The Untold Story of Blockchain

Be it investors, startups or corporates why everyone jumped on to the blockchain train.

As a former blockchain consultant, I have told a version of this story many a times at client meetings, industry conferences and business schools including Wharton and Columbia. In this article I’ll take you through the journey of where it all started, how it got picked up and what special ingredient it has which made it so sensational that it was more famous than any celebrity or a politician during 2017/18.

While most people can learn what it is and how it works but in my experience very few seem to understand the “why”. And this is due to too many technologists and salesmen in this domain and almost all of them driven by the monetary gains. There is one other group as well, the social reform camp, who would only tell you the magical power it has to solve world hunger or what not.

If you don’t know the “why” of blockchain, it is worthless to know the “what” and the “how”.

CHAPTER 1: The Invention

Blockchain came into existence because of the financial crisis triggered by the money hungry corporates including the banks, the lenders and the wall street. While the banks got saved by public money, the public themselves lost jobs and their savings. This led to one of the programmers named “Satoshi Nakamoto” in an underground hacker community to initiate a project called “bitcoin” to replace banks by a software. By the way typically the members in such communities are self proclaimed ethical hackers.

There is a controversy around who is Satoshi Nakamoto as the said person was never identified and some think it’s not a person but a group of people and some even think it is some covert government scheme.

Hacker/underground communities have never trusted corporates and were always working on projects to create an alternative banking system which can get rid of the central intermediary, “the banks”. Afterall banks are just record keepers, so the idea was to replace it with a self governing system (computer software).

Satoshi wrote a whitepaper about the bitcoin and shared with couple other programmers. This is where the word “blockchain” gets coined and it’s usage got defined as an underlying layer to enable the bitcoin system to work.

Blockchain may go down as one of the top inventions in the history books with an unknown inventor.

With the design of blockchain, Satoshi was able to crack all the problems any predecessor (example: Zcash) of a similar technology were stuck with and hence the creation of the first self operating and governing banking system.

The point here is that blockchain was created to dismantle centralized authorities and guardians to give back control to us individuals.

CHAPTER 2: The Banking System

We have to start with early days of how human beings conducted all business transactions, typically this was one to one, which means I give the money directly into the farmers hands and buy some carrots. In the physical world most of the small transactions are still conducted the same way. Two parties directly doing transactions between them.

When ever the transactions require a large sum for example purchasing property or some kind of loan/credit, people used to go to the village head in the olden days and still to this day in some parts of the world. Because they can keep account of the transaction and resolve disputes as a third neutral party.

For the most part of human existence above two were the only available method. In the 18th century the concept of centralized banking came into development and within a century it became one of the biggest industries. Banks can keep our money safe, keep record of all transactions, avoids most disputes by default. In doing so banks charge us a fee and to create more value from the deposited swaths of funds they lend money as loans.

Any private or public banking have great power and the responsibility to do the right thing. But as any other business, they can get hungry to keep their profits up year on year while also getting pressured from the the stock market and the holders to boost profitability. In this endeavour their executives often end up creating market bubbles covered with fraudulent activities, lies and misleading information.

If and when these market bubbles burst, it impacts the entire economy like the financial crisis of 2007. While the executives and the companies get bailed out with almost no accountability because they are too big to fail, the common people pay the price with their jobs, savings and livelihood.

CHAPTER 3: The Bitcoin

As blockchain is just a by product of bitcoin, we have to first understand “what is bitcoin”. In the quest of creating an alternative to the centralized banking system, Satoshi came up with a very clever software design based on very simple to understands principle.

Let’s say I want to change my name from “Nishant” to “Raj”, may be just because it is cooler and I tell it to my family that my name is Raj from now on. After that for any shady purpose if I again want to change my name then I just need to convince my family and voila, I can be Ravi or any thing I want. What if I announce my name change to “Raj”, not just to my family but to my extended family, friends and colleagues. Now it is difficult to convince so many people if I want to be Ravi, right? The more people I tell it to, it becomes more difficult and even impossible.

Bitcoin works on the same core principle, it broadcasts any transaction (exchange of bitcoin between two parties) to multiple computer systems on the internet, so that it is difficult to edit later. For this to work, it needs to create its own currency called bitcoin and have ordinary people running the software to store the transactions in their computers instead of central servers.

But why would ordinary people run this software in their own computers? For that it incentivizes everyone who runs the software with pre-specified amount of bitcoins. The transactions of bitcoins between any two parties (debit or credit) are clubbed into a block of data and are sent out to every computer to be stored. All the computers in the network attaches every new block to the existing blocks, hence creating The blockchain.

