The future of Bitcoin and blockchain – and why it’s much more important than the price

I’ve been following Bitcoin since 2013, and oh boy, it has been a ride. Some months it has been crazy interesting, but most months it has been slow and boring.

Fast-forward to the last couple of months, the media has been in a frenzy. As an early Bitcoin enthusiast, this has been exciting, but admittedly also a quite sad experience. Everyone is talking about making a quick buck by investing, and even the smart people who understand the technology often throws around vague statements that blockchain will change the world but never really are able to say more than this.

This leads to A LOT of things people get wrong about Bitcoin. I hope to help those things get right, by making this post. We should focus more on the future:

And less on:

This is how it feels watching the price of Bitcoin

And more on facts and what is possible.

Back to today, this is Google Trends comparing the search volumes of Bitcoin and Trump – and Bitcoin is more popular in the search engine Google:

 

I can also feel this myself. My social media feeds are FULL of people talking about Bitcoin. This is nothing like 2013, where we had our monthly Bitcoin meetups in shady bars discussing the future of money. No, this frenzy is everyone talking about Bitcoin, even people who have absolutely no clue about what Bitcoin or the blockchain is.

Instead, the posts are usually one of three categories:

  1. Oh see, the price of this thing has gone from 1.000 USD to 15.000 USD in a few months!!! You should invest now because it’s only going to go up
  2. Oh see, the price of this thing has gone from 1.000 USD to 15.000 USD in a few months!!! This is clearly a bubble and you should get out because everyone is going to lose their investments
  3. Oh see, the price of this thing has gone from 1.000 USD to 15.000 USD in a few months!!! This is clearly just the start and we’ve seen nothing because the technology is going to change the world and blockchain is awesome

Usually, category #1 are not that smart, so they’re easy to ignore.

However, the smartest people I know is divided between category #2 and #3. The challenge with category #2 and #3, is their discussions suck. Category #2 points towards all logical reasoning and says “IT’S A BUBBLE!“. Category #3 are afraid to get their hands dirty and just say “BLOCKCHAIN WILL CHANGE THE WORLD“, without going into details.

Challenge is. I am convinced that both category #2 and #3 people are right. Yet, from logic alone the people who say “get out!” makes much more sense, because those who hype blockchain haven’t managed to communicate what it can do to a person not understanding it very well. Combine this with journalists who don’t have any good resources to understand it, so a lot of articles with limited nuances get published.

The current growth of the Bitcoin price most definitely looks like a bubble, and I’ve held that belief for a while. I also agree that the frenzy currently shares patterns with both the IT bubble and even worse, the tulip mania from the 17th century. But, I also believe that blockchain will fundamentally change the world. With Bitcoin being the first, and by a big magnitude, the biggest cryptocurrency, I also believe we could see price doublings in the hundreds in the future.

But why is it the blockchain is so awesome? Why is it I can say with a straight face that such doublings could happen? In addition, just because the blockchain gets popular, will it also result in Bitcoin growing popular?

This post is trying to do many things. We are going to cover exactly what Bitcoin and blockchain are, so you can make up your own mind. After this post, you will not only know how the technology works, but also why the smartest people are so hyped about blockchain. You will also be able to discuss blockchain with friends and family and be the expert – and most importantly – look behind the complete nonsense that is happening on social media and the news.
And in the end, you can make up your own mind: do YOU think Bitcoin is a good investment, or not?

To do this, we are going to go through 3 chapters:

PHASE #1: We will introduce the basics. What is Bitcoin, Blockchain, Bitcoin mining and everything we need to understand to continue.  Phase #1 will be the foundation for everything we are going to dicuss in phase #2 and phase #2.
PHASE #2: We will zoom out, and look at what blockchain really can do. We will see that there is so much more than Bitcoin – and understand decentralization to the core. JUMP here.
PHASE #3: We will use all our new knowledge to look and predict the future. JUMP here.

Start our blockchain story, we must!

PHASE 1: Introducing Bitcoin and Blockchain

If I ask a stranger: “What is Bitcoin really?”, the answer could be something like “Magic internet money”, “digital gold” or “anonymous money”.

But if I decided to dig a bit deeper and ask what it really is or how it works, I’m pretty sure the reaction would be something like:

 

And if that is the default answer, how can we have a good dialogue about it?

The Bitcoin white-paper

Bitcoin was released anonymously under the pseudonym Satoshi Nakamoto in 2009, as a white paper which has the title “Bitcoin: A Peer-to-Peer Electronic Cash System“.

Wait, WHAT?

How can something be released anonymously? What is a pseudonym? And why does the name sound Japanese? What’s up with all the whitepapers? And why do I want a peer-to-peer electronic cash system?

Zoom out time.

It’s difficult to run from the fact: Bitcoin is pretty complex. Because most people rather want to be right and precise, they can’t make “easy to understand explainations”. I plan to do the opposite. Some details will be bent, but I will try to explain everything so it’s very understandable.

With that in mind, let’s make the non-sense above understandable.

Let’s start with the white paper. In academia, new research is published in the form of a white paper. A white paper is basically a pretty short report that is very compact, often very difficult to read and full of formulas. When researchers and their Ph.D. students spend time doing stuff, their result is a white paper. The research team then try to get their white paper published at a fancy industry publisher, that publishes the newest research. Then, if successful, the researchers are allowed to present the paper at a conference.

White papers are usually written by a group of people; for instance the professor and some students or an internal team at a big corporation. So when someone logged onto the Internet in 2009 and uploaded the Bitcoin white paper, it was not through a fancy publishing company or university – it was just someone – uploading a PDF file to the Internet.

When I say “someone”, we’ve no clue. The person who made the Bitcoin white paper simply attached the name Satoshi Nakamoto to the paper. The reason we don’t know, is simply that the person(s) who wrote this document, simply uploaded to the Internet without telling anyone who he/she was.

This could be a Japanese professor. It could be a team in the US. It would be a random dude from anywhere in the world. It could be NASA. It could be me. The person(s) who wrote the document, decided to use a pseudonym. A pseudonym is just making up some name and using it. You don’t know who is behind the pseudonym.

So why was this specific white paper interesting?

The reason this white paper became so popular, was because it solved a problem researchers around the world have attempted to solve for a long time.

Researchers have tried to create “Internet money” for a long time. When you mentioned Internet money before 2009 people would be thinking PayPal, but that’s not really Internet money. Having your cash at PayPal are more like a nice website to a bank account, it’s not truly digital cash because it’s a company – not a system like when you use e-mail. When you use e-mail you can send e-mails to both Gmail and Outlook users simply because it’s not just one company.

