Brendan January - Cryptocurrencies and the Blockchain Revolution: Bitcoin and Beyond

I n January 2009, a mysterious software developer known as Satoshi Nakamoto exchanged a specially designed file with another developer. The thirty thousand lines of code were a form of digital currency that Nakamoto had proposed several months earlier in a paper titled Bitcoin: A Peer-to-Peer Electronic Cash System.

This was the first Bitcoin transaction, but few people noticed it at the time. Through most of 2009, no one would value a single Bitcoin at more than just a few pennies. In 2010 a programmer completed the first known commercial Bitcoin transaction: the delivery of two pizzas for 10,000 Bitcoins. Seven years later, the Bitcoin used to buy those two pizzas was worth more than $100 million. The day that the transaction occurredMay 22would be celebrated by cryptocurrency enthusiasts as a holiday: Bitcoin Pizza Day.

The journey of Bitcoin, from an obscure program to the height of global finance, is an extraordinary and controversial story. Bitcoin is the most well-known cryptocurrency. A cryptocurrency, in simple terms, is a digital asset that relies on the internet and computers to verify its value and ownership. It is designed to be used like money. According to supporters, cryptocurrencies represent a new way of storing value and conducting business, one that exploits the ease and reach of technology. In this vision, cryptocurrencies will replace paper and coin currencies. Costly, slow intermediaries will be removed from the transaction process. Tyrannical governments and corrupt institutions will be sidelined. Individuals will freely conduct transactions directly with one another in a framework that establishes and maintains trust.

Although Bitcoin is a form of digital currency, some physical coins have been produced as collectors items. The physical coin can come preloaded with the code for a digital Bitcoin or can come blank so that buyers can upload their own Bitcoin to it.

At the heart of these claims lies the infrastructure beneath Bitcoin: blockchain. Blockchain is a decentralized computer system that can guarantee the authenticity of data. In effect, blockchain establishes the truth. Blockchain can validate transactions between organizations or peoplefrom concert tickets, to supply chains, to legal documents such as property deeds, stock certificates, or identification cards.

These extraordinary claims have drawn skepticism from economists, technology experts, and financial regulators. They deride cryptocurrencies as at best a fad and at worst a fraud. In their view, Bitcoin and its herd of copycats are driven by speculators hoping to bid up prices before dumping them, leaving investors with losses. Blockchain ignores the value and stability that intermediaries bring to society and requires a deep understanding of computer code. It assumes technology can solve human nature.

Who is right? Well find out, because if theres anything certain about Bitcoin, cryptocurrencies, and blockchain, its that they are not going away anytime soon. Rather, they are at the center of debates about the role of technology in human society. Cryptocurrencies and blockchain can play a critical role in the futurefor better or for worse.

Chapter 1
Bitcoin and Blockchain

M oney is an essential component of civilization. It acts as a medium of exchange for individuals, enabling them to buy and sell goods and services. When it functions properly, money also allows individuals to store value over time.

Over thousands of years, people have employed many different kinds of moneyfrom beads to metal coins and from shells to coffee beans. Some forms of money are more effective than others. To be a really good currency, wrote economist and Financial Times columnist Martin Wolf, it needs to be durable, portable, divisible, uniform, limited in supply, and acceptable.

Today, most people use fiat money, or what we would recognize as coins and paper bills. Fiat money is made legal tender, or currency, by government regulation. This money actually has no intrinsic value on its own. People give and receive money for real goods and services because it is a socially accepted symbol of value. Citizens must also use it to pay their taxes.

However, it can be unnerving to realize that fiat money is based mostly on trust. Citizens have to believe that the government wont simply make more when it needs to. When the government prints too much money, inflation rises. The value of the currency declines because it doesnt buy as much as it used to. Hyperinflation occurs when the currency loses its value. When a society loses faith in its currency, the results can be catastrophic. Citizens cant afford food, savings are destroyed, and law and order breaks down.

There is no way to track the origins and history of a paper bill, making it much easier to counterfeit than cryptocurrency coins, each of which can be fully tracked on the blockchain.

The root problem with conventional currency is all the trust thats required to make it work, said researchers Stanton Heister and Kristi Yuthas. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of trust.