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Blockchain
Jun. 9th, 2017 08:11 am
A blockchain is simply a decentralized network with information. The innovation here is in the word "decentralized" - the blockhain has made it possible for us to have a centralized database of information that is not owned by any organization.
Instead, blockchains are really sitting on the computers of many, many computers on the internet (whose owners are called "miners").
This is a ground breaking innovation as this was never possible till the blockchain came about. This is thanks to a now iconic paper by a still mysterious Satoshi Nakamoto. This innovation is significant because owning the data in that centralized database is what has given the likes of Facebook its awe inspiring power.
Bitcoin, very simply, allows you store value on the Bitcoin blockchain. Bitcoin allows us to store information on how much value each account on the Bitcoin blockchain has and keep it synced across the Blockchain. Bitcoin's value has surged in the past few months. Some of the surge was explained by Japan's decision to treat Bitcoin like any other currency. Some of it might be explained by a rush to find a new store of value given the high global uncertainty of late.
But, the surge is definitely unusual and unnatural.
This has caused all sorts of issues around Bitcoin's blockchain as the network hasn't yet proved itself capable of handling this scale. For example, a transaction right now takes hours to get confirmed.
So, these scalabilities issues have been at the heart of arguments around Bitcoin in recent years. The programmers who maintain the network can't agree on the best way to solve them and there is a sizeable section calling for a "fork" or the creation of a new blockchain that is designed for scalability.
That context about issues around Bitcoin sets the scene for Ethereum. While still in his teens, a Russian programmer called Vitalik Buterin was an early Bitcoin adopter, developer and writer. Having experienced the issues around the Bitcoin blockchain first hand, he decided to build a new blockchain called Ethereum with Ether, its own cryptocurrency.
So, what is Ethereum? Ethereum enables you to store value (à la Bitcoin) but also add "smart contracts." Smart contracts enable us to add conditions around sending value, for example. Or, put differently, it is programmable digital money.
Each blockchain is a network. We've so far talked about two networks - the Bitcoin blockchain and the Ethereum blockchain. As you can tell, both these networks exist to do different things. The Bitcoin blockchain is a store of value while Ethereum is all about smart contracts (that can also double as a store of value).
But, there will be other legitimate reasons to create blockchain based networks. In the past, however, building a network based business has proven really hard. Would you bet on taking on Amazon, Facebook and Google - giants by every way you want to measure success?
Imagine you want to start a new coin - ABCoin. You believe ABCoin is going to be great and worth $100M someday. You can now decide to do an "initial coin offering" or ICO to sell 10% of these coins. The buyers of the new offering pay up Bitcoins to get these tokens worth $10M in the hope of future return (much like the stock market). These tokens can be traded but don't confer ownership rights.
You now use $10M to fund the project and make ABCoins great again - while still maintaining ownership. But, now, you have $90M left. What do you do?
You might do is design systems that do the following:
* Pay your core developers and employees
* Rewards miners with tokens for mining
* Reward third-party developers for awesome applications they build on your network
* Return some money to your investors
* Pay all service providers who help you maintain this network
Most of these payments will decrease over time. So, early adopters get disproportionate value for taking the risk. And, assuming you are successful, the value of your token keeps increasing.
In the early stage, they ensure early adopters can fund the growth of the network. And, over time, the power of network effects kicks in.
There are 2 ways to interpret what is going on here - What we're seeing right now is a bubble. And, we'll see the bubble burst because people have incorrectly assumed that the blockchain is going to replace the internet instead of simply being the infrastructure that powers it (i.e. the linux analogy)
Second - What we're seeing is likely a bubble but, if that is the case, this is just the beginning of highs and lows before we build a blockchain based internet that is designed around decentralization.
Finally, blockchains powering the internet, is already happening. Governments around the world are experimenting with blockchain technology to maintain centralized registries. Sweden is testing a land registry, Dubai wants distributed ledgers to power the government by 2020 and Georgia has already moved its land registry to the blockchain. When you have governments among your early adopters, you know you are onto something.
