may sound complex, but a user’s wallet is really a list of

the UTXO records associated with that user, totaled to give an account
balance. Every full node on the Bitcoin blockchain holds a copy of all the
unspent Bitcoin transactions.
Why should a distributed ledger approach be restricted to financial
transactions? The idea of decentralizing processes other than cryptocurrency
transactions quickly caught the imagination of developers and enterprises.
If you could cut out the middlemen in day-to-day banking, what other
agencies could be rendered unnecessary? UTXO is not really a practical
methodology for anything other than an exchange of identical digital assets:
the idea of writing a second protocol layer on top of the Bitcoin blockchain
is credited to J. R. Willett who, in 2012, published “The Second Bitcoin
Whitepaper.” Crucially for the future of this industry, he also suggested
securing development funds to do this from within the crypto community.
The original document is no longer accessible, but at the 2013 San Jose Bit-
coin conference, Willett explained the idea to his panel’s audience.16 Laura
Shin, writing for Forbes in 2017, describes the breakthrough.17 “He dreamed
up something like contracts on top of Bitcoin,” she explains, “the way e-mail
is layered on top of TCP/IP, but wondered how he could pay for its devel-
opment. [He realized] he could float a coin on top of Bitcoin that buyers
would automatically own if they sent bitcoin to fund its development.”
Willett succeeded in funding his Mastercoin project through what
became known as an Initial Coin Offering (ICO), but the project was
not launched on Bitcoin. The Bitcoin blockchain is a robust creature,
and by this time its tried and tested structure had been replicated and
refined by other blockchains including decentralized name registration
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database Namecoin (2010), Litecoin, the silver to Bitcoin’s gold (2011),

and enduring and much-loved joke currency Dogecoin (2013). However,
it is not sophisticated enough for the needs of enterprise. Something more
tailored was needed to handle additional protocol layers and complex,
multistage smart contracts.

Ethereum and the Virtual Machine

In December 2013, Vitalik Buterin published a whitepaper entitled

“Ethereum: The Ultimate Smart Contract and Decentralized Applica-
tion Platform.” The Ethereum software itself is open source therefore the

whitepaper is a constantly evolving document on GitHub,18 but the origi-

nal19 can be accessed in online archives. Ethereum was the first blockchain
infrastructure purpose-built for distributed computing, that is, with the
ability to hold multiple protocols above the base cryptocurrency layer.
Buterin’s vision of smart contracts running autonomous rules to govern
the movement of any digital asset went far beyond Bitcoin, and although
Ethereum relies on Bitcoin’s “credible decentralization” and in particular
the timestamping for first-to-file transactions, it reduced blocktime sig-
nificantly from 10 minutes to around 15 seconds.
The Ethereum Virtual Machine (EVM) enables code to be run
within individual nodes, a significant innovation for the development of
distributed applications (dApps). Buterin also suggested a logical exten-
sion toward “decentralized autonomous organizations (DAOs)—long-
term smart contracts that contain the assets and encode the bylaws of
an entire organization.” The launch of Ethereum was itself part financed
by an ICO, which raised the approximate equivalent of $18 million of
development funds through the sale of its native currency, Ether (ETH).
This opened the floodgates for hundreds of ideas that entrepreneurs
believed, rightly or wrongly, would benefit from the unique properties
of blockchain.
What are the potential applications of Ethereum? Founder Vitalik
Buterin listed his top picks in response to a query from Elon Musk on
Twitter in April 2019. The thread included:

A globally accessible financial system, including payments, store

of value, also more advanced stuff like insurance; Identity: “sign in

with Facebook” -> “sign in with an Ethereum account, no inter-
mediaries”. Also, web of trust...

All sorts of registries should publish on chain for security and

easy verifiability; Experimenting with new forms of human
organizational structure; All sorts of micropayment use cases
via payment channels; Markets for personal data for privacy
preserving machine learning (you pay me X, I let you homo-
morphically execute function Y on my data that’s been attested
to by Z ...);

Cryptoeconomics for spam prevention in social networks; Pre-

diction markets for content creation DAOs; Cryptoeconomics
/ micropayment schemes to reward publishers of good content;
Testing ground for new market designs, e.g. frequent batch auc-
tions, combinatorial auctions, automated market makers;

“Peer-to-peer (p2p) marketplace for internet connections / incen-

tivized mesh networks; Identity, reputation and credit systems for
those that currently have few resources (e.g., refugees); Decentral-
ized DNS alternatives e.g. Ethereum name service domains.”

Some of these applications have already been realized and will be exam-
ined in more detail later in this book. Others are tantalizingly out of reach
but visible on the horizon of blockchain development. Over time, where
the Bitcoin blockchain’s native currency began to find its niche as a store
of value based upon its programmed scarcity, Ethereum has become the
ICO machine. The EVM allows applications built on top of the E thereum
blockchain to operate separately from the host. The decentralized ecosys-
tem that has grown up around this mechanism has developed genuinely
new concepts, with open source collaboration yielding new types of token
with unique behaviors and properties beyond simple digital cash. The
gaming sector in particular has pushed this work forward with ownership
of nonmonetary digital assets, of which more in Chapter 5.

Not-So-Smart Contracts and Cautionary Tales

Decentralized contracts were the third feature of Wei Dai’s suggestions

for b-money. Although the transfer of an asset from A to B is reason-
ably straightforward, transactions in the wider world can be significantly
more complex. Of course, blockchain wasn’t the first piece of software to
encode business rules, but the need to manage such complex transactions
in blockchain applications gave rise to smart contracts. This is a terrible
name for a piece of code that is neither a contract, nor particularly smart,
and causes all kinds of confusion among the uninitiated. Even Vitalik
Buterin said in 2018 that he wished he’d called them something quite
different. However, smart contracts they became.

The smart contracts that characterize Ethereum’s protocol are the

rules for a transaction laid out in the ledger’s code. There is no contract
formed in the legal sense of the word (although the code may be reflective
of binding contract conditions), and there is no learning or refinement
involved. Our not-so-smart smart contracts have more in common with
robotic process automation (RPA) than intelligent machines; they are
RPA for mutually suspicious groups.
These snippets of chain code define very clearly a repetitive process
to be applied. Movement of cryptocurrency on an account balance basis,
rather than the UTXO model, was the starting point, ensuring that trans-
fers from one wallet to another run smoothly without any central inter-
vention. The transaction for a payment is reasonably simple: First, check
the details: Is the balance in the originating wallet enough to make the
transfer? Is it going to a valid address? What is the appropriate transaction
fee? Then the relevant variables are inserted (here they would be origi-
nator wallet address, destination wallet address, amount sent, and the
fee due) and the resulting transaction reads “send x coins from wallet a
to wallet b and send transaction fee y from wallet a to the miner’s block
reward pot c.” This statement is hashed for inclusion in the next available
block while the transaction executes and is written to the ledger. If your
own record of this exact transaction is checked against the immutable
record in the future, the hashed strings will match, and you have verifica-
tion of its authenticity and the accuracy of your own ledger.
Smart contracts enable transactions to be completed without estab-
lishing a relationship with the processor. Instead of putting trust in your
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bank to process a payment, for instance, you rely on the smart contract
in the blockchain of your chosen cryptocurrency to execute the transfer
of coin.
Let’s think through the kinds of transaction that happen in the real
world. In a supply chain, an invoice issued by a supplier must be recorded
as a debt in the ledger of the customer but will not be settled until cer-
tain conditions are fulfilled. Smart contracts can be used to line up the
different elements of authorization such as receipt of goods and confirma-
tion of quality certification among the mutually suspicious groups along
the chain, before effecting a transfer of funds from customer to supplier.
The similarity to robotic process automation is clear. A smart contract is

simply an automated process in a decentralized system. Another exam-

ple that is commonly quoted as a potential smart contract application
is a discharge from hospital treatment, which triggers the creation of a
follow-up appointment. This is certainly possible through a distributed
ledger, but as it is likely that all the parties to this transaction are known
and trusted, then automation within a centralized system is a more
appropriate solution.
The significance of smart contracts is their ability to disintermediate
any transaction. By removing the role of a central agency, parties can
transact directly, even settling their commitments using the platform’s
native currency. However, there are good reasons to be cautious about
disintermediation. If there is an error in a smart contract on which you
rely for accurate transaction processing, there is nowhere to go if there is
no centralized complaints department. Although a smart contract is not
a legally binding contract in itself, there are legal implications to con-
sider. Disintermediated transactions that can be executed across different
countries and jurisdictions not only remove the middleman but can also
obfuscate the legal and fiscal position of the parties. Although a smart
contract is a transactional process and not designed to be contractually
watertight, execution may result in the formation of a legally binding
contract, either intentionally or inadvertently. Even if a legal contract is
the intention of the developer, it may not turn out to be enforceable,
and the route to recourse is not clear for the parties under law if there is
a dispute. In the case where a legally binding contract is created, and the
existence and content of the completed transaction can be authenticated
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by reference to the immutably stored data, questions arise over what juris-
diction applies, and in the case of borderless cryptocurrency, under what
tax system earnings should be declared. This is further complicated by the
extraordinary range and diversity of conflicting privacy laws that are in
force across the world: which law applies to cross-border interactions and
how does the transparency of transactions on a public blockchain play out
in different legal systems?
The quality and the usefulness of a blockchain application stands or
falls by the quality of the smart contracts encoded within. It is up to
developers to ensure that these are effective, efficient, and secure. This
code governs the everything from the management of ICO investments

to property register updates. The technology is exciting, but there are

plenty of potential pitfalls and cautionary tales.

