1. PART (scroll down to the second part if you know what Bitcoin is but want to learn more about the power of decentralization)
Today I want to talk about Bitcoin, the most exciting thing ever! I know, it is all over the media these days, but for the wrong reasons. Or rather, most reports do a terrible job explaining how terrific this technology really is.
We are in the midst of a revolution, a paradigm shift. The world will be very different in 10 years’ time, largely because of Bitcoin’s underlying blockchain technology, which will disrupt everything.
If you’ve never really been interested in Bitcoin, or if you don’t really understand it, or if you care about equality and liberty, then read this:
Right now, everyone talks about Bitcoin, mainly because its price skyrocketed from about 1000 USD at the beginning of the year to about 20000 USD as of now.
Critics say it is a bubble, that Bitcoin has no intrinsic value and will crash down hard, sooner or later. As indicated above, I disagree and I am convinced that blockchains will change the way we live profoundly, even more so than the internet did.
But first, let me quickly explain what Bitcoin is. Because actually it means two things:
- Bitcoin is a digital token that can be sent from one user to another, anywhere in the world.
- Bitcoin is also the name of the network on which this Bitcoin token exists.
The Bitcoin network is not run by a single entity but rather by a decentralized network of computers around the world. Bitcoins are not issued by a central authority but instead according to predefined, set rules, which cannot be changed unless the network reaches consensus.
In other words, it is peer to peer cash, a monetary system not controlled by anyone. To understand the significance of this, let’s have a look at our “traditional” money (USD, EUR) and how it became what it is today.
Money itself is nothing, it derives its value from being a medium of exchange, a store of value and a unit of account. As such, it has always been used to communicate value to other people. In the last 100 years however, money has been increasingly used as a SYSTEM OF CONTROL, effectively undermining its other properties. Let me explain:
You have probably heard of the gold standard. It refers to a system where the value of the currency is based on gold. For each and every banknote there has to be an equivalent amount of gold, to back its value. Everyone can take a note to the bank and get its face value in gold or silver coins.
This was! our system.
Governments like to exert power and there is great power to be had when you control the money supply. Long story short, the gold standard was abolished about 50 years ago, now our money is not backed by anything.
No, that is not entirely true, of course. It backed by the government. It represents the economic power of a country. It pretty much means that the value comes from people’s trust in the government’s ability to keep the economy, the system, afloat.
There is only one problem: said trust is starting to crumble. And if you take a closer look, you won’t be surprised why:
Banks have great power over “your” money, they can freeze your account, the can stop or reverse transactions, and they will cooperate with governments and confiscate your money, eg, to hand it to failing banks, like it happened in Greece or Cyprus. Doesn’t exactly instill confidence in money as a store of value, or?
Another wakeup call was the aftermath of the financial crisis in 2008. In a short period of time, trillions were wiped off the stock markets. To avoid a complete collapse the governments started printing money, basically creating value out of thin air, to stimulate the economy, all without appropriately addressing the systemic flaws of our financial system. Today it is back to business as usual and the money printing never stopped. The image below shows the US money supply over the years:
I am not an economist but that does not seem to be sustainable, and there are many who agree with me.
In an effort to curb the governments’ power by using money as a political and economic tool there have always been attempts to create alternative currencies, not controlled by the government. Especially the inception of the internet sparked many of such attempts.
I don’t want to bore you with details, so just understand that there has always been one major problem with all those digital currencies: They had to rely on a central authority to confirm transactions (to avoid the double spending problem, in case you want to google). This provided a single point of failure, a target, and eventually all of these currencies were stopped by the government.
But then, in October 2008, on an anonymous mailing list called Cypherpunk, an anonymous participant using the pseudonym Satoshi Nakamoto announced the publication of a paper, saying that they/he/she has solved a problem in computer science. He said he has found a way to create electronic cash that is direct, peer 2 peer, not controlled by anyone. He offered the whitepaper and software to download and invited people to participate.
That network started on 3 January 2009. And on that day, the world changed. For the first time in the history of money, trust, institutions, humanity really!, there was a system that is completely independent of authority, completely independent of institutions of any kind. It develops trust as the result of collaboration, communication and computation through cryptography.
Bitcoin was born.
Just to recap, the revolutionary aspect of the blockchain, Bitcoin’s underlying technology, is that it allows to establish trust between parties unknown to each other (because they trust the NEUTRAL blockchain), which basically means that it renders intermediaries obsolete.
A great, succinct explanation is that Bitcoin does to trust what the internet did to distance. It makes it obsolete.