So during the last couple of decades, various groups and researchers have attempted to create a digital cash system. This is a fancy word for digital “Internet money”. The biggest two successes in these attempts were called “DigiCash” and “e-gold”  They had managed to get closer and closer, by making a lot of innovations in the field of cryptography.

You might ask: but why would I want “Internet money”? Why not just trust PayPal? This is a very valid question – and a question we are going to get back to again and again throughout this post. For now, this is not so important – and we will get back to it.

The underlying challenge with “Internet money”, is you don’t want a company issuing the money. PayPal is not a currency, nor would you want it to be. PayPal is more like a smart bank account, but not a currency. In order to make “Internet money”, you need it to be more than one company that can issue and control the system. Before 2009 this was only possible by governments to make new currencies such as the Dollar or Euro.

So let’s say we want to make “Internet money”. The problem we have: how on earth do we make sure people only can spend the money they have?

If I sell you milk, but you have already spent all your money on cookies, I need to know before I give you my milk.

This might seem simple, but this problem was never solved. It was easy to solve for a company such as PayPal, but impossible if you did not want one company to issue the “Internet money”.

The reason Bitcoin got so much hype is that the white paper solved this problem. Bitcoin allows to create “Internet money” without a company in the middle – and when I sold milk, I would KNOW you as the buyer had the money.

 

This was an early meme and ad for Bitcoin. “Magic Internet Money” 🙂

The white paper described what we today call the blockchain – as it’s described in the white paper – a “chain of blocks”.

Bitcoin in itself is actually super simple (it is!):
Bitcoin is basically a long list of all transactions ever made since Bitcoin was launched. So if Jane buys milk from Jason and pays with Bitcoin, this is stored in the system. And it will be stored forever.

Since every single transaction is stored, and everyone can see them, we always know how many Bitcoin everyone has. These transactions are basically person A saying “I am transferring 3 Bitcoin to person B” and so forth. The thing they transfer is called Bitcoins.

That’s it. This is very simplified what Bitcoin is: a (very) long list of all transactions ever made, and because this is stored so everyone can see them, you always know how many Bitcoin everyone has. Easy!

 

 

Bitcoin gets a bit more complex if we have to understand HOW this works:

The way the blockchain work is that when you make a transaction, you store it in a block together with other transactions. Imagine you’re in a bar with 3 friends and you all buy a cocktail. This will create 4 transactions because each of you just bought a Mai Tai cocktail. These 4 transactions are all put together in a block.

Every ten minutes, the Bitcoin system will take all transactions made in the last ten minutes. Then this block is attached to what we call the blockchain. When the block is attached, your transaction is stored forever and added to the blockchain.

This explanation usually leaves more questions than it answers.

Why ten minutes? This is a decision made in Bitcoin, and other alternatives have picked a different time than ten minutes.
Does it mean I can only do one transaction every ten minutes? No! transactions are sent to everyone in the network in seconds, but first, after it’s stored in the blockchain can you be absolutely sure. 
Can I run this on a smartphone? 
In theory, but you are going to actually use Bitcoin through user-friendly websites and apps.

For now, the important takeaway is that the reason Bitcoin got popular, was because it was the invention that allowed us to run “Internet money” without a company in the middle – a decentralized payment system. As long as you had a computer and you opened the Bitcoin program, you would essentially be running a payment network like VISA and MasterCard.

Digital cash – our Internet money

The title of the original white paper was “Bitcoin: A Peer-to-Peer Electronic Cash System“. What does this mean?

The peer-to-peer part simply means it’s between the users. It means you should be able to send Bitcoins to other users yourself. Another smart thing about peer to peer is that you can download the Bitcoin program and start running the system right now on your computer.

The interesting thing, however, is the word “electronic cash system”.

Electronic cash.

The original idea with Bitcoin was that it could be used as cash. So when I want to buy a smartphone from you, I pay you some Bitcoin. I do this by making a transaction. The transaction is then stored in a block.  After waiting maximum ten minutes we know the Bitcoin was transferred.

But this brings up some questions – so how much is a Bitcoin? How can a Bitcoin be worth anything?

This things us to a small detour.

A small detour: what is money?

To understand why Bitcoin can be used as cash, and have a value, we need to briefly talk about MONEY:

The history of money is long, and, actually quite exciting. I wrote quite a lot about this when I made my master thesis about Bitcoin, and it’s amazing how early as a society we actually had some kind of money.

Looooong time ago, we humans started out with the barter system: I give you some milk, and you give me some tomatoes. All is good. This evolved century after century, ultimately leading to the system we know today which involves banks, cash, debt, loans and lots of interesting financial products.

Focusing on cash. Today, if we have 1 Dollar, we feel it has a certain value. The Dollar has a value because I can go down to the local store, and buy something with it. If I have dollars, I can get food, I can get drunk and I can even buy a plane ticket to travel the world.
If I could not buy something with it, I would not give it any value. The paper it’s made on is not particularly useful for anything else than toilet paper.

The underlying value of money used to have some underlying value. It used to be that you could go down to the bank, present your dollar notes, and get the same value of gold. But in the 1970’ies this connection was removed in the US, and today there is no “real” backing of the dollar. The dollar has a value because we tell each other it is worth something. If we start not to believe in it, it will decrease significantly in value.

While it seems absurd to talk about the dollar decreasing significant in value, it’s not absurd with a global perspective. It’s quite interesting to read the Wikipedia article about Hyperinflation, which is periods where a given currency loses a lot of value – and the bank notes are best used for toilet paper.

This is important to realize. In a normal day to day environment, we think our currency is stable. If I have 100 Dollars, I don’t fear it’s worthless tomorrow. But if we look at money with more broad eyes, this is actually not always the cash. This is important to keep in mind when we discuss Bitcoin.

Back to our Bitcoin cash system

So Bitcoin has no underlying value.

You cannot go to anyone and ask to give you gold for Bitcoin. There is no underlying value.

But still, one Bitcoin has a very significant price.

The reason is that we believe it has a value. It has a value because you and I believe it has a value. If I go down to the local restaurant and ask to pay them one Bitcoin for a meal, they would probably say YES – because they have heard one Bitcoin is worth 15.000 USD. This means Bitcoin has a value.