Obviously there is more to it such as how many bitcoins are released per block, who gets it and how the mathematical equation is solved. All of these you can learn for advanced understanding. Now to change any transaction in the bitcoin network, you need to hack 51% of the computers and then hack each of the blocks within the blockchain. This is virtually impossible to do and hence we typically say data within the blockchain is immutable.

These computers in the bitcoin network are called nodes, if you had only 100 nodes it may be easier to break it but currently it has 100,000 of them constantly running and consuming electricity as much as the country of Switzerland in one year.

CHAPTER 4: The Initial Days

Know one knew or cared about this bitcoin toy created by the underground community and at that time just for the underground community. After its launch on 3rd Jan 2009, it was mostly traded for fun with almost no value to this new and novel currency. In fact the first real transaction of value was almost one and half years later on 22nd May 2010, when a programmer in florida paid 10,000 bitcoins for two pizza. You can multiply it with the current value of bitcoin and you’ll have the most expensive pizza sold ever.

The most notable phase of bitcoin came when the bitcoin based darknet marketplace mostly selling drugs was launched in Feb 2011 aka Silk Road. Within four months it became the most known notorious website for anonymous sales and purchase of scheduled drugs. Bitcoin was chosen because it allows transactions to be conducted anonymously on a secured public ledger.

Though authorities were successful in shutting down Silk Road by October 2013, bitcoin appreciated in value from $1 each to $125 during this time. While this happened, legitimate businesses and governments did not appreciate the technology and bullishly touted all the wrongs it can do to our society.

Bitcoin on the other hand did not lose its value and not so steadily but went over $400 over the years until the first part of 2016. If you ask what determines its value, I’ll say pure speculation by the people who are buying and selling them.

CHAPTER 5: The Second Invention

Since 2011 a parallel story was brewing in Canada where a 17 year old programmer named Vitalik Buterin got interested in this technology and co-founded Bitcoin Magazine. His idea was to create a platform that went beyond Bitcoin or any financial use case. In 2013 he released a white paper describing what ultimately became Ethereum.

“I thought [those in the Bitcoin community] weren’t approaching the problem in the right way. I thought they were going after individual applications; they were trying to kind of explicitly support each [use case] in a sort of Swiss Army knife protocol.” — Vitalik Buterin

Ethereum was created to be more than just cryptocurrencies (another term for all bitcoin like currencies). Buterin and his co-founders conducted a crowdsourcing to raise funding for their vision, so they sold ethers (the underlying cryptocurrency similar to bitcoin) and raised a whopping $18 million. This can also be termed as the first Initial Coin Offering (ICO) which we will discuss in one of the upcoming chapter.

Ethereum by design was a much more powerful platform than bitcoin, making it faster as well as allowing other applications or cryptocurrencies to run on top of it.

With Ethereum a new term was coined “Smart Contracts”. This is when blockchain technology was actually picked up by the general industry consultants, as the bitcoin stigma went away with this kind of implementation.

CHAPTER 6: Smart Contracts

Not so smart and a purely technical term became the most used term within the business domain. For most of them corporate sales people and business leads it meant a business contract which is smart like a smartphone, this is by the way pure ignorance. And they used it as a buzz word to sell a hammer looking for nail, by which I mean no one knew what to do with it.

In reality this was the way you could write your own application on top of the Ethereum platform, similar to the way we write a class within a programming language like Java or structured query within a database like Oracle. Too technical right?, this is exactly what it is.

Within these smart contracts programmers write a set of rules to interact with the Ethereum ledger (distributed database) and execute any business logic. It is not a legal contract between two parties and only as smart as any other software we use. In the real world most of the smart contracts are written to create new cryptocurrencies (ERC-20 tokens) on top of the Ethereum platform.

Out of FOMO (fear of missing out) and lack of understanding, big tech started funding and investing to understand how to use the technology for companies and many open source collaboratives such as from Linux foundation — Hyperledger (founded in 2015) started taking the centerstage.

Subsequently many platforms were released such as Fabric, Corda and Quorum (all proprietary implementations of blockchain). Initially they all targeted financial sector but branched out to cater other industries later.

CHAPTER 7: The Gold Rush

By Feb of 2017 many altcoins (a term for all cryptocurrencies except Bitcoin) were already established and many were in making. To facilitate the trade of these currencies many exchanges were also booming in places like China.