The Price of Gas

Cryptokitties, the first high-profile blockchain game, is a great example
of a set of smart contracts managing digital asset transactions (plus, the
kitties are cute). The buying and selling of kitties are simple transactions,
while breeding kitties involves more complex rules, taking account of the
inherited genetic traits of the parents and determining the final makeup
of the offspring. The game was an instant hit with the crypto community,
so much so that it put considerable pressure on the functioning of the
Ethereum blockchain. In so doing, it not only tested the robustness and
scalability of the network, exposing concerns that led to greater innova-
tion, but it also opened the eyes of users to the transaction costs beneath
smart contracts.
Every smart contract on a public blockchain comes with a cost. This
is an inherent part of the Proof of Work consensus mechanism: there
must be a reward to miners that makes it worth their while to maintain
the blockchain. The reward is made up of coins issued from a reserve,
and fees for the execution of each transaction. The transaction fee on the
Ethereum blockchain is dependent on the functions in the smart contract
and the price of gas. Gas is a measure of how much work a particular
function takes to perform; it is named for its role as the cryptofuel which
drives the motion of smart contracts. Every function has a fee expressed as
Copyright © 2020. Business Expert Press. All rights reserved.

a number of units of gas, and these are set out in Appendix G of the Ethe-
reum white paper. For example, calculating a single cryptographic hash
costs 30 units of gas; an *ADD function to find the sum of two integers
costs 3 units of gas; a *COPY operation in a smart contract is charged at
3 units of gas per word. These add up. A payment in ETH, moving the
asset from one wallet to another, will cost the transferor in total 21,000
units of gas. When developers are writing smart contracts, there is a new
consideration: how gas-efficient is the code? Has the transaction price
been minimized for users?
The gas price, in other words the amount of ETH payable per unit
of gas, varies according to the volume of transactions being processed.

It is expressed in small denominations of ETH known as Gwei (10-9

ETH). A typical price per unit of gas might be 20 Gwei, or 0.00000002
ETH. When Cryptokitties mania was at its height, the gas price was cor-
respondingly high. At the time, using Metamask, the most well-known
user interface that allows players to access Cryptokitties and other games,
required knowledge of the gas rules. Users were asked what price they
would pay for gas, and a range of appropriate values suggested. This was
both a barrier to adoption and a learning opportunity, but more recent
versions of Metamask and newer wallet interfaces such as Dapper have
reduced the complexity for users by automating gas price selection or, in
the case of Dapper, absorbing the costs entirely.
The rules of demand and supply meant that in an oversaturated net-
work only those users bidding high for gas had their transactions suc-
cessfully validated, but crucially, costs are incurred whether or not a
transaction succeeds, because processing takes place regardless. Some of
my own attempts to breed Cryptokitties at too low a gas price cost me a
fraction of an ETH with nothing to show for it. That’s a trivial loss, but
something you don’t want your users or your investors to experience.

The Cost of Getting Things Wrong

The most notorious transaction fee disaster to date occurred when an

overeager investor fell afoul of a smart contract error during the ICO
for AirSwap in October 2017. Attempting to buy 1,700 ETH worth
of tokens, the investor set the transaction gas price ridiculously high at
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400,000 Gwei (0.0004 ETH) per unit of gas, possibly to ensure that
their transaction had top priority for validation. Unfortunately, the smart
contract had been set up with a gap in the sale window. The transaction
arrived on the network at a time when the contract was unable to transfer
tokens to the buyer and the resulting error automatically invalidated the
attempted purchase. The investment ETH was not transferred, but just
short of 237 ETH in transaction fees were charged, the equivalent of
over $70,000 at the time. At normal gas prices, the 592,379 units of gas
should have cost the transferor around $3.50.
This cautionary tale should prompt developers to get things right
at launch, but smart contract development issues prevail. These are not

only a concern in structuring contracts correctly, but also ensuring that

they are secure in the face of cyber threats. Hartej Sawhney, cofounder of
blockchain and smart contract security specialists Hosho Group, gave me
a clear picture of the current state of play.

“The quality of smart contracts being written in the industry

is slowly but surely improving,” he said. In 2017 and 2018, it
was not uncommon to discover critical vulnerabilities such as
“infinite token generation” inside smart contracts. Companies
were proudly copying and pasting large chunks of other compa-
nies’ smart contracts and praying that the code would compile
and do what functions they intended.
There has been a lack of incentive for talented individuals in
InfoSec to learn blockchain languages such as Solidity and to pro-
vide security services in the space. Standard practices for security
such as those found in the United States financial industry could
do much good to the Blockchain industry. Most companies lack
the sophistication to ensure security is given priority [and] that
regular penetration testing and auditing is conducted.

This is a real concern, and also an opportunity for companies like

Hosho. Developers have an ethical responsibility to collaborate and
support each other to deploy effective and secure smart contracts
throughout blockchain applications, and business leaders must be
aware of the standards that must be upheld to protect users and the
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business itself.

Hacks, Forks, and Infighting

Cryptocurrency has not been without controversy. The original Bitcoin

blockchain’s code, released under an open source license for the use of all,
has spawned clones and competitors over the years. While imitation may
be the sincerest form of flattery, some of the new currencies have a murk-
ier history rooted in errors, attacks, and bitter differences of o pinion.
It is normal for changes to be made to public blockchain code. The open
source community takes responsibility for maintaining and updating

chains, improving security, speed, and capacity as demand for transac-

tion recording grows and relevant technology improves. When a change
is agreed by community consensus, this results in a fork of the block-
chain in question, pausing activity and implementing new code before
moving forward, hopefully more efficient but to all intents and purposes
unchanged. If the new code is backward compatible with the existing
software, this is a soft fork. In cases where the new code is more disruptive,
we have a hard fork in the chain, which requires all nodes to update to the
new protocols before continuing block confirmations.
The complication arises where developer communities find them-
selves irreconcilably divided over the best course of action for the existing
chain. This results in a contentious hard fork. There are good examples of
contentious hard forks on the Bitcoin blockchain (the Bitcoin Cash saga)
and on the Ethereum blockchain (The DAO Hack). Let’s have a look at
how these arose.

Changing Direction: Bitcoin Cash

In 2017, Bitcoin developers spent considerable time addressing the

shortcomings of the original blockchain protocol that had been exposed
through almost a decade of advancing technology and greater demand
for transaction throughput. As the chain grew longer the throughput of
transactions recorded in each tiny 1 Mb block slowed, causing frustra-
tion and increasing costs as people paid premiums for faster validation.
There were several solutions proposed by the community with the aims of
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reducing the data recorded and / or increasing the size of the block. One
proposal known as Segregated Witness (SegWit) changed the order of
processing for block confirmation, segregating elements of a transaction
to reduce the volume of recorded data and thereby speed up processing.
A second phase of Segregated Witness (SegWit2x) aimed to increase the
block size from 1 Mb to 8 Mb. In the end, the Bitcoin blockchain only
adopted the first phase of SegWit through a soft fork. Most of the com-
munity backed down from making a hard fork implementation of larger
block sizes, but a minority of objectors decided to go ahead and create a
new fork of the Bitcoin blockchain, called Bitcoin Cash. This came into
being on August 1, 2017. Other forks to create different currencies with

different mining structures, notably Bitcoin Gold and Bitcoin Diamond,

also occurred in 2017.
The Bitcoin Cash story does not stop here. The new currency gained
traction, while the core Bitcoin blockchain continued on its way with
1 Mb blocks. Bitcoin Cash was widely promoted as the cryptocurrency
that Bitcoin should be, and a roadmap for its development was laid
out. However, a year later the two key developers involved in Bitcoin
Cash, Roger Ver and Craig Wright, disagreed over the direction that the
currency was taking. A planned soft fork of Bitcoin Cash took place in
November 2018, moving the roadmap forward under the leadership of
Ver. Wright and his team took a different path and hard forked to create
a new chain, which they claim reinstated the original Bitcoin protocols
from 2009, known as Bitcoin Cash: Satoshi’s Vision.
Confused? This is normal. The philosophical differences that arise
between Bitcoin developers in a quest to achieve the perfect peer-to-peer
system of electronic cash may haunt us for years to come.

Computer Says Yes: The DAO

Ethereum is not prone to as much infighting as Bitcoin, possibly because

the developer community includes founder Vitalik Buterin rather than
being distracted, as Bitcoin is, by speculation over the identity of Satoshi.
This does not mean that contentious forks don’t happen, and the forking
of the Ethereum blockchain to create a second currency, Ethereum Clas-
sic, came about following an attack on an application known as The DAO.
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This hack in June 2016 was the daddy of all smart contract disasters.
In his original 2013 white paper, Vitalik Buterin noted in relation to
smart contracts that, “[the] logical extension … is decentralized autono-
mous organizations (DAOs)—long-term smart contracts that contain the
assets and encode the bylaws of an entire organization.” In 2016, a team
of developers launched The DAO, an investor-directed venture capital
fund whose structure was a realization of Buterin’s original idea. Funds
contributed by investors would be distributed automatically to ventures
selected by the system and approved by consensus, and the returns would
be shared among the members, with all the transactions governed by
smart contracts and untouched by human (centralized) hand. A successful

ICO was launched, and the team sat back and watched the money roll in
from more than 18,000 investors. Sadly, there were underlying flaws in
the smart contracts governing the approval of suitable ventures and the
distribution of investment funds. A hacker succeeded in manipulating the
contracts to send around $50 million of the funds, a third of the total, to
themselves. The horrified DAO team could only watch as their own smart
contract carefully executed immutable transactions in favor of the hacker
and the money rolled straight back out again. They could do nothing to
stop the code running, and the transactions were irreversible.
In this case, the Ethereum community controversially reached a con-
sensus to roll back the blockchain to a point before the ICO. Later entries
on the Ethereum distributed ledger ceased to be valid, and the next trans-
actions to be processed were recorded in a new block referencing as its
previous neighbor a block prior to the hack. Not all of the community
was comfortable with this action. It went against the principle of immu-
tability to change anything that had gone before. The dissenting minority
did not implement the fork and thereby created a second blockchain,
Ethereum Classic: This chain still incorporates the DAO transactions.
The whole DAO affair was the final straw for the U.S. Securities and
Exchange Commission (SEC). Their report on the hack determined that
the tokens offered for sale were securities under the Securities Act of 1933
and therefore should be regulated as such. This started the process for
development of strict regulation for the conduct of ICOs and the protec-
tion of investors, and arguably slowed down blockchain innovation in the
United States as entrepreneurs sought more sympathetic jurisdictions for
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ICO fundraising.