I want to add though, that, personally, I do not think that Bitcoin will play a significant role in the Blockchain(s) we will use in future, because, as exciting and important as it was, meanwhile there are several indicators suggesting it will be replaced by newer, even more capable blockchain tech (read: Ethereum). That’s a matter of debate though. Just for your information, I don’t hold any Bitcoins and I do not recommend to buy any. Bitcoin was the beginning and paved the way, but in my opinion it is on its way out. Going forward I will use “Blockchain” instead of “Bitcoin”.
Alright, so the Blockchain enables a decentralized network, which cannot be shut down or censored, which can be accessed by everyone, and which – in case of Ethereum – is even programmable. What that means is the Blockchain allows for decentralized applications (Dapps), which cannot be stopped by anyone, which can be accessed by everyone and which work exactly as intended, according to predefined rules. Programmable trust, so to speak.
Such applications won’t know or care about boarders, gender, age, skin color or political orientation. Again, they’ll be open to EVERYONE.
Everyone can access and use the tools the Blockchain provides. As of right now, most people on this planet are cut off from, eg banking services or commercial activities on a global scale. Blockchain changes that, so in that sense it tremendously empowers individuals. It gives EQUAL access to the world economy to billions of people who don’t have it today.
Furthermore, it democratizes jurisdictional arbitrage, which means you can pick and choose the place that is most beneficial for your purpose. Today only mega corporations can do that, the Blockchain allows it for everyone, and that alone will reshape the world.
In fact, you don’t even have to be human to use the network. Which, in itself, is already revolutionary.
For the first time ever “things” will be able to hold and spend money, according to predefined rules. You’ve probably heard about the “Internet of Things” – add Blockchain and see the potential.
For example, imagine a self-driving taxi, driving around autonomously, being able to buy petrol, get repairs done etc.
Or even whole organizations, acting completely independently from human intervention once they have been set up according to certain rules. It could be an insurance company existing solely for the benefits of its users. Mind-blowing, or?
More basic but equally important use cases are public ledgers. The Blockchain will most certainly replace many institutions that safeguard commercial activities today.
Or, how about a decentralized Facebook, where you alone own your data and can sell it for profit or keep it private, whatever you prefer.
I could go on and on but you should get the picture. The possibilities are endless.
In case you haven’t yet fully grasped the magnitude of this, let me explain the significance of DECENTRALIZATION, which – mark my words – will be the buzzword of 2018. It does not sound particularly exciting but when you think about what it actually means, you will be blown away. I was.
So what does it mean? It means the distribution of functions, powers, people or things away from a central authority. It is not exactly a new idea, there are many instances of decentralization in the past or present.
A good example is the insurance industry. Today an insurance is either a bought service or provided by governments. But how it actually started was that a group of people came together and agreed to cover each other’s costs in case something happens.
Today, our society is mostly run by centralized institutions. Companies set up by people to turn a profit, acting solely in self-interest. It means that an insurance company today doesn’t just exist to insure your stuff, it first and foremost wants to make money. That’s not necessarily bad because it also creates value for society.
Also, our economy allows many participants to enter the markets and offer their services/products, thus reducing the power and influence of one particular player (who, again, mainly acts in self-interest and could abuse his power). This competition also drives innovation.
However, globalization and other factors gave rise to mega corporations with too much power. They can play the free markets, or influence politics in their favor, which greatly undermines the governments’ ability to protect the people from their supremacy.
Of course, acting in self-interest, to make money, such corporations use their power to influence consumers – YOU – to buy or use their product or service, and they also design their product or service in a way that is most beneficial to them, not you.
I mean, think about it, why do people camp in front of stores to get a new phone (even though they have one already), why has Facebook so much power? Why are there so many food products full with toxic ingredients?
Even non-profit organizations’ main purpose is to stay in existence, to stay relevant. Before a single cent of you WWF donation reaches its goal, many salaries need to be paid, the centralized organization always comes first.
Same with political organizations, which greatly influence our all lives. They first and foremost exist and act for their own benefit, to stay relevant. Also here Blockchain can help, by providing mechanisms to facilitate decentralized governance, true democracy! (check out eg http://secure.vote)
All these decentralized applications will fundamentally change the way we do business. Why?
Because, if there are decentralized organizations (and there will be), a centralized business that solely exists to enrich its owner, won’t be able to compete anymore, simply because the decentralized version, which operates solely for the benefit of its users, will be significantly better and cheaper.
So yeah, it is not only about banking the billions of people without access to banks today, this can and will go much further and will liberate us in ways not even imaginable today.
I know this was a very rough, and perhaps confusing overview of what Blockchain can and will do and how it will change society, but is such a huge topic, I could – and might – write another 5 posts. So stay tuned.
PS. If you enjoyed this story (and work too much ;)) make sure to check out “Don´t settle for THAT”, an article capturing the struggle between our natural urge for freedom and self-development and the demands of work and life in our modern society.