March onwards the price went up and up for all such coins and bitcoin peaked beyond $19,000 in value by Dec 2017. Earlier in the year the news and headlines of bitcoin reaching $1000 coupled with continuous growth created a purchase frenzy among buyers from all walks of life. After all everyone was talking about it and no market could provide such meteoric returns.

Also in March 2017, total of 30 companies including many Fortune 500 companies announced the creation of the nonprofit Enterprise Ethereum Alliance (EEA) along with various blockchain based startups and research groups. This too added some legitimacy to the unregulated cryptocurrency trading markets. By July 2017, there were over 150 members in the alliance including Microsoft, Intel, Accenture, Deloitte, BNY Mellon, MasterCard and Cisco Systems.

It is to be noted that as per research (controversial to some) paper by University of Texas professor John Griffin and Amin Shams, an instructor at Ohio State University concluded that half of the increase in prices of bitcoin were fueled by coordinated price manipulation using another cryptocurrency called tether following any market downturn.

They sight that Bitfinex, a popular cryptocurrency headquartered in Hong Kong could be behind this manipulation. Bitfinex and tether are owned and controlled respectively by the same executives.

CHAPTER 8: The ICOs

In the context of crypto-world, after the successful Initial Coin offering (ICO, also called token sales) of Ethereum it became so popular in 2017 that around 20 websites were just there for tracking them. These crowdsales generated anywhere from $2M to a whopping $4B. Both large venture capital funds and ordinary people invested in these projects.

Although ICOs have been used for fraud and scams, they have also been used for legal activities such as corporate financing and charitable fundraising. Authorities have warned investors that ICOs are high risk speculative investments, offer no protection and to beware of scammers, they use marketing to up the value of an ICO and then they immediately sell for a profit. Many internet platforms across the globe now also prohibit promotion of ICOs altogether.

At one point many startups thought of fundraising using ICOs as it was very lucrative until 2018. Scammers have muddied the field and this does not seem to be viable option anymore. Even now there are 100s of active and upcoming ICOs.

CHAPTER 9: The Salesmen Effect

We discussed a lot about cryptocurrencies and now lets discuss how industries plan to use blockchain. The buzz of 2017 made business leaders across industries to open their eyes and ears to read and hear about blockchain.

Consulting firms immediately started offering blockchain solutions and this is what I call the “Salesmen Effect”. But what were they offering? Some said “Private Blockchain” and some said “Smart Contracts”. But no one knew how to use it beyond finance and everyone went looking for problems they could solve with blockchain.

In my experience no one actually used blockchain and it just became an umbrella term to sell various types of distributed database systems. Though beyond the financial sector, still there has not been a single application implemented at scale. And most of it even when they are called blockchain based have little or nothing to do with it.

The good thing for the industry is at least this opened a conversation within many industries to collaborate with others and discuss problems they could solve with blockchain. And for the ordinary people this will only bring more transparency in how any business is conducted.

In my opinion, in 90% of the cases blockchain has no use in business and a complete waste of time. Afterall it is just a database and any database on the cloud can provide all the features you may think blockchain provides.

CHAPTER 10: The Current State

No matter what we say, cryptocurrencies are here to stay, a lot of money is riding on it. On 30th Nov 2020, the value of bitcoin reached all time high of $19,850 since the so called crypto crash 3 years ago. The global crypto market app is over $575B, completely speculative and who knows it will grow or shrink. I am not sure if anyone can define the “bubble” in this market anymore.

There are many Ethereum projects which can be used right now but most of them just seem to be for the platform itself or just toys at this time. Being a toy is a good thing most great applications are initially just a toy, Bitcoin in point. Ethereum 2.0 (beacon chain) went live as recent as 1st Dec 2020, this is the next gen and much improved software.

“The launch of the Beacon Chain is a huge accomplishment and lays the foundation for Ethereum’s more scalable, secure, and sustainable home,” Ethereum Foundation researcher Danny Ryan told CoinDesk.

As per the article by Tozex a crypto asset platform, out of the largest 25 ICOs, 15 are still developing their solutions, 9 have lost 80% of their value and 1 is dead. Combined they raised over $10B over the years.

As for the businesses, banks made use of the private blockchains for some use cases such as to speed up the overseas money clearing process and other industries still seem to experiment with the so called private blockchains with no significant projects at scale to report.

My name is Nishant Modi. I am an entrepreneur, writer, former management consultant working on blockchain based solutions since 2016, founder of Zoob Labs, and Namaste Revolution. I openly share my learnings through medium.