Challenges of Expanding to Enterprise

The underlying technology of blockchain caught the attention of enter-
prise very quickly, and it became clear that there was potential to use
distributed ledger technology to good effect in multiple industry sectors.
However, the volatility of cryptocurrencies, the public nature of the exist-
ing blockchains, and the SEC movement toward securities regulation after
The DAO was not an ideal environment for the development of com-
mercially sensitive technology. Enterprises needed some way to harness

blockchain. The rewards to be reaped from a trustless commercial net-

work, for instance in the context of a supply chain, could be to reduce the
administrative burden of repeated checks as raw materials move through
iterations of processing, or products pass through borders, or to provide
verifiable proof of compliance with regulation through an immutable
record. This functionality could be achieved with an application built on
top of Ethereum, but the transparency that characterizes blockchain is
not something always welcomed by businesses. How could a network of
mutually suspicious organizations keep their distributed ledger out of the
public domain and thereby protect commercially sensitive information?

Permissioned Blockchains

To solve the problems of privacy and verification, a variant of distrib-

uted ledger technology has emerged: the permissioned blockchain. These
are intended to replicate all the benefits of blockchain as a transparent,
immutable record, but eliminate the anonymity of users and open view-
ing of transactions and smart contracts, which are features of public
blockchains. A permissioned blockchain restricts participation to those
parties who have the credentials to access the data on the ledger. These
permissions may even be granular within the platform, allowing some
parties to submit transactions, and others to view a limited part of the
whole record on a need-to-know basis. Many of the case studies later in
this book involved permissioned systems.
It is possible to create a private Ethereum blockchain. These are most
Copyright © 2020. Business Expert Press. All rights reserved.

often used as a testing environment for applications that will eventually

move into the public arena, but there are some notable private Ethereum
innovations running at scale. These include the World Food Programme’s
Building Blocks project,20 which uses a version of Ethereum developed by
Parity Technologies.

The Hyperledger Project

Work on permissioned frameworks has been pushed forward by the

Hyperledger Project. This started out as a collaboration between the Linux
Foundation’s open source community and commercial giants including

IBM, Hitachi, Intel, Soramitsu, and Huawei, and in 2019 Microsoft,

Salesforce, and Consensys joined the consortium. Hyperledger’s growing
suite of open source tools includes several frameworks with specific use
cases and a number of auxiliary software modules. Frameworks released
to date include: Iroha (with Hitachi) for infrastructure projects; Sawtooth
Lake (with Intel) for supply chain and provenance, particularly using
sensors as a source of prime entry; Fabric (the foundation of the IBM
Blockchain platform) for supply chain featuring channels for private and
commercially sensitive transactions; and Indy (with Sovrin Foundation),
purpose-built for distributed identity.

Distributed Ledger Frameworks

The requirements of specific industries have given rise to several distributed

ledger frameworks, which have diverged from the traditional blockchain
structure. These include the R3 Corda framework, which is commonly
adopted in financial services. Here we could also include IOTA’s Tangle,
which is designed to handle the ever-widening landscape of the Internet
of Things and specialist cross-border payment systems such as Ripple and
Stellar Lumens, although these differ from other permissioned systems in
that they make use of a native cryptocurrency.
The large R3 Corda consortium includes banks from across the world
and has developed a number of private, notarized frameworks in-house
and with partners for applications including interbank settlements, trade
finance, letters of credit, and securities. Corda’s structure is interesting as
Copyright © 2020. Business Expert Press. All rights reserved.

it requires a centralized notary function as the glue that holds together the
decentralized community of participating enterprises. This role is exam-
ined in more detail in the Insurwave case study in Chapter 4.

Reaching Consensus Without Coins

A permissioned distributed ledger such as Hyperledger or Corda takes

from Bitcoin and Ethereum the highly effective and stable first-to-file
timestamping of transactions and the ability to create smart contracts to
govern business processes but has no cryptocurrency element. At a fun-
damental and practical level, how can a private distributed ledger run as

a trusted record keeping vault without a Proof of Work system, a native

cryptocurrency paying miners to maintain the blockchain and act as a
mechanism to randomize confirmations? If there are no monetary incen-
tives for participants to compute the nonce value required to close one
block and open a new one, how can the integrity of the blockchain and
the records secured within it be guaranteed? Let’s look in more detail at
the cryptoeconomics within blockchain and the mechanisms that main-
tain the integrity of the ledger.

Consensus Mechanisms and Cryptoeconomics

Research into the development of new Proofs, or consensus mechanisms,

is not only important for the operation of distributed ledgers without
cryptocurrency, but for the wider operation of blockchain going forward.
As concerns grow over the environmental impact of all the computing
power deployed in maintaining these decentralized networks, there is a
need to investigate all possible avenues. The environmental and sustain-
ability aspect is covered in greater detail in Chapter 7; for now, let’s review
the operation of consensus mechanisms and the different ways in which
they are implemented for public and permissioned blockchains.
Transaction details for inclusion in a block are recursively hashed to a
single string of letters and numbers, the Merkle Tree root of all the data.
This string sits in a child block at the very end of the blockchain, along
with a reference to the previous block. Closing the block and opening the
next one is an essential operation, which, for the integrity of the chain,
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cannot be centralized or left to specific nodes, and must be sufficiently

robust that the nodes of the chain agree, in other words reach a consensus,
that the operation is valid and complete. This ensures that data is consis-
tent across nodes and prevents malicious manipulation.

The Role of a Consensus Mechanism

The problem that a consensus mechanism tries to solve is this: In a net-

work of mutually suspicious parties there should be a way to agree on
the current state of the ledger. Work on consensus fault tolerance in soft-
ware goes back to the late 1970s, and a paper describing “The Byzantine

Generals Problem” was published in 1982.21 This describes the challenge

for fictional army generals reaching consensus on the optimal joint attack
strategy without direct communication or established trust. Achieving
Practical Byzantine Fault Tolerance (PBFT), a complex mathematical
construct, is the aim of the algorithms that underpin the various con-
sensus mechanisms in use. There are broadly three ways to approach the
problem: by lottery, voting, or work.

Proof of Work

The original Bitcoin blockchain consensus mechanism is Proof of Work

(PoW), the work being the computational effort of the miners. It is not
simply a consensus mechanism but is intrinsic to the cryptoeconomics
of the currency: it is the method by which new coins are brought into
circulation. This competitive proof derives from an earlier concept called
HashCash.22 The computation for each block is hard to solve, taking con-
siderable processing power, but easy to verify once completed. The miners
are calculating possible nonce values for a given value of N in the equation
“hash(blockcontents + nonce) = a string with N leading zeros.” You can
see the winning nonce value and the resulting hash of the block with its
leading zeros on every block via a block explorer. The first miner to solve
the equation earns all the transaction fees and a reward from the dimin-
ishing reserve of Bitcoin. This is a proof that has stood the test of time
and has been implemented in around three quarters of cryptocurrencies
by market capitalization, according to figures tracked by Cryptoslate.23
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Proof of Stake

In Proof of Stake (PoS), the miner’s investment is in their stake in the sys-
tem, not in computation power. Miners earn fees for the transactions that
they validate, and then nodes must majority vote to commit the opera-
tion and close the block. The higher your stake, the more transactions
you will validate. There are some concerns that bad actors could achieve
domination of the consensus through building their stake or a consor-
tium of stakes beyond 51 percent, giving them majority control and
the ability to validate and commit fraudulent or duplicate transactions.

A variant of Proof of Stake, Delegated PoS (DPoS) uses real-time voting

combined with a measure of the voter’s reputation. Token holders nomi-
nate a delegate to vote on their behalf, and these delegates earn fees from
the transactions in the blocks they sign.
PoS requires miners to stake their coins for the chance to commit
(forge) the next block in the chain, and the system chooses one of the
participating nodes either at random or by selecting the node that has
the longest interval since last forging a block (coin age randomization).
In case of cheating, for example, validating a fraudulent transaction, the
stake is forfeit, which incentivizes honesty. The costs of participation are
lower, as there is no algorithm processing to consume energy, and this
encourages greater participation in the consensus, which contributes to
effective decentralization. It sounds simple but there are many challenges
to overcome to maintain the integrity of a single unbroken chain. In par-
ticular, developers recognize that there is an opportunity for competing
chains to occur by accident or design, or for early participating nodes to
seize control and invalidate later transactions. The technical detail behind
this is complex; for further reading, there are a number of excellent arti-
cles online that explain this in more detail. Different chains have devel-
oped different methods of ensuring that miners maintain the right chain
at all times, but none have quite succeeded in replicating the incentive in
Proof of Work, whereby the cost of equipment and energy that would be
expended in attempting to divert the chain are simply too great for min-
ers to attempt such a coup.
NXT is one of several blockchains that uses a PoS consensus, and
Copyright © 2020. Business Expert Press. All rights reserved.

Ethereum’s community has invested a lot of work in developing its Casper

update in anticipation of an eventual move from Proof of Work to Proof
of Stake.
There are several variations on the Proof of Stake consensus, which,
again, require no energy to be consumed in computational intensity.
Principal among these are Delegated Proof of Stake (DPoS) and Proof
of Authority (PoA). DPoS is equally energy efficient and relies upon a
network of witnesses delegating validation duties to a small community
of nodes. Notable DPoS blockchains include EOS, BitShares, Steem,
and Lisk. Proponents argue that this is a more democratic system than
PoS, but the small number of delegated nodes causes concern over

centralization: for example, EOS has only 21 delegated nodes, although

there are tens of thousands of witnesses. PoA has a similar structure, with
a small number of preapproved validators who are staking their reputa-
tion on maintenance of the chain. As time goes on, this may prove to be
the more powerful incentive. PoA has been cautiously adopted by some
of the more centralized blockchains including Ripple.