The first famous purchase with Bitcoin was a guy posting on a forum he wanted to pay 10.000 Bitcoins for 2 pizzas. Back then, the belief in Bitcoin was so small that 10.000 Bitcoin equaled 2 pizzas. Because more people believe in Bitcoin today, those Bitcoin are worth +150 million USD. Back in 2010, people simply didn’t believe 10.000 Bitcoin had more value than 20 bucks.

Today this seems absurd. Why would ANYONE ever make that trade? In hindsight, this is easy to say. Reality is that back in 2010, Bitcoin really didn’t have a value. It was still “play money”, not much different than monopoly money. That someone would buy actually accept “monopoly money” for a real purchase, was something NEW. And this kickstarted that maybe it could be more than monopoly money. While spending 10.000 Bitcoins for two pizzas seems absurd today, it was more absurd for the guy buying the pizzas and accepting the Bitcoins back in 2010.

The reason Bitcoin has a value today is that we believe it is worth something. If more people hear about Bitcoin and think it’s a good idea, a Bitcoin will become more expensive. If fewer people want Bitcoin, it will become less expensive.

The way Bitcoin is designed is there will never be more than 21.000.000 Bitcoin. We soon have 17.000.000 Bitcoin in circulation, meaning very simply that: if more people want Bitcoin, prices will go up, if people don’t want Bitcoin, prices will go down.

Because Bitcoin now is worth something, because people want Bitcoin for whatever reason, it can be used as cash.

 

To recap, that means Bitcoin was invented to be a cash system. A system that can run without a central authority like VISA or MasterCard, but by anyone. And because people now think Bitcoin is worth something, it can be used to pay for things.

What is the blockchain

Previously we skipped through blockchain quite fast, but this time: let’s dig into the blockchain.

The blockchain is particularly interesting because the technology people are raving about. Back to the smart people at the start of the post: they all say “I’m not so sure about Bitcoin, but the blockchain is interesting“.

Now, some of these smart people are also just stupid people pretending to be smart, because they still don’t understand it. They just heard other smart people say the blockchain is important, and they repeat it.

Anyway. As we went through, the real innovation of the Bitcoin white paper, was the blockchain. The innovation how we every ten minutes add a block, which contains transactions, to a blockchain. By doing this, everyone using Bitcoin knows exactly who has Bitcoins and who don’t.

But how does this really work?

Well. Zoom-out time again.

The Bitcoin program

A part of the Bitcoin innovation we haven’t talked about yet is the Bitcoin program. Not only did this Satoshi Nakamoto figure write a white paper, he also made a computer program.

What he did, was he actually took what he described in his white paper, and made a program that did exactly what we wrote. This program was published to Github. Github is a website for programmers where they can upload programming code and programs. Github is used both for companies – but also for open projects where everyone can see the code and follow along.
Github doesn’t require you identify who you are, meaning Github allows code from anonymous developers. Just like the original white paper was uploaded as a PDF without anyone knowing who did it, the same is the case with the original program.

The original Bitcoin is open-source. This means you can go and see every line of code that runs Bitcoin! You can click here and see the code yourself.

When something is open source, it means a couple of things.
First of all, it means, that everyone in the world can see how the program works (heck, just try to see this random file from the Bitcoin program – which I’ve no clue what does!). That means that you – if you know programming code – can verify that whatever you’re running actually do as you suspect.
This has a couple of very interesting consequences.

The first consequence is that this means everyone can copy the code, which is called a fork. Tomorrow, you and I, could simply copy the Bitcoin code and call is Bitcoin2, and we would be up and running.

The second consequence is that other people can improve the code. If I want to add something to the program or fix a mistake, I can. This means hundreds, if not thousands of people, help on the program.

The original Bitcoin program is designed as a peer-to-peer system.
Remember the illegal downloading software Kazaa, or heard about torrents? These are based on a peer-to-peer system.
If I have a music file and I want to share it on the Internet, the first person downloads the file from me directly. Now, when the third person wants to download the file, he will download half from me and a half from the first person.

This is how a peer-to-peer system works. Instead of everyone downloading the file from me, the peers in the system – the users – download and upload data to each other. Peer-to-peer doesn’t have to be illegal – it can also be used for more legit purposes.

The original Bitcoin programs work in the same way. When you download the program, you automatically become a computer in the big Bitcoin network. You will automatically download the whole blockchain – which is sent to you from all the other computers in the Bitcoin network. Every time someone makes a transaction, everyone in the system knows about it in seconds. Every time a new block is added to the blockchain, this block is sent to every single computer in the network.

Bitcoin mining

Bitcoin is run by computers and everyone can join in. But then this begs the question: why on earth would anyone do this? Of course, if you believe in Bitcoin, you might run the program – but there is really not an incentive to run the program. Without an incentive, the system wouldn’t be run on many computers, but only a few.

This is where Bitcoin mining comes in. Bitcoin mining is done from a special program designed for specific users. This means there are two different Bitcoin programs: the “user-friendly” Bitcoin program and the “Bitcoin mining” program.

The “user-friendly” program is a part of the peer-to-peer system. When I download the blockchain, all the other computers running the “user-friendly” program, will send me the data. When I make a transaction, it will be sent to all the programs within seconds. This works the way that every program is connected to a couple of other computers (example 8 computers), and not all of them at the same time:

Imagine every one of these dotes as a Bitcoin program. You’re connected to other programs. Whenever something happens, updates are sent to all the computers you are connected to, which sends to all those they are connected to, until everyone has all updates. This takes seconds.

The “Bitcoin mining” program is a bit different. The “Bitcoin mining” program has an additional feature the “user-friendly” program doesn’t: It is adding blocks.

Remember, transactions are sent out to everyone in the network in seconds. But at this time, you’re not really sure that these are LEGIT transactions. Let’s say that the computers YOUR computer is connected to are sending fake transactions:

In this scenario, your computer is connected to a lot of fake computers. These could send you wrong information. This is mostly a theoretical exercise, because this is not easy to do, but Bitcoin is about making sure it’s not POSSIBLE

If above happens, we’re back to the “we don’t know if you actually have the money!” problem. This is why we also need the blocks, and not only to rely on the transactions we know about within seconds. While you would definitely trust this enough to spend a few bucks, if I sell you a car, I would definitely not trust this.

This is where the blocks come in. The Bitcoin miners are taking all the transactions from the last ten minutes, and adding them to a block. The way the “Bitcoin mining” program does this is by doing a very complex calculation.

This calculation is doing what is called “calculating hashes“, and this is what every Bitcoin miner does. This might sound trivial – but these calculations are ridiculously difficult and take a lot of effort.