Lottery and Voting

For an enterprise blockchain, nodes are invited to the network. There

is no public aspect, no cryptocurrency, therefore no monetary incentive
in the form of transaction fees or mining rewards. It is impractical to
use a Proof of Work model, so developers must turn to lottery or voting
mechanisms instead.
The Paxos protocol has been the foundation of much of the devel-
opment of consensus mechanisms, but the landscape is diverging and
evolving. Hyperledger and Intel’s Sawtooth Lake framework uses Proof
of Elapsed Time (PoET). This is a lottery consensus where the network
pings the Intel chips in every active node to see which has the short-
est wait time for processing (stochastic selection). This node is elected
the leader and creates the next block in the chain. Other Hyperledger
frameworks have turned to voting, for example, Yet Another Consensus
(YAC), ordering services such as Kafka, or to a Simplified Byzantine Fault
Tolerance (SBFT) model thanks to the fact that in a private distributed
ledger the peers are all known. The Raft consensus mechanism, rolled
Copyright © 2020. Business Expert Press. All rights reserved.

out to Hyperledger users in 2019, was developed in an effort to produce

an understandable consensus mechanism,24 separating the key elements
of consensus and providing a good foundation for system building
and education.
As more public and private blockchains are developed, adoption
increases, and understanding of cryptography improves further we can
expect to see more specialized consensus mechanisms and common
standards emerging.
The explosion of cryptocurrency and the development of blockchain
applications excited entrepreneurs and put regulators on high alert. Let’s
see how this complex relationship plays out in Chapter 3.

Baucherel, K. (2020). Blockchain hurricane : The origins, application, and future of blockchain and cryptocurrency. Business Expert Press.
Created from rmit on 2023-08-30 15:06:44.
CHAPTER 3

Magic Internet Money

Money doesn’t grow on trees, but the Initial Coin Offering (ICO) crowd-
funding method inspired by J.R. Willett resulted in cryptocurrencies
sprouting everywhere. This new way of raising money attracted attention
from well-intentioned entrepreneurs and snake oil salesmen alike. Here
was a pot of unregulated, magic money created from thin air by the issu-
ance of tokens native to the application, some floating on top of Ethereum
and others generated in completely new blockchains. A growing interest
in cryptocurrency from the wider community meant that crowdfunding
in this way for blockchain projects caught the imagination of people with
money to spend in pursuit of the next big tech success.
Some of these projects have been genuinely innovative, based on good
business sense and responding to a real-world problem by proposing an
appropriate solution. Certain among them knuckled down to developing
the technology stacks that would enable use of distributed ledger in the
long term, putting in place the protocols and tools for future develop-
ment. Others went straight for consumer adoption with varying degrees
of success. Notable early ICOs that continue to deliver on their original
vision included Ethereum, IOTA, NXT,1 and Augur.2 Three of these deal
Copyright © 2020. Business Expert Press. All rights reserved.

with the infrastructure that is needed for wider use and easy adoption
of blockchain: Ethereum with its smart contracts and Virtual Machine,
IOTA with its evolving cryptography and scalable Internet of Things
transactions through the Tangle verification mechanism, and NXT pub-
lishing an open-source blockchain for financial and public services, using
Proof of Stake consensus. The Augur project is user-facing: a peer-to-
peer oracle and prediction market protocol where users are financially
rewarded for correctly forecasting the outcomes of future events.
Some excellent concepts and innovations have emerged around block-
chain’s new way of solving old problems. As venture capitalists Alyse
Killeen, Gil Beyda, and Jimmy Song explained at Austin’s SXSW festival

in March 2019,3 people are revisiting business models that did not work
on earlier technology, and as long as the problem to be solved is clear
before jumping into developing a solution (a common trap in software)
there are serious propositions that are attracting traditional support from
reputable investors alongside ICO funding.

Gold Rush Scams and Broken Business

Unfortunately, most projects that proliferated at the early stage were not
such good business prospects. Research by Statis Group4 determined that
almost 80 percent of the ICOs launched in 2017 were scams, according
to findings based primarily on projects failing and founders disappearing
once funds were raised. Poor quality white papers behind glossy websites,
and fraudulent claims of association with high-profile advisors, drew in
the unwary in search of a quick buck. The wider market homed in on
blockchain startups with an unerring instinct for shaky high potential
ideas, and investors looking for a chance to get rich quick jumped in.
Reassuringly, it seems that the Pareto principle applies to investment
in ICOs as it does in so many areas of business. Statis noted that “over
70 percent of ICO funding (by $ volume) to-date went to higher quality
projects.” The discerning investor triumphs, but there have been casual-
ties along the way. Not everyone subscribes to the adage that if it looks
too good to be true, it probably is, and legislation to protect the unwary
has been running to keep up.
The new gold rush gave Bitcoin and blockchain a bad name.
Copyright © 2020. Business Expert Press. All rights reserved.

The question is, did cryptocurrency break the system, or was the system
broken before?
According to journalist and author Dan Lyons, there are some dubious
practices that have their roots far back in management science. His 2018
book Lab Rats5 tells a century-long tale of organizational priorities shift-
ing from the benefit of workers to the benefit of shareholders, normally
the founders and principal funding providers. Companies became more
focused on delivering returns to their investors, and pressure to per-
form meant that these returns were not necessarily related to profitable
and sustainable business models. Pension funds were raided to prop up
share prices in long-established enterprises. Disruption of the workplace,

sacrificing long-term employment for the sake of short-term productiv-

ity, increased staff turnover. We are now moving inexorably toward what
is positively described as the “gig economy,” a benefit for shareholders
but not for those workers whose income is gradually being eroded and
employment rights compromised. In the end, says Lyons, many inves-
tors in Silicon Valley and beyond settled on a profitable business model
of “grow fast, lose money, go public, cash out,” taking quick returns at
exit and jumping the traditional, messy, long-winded stage of building a
working, profitable business. Speaking to Lyons, he points out that this
has all the hallmarks of a classic Ponzi scheme, with public investors pay-
ing out the early round shareholders and more often than not watching
the share price decline thereafter.
If investors rewarded loss-making enterprises by putting up several
rounds of funding in the search for the next Facebook, how did this
change the behavior of entrepreneurs? An expectation grew that a good
idea was enough to justify financial support. The system was already
broken: throwing cryptocurrency into the mix made a lethal cocktail.

When Lambo, When Moon?

As cryptocurrency prices rose rapidly in the latter half of 2017 the craze
for the Next Big Thing reached its peak. At the time, many crypto enthu-
siasts were confident that the market was adjusting to put Bitcoin in its
rightful place, sweeping all other coins and tokens along for the ride.
“To the moon!” was the cry, or if not moon, then would crypto deliver
Copyright © 2020. Business Expert Press. All rights reserved.

a Lamborghini? Many early adopters of Bitcoin took sizable profits from

the bull market, and it is good to see that they continue to champion
cryptocurrency and blockchain development by investing their coins
in new enterprises, notably in the gaming sector, which is examined in
greater detail in Chapter 5. There is a significant downside, though: not
everyone was a winner. Newcomers who bought in at the peak of the 2017
bubble, before prices dropped back down to a more sustainable level,
were disillusioned and angry. Accusations flew that this was the real Ponzi
scheme, sucking in new investors to reward the existing crypto holders
and leaving late arrivals with worthless assets. Price volatility and sus-
picions of manipulation through repeated Tether exchange transactions6

(buying and selling Bitcoin through a cryptocurrency pegged to the U.S.

dollar to drive price and volume) added fuel to the fire of opponents and
skeptics. Warren Buffett called Bitcoin “a delusion” in an interview with
CNBC in 2019,7 although the veteran investor apparently has a more
positive view of the underlying distributed ledger technology. In October
2018, Professor Nouriel Roubini of Stern Business School testified to the
U.S. Senate Committee on Banking, Housing, and Community Affairs.8
He titled his talk “Crypto is the mother of all scams and (now busted)
bubbles, while blockchain is the most overhyped technology ever, no
better than a spreadsheet/database.”
The backlash against this period of extreme volatility was under-
standable. Crypto and blockchain supporters doubled down, and HODL
became the watchword (this stemmed from an overexcited and misspelled
tweet, which had intended to urge people to hold their cryptocurrency).
The Lambos seemed far away, the moon doubly so. But every cloud has
a silver lining, and this turbulent time was no exception. Not only did
it clean out many of the speculative and foundationless projects, which
only had their eyes on magic internet money, but it accelerated legislation
in multiple jurisdictions to protect investors and put blockchain project
crowdfunding on a firm footing.

Taming the Wild West of Token Fundraising

New ideas are proposed daily by entrepreneurs who are attempting to

raise funding through the mechanism of token sales to the community.
Copyright © 2020. Business Expert Press. All rights reserved.

The best of these are transformational, the worst unfeasible or fraudulent,

but the rapid development of blockchain applications owes much to the
easy availability of capital. Where the proposals are sound, and the project
is backed by a competent and effective team this advances our under-
standing of the technology and its potential. However, if a new enterprise
is not sufficiently robust to attract the attention of traditional investors
such as venture capitalists and banks, or to succeed in mainstream crowd-
funding, this is a signal to be wary. A token sale can collect significant
investment without the project having been rigorously or independently
reviewed. There are good reasons for the existing share issue legislation
around the world, which protects uneducated investors from putting

their money into something they do not understand. It is inevitable that

all jurisdictions are seeking to extend existing regulation and implement
new rules for token fundraising to protect investors from themselves.

Utility Versus Security

An important distinction has emerged around the function of the token

being offered for sale. In many jurisdictions the regulations imposed
depend upon whether the token has a utility in the blockchain project
under scrutiny. If there is no utility, then the offer for sale of tokens is
likely to involve the investor taking on board a degree of risk and certain
rights and obligations that are comparable with the purchase of shares
and securities. Of course, the issuance of debt and equity for business
funding is heavily regulated in all jurisdictions, and the idea of circum-
venting the paperwork by simply shoehorning a token into the business
plan is strangely attractive to some founders. I work with businesses who
are considering or are already using emerging technologies, and unfortu-
nately this is a common theme. Can we put this “on the blockchain” and
build in a token? In the vast majority of cases the answer is no, and some
approaches have bordered on the downright irresponsible, aiming to pass
the whole burden of risk on to speculative token holders like a digital
lottery ticket.
What is a utility token? As tokens are programmable, they can have a
specific role in the operation of the application. You could consider a pre-
sold token as a gift card: buy it now, use it when the system is built. In the
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case of Ethereum, for example, the native token Ether (ETH) has utility
in the settlement of transaction fees and payment of rewards to miners
in the Proof of Work consensus mechanism. The Ethereum blockchain
could not function without it because the network itself is decentralized,
and users must have ETH in order to transact. This utility status from the
point of view of U.S. legislators was confirmed by Bill Hinman, Direc-
tor of Division of Corporation Finance at the Securities and Exchange
Commission, in June 20189 when he said,

based on my understanding of the present state of Ether, the

Ethereum network and its decentralized structure, current offers

and sales of Ether are not securities transactions. And, as with

Bitcoin, applying the disclosure regime of the federal securities
laws to current transactions in Ether would seem to add little value.

Another common analogy that may be easier to envision is a business sell-

ing advance tickets for the rollercoaster at a discount, with the proceeds
of sale invested in building the theme park. Is this ticket a utility, because
it allows you to ride the rollercoaster, or a security, because you have
helped to fund the capital expenditure on the construction of the park
and have an expectation of a return? In this case it is a utility, because the
return is not participation in the success of the park but the opportunity
to use it. If the park doesn’t get built for any reason, then the token hold-
ers have no benefit. If the enterprise that raised the funds has not, for
example, held funds in escrow pending investment in the development,
then there is no recourse. This is why investors in tokens must exercise
caution and ensure that they have all the detail with which to make an
informed decision.
The position of different jurisdictions on the utility versus security
spectrum differs considerably: as a rule of thumb the United States is
heavily risk-averse while mainland Europe is considerably more relaxed.
The United Kingdom sits neatly between these extremes, and territories
including Malta, Gibraltar, and the Swiss canton of Zug have devel-
oped legislation that is attractive to enterprises in the field of blockchain
and cryptocurrency. Regardless, the sentiment that utility and security
are important distinctions is shared. The difference of approach is more
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reflective of the existing structure of legal systems and constitutions,

the state’s treatment of similar real-world assets and structures, and the
degree to which each legal system is codified. These all vary enormously.
Note that, although the specific legislation referred to in the following
paragraphs will be superseded in time, the underlying approach of each
country is probably too deep rooted to change markedly.

United States

The different layers of legislature in the United States and the tradition of
codification, which accompanies a written constitution, have historically

contributed to a patchwork of laws at state and federal level that can

conflict with each other. The nascent legislation around blockchain and
cryptocurrency is no different. Leading the field is the state of Wyoming,
whose legislature had passed 13 new laws by early 2019 supporting and
framing a welcoming environment for blockchain and cryptocurrency
innovation. As Wall Street veteran and Wyoming Blockchain Task Force
member Caitlin Long explains, this “[enables] innovation and creativ-
ity … to bring capital, jobs and revenue into Wyoming.” Covering key
aspects of digital asset ownership, custodianship to bring crypto busi-
nesses in line with federal legislation, and support for fintech innovators,
the Wyoming laws are gradually being adopted by other states. They have
paid attention to the U.S. tendency to class tokens as securities rather
than utilities and modeled their legislation accordingly to deal with native
blockchain securities in line with the treatment of any traditional security.
In April 2019, the SEC issued its Framework for “Investment Con-
tract” Analysis of Digital Assets.10 Intended as “an analytical tool to help
market participants assess whether the federal securities laws apply to the
offer, sale, or resale of a particular digital asset,” the statement, signed
by Bill Hinman and Valerie Szczepanik, senior advisor for Digital Assets
and Innovation, clarified that the majority of digital asset sales are likely
to be treated as securities. Hard on the heels of this guidance, the SEC
sent its first No Action Letter to new venture Turnkey Jet for issuance
of utility tokens. There were strings like steel hawsers attached to Turn-
key Jet’s token sale, including requirements that the funds could not be
used to develop any part of the software platform, and that the token
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must have immediate usefulness within the application. Reaction to the

SEC Framework and No Action Letter was mixed, and many observers
were disappointed in what is seen as a continued overly restrictive stance.
Joshua Ashley Klayman, U.S. Head of FinTech and Head of Blockchain
and Digital Assets at Linklaters LLP, was philosophical. Speaking to
Modern Consensus when the Framework was released, she said:

The SEC has been saying for a long time that nearly every sale of
digital assets is going to be the sale of a security. Why people keep
expecting a different answer from them, I don’t know. I think if we
want a different result, we need to look to lawmakers.

The lawmakers were ready. Before the ink had dried on the SEC’s Token
Guidance, U.S. federal legislators introduced two bills supporting the
blockchain industry: The Token Taxonomy Act of 2019 and the Digital
Taxonomy Act. Writing in Forbes,11 Klayman reflects “how remarkable
and powerful it is to have broad bi-partisan support for non-security token
sales.” As in Wyoming the primary driver for these bills seems to be con-
cern over a lack of regulatory clarity, which Congress believes has stifled
innovation and sent businesses overseas to more welcoming jurisdiction.
The bills have been drafted with feedback from the blockchain industry,
but there are still concerns, including from Wyoming itself where Caitlin
Long notes that there are conflicts between the Token Taxonomy Act and
some of the legislation that has already been enacted over several states.
U.S. efforts continue to codify blockchain and cryptocurrency legislation
consistently at state and federal level in a way that eliminates ambiguity,
but satisfying all parties is going to be a challenge.

United Kingdom

The Financial Conduct Authority (FCA) in the United Kingdom has a

simpler task because it is working within a very different legal framework.
UK law is not excessively codified. It relies upon principles and precedent,
and there is no desire to overcomplicate blockchain and cryptocurrency
regulation. The FCA’s guidance12 categorizes cryptoassets according to
their structure and their designed use. Exchange tokens, in other words
cryptocurrencies that are essential to the operation of a decentralized plat-
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form such as Ether, Bitcoin, IOTA, and XRP, are outside the scope of
FCA regulation, as are utility tokens, which provide access to a product
or service on a decentralized platform. Security tokens are identified as
such if they share characteristics with real-world securities, such as rights
conferred on the holder or expectation of a return, and are regulated.
The actual use of the funds raised has no bearing on the designation of the
token: rollercoaster tickets are utilities, regardless of whether or not the
cash raised from their sale pays for construction work.
This flexibility and the reliance by regulators on principles and char-
acteristics rather than strict rules give the UK a uniquely balanced set of
guidelines for the emerging blockchain and cryptocurrency landscape,

according to Martin Bartlam, International Group Head of Finance and

Projects and FinTech Global Group Chair at DLA Piper. He is bemused
by the enthusiasm of some startups to hop jurisdictions, setting up their
business in Gibraltar, Switzerland, Malta, or Singapore to access differ-
ent frameworks that they see as more suited to their needs despite their
customer base being elsewhere. It is a sad indictment of the Magic Inter-
net Money mindset that the priority is sometimes not solving a problem
for the customer but avoiding problems for the entrepreneur. For most,
though, the UK’s approach to regulation is supportive of genuine innova-
tion and viable business models and has its feet firmly in the real world.
Bartlam also observed that the volume of ICOs coming through the
firm dropped off markedly even before the crypto bubble hit its peak at
the end of 2017. As a result of market volatility, there is a trend now for
the more viable businesses seeking ICO funds to offer stablecoin tokens
for sale, which are tethered to real-world reserves of fiat currency or gold.
This is a complicated process but is perceived as a better course of action
than exposure to fluctuations in crypto valuations.
The Bank of England has also made changes that will have positive
implications for cryptocurrency. Governor Mark Carney announced in
June 2019 that nonbanks can hold an account with them, which ini-
tially impacts payment companies such as Worldpay, and was cautiously
welcoming of the “systematically important” Libra whitepaper, which
had been published a few days earlier. Launching accounts for nonbanks
opens the door for stablecoins to store supporting reserves with the Bank
of England, a positive signal for the integration of cryptocurrencies with
Copyright © 2020. Business Expert Press. All rights reserved.

mainstream finance. Carney has indicated more than once that he is

supportive of cryptocurrencies in general. Speaking at a meeting of cen-
tral bankers in Wyoming in August 2019,13 he suggested that a global
digital currency could become the world’s reserve, releasing U.S. dollar
funds from the role and insulating world economies from volatility in the
United States.

France

Speaking at the Blockchain Game Summit in Lyon, France, in Septem-

ber 2019, lawyer Jean-Baptiste Soufron, former senior advisor on digital

economy to the French Minister of Innovation, outlined the French

approach to ICOs. A token sale to fund the development of a new plat-
form, he explained, can be compared to buying a calf for a farmer’s herd.
The animal is essential to the business model and is viewed as a utility
from the outset. It may take time to mature sufficiently to produce milk,
and it may accrue value, but neither of these features should disqualify its
consideration as a utility rather than a security.
This is the most flexible interpretation we have seen and comes from
a jurisdiction which is largely supportive of ICOs. France has taken time
to consult with the industry and define the practicalities around token
sales. The PACTE law,14 an action plan for the growth and transforma-
tion of business (plan d’action pour la croissance et la transformation
des entreprises) was enacted in April 2019 and includes specific regu-
lation surrounding ICOs (Offres de jetons virtuels). It recognizes that
ICOs have become a key fundraising vehicle for innovative projects, and
that it is important to distinguish the genuine offers from the fraudulent.
Its guidelines include the use of a traditional escrow mechanism for the
token sale process, proof of robust internal systems and insurances for
the company, and a requirement for clear and accurate white papers, all
intended to mitigate risk to investors.