The calculations of this calculation adjust over time. Let’s say we have ten computers running the mining program, then the difficulty is SOMETHING. Then a month after, we have twenty computers running the program. Then the difficulty is adjusted to MORE THAN SOMETHING.

The way Bitcoin is designed is to create a new block every ten minutes. This means if you suddenly added double as many computers running the mining software at once, it would take five minutes between each block until the difficulty of the calculation has been adjusted.

So a short re-cap: we have computers running a special computer program, that is doing a ridiculously difficult calculation. When this is solved, we can finish the block and add it to the blockchain. Because the 10 minutes are just “on average”, it sometimes takes 2 minutes, sometimes 20 minutes – but on average it takes 10 minutes to solve the difficult calculation. The more computers trying to solve the calculation, the more difficult the calculation becomes.

But why are the miners running this program?

Well, there are two reasons. First of all, ever wondered how the first Bitcoin was made? Ever wondered how new Bitcoins are made?

Every time the calculation has been solved, a new block is added to the blockchain. Adding a block to the blockchain gives a reward.

This reward is currently 12.5 Bitcoins. The first reason miners are running this program is that of the reward. This means if you open a Bitcoin miner and you manage to be the one doing the calculation right for just ONE block – you’re earning 12.5 Bitcoins – above 200.000 USD for the time being. This reward halves every 4 year – so back in 2009 the reward was 50 Bitcoins for every block added.

You might think: Wait, so every ten minutes I have a chance to solve the calculation and earn 200.00 USD? I think I can be lucky!
Forget it – right now. No one runs these programs alone. Today all mining happens in what is called “mining pools”, which is different groups you join. Then you get a percentage of the rewards, instead of the full reward. Today, you’re better off playing the lottery than hoping to mine a block alone.

The second reason the miners are running the program is transaction fees. Remember how every, single, transaction ever made in the Bitcoin system, is stored on blocks? This means that if you run the Bitcoin network, you have access to every single transaction EVER made.

This takes up some disk space! And even though hard disks are pretty cheap, this could become a problem. Because of this, Bitcoin has enforced a 1mb limit for every block (your smartphone probably have 32gb or 64gb of space, so 1mb is very little space!).

That means when the Bitcoin miner that actually solved the calculation, they cannot accept more than 1mb worth of transactions. The way the miners determine which transactions to add is by looking at transaction fees. When I do a Bitcoin transaction, I can decide to add a transaction fee (or don’t). However, it’s first when a miner has decided to add your transaction to a block that your transaction becomes valid and stored in the blockchain. This means, if you add too little a fee, it will not become part of the blockchain. This is why it costs money to send transactions:

 

This is the latest 3 months development of the Bitcoin Transaction fees. Yes, it costs more than 20 USD to transfer Bitcoins – very expensive to buy a coffee with, right?

This is also a good time to confirm: Yes, sending Bitcoins are not free. It used to be basically free, but today it costs more than 20 USD – for ONE transaction – rendering it completely useless for anything remotely related to commerce for the time being.

Electricity usage of Bitcoin

Recently, there has been some news that it cost more to run the Bitcoin network than the electricity usage in many countries – combined!

And why is this?

It is because a Bitcoin is worth so damn much.

A common misunderstanding is that Bitcoin uses so much electricity because more and more people use it. This is the logical thinking: Bitcoin must be horribly ineffective since it already now – as a young technology – uses so much electricity! And if more people use it, how much more computers will it not require running the network?

Well, the challenge is actually another. If no one else decided to mine Bitcoin, and I was the only one running a Bitcoin miner, I could run the whole system on my laptop! I could take my now 4-year-old MacBook, set up the Bitcoin miner, and I would have no problem running the whole system. It would require the same amount of energy as watching a movie on Netflix. And a related side note to miners: please do, I’d very much like 200.000 USD every ten minutes.

But it doesn’t. Because the miners have a HUGE incentive – +200.000 USD pr. 10 minutes if they mine the block – I would not be the only miner in town. This means miners will keep adding computers until it’s not profitable anymore. Challenge is, in China, you have access to A LOT of excess power – both illegally and legally – and that drives up the electricity usage A LOT. And this is why the Bitcoin system is so electricity intensive.

I’m not going to argue this makes it better, though. If Bitcoin becomes ten times as valuable, the electricity usage is going to ten-double. This *is* a problem and one that should be solved.

Bitcoin Miners working hard!

It’s important to notice that this is a problem many are trying to solve. The most promising approach is called “proof of stake”, and this is going to be tested in smaller cryptocurrencies. If it works here, Bitcoin would probably add the same method, reducing electricity usage too much, much less. So of all the things to worry about Bitcoin, I am not personally worried about electricity usage. It’s, of course, disgusting how much electricity is being used right now, but I am convinced this is going to be solved.

Why are transactions “safe” when they are added to a block?

Stepping a bit back, it makes sense to be critical:
Why is that we’re mining these blocks?

If I have my “user-friendly” program and I get all transactions within seconds, why do we need the blocks? And why is it that the block guarantee the transaction is actually legit?

To understand this, we need to dig a bit a bit more into the Bitcoin program. The important thing is that when a miner adds a block to the blockchain by solving the calculation, they add their own small signature to the block. The signature is the answer to the very difficult calculation.

However, while it is very difficult to solve the calculation, it is very easy to see that the answer is correct.

So every single Bitcoin program, both the “user-friendly” and the “mining version”, can validate that the block was added correctly. They validate this by checking the answer is correct to the very difficult calculation.

You cannot fake this because it requires you do the “work” to make the proof – this is why the underlying algorithm of Bitcoin is called “proof of work” – you can prove you have done some specific work.

This proof of work is what makes Bitcoin secure. The moment you see a block has been added to the blockchain, the Bitcoin program will validate that the block is actually legit – and when it is – you trust the block!

Since every Bitcoin program is holding the whole blockchain as a history, it’s also impossible to change the history. Let’s say that I want to cheat the Bitcoin system. I now add a new computer, but I have a fake history of transactions, saying I have thousands of Bitcoins. But this leaves two problems for me as a scammer. The first one is everyone else already share the blockchain history, so they would know my history is wrong, second, I have not done the proof of work – so no one would trust me scamming attempt!

Who decides the rules of Bitcoin?

We’ve already gone through a lot of arbitrary numbers. Why 21 million Bitcoins? Why a new block every 10 minutes? Why a 1mb limit on every block?