Malta, Gibraltar, Singapore, and Zug

Several smaller states accelerated past more complex jurisdictions in the

chain and cryptocurrency. They attracted attention from fundraisers seek-

ing legislative endorsement and credibility for their ICOs in the gold rush
years 2015 to 2017 and proposed early examples of specific regulations,
which are gradually being passed into local law.
In its quest to become the capital of blockchain and cryptocurrency
in Europe, Malta, the self-styled Blockchain Island, passed three bills in
November 2018 around technology, tokens, and cryptocurrency. Accord-
ing to Forbes writer Rachel Wolfson, the Malta model takes a technology
first approach and has developed a clear regulatory framework, recog-
nizing the importance of legal certainty for businesses in the sector.
The bills include certification for exchanges, which was a major factor

in the relocation of leading exchange Binance to the island, a regulatory

regime for ICOs, and a requirement for internal governance in distributed
ledger technology to promote credibility.
From Crypto Island to Crypto Valley, the Swiss canton of Zug was an
early haven for blockchain businesses and a welcoming jurisdiction for
ICO fundraising when other countries were still developing their guide-
lines. More than 50 blockchain companies are now established in the
region.
Gibraltar also pitched for the “blockchain island” crown, develop-
ing the first regulatory framework for distributed ledger technology, and
establishing a series of nine principles to which DLT businesses on the
peninsula are expected to subscribe.
Singapore’s Securities and Futures Act governs utility and security
tokens, while its Payment Services Act regulates what the British FCA
would describe as Exchange Tokens.
Gibraltar, Malta, and Singapore historically inherited the British legal
framework, for a variety of reasons, and the flexibility of their regulations
has much in common with the balance that seems to have been achieved
by the UK’s FCA. After a torrid few years, the Gold Rush seems to be fad-
ing, and we are moving toward a more stable ecosystem with sustainable
business models.

A Coin for Every Occasion

world. By contrast, Cryptoslate15 lists over 2,100 cryptocurrencies. The

proliferation of coins in the digital world comes down to their nature:
cryptocurrencies are programmable money. They can and do have spe-
cialist functions according to their place in the digital ecosystem. Many
coins grease the wheels of their own distributed ledger, while others are
tokens within Ethereum.
Tokens are a particularly interesting aspect of distributed ledger tech-
nology. A token is not just digital cash: it is programmable money. Tokens
with different properties are commonly referred to by the reference num-
ber of the relevant Ethereum Request for Comment (ERC), which led to
their development by the open-source community. The most common

are ERC20 tokens, which act as native currency for applications built on
the Ethereum blockchain. Other tokens have specialized roles: ERC721
and ERC1155 have been widely adopted to perform specific functions
in gaming and are spilling over into the world of business, as we will see
in Chapter 5. A token can be a measurement of value, a nonmonetary
unique or generic asset, or a degree of influence in a community.
Let’s have a look at some of the types of cryptocurrencies in circula-
tion and their individual functions.

Anonymity and Privacy

Bitcoin, Ether, and other cryptocurrencies appear to the casual eye to be

anonymous, with a user’s wallet address rendered as a string of letters and
numbers. This is not the case. They are not anonymous, but pseudony-
mous. It is entirely possible to trace transactions out to the real world. There
are other coins, however, whose structure enables anonymity and privacy
for users. The most prominent of these are Monero, Dash, and Zcash.
While any transaction on the Bitcoin blockchain identifies the sender,
receiver, and amount for all to see, transactions involving privacy coins
are obfuscated in a variety of ways. Mechanisms include hiding details of
the transacting wallets, splitting payments into several separate amounts,
disguising a genuine transaction in a list of decoys, and permissioned
views. In effect, these coins replicate our day-to-day cash transactions:
no transparent, public record can be interrogated to prove who passed a
dollar bill to their friend.
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Stablecoins

One of the greatest challenges for cryptocurrency is the volatility of Bit-

coin, Ether, and their peers. Quite apart from bubbles such as 2017’s
tenfold rise in value and 2018’s corresponding fall, the day-to-day fluctu-
ations in cryptocurrency compared to large fiat currencies cause friction
and challenges with adoption. While the crypto ecosystem is still small,
there are too few transactions for value exchange (in other words, pur-
chase of goods and services) compared to the volume of speculative trades,
which drive dips and spikes in price. Even where there are flourishing

areas of cryptocurrency use or popular applications, the exchange risk

involved in moving back and forth to fiat is high. This friction at the edge
is a substantial barrier to entry and tars perfectly sound distributed ledger
applications with the brush of unpredictability.
Enter the stablecoin. This is a specific class of cryptocurrency whose
value is not driven by the vagaries of the emerging cryptocurrency market
but by the movements of real-world assets. There are several advantages
to stablecoins, reducing friction at the edge of the crypto ecosystem by
acting as a form of value airlock. For investors in cryptocurrency they
represent a lifebelt within the crypto world, a safe haven in the event of
extreme volatility. For existing users of public blockchain applications,
they are becoming a link to the real world: in California, for example, it is
now possible to pay state taxes from cannabis-related businesses in stable-
coin. Finally, applications which use a stablecoin as their core cryptocur-
rency remove a large part of the perceived risk for new adopters, enabling
people to benefit from blockchain-enabled applications without worries
over volatility and liquidity.
The earliest and most widely adopted of a clutch of stablecoins, Tether
is aligned to the value of the U.S. dollar and collateralized by its match-
ing fiat currency reserves. Tether has suffered from bad press in the past,
notably due to a lack of independent verification of its reserves. It also
gained notoriety thanks to third party manipulative trading of Bitcoin to
and from Tether, which may have artificially inflated the value of Bitcoin
during the bull run of 2017.
The issue of trust and confidence is one which Cameron and Tyler
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Winklevoss of the Gemini exchange are addressing head on. The Gemini
Dollar is the world’s first regulated, audited stablecoin. The Winklevoss
twins have a clear agenda of building trust through oversight, avoiding the
very human problems that have plagued custodians in the cryptocurrency
world. Speaking at the SXSW conference in Austin, Texas, in March 2019
they explained that “the most healthy markets are the best regulated” and
reiterated that the key to success is “not the tech, it’s the trust.”
While Tether, Gemini, and other collateralized stablecoins have
the onerous requirement to maintain matching reserves, DAI from
MakerDAO (Maker) has overcome the need to hold physical reserves
through automatic pricing systems built into the token’s smart contracts.

These mechanisms are continually readjusting the price of DAI as the

market fluctuates, ensuring that it remains pegged one-to-one with the
U.S. dollar. Since its launch in 2017, it has demonstrated good stability
despite major volatility in the market.
It is becoming more and more common for applications to be devel-
oped using a stablecoin as their principle currency, says Martin Bartlam
of DLA Piper. Established apps are also turning to stablecoin. Tom Kysar
of the Augur Project, which was one of the earliest Ethereum applications
to be developed, explained that a need for lower volatility led version 2.0
of their peer-to-peer prediction market to move to trading in DAI. The
mitigation of cryptocurrency risk has become a vital step toward greater
blockchain adoption. However, there is a caveat: for all that this approach
reassures new users whose concept of money is informed by fiat behav-
ior, stablecoins are in danger of abandoning the systematic stability of
traditional cryptocurrency in a quest for price stability.

Specialized Cryptocurrencies

In the world of financial technology (FinTech), the concept of a distrib-

uted ledger was quick to be explored. After all, financial systems are built
on the checks and balances of ledgers and the industry both understood
the new technology and realized that it may one day supplant traditional
banking. Considerable work has been done in all areas of FinTech and
banking to explore automation, decentralization, and the role of block-
chain in managing trust between mutually suspicious parties.
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So where are the FinTech coins? The largest of these is XRP, the native
currency of the Ripple cross-border payment platform. Ripple has been
adopted by banks worldwide and is a popular blockchain application
aiming to reduce friction in international transfers. The fact that XRP is
fundamental to the niche Ripple application has led to controversy and
argument that XRP is not a decentralized cryptocurrency and should not
be traded as such. Legal action around whether the sale of XRP on the
open market was legitimate in the first place has been rumbling in the
background. Despite this, XRP grew to be one of the more popular traded
cryptos thanks to the widening adoption of Ripple. A spinoff from an
XRP form, XLM is also gaining traction in the payment processing space.

Another coin with a niche application is IOTA, the native cryptocur-

rency of the eponymous blockchain, which focuses on the security of the
Internet of Things and enabling machine-to-machine communication.
IOTA’s framework departs from Satoshi’s blockchain structure, introduc-
ing a concept called Tangle. Transactions are written to the ledger and
attached to others by an edge, rather than a linear chain. A transaction
can only be entered if the node doing so validates two adjoining trans-
actions. This results in a random consensus where, as more transactions
are entered, more validations are completed, so in theory the system runs
faster the more data is recorded. The validations use the same Hashcash
basis as the Bitcoin blockchain but with a much lower level of complexity,
which means that nodes can validate with limited processing power on
smartphones or within sensors. The IOTA coin (more accurately mIOTA)
is the means of payment for any machine-to-machine transactions which
happen within the network. IOTA has still to be proven at scale, but it
occupies an increasingly important niche in the world of blockchain and
cryptocurrency.

Crypto for the Masses

Adoption of cryptocurrency has, unsurprisingly, been a worldwide phe-
nomenon. According to the 2019 Statista Global Consumer Survey,16
Turkish citizens led the way with 20 percent of those surveyed having
owned or used cryptocurrency; Brazil, Columbia, Argentina, and South
Africa also reported usage rates above 16 percent. This contrasts with
Copyright © 2020. Business Expert Press. All rights reserved.

much lower levels of adoption in Western Europe and North America

(6 percent in the United Kingdom, 5 percent in the United States).
Cryptocurrency is gaining ground as a genuine alternative medium for
exchange of value in countries where there is volatility, heavily controlled
currencies, or a large proportion of the population without access to
banking facilities. This is not to say that adoption in such economies has
been easy. Authorities have attempted to regulate and even ban crypto-
currency mining and use in a number of countries with varying degrees of
success. In cultures where there is strong government control and censor-
ship, exchanges which are permitted may be heavily regulated. Venezuela
has been held up by some cryptocurrency evangelists as a pioneer thanks

to the creation of a national cryptocurrency, the Petro, but the real pic-
ture is far more complex and sinister. There is a clear distinction between
what Andreas M. Antonopoulos describes as “money of the people,” that
is open, borderless, neutral, censorship-resistant cryptocurrency, and
“money of the government” under centralized control. Because no-one
trusts the Petro, use of Bitcoin has flourished defiantly.
Cryptocurrency is gaining traction where it has utility for users: this is
only to be expected. However, any enterprise introducing an application
that incorporates the use of cryptocurrency must consider the mechanism
by which they expand their user base beyond the crypto space.