These are all decisions made in Bitcoin. These are decisions the original Bitcoin program included. They could just as well have been 20 Million Bitcoins, a new block every 8 minutes and a limit of 5 Mb. Like any software program, these are just a decision made by the original founder of Bitcoin.

But who decides this? 

This is decided by the Bitcoin mining programs. All the Bitcoin miners run a specific version of the Bitcoin mining software. This Bitcoin mining software has built in the rules.

Let’s say that we now wanted to change the Bitcoin software, and instead of 10-minute blocks, wanted to do 5-minute blocks – we could. The “only” thing this would require, is you convince the majority of the Bitcoin miners. If you make this new version of the Bitcoin software and make the Bitcoin miners run this software, we have now successfully updated Bitcoin.

This is true for everything in Bitcoin. All the underlying features and decisions in Bitcoin is decided by the version the miners run.

Bitcoin updates happen quite often. These updates happen without much pain and news, simply because the changes are small and uncontroversial. Since every new feature is reviewed by thousands of developers (remember how the source code is hosted on Github and can be seen by anyone?), even the smallest controversial update would get lots of attention.

But, what happens when a group of people wants something controversial?

This happened recently. Earlier, we talked about transaction fees. These fees are surprisingly high. This is partly because of the 1mb limit of the blocks, so there simply isn’t space enough for transactions with a smaller transaction fee.

So why not just rise the size of blocks to 2mb? This would decrease the transaction fees right away!

But, this could also decrease how many people that can run the Bitcoin program. At the time of writing the Bitcoin blockchain is 145 Gb. This is already such a big size, you do not want this on your smartphone. Or my old MacBook.

By increasing the block size to 2mb, this will double the growth size of the blockchain. If the size of the blockchain becomes very big, very few people can run it. This means Bitcoin becomes less safe because it would be fewer people controlling Bitcoin.

This is the development of the size of the blockchain. Soon, not so nice to run on my old Macbook!

This resulted in two different groups: those who believed Bitcoin should be mainly used for storing value – a bit like gold – and high transaction fees is actually just fine. Higher transaction fees reduce the incentive to make lots of transactions, which is fine for a system that is copying cold. Another group meant Bitcoin should be cheap to use – and they wanted to change the block size.

The groups could simply not agree, and then they did something that’s very special with blockchain technology: they made a fork. They took the original Bitcoin software you can find on Github, changed the limit to 2mb instead of 1mb, and released Bitcoin Cash!

Bitcoin Cash is simply Bitcoin, but with a different block size limit. Bitcoin Cash shares the same Blockchain history as Bitcoin itself. This means if you had 10 Bitcoins before Bitcoin Cash was released, you would have BOTH 10 Bitcoins and 10 Bitcoin Cash. Why is that? That’s because at the time Bitcoin Cash went a DIFFERENT path than Bitcoin, you had access to those Bitcoins. However, after the fork happened, all transactions AFTER, diverge.

Bitcoins lives on perfectly fine, and Bitcoin Cash lives on perfectly fine. Bitcoin has a market cap of roughly 10x of Bitcoin Cash, Bitcoin Cash is much cheaper to use but does not share the brand and popularity of Bitcoin.

Are there one blockchain or more blockchains?

Another misconception is that we have one blockchain. But that’s not really true.

Bitcoin is running on a blockchain. The blockchain itself is just a list of all the blocks and the transactions in the blocks. When Bitcoin cash made their fork, they blockchain was a different one.

If you and I decide to make Bitcoin2 tomorrow, we could either start completely over without any history – just like Bitcoin started in 2009 – or we could do like Bitcoin Cash and include all the history.

Because this is so easy, we also have thousands of alternatives to Bitcoin today. An important takeaway is, therefore: just making a blockchain is not worth anything. I can make one tomorrow, and that has zero value. It’s first if someone actually uses my blockchain and will sell pizzas for my coins, it actually has a value.

A final note in the first phase: you don’t really have a Bitcoin

We’re getting near to the end of phase 1. We just need to cover one last thing.

Because we’re human beings, it’s super nice to imagine that I actually hold some “physical Bitcoins”. And when I transfer them, I take these coins and move them to you.

This is not the case – because you don’t actually own any Bitcoins.

In Bitcoin, you have Bitcoin addresses. Think of a Bitcoin address like an e-mail address. An example Bitcoin address could be “1BvBMSEYstWetqTFn5Au4m4GFg7xJaNVN2”.

When we send transactions in the Bitcoin system, it’s always between Bitcoin addresses. The transactions we add to a block could basically be: ADDRESS A sends 0.5 Bitcoin to ADDRESS B.

Try to see the following two links. Here is a link of a block. The block, #499600, then has a long list of transactions as you can see. An example of a transaction could be this one. In this transaction someone just transferred 1 Bitcoin, roughly 17.000 USD, from one address to another costing 24 USD in fees:

Just like when you have an e-mail address, you have a password. When you have the password to your e-mail address, you have access to send e-mails. The same is the case with the Bitcoin addresses. The Bitcoin address is called a public key, and to send transactions from a Bitcoin address, you need to have the private key. The private key is a long text – just like the Bitcoin address – and the holder of that key has access to spend the Bitcoin on that address.

This also brings up the question: is Bitcoin anonymous or not?

Bitcoin is anonymous if no one knows who is behind the Bitcoin address. Since the Bitcoin key doesn’t tell anything about the owner but is just a random series of letters and numbers, this is by definition anonymous. This is also why people often say that Bitcoin is anonymous and impossible to track – you’ve no idea who is behind the addresses.

However, this is usually not the case. First of all, today, how do you get your Bitcoins? You buy them. When you buy some Bitcoin, you often have to validate yourself with passport and social security information, because the Bitcoin exchanges and sellers follow what is called “know-your-customer” compliance – basically meaning they’re required to know who their customers are.

Since all transactions are stored in the blockchain, and available to everyone, you can also track how those Bitcoins are spent. Let’s say I buy 10 Bitcoins, everyone can see my Bitcoin address is used to send Bitcoins to other things. That makes Bitcoin perfectly traceable – and every time you interact with the “real world” – it is possible to track who you are. There also companies such as Chainalysis who are experts in tracing Bitcoin users.

This is very important going forward. Every time we talk about “you can see all things in the blockchain”, it’s partly true. You can see everything that happens, but you don’t know who is on both ends. That means you can see “A transferred BItcoins to B”. And that is the closest we are to see the actual transaction.