Adoption Through Need

Case Study: Venezuela

My colleague Patricia O’Callaghan left Venezuela in 2017 in the face of

mounting inflation, crumbling infrastructure, and dismal prospects for
the future. The inflation rate at the time was reported by the International
Monetary Fund to have reached 1,000,000 percent, with predictions
that this would rise to an estimated 10 million percent in the following
12 months. Patricia and her friends, now scattered across the world, told
me about the challenges of the environment they left behind and the
importance of Bitcoin in Venezuelan society.
Cryptocurrency is viewed in countries with a stable banking and
political system as a volatile, risky venture. In Venezuela, where people
are facing rapid devaluation of the local currency, Bitcoin plays the role
Copyright © 2020. Business Expert Press. All rights reserved.

of a stablecoin. Individuals receiving payments in the local currency, the

Bolivar, cannot convert to fiat currencies. Holding dollars is illegal, to the
extent that Patricia recalls being stopped by the police and having the few
dollars in her wallet confiscated. Conversion to Bitcoin became a way to
preserve value, transfer money between citizens and across borders, and
store savings safely: “Bitcoin is much safer than dollars,” she explains.
Using Bitcoin is not as simple as we might expect given the reported
uptake. A lack of reliable infrastructure results in regular power cuts, or
more accurately a sporadic supply of electricity to one town, then another.
Internet access is patchy or nonexistent. Bitcoin mining, once lucrative

thanks to virtually free electricity funded by the country’s oil revenues, is

illegal. Any equipment found is confiscated, although this simply moves
the mining rigs into the control of the government. But still Bitcoin flour-
ishes. Payment for regular commodities in Bitcoin via SMS started to
become common in November 2018, in grocery stores, restaurants, cof-
fee shops, and even for buying clothes. This is a huge cultural shift in a
country where very few people were previously aware of cryptocurrency
and only a small population had access to the internet. The response to
the political and economic situation has been a wholesale adoption of
“money of the people.”
What of the “money of the government”? The Petro is increasingly
being imposed on a population who are not technologically able to cope
with it. Pensions are paid in Petro, and a video, which circulated widely
online, shows a tax collector demanding payment in Petro from a busi-
ness owner.17 The young man was unable to oblige, explaining that all his
customers paid him in Bolivars, and was jailed for his protest. Many of
the Venezuelan professional classes have left the country, including my
developer colleague and her husband, a doctor. For those who leave, at
least they can transfer their money out of the country in Bitcoin. On the
Columbian border, easily reached on foot, there are Bitcoin ATMs in
place ready for new arrivals to access their savings. Independent reports
also suggest that the main users of Columbia’s growing Athena Bitcoin
ATM network are Venezuelans transferring cash back home.18
The most effective adoption of any new technology is that driven by
need, and true cryptocurrencies, emerging as they have from the Crypto
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Anarchist ethos, are perfectly suited to meet a need such as that of Vene-
zuelan citizens and others around the world in a similar position. What,
then, are the incentives in a society without an obvious need for a “money
of the people”?

Putting the User First

A Seamless User Experience

It is much easier to bring users on board through the familiar. People may
not realize that they are using cryptocurrency at all thanks to centralized

structures that have custodianship of assets. Blockchain and cryptocur-

rency innovator Adryenn Ashley outlines the pattern of technology adop-
tion through recent history. The VHS versus Betamax video formats was
a battle won by the less robust but more familiar VHS: after all, reasoned
consumers, this was just a big cassette tape. CDs became mainstream for
audio, smoothing the path for DVDs as a new medium for video despite
the technical superiority of laser discs. Cryptocurrency adoption relies
upon this appeal to familiarity, says Ashley. If the language is too alien, or
the methods of access too complex, then there is no path for the main-
stream consumer to follow.

Adoption Through Play

Gaming is one area where cryptocurrency can add new functionality

without disrupting the user experience. As many as 250 million Fortnite
players pay to play using VBucks in the game, and World of Warcraft’s
WoW Gold and off-platform asset trading is well established. Onboard-
ing new cryptocurrency users through play gives users the chance to own
their coins and assets, but why should the user’s experience be disrupted?
Gaming industry veteran Alex Amsel discussed this challenge with me.
He also sees the challenge of introducing the benefits of cryptocurrency
without compromising the existing features to which the gaming com-
munity are accustomed. Stablecoins provide a route to eliminating vola-
tility, but there is no reason why games should not be denominated in fiat
currency, and this is increasingly the route being taken.
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Adoption by Informed Choice

Crypto-Maximalism

Crypto-maximalists advocate for a future where people consciously opt

to have absolute decentralized control of their own assets, following in
the footsteps of the Cypherpunks and the crypto-anarchist vision. These
may include users who are otherwise unbanked or do not wish to place
their trust in government, but to actively adopt cryptocurrency implies
a degree of knowledge and understanding of the crypto landscape and

language. To expand this way requires user education and a consider-

able amount of work to improve the public perception of cryptocurrency.
In those cases where cryptocurrency has been directly adopted, for exam-
ple among groups of Venezuelan citizens, this is driven by need but still
requires understanding.
Education is an important part of giving users the choice to use cryp-
tocurrency. Understanding the pros and cons of controlling crypto assets
improves safe and secure use and helps to promote appropriate adoption
where cryptocurrency meets a need.

Educating Asia

Direct interaction with a potential user base and proactive education and
onboarding are gradually driving adoption in Asia in the face of regula-
tion, censorship, and anti-crypto propaganda. Emily Rose Dallara, Head
of Marketing and Growth of trading platform Liquid.com, has worked
throughout Asia and is based in Saigon, Vietnam. She observes that
Tokyo, along with Bangkok, is probably the most advanced in adoption,
where Roger Ver, Akane Yokoo, and their team have encouraged a large
volume of small businesses to take Bitcoin Cash (BCH) both in person
and online. It’s now possible to make micropurchases in coffee shops and
restaurants across the Tokyo central districts of Roppongi and Shibuya,
and it is becoming increasingly straightforward for an online merchant to
accept BCH.
The adoption that Dallara sees among Vietnamese traders is more
Copyright © 2020. Business Expert Press. All rights reserved.

likely to be driven by holders of cryptocurrency encouraging others to

use it so they can spend their money. Accepting crypto can also present
problems for merchants as it is illegal to ask for payment or list prices in
any currency other than the Vietnamese Dong (VND), and across Asia
there are so many e-money applications in use that crypto is just another
payment option. However, there is one area where cryptocurrencies are
meeting a need, albeit one that will not find favor with the authorities.
Vietnam, in common with many other more centralized, communist
countries, discourages the transfer of VND out of the country. Dallara’s
experience is that it is easier and cheaper to convert VND to BCH on
a local exchange and manage cross-border transfers in cryptocurrency.

In Saigon there is also a big focus on the DAI stablecoin, and people have
started accepting cryptocurrencies online and converting to DAI or USD.
How this gradual adoption plays out against the political backdrop of
Asia’s communist countries will be interesting.
One cultural aspect that sometimes escapes Western eyes is that being
unbanked in Asia is neither unusual nor a disadvantage. Our economy
expects people to have access to traditional banking and excludes those
who do not, for instance, by offering more competitive utility pricing to
those who can pay by direct debit from their bank. The advantage we
might expect to accrue to the unbanked in Western culture is not going
to drive adoption in the East.

Banking the Unbanked

Gaining access to a store of value and payment mechanism is attractive for

those who are disadvantaged by being unbanked, and for cash economies
such as the emerging cannabis industry. Cryptocurrency fills a vacuum
where banks cannot or will not step in, whether this is a result of external
regulation or their internal business model. This is a problem close to
home. According to Federal Deposit Insurance Corporation research,19
6.5 percent of U.S. households are unbanked, and a further 18.7 percent
underbanked, representing 32.6 million households in the largest econ-
omy on the planet. If these households were able to use cryptocurrencies
as easily as bank customers use fiat currencies, this would reduce eco-
nomic exclusion.
Copyright © 2020. Business Expert Press. All rights reserved.

Case Study: Abstrakt

Companies such as Austin-based Abstrakt are already working toward

this goal, aiming to make cryptocurrency use uncomplicated and secure.
Speaking to founder Corey Segall, he reinforces the need for a straightfor-
ward user experience to help adoption while ensuring that the individual
has ownership of their assets and data. Banking clients and users of pay-
ment mechanisms such as PayPal have access to good mobile applications,
which enable quick and easy transactions: why should this be any different
with cryptocurrency? The challenge, of course, is that where a user holds

the keys to the safe, they have full responsibility for the security of the
assets. If mistakes are made in banking, or on any platform where there is
good custodianship, there is recourse to a centralized ledger. If individual
users make mistakes in the management of crypto assets, for instance
sending funds to the wrong wallet, or worse, losing the private keys which
are the sole means of access to your assets, then there is no way back.
Abstrakt’s proprietary technology is available publicly as the VaultWallet
mobile app but is more usually found under the hood of a number of fin-
tech and blockchain applications. It addresses these two worst case scenarios
of cryptocurrency use with outwardly simple transactions (from whom, to
whom, and how much) backed up by innovative sharded key management
strategies and automatic server-side fraud detection mechanisms. The focus
is on delivering a high level of security for the user from several angles. The
system is protected against direct attacks by its distributed nature, against
fraud through confirmatory signing if the transaction is clean, and against
user error with a series of backup options, which are carefully designed to
avoid any custodian relationship arising. Ultimately, says Segall, for day-to-
day transactions users should experience the same ease of use with crypto-
currency as they have with their credit card or checking account.

Libra: A New Pathway?

In June 2019, the publication of the Libra white paper by Facebook

“money of the corporation.” It had long been speculated that at least one
of the Silicon Valley giants would bring out its own cryptocurrency, with
work going on not only at Facebook but at Amazon, Apple, and Google;
this whitepaper was the first shot across the bows of traditional banking.
The launch of Libra was originally planned for mid-2020, subject to pro-
duction and regulatory hiccups, but the project suffered early setbacks
with the withdrawal of major founding members including Paypal, Visa,
Mastercard and Stripe. Despite this, the publication of the Libra white-
paper was significant for several reasons.. First, it changed the dynamic
between cryptocurrency and banking overnight, making a worldwide user
base of two billion and a wider public aware of an alternative to “money

of the government” backed by a recognized brand. It represented more

of a threat to banks than to established decentralized currencies, which
regulators were not slow to recognize. Second, it was designed to be a
seamlessly accessible medium for peer-to-peer payment. Once ease of use
of a corporate currency is established across a large population, the world
of traditional cryptocurrencies opens up to users who are more discerning
about privacy, neutrality, and value conferred by the community rather
than by a basket of fiat currencies.
Widespread cryptocurrency adoption will be influenced by corporate
cryptocurrencies, but there are many more factors at play, along with con-
siderations for the protection of individual users and the practicality of
using digital cash in the real world. Let’s look more closely at the custo-
dians of cryptocurrency and ways of reducing friction at the edges of the
crypto ecosystem.

The Contradiction of Custodianship

From cryptocurrency’s anarchic beginnings, the intention was that
Bitcoin and those coins that followed should be money of the people, decen-
tralized and unfettered by agency or authority. The people had other ideas.
As the equipment required to mine cryptocurrencies became prohibitively
expensive and enthusiasts sought to invest in this new asset, exchanges
sprang up to meet the need of buyers and sellers whose early transactions
were clandestine face-to-face meetings for cash purchase of digital goods.
Of course, once coins could be purchased through a digital intermediary
Copyright © 2020. Business Expert Press. All rights reserved.

the temptation for new investors was to leave their coins on the exchange.
This was the curse of the familiar: exchanges began to be treated as de
facto banks. It is ironic that while the Bitcoin white paper was published
in the wake of the 2007 to 2008 banking crash and offered a decentral-
ized alternative, the increasing numbers of Bitcoin holders turned toward
what looked like traditional structures to manage their accounts.

Risks of Individual Control

Cryptocurrency holders are encouraged by the community to move their

assets from exchange wallets to private storage, and on January 3, 2019

the first “Proof of Keys” event took place. This date, the tenth anniversary
of the Bitcoin Genesis Block, was chosen as a reminder for holders to be
sure they had private keys for all of their assets and to move long-term
investment coins into more secure private storage. For newer entrants,
this felt like jumping out of the frying pan and into the fire, a step out
of the familiarity of bank-like exchanges to a new world of holding your
money in what amounts to a digital personal safe. But even if you have
control of all your assets, are they really as secure as they can possibly be?
Even the most careful cryptocurrency investors have fallen foul of
manipulation and theft from their private wallets, to say nothing of the
Bitcoins which have been lost down the back of the virtual sofa over the
years thanks to misplaced keys, destruction of records, or accidentally
junked hardware. Cryptocurrency theft is a growing phenomenon, par-
ticularly where hackers exploit the security around individually held assets
to gain entry. In November 2018 a group of investors sued both AT&T
and T-Mobile for negligence in allowing the SIM cards on their accounts
to be replaced in response to verbal requests from hackers.21 The replace-
ment SIM cards were then used to pass two-factor authentication con-
trols and access wallets: one victim reportedly lost 3 million unspecified
coins, while another quantified the loss at the time at $621,000.
Investors are caught between the risk of trusting a centralized exchange
with their decentralized assets, and the risk of disaster in their own hands
for which there is little or no recourse. Cryptocurrency cannot scale effec-
tively with this degree of risk associated. How can we move forward?
Copyright © 2020. Business Expert Press. All rights reserved.

Watching the Watchmen

Exchanges may have been free of centralized government regulation, but

they have been historically equally free of any exacting or enforceable
standards to protect the consumer. For many people the risks involved
in remaining on an exchange are outweighed by fear of the complexity
and precision required to move funds to wallets under their sole control.
Exchanges have been trusted to watch over significant holdings of crypto-
currency on behalf of individuals, resurrecting an age-old question. A little
short of two thousand years ago, Roman poet Juvenal coined the phrase
“Quis custodiet ipsos custodes?”: Who watches the watchmen? This is a

legitimate concern. In February 2014 the highest volume exchange of the

time, Mt Gox, suffered a record theft which ultimately brought down
the organization as thousands of holdings were compromised and a stag-
gering 850,000 Bitcoin were stolen, although some were later recovered.
Despite efforts by exchanges to build trust and establish self-regulation, a
second scandal emerged almost five years later. Canadian company Quad-
riga Fintech Solutions originally hit the headlines in 2015 as potentially
the world’s first publicly traded Bitcoin exchange.22 The plans to list were
shelved soon after this announcement, but coming as it did in the wake
of Mt Gox, the publicity helped Quadriga’s reputation as a business that
expressed a wish to be regulated. In January 2019 following some finan-
cial challenges, it was reported that founder Gerald Cotten had died sud-
denly without leaving instructions for access to the cold (offline) wallets
holding all the funds deposited on the exchange. Suspicions raised at the
time about the circumstance of the loss and the certification of Cotten’s
passing in India were vindicated when auditors discovered that the wal-
lets had been emptied some weeks prior to the founder’s disappearance.
During the long court investigation which followed, Ernst and Young
observed that the “operating structure was significantly flawed from a
financial reporting and operational control perspective.”23 If self-regulation
falls at the first hurdle, what trust can be placed in custodians?

Case Study: Gemini

Cameron and Tyler Winklevoss, founders of the Gemini exchange, sit

firmly in the camp of externally regulated custodianship. As seasoned

crypto investors they watched the development of the space including
the high-profile exchange disasters and increasingly frequent reports of
theft from both exchanges and individuals. This prompted them to act.
In most of these cases, they observed at their SXSW 2019 keynote, the
weak link has been human: the trust placed in the guardians of crypto
assets has been misplaced.
Who watches the watchmen? they asked the audience. In the absence
of caped heroes, the Winklevoss twins assert that regulatory oversight is
currently our only hope. They argue that the healthiest financial markets
are those with the best regulation, and that regardless of the currency

involved, the future of money requires trust. They started work on their
Gemini exchange in the aftermath of the Mt Gox collapse and acquired
their banking license before launching. Gemini’s founders have their eyes
on long term security for investors and long-term success for the busi-
ness, once again comparing the development of the cryptocurrency space
with the historic rise of the internet. They reminded the audience about
early legal wrangles between Microsoft and Netscape, which held those
1990s giants back from dominance on the internet, allowing Google
to overtake. The Winklevoss twins are in the exchange business for the
long haul, ready to take the opportunity that being a trusted custodian
should convey.

Defining Stability
Critics have said in the past that “you can’t buy your coffee with Bitcoin.”
As we have seen, this is no longer the case in Tokyo, Caracas, Bangkok,
and hundreds of cities around the world, but the trope illustrates a fun-
damental challenge for cryptocurrency: its volatility when compared to
fiat currency. We are generally used to a $3 coffee today being a $3 coffee
tomorrow. We take home our regular pay, and budget for the month
accordingly. Surely it’s unreasonable to adopt a system where coffee is
$3 today, $6 tomorrow, and $1 the day after? In some places, this is the
norm. Friends who lived in Zimbabwe during its prolonged periods of eco-
nomic instability recall walking into the store and not knowing whether
the bread would be 20 cents or $5 that day. Patricia O’Callaghan’s father
Copyright © 2020. Business Expert Press. All rights reserved.

still works in banking in Venezuela: I have seen video of thousands of

notes being fed into the bank shredder, replaced by a new issue after only
two years as legal tender. Government money is not systematically stable
and relies upon the mechanism of fiscal policy to bestow price stability.
Cryptocurrency is the opposite of government money. As Wall Street
veteran Caitlin Long explained following a flurry of price movements in
June 2019,24 Bitcoin was designed for systematic stability, not for price
stability, and the two concepts are probably mutually exclusive. Demand
for money itself is not stable, influenced by factors from natural disasters
to population growth through regulation, industrial developments, and
seasonal changes. Basic economic theory of demand and supply suggests

that in periods of high demand the price of a scarce commodity should

rise, but, as Long says, “central bankers manufacture the price stability of
fiat currencies by interfering with natural market processes.”
Systematic stability is quite different. As demand for Bitcoin rises,
there is no way to increase the supply of coins to match demand and
maintain price, because the number of Bitcoin is fixed. Instead, the secu-
rity of the system varies with demand through an automatic increase in
the difficulty of the mining algorithm. How can government money,
manipulated for price stability and suppression of market volatility, main-
tain systematic stability? As Long observes, interference can only result
in instability. Since the 1980s, she observes, “traditional financial mar-
kets have ping-ponged within a crisis/stability/crisis cycle.” Day-to-day,
we might enjoy the price stability that government money gives us, but
cryptocurrency offers an alternative systematically stable route, which will
have its day in times of crisis.
In the search for mechanisms to improve the uptake of cryptocur-
rency people can lose sight of the fundamental role of money as an hon-
est ledger, a way of recording transactions in a way that the community
accepts. Bitcoin has claimed its place as a monetary unit precisely because
the community accorded it a value and used it to record the buying and
selling of real-world assets. In Venezuela, the price of Bitcoin against the
dollar is irrelevant. Venezuelans have had enough volatility in their gov-
ernment-issued fiat currency, and the fact that Bitcoin is gaining traction
in day-to-day purchasing shows it is valued as a means of exchange.
Ultimately, there is no quick fix. For traders and consumers to embrace
Copyright © 2020. Business Expert Press. All rights reserved.

cryptocurrency, there must be a real advantage over the status quo. This
could be triggered by price instability in traditional fiat currencies, by
a community’s decision to use a cryptocurrency as its honest ledger of
transaction value, or by the increased adoption of blockchain outside the
monetary system. With that in mind, let’s turn to the ways in which
the technology underpinning cryptocurrency is solving problems in the
wider world.

Baucherel, K. (2020). Blockchain hurricane : The origins, application, and future of blockchain and cryptocurrency. Business Expert Press.
Created from rmit on 2023-08-30 15:09:45.

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