So it Bitcoin anonymous? As much as your e-mail address. If you’re good at hiding who you are, you’re anonymous. But every time you interact with the real world, it becomes less anonymous.

This concludes our first phase:
Bitcoin is actually pretty simple – it’s just a big list of transactions between two public addresses. These transactions are then grouped into blocks, which is added to a big blockchain every ten minutes. The reason this happens is that Bitcoin miners are running a special Bitcoin program, that calculates difficult calculations. This is pretty much it, and this makes it possible to continue to the next phase: decentralization.

Decentralization and removing middlemen

So why is this so exciting? Why is “Internet money” without a company in the middle so exciting? To understand this, we need to look at decentralization and that it really means.

Looking at Bitcoin, the important thing was the “proof of work” algorithm. It seems like a simple idea, and it is. This technology alone opens up a lot of opportunities!

A very popular example is payments. By having this system, we could, in theory, make a blockchain with very low transaction fees, and replace a system such as Visa or MasterCard. And why wouldn’t you? Fees to credit card providers are 2-3% depending on where you live, and with blockchain technology, you should be able to make a system with no centralized organization. We should simply make the world 2-3% more efficient by removing this middle layer.

But wait a second. I could also argue: YES, credit card providers do charge 2-3%, but they also make a BIG chunk of work: they make sure millions of people have access to an easy-to-use card, they have thousands of engineers making sure their system is fast and safe and they help prevent fraud. Recently, a credit card of mine was stolen – and MasterCard simply just did a chargeback and I got my money back.

So what is best? The centralized or decentralized organization? Why would it be the case “Internet money” would work better if we have it without the company in the middle?

To answer that question, we need to dig into decentralization.

What is decentralization?

Every day, we use both central and decentral systems. When you log in to Facebook, you’re using a centralized system. When you search on Google, you’re using a centralized system. Google and Facebook are organizations who own everything: the website, the code and your data. They make the rules.

Google is very centralized. This has nothing to do with blockchain – everything is made and hosted by Google

This has a lot of benefits. Very profitable businesses can hire more people, and make their product better. They can pay a very good salary, which is a great incentive for the smartest people in the world to work at them. Businesses usually also rely on having a very good reputation, so they invest huge amounts of money into customer service. Try buying a product from Amazon and write their customer support – it’s wonderful.

I would argue many of the biggest and most important things in the world is made by companies. Corporations are an amazing invention, which is effective in pushing out great products.

But centralized companies also have problems. If you don’t like Facebook, good luck. How do you plan to write with your friends without Messenger, WhatsApp, and Instagram? Or if you don’t like Google, how do you plan to actually find stuff? You have no backup plan. You don’t own anything. But today you deal with this by accepting that’s how it is.

At the same time, we also use decentralized systems every day. When you check your e-mail or go to a website, you’re using both a centralized and a decentralized system. The e-mail protocol is by itself, decentralized. The fact it’s decentralized means that you COULD – if you wanted – could make your own e-mail program and interact with the world. However, instead, you use a centralized system – such as Gmail or Hotmail – which is a centralized “wrapper” around a decentralized system.

Gmail itself is made by Google and is centralized, but I can still write e-mails to people OUTSIDE Gmail. That is because e-mail a decentralized platform. Gmail is just one of the many programs you can use

Because it is decentralized, it also means you are able to write to people who are NOT using Gmail or Outlook. You can write to anyone. This is very far away from how Messenger inside Facebook works. The difference is that Facebook is fully centralized, while e-mail is decentralized.

However, with most things today, the world works with a fully centralized system. If I want to make my own social network based on Facebooks data, I can’t. If I want to make my own bank interface based on my bank account, I can’t. If I want to make a different taxi app based on Uber’s fleet, I can’t.

You might ask: Why on earth would I also bother? Facebook, Uber and my bank work pretty damn great.

This question is very important. And it’s important you reflect on it. Because you can argue two ways, and these arguments are very likely to sway your opinion about blockchain and Bitcoin. If you think decentralization seems unimportant, you are not going to buy into the idea behind blockchain.

One argument is centralized systems just work better. Centralized systems are usually corporations with a solid business model. They can afford the best people by paying salaries. Facebook is so good because they have thousands of engineers to make your user experience better.

The counter-argument is that decentralized systems are better. You own your own data, and if you disagree with how something works, you can just switch provider. No one can disallow you to use e-mail or the Internet. The centralized organizations also have to make money, but the decentralized ones don’t – which means you can make much more efficient systems.

And what is best? Up until today, most things are not decentralized, but a few very important technologies are (e-mail and the Internet for instance). Blockchain, however, makes it possible to make much more things decentralized.

Why decentralization could be very interesting

Up until recently, I have often been a big fan of corporations and centralizations. But, follow me for a second. Today, we have not split a lot of things between a decentralized foundation and a centralized wrapper. E-mail, the Internet, and few others work this way, but most don’t. When I look through my day, I rely and mostly used companies which is centralized.

However, imagine a world where both Facebook, your bank, the Uber fleet, the Airbnb housing platform and everything else we use was decentralized.
You would own the data, you would have NO commissions to third parties and you could decide HOW you want to use the platform. You would still use centralized programs (like Gmail and Outlook), but if you don’t like a recent update in Gmail, you can just change to Outlook.

I believe A LOT of systems could benefit from this. But the biggest problem is most decentralized systems are just not possible – at least not before blockchain.

The challenge is that the underlying decentralized system just doesn’t develop itself – and there is no great incentive model to make the system better. Who should develop a decentralized taxi fleet, without being able to earn money? Why would anyone do that?

But this is why Blockchain will potentially change the world.
We could easily argue that a decentral Uber fleet would make a lot more sense, but because no one will get paid to put in the enormous work do create it – no one will.

One of the things blockchain make possible, is to pay people for doing work. Just see how much the early Bitcoin adopters have been rewarded – the same logic can be applied to most likely everything.

Blockchain makes it possible to REMOVE the underlying protocol – the data and the underlying rules of the system – from the app you use. And blockchain makes it possible to happen for GENERIC use-cases. And this is very, very big news. This is why many of the smartest people in the world love and work with blockchain.

In Bitcoin we’ve already seen this. Bitcoin is basically saying: “hey, you can be your own bank“. Bitcoin is a protocol; you own the data and Bitcoin defines how the rules are. You can trust the Bitcoin protocol to actually do as you expect.

However, today, we have multiple centralized companies in the Bitcoin space. The most famous is Coinbase. Coinbase knows it’s both difficult to hold and trade your Bitcoins. Just like you don’t run your own mail-server in your basement, nor do people without technical skills want to host their own “private keys” to money! Coinbase is the centralized unit you trust – they’re the company on top of the protocol which is Bitcoin. Coinbase is Gmail or Outlook, Bitcoin is the e-mail.

This gives a lot of options. Say you don’t like what Coinbase is doing.
An example was when Bitcoin Cash was made as described earlier. Coinbase sent out an e-mail saying: “Hey, we don’t plan to support Bitcoin Cash. If you don’t like this, please withdraw your Bitcoins to somewhere else 🙂“. And people did.

E-mail from Coinbase before the Bitcoin split, which made Bitcoin Cash. Coinbase gave me as a user a choice on what to do.

Imagine if you could do the same with Facebook. Say you don’t like an update or how they ran ads, the equivalent would be you exported your data and imported in a competitor to Facebook for free. And all would be good.

Why Bitcoin is a much bigger deal than first anticipated

When Bitcoin came out, it started as a payment system. The real big innovation that came, was the “proof of work” which could prove if someone had spent Bitcoins or not.

However, I would argue something way more important happened. To explain what, I will use an analogy.

Before 1954, the 4-minute mile was never accomplished. Runners tried and tried, but they simply never got under the 4-minute mark. Then, one day, after years and years of trying, Roger Bannister managed to do it! This was impressive, but something even more impressive happened after.

A picture from the first time the 4 minute mile was made!

Years after, the record was broken many times. The 4-minute mile was made by a lot of runners.

Why is that? I believe it was because no one thought it was possible, so they didn’t try. When people saw it was possible, they tried and could make it.

I believe Bitcoin to be the Four-minute mile of 1954. Bitcoin did something no one was thought to be possible: to make a purely decentralized system. And when that suddenly is possible, then much more is also possible.

LOTS of inventions happened quickly after Bitcoin came out. Etherium made it possible to run software as decentralized programs, Dash made a decentralized voting system for decisions and lots of smart people are going much further than Bitcoin. People are working on replacing proof-of-work, so we don’t spend so much electricity to run Bitcoin.

I have a strong belief that Bitcoin simply opened a door. Bitcoin opened a new area of research, and the second you open that door, lots of low-hanging fruits are there. These are the fruits we will start to see in the coming years.

Before we move on to phase 3; I want to cover 3 very interesting innovations that will mean a very big deal looking ahead: decentralized programs, a decentralized governance model, and tokens.

 

Decentralized programs

Today computer programs can be run on your smartphone or laptop. It can also be run on a server, just like when you go to Facebooks website, it runs a computer program which is your news feed.

However, the code that runs on your smartphone and mine, are not the same. That is okay for most programs today, but for one specific type of programs, it’s not: contracts.

A huge part of our lives today are dependent on contracts.
Everything you own – your home, your car, your stocks and your bank account – is based on a contract.
Everything you buy and sell in a company – is based on a contract. An invoice is a contract, your relationship with Facebook is based on terms of services which is a contract and so much more are basically contracts.

Previous to the blockchain, it was not possible to manage contracts in computer programs, unless you trusted a third party. Obviously, we do trust third-party programs. When we sign an insurance contract, we trust the insurance company to make the right decisions.

However, if you zoom out a bit – does that make sense?

Let’s say that you have a travel insurance, and you get sick. You go to a hospital on your travel and you pay cash. You now go back to your insurance company and file a report to get your money back. This flow is a bit weird. You’re basically sending a report, hoping a third party, you don’t know, to do that they’re supposed to do. You already paid for the service, but you’re not sure they will deliver. And if they don’t, the best alternative you have is to go for a shit storm on social media. This actually makes very little sense if you think more about it.

What if instead the insurance contract was made into code. The second you could prove you were sick and uploaded the receipt, a small computer program verified it and you would get your money without problems. In this scenario, you would not trust the insurance company, but the contract you signed. This would be a much better experience for you – and – why would we even need the insurance company in this case? The insurance company also needs to turn a profit and – have many people employees – making your insurance policy much more expensive than it could be.

This is why Etherium was made. And no, this is not a character from Lord of the Rings despite sounding like it. Etherium describes themselves in the following way:

Ethereum is a decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third party interference.

So, this description is obviously even worse than the title of the Bitcoin white paper. What is a decentralized platform? What is a smart contract? What exactly does it mean a program won’t get third party interference?

Etherium is also based on blockchain technology. Just like Bitcoin, it has a blockchain. Just like Bitcoin, it also has blocks (17 seconds instead of 10 minutes), a block limit (not 1mb, works in a different way) and you can make transactions. Instead of 21 million Bitcoins, there is no upper limit in Etherium and it grows every year. In Etherium, you have Ether instead of Bitcoins.

What makes Etherium different, is that a receiver and a sender, doesn’t have to be an address. In Bitcoin, you could send transactions between two addresses. In Etherium you can send money to and from a contract! This contract can be made by developers.

So imagine a contract would be: “When Lars reaches 80kg, send Lars 5 USD!“. This is possible in Etherium! Or: “When Lars has received 5.000 USD, the access to Lars’ car is automatically transferred to the person transferring the Ether“.

With Etherium you can, therefore, manage contracts. And this is very, very interesting – because if we start to think a bit more generic about contracts. How much is really not somehow a kind of contracts?

Decentralized decision model

How do you make decisions in a group?

In corporations, it’s pretty easy. In a corporation, you have an ownership. In big fortune 500 companies, it’s usually shattered between thousands and thousands of people, who own stocks. The owners then decide on a board.

The board is responsible for maintaining everyone’s investment the best way. The board then hires a CEO, who is the boss. The CEO then hires an executive team, which then again hires people.

For startups, this isn’t very different – just fewer people on the chart. You usually have the founder(s) and some optimistic people who put money into the venture. These sit on the board because they have the stake. The founder(s) is also the CEO and the executive team.

The decisions are pretty clear here. A corporation is not a democracy. Decisions are much more similar to a dictatorship.

But, how on earth do you handle decisions in a decentralized project?

This has proved to be the biggest problem of Bitcoin.

Remember the 1mb blocks, so transaction fees became crazy high? How transaction fees today is more than 20 USD?

This problem started to get serious back in 2014, and no one did anything. Some people believed it was OK that fees got up, other people strongly disagreed.

Bitcoins is 8 years old, and for soon 4 of those years – it has been a problem ignored. The problem is kinda solved now because the groups made a new version of Bitcoin called Bitcoin Cash – but is this really a smart way to do it?

If you strongly disagree on values, it’s a smart thing to do. If one group believes Bitcoin should act as gold, and another as a cash system – then it makes a lot of sense to diverge into two different things. However, for many smaller decisions, this is not effective.

A very interesting solution is the one the cryptocurrency Dash has implemented. Dash is another cryptocurrency which wants to be used for “digital cash”. The underlying idea for Dash is to be very cheap and fast to use – so an important goal is both scalability and low transaction fees.

However, the reason Dash is interesting, is how they make decisions. In Bitcoin, mining fees (rewards for adding the block and the transaction fees) go 100% to the miners.

In Dash, this is different. Dash believes people should be rewarded for making the system better. In Dash you have miners who are responsible for mining the blocks, and a new concept called master nodes, who are responsible for running services closely related to Dash. Instead of 100% of fees going to Miners: 45% Go to Miners, 45% go to master nodes and 10% to a treasury system. This means miners don’t get paid as much, but we have more types of people who get paid.

Since Dash is one of the biggest cryptocurrencies, this means a lot of money goes into the treasury system (millions of dollars every month). These are then used to employ developers to work on the core Dash system. In addition, everyone can upload projects they want to do and how much it will cost. Those people with at least 1.000 Dash can then vote on which projects to give money.

This means, those who have 1.000 Dash or more, they can decide exactly what should be developed, who should be hired and how any incoming money should be spent. This is done by voting every month.

The voting can be seen here:

The voting in Dash. Those projects that get votes, get paid in Dash (which can be sold for normal cash!)

Tokens

Imagine you want to start a website where people can back up their files. Today you have DropBox, Google Drive, Apple Cloud and many, many other competitors.

A different way to approach this would be to use peoples free space on their computers. Imagine if you could invent a system in where instead of relying on buying new hardware, which Amazon, Google and Apple do – you could take everyone’s computers who already have extra space – and use this space.

Previously, this was not possible. It was, of course, possible technically – but why on earth would you do this? Why would you store others peoples back-up on your computer?

This is where tokens come into the picture. A great example of this is a project called FileCoin. FileCoin believes in this vision: let us take all the space on peoples computers, and use it for storing other peoples stuff!

They’re doing what we wrote earlier: making the file system the decentralized protocol – and then making one version of the wrapper around it. But because it’s a protocol, you could make Dropbox2, and everyone could just switch.

The way FileCoin works is that you can either buy FileCoins, just like you buy Bitcoins, or you can get them by doing something in the network. In this case, imagine you’re hosting 50gb of peoples files. When you do this, you automatically get FileCoins. This means you get something in return for storing the files.

This is pretty amazing, and important to think about for a moment. This means you can pay people for doing something useful, automatically, in a decentralized way.

FileCoins can then be used for two things. Either you can spend them for letting other people host your files, or you can exchange them for money. And why can you exchange them for money? Just like Bitcoin – because people think they might be worth something!
This is a very interesting dynamic. Think about it. If you’re one of the first users of FileCoin and you like the idea, you can also buy lots more FileCoin then later, because you’re early. As FileCoin grow, more and more people use the system. This means two things: more and more FileCoins are used and spent, making the token easier to transfer. But because the token is used more, it grows in value. That means that not only can you earn money by hosting the space, you’re a stakeholder in the system. You do not own anything of the underlying company FileCoin, but you own some of the tokens they USE in their system.

Compare this to Bitcoin. Here the FileCoin would be Bitcoin. If you adopted Bitcoin early, you would have been able to mine a lot of Bitcoins early without competition. Not only would you get lots of mining rewards because you mined with low competition, you would also be able to buy lots of Bitcoin very cheap.

FileCoin could be the same. But let’s say FileCoin became popular – what would happen? Then serious actors would buy HUGE harddisks and set them up, and suddenly you could not compete with your small laptop.

Would FileCoin then be focused small laptops anymore? Absolutely not. Instead, it would be professional actors – just like Bitcoin miners – who would put the price exactly above earning money. You would have a decentralized DropBox – and if the company DropBox didn’t like the files you hosted and blocked you – you could just change provider without losing access to your files.

 

So is something good just because it’s decentralized?

Absolutely not. Even decentralized systems such as e-mail and the Internet, rely on some very big and centralized companies. I use Gmail, and I would not change it for anything. I’ve tried many clients – open source and closed source. Nothing gets close to Gmail in my mind. I don’t care much about the underlying protocol in my day to day activities, and I put all my trust in Google. I doubt I Can even export my data in a convenient way.

So the question is – does e-mail and Facebook feel different? Facebook is a fully centralized system – you rely completely on their technology and you own absolutely zero data. Gmail is on top of a decentralized system. I don’t think about this every day, nor do I feel Facebook is worse than Gmail.

But, the more I think about it, I do have problems with Facebook. The problem is – I disagree with some of the things they do. I’m not completely sold on the idea I should share my data the way they do; nor do I always like the interface changes. But I cannot change. Especially Messenger and WhatsApp, both Facebook-owned, are a huge part of my life. These apps are basically all my online interaction with family and friends. I don’t like that if Facebook one day suddenly dislikes and block me, they can stop my social life. I don’t like Facebook owns my data the way they do. But I cannot do anything about it.

I am not sure I like how Facebook uses my data to target me. I do a lot of online marketing, and because of that, Hotjar can target me easily. This is possible because Facebook tracks everything I do

This is one of the reasons I’m excited about blockchain. Blockchains allows us to not only build decentralized systems. They allow us to give tokens to the people who are building the network, and therefore pay them. Bitcoin started out as a cash system – a threat to Visa and MasterCard – and the early adopters got paid. That is very interesting, and I can easily imagine we will see this approach to thousands of industries.

This will not remove companies such as Facebook or Google. Just like Bitcoin have Coinbase, it will just be different. Coinbase have a great business model – they make it easy to buy and sell Bitcoin, and they charge a fee. I’m fine with that. You could also imagine someone made a new Coinbase but based on ads like the previous generations of Facebook and Google. Then I could choose.

But the underlying innovation is that you’re not limited. You can just take your data and leave, the underlying rules will stay the same. That’s the power of decentralization.

Implications of blockchain

Bitcoin is interesting and blockchain will change the world. That is what many smart people say. To this, I must agree.

Bitcoin is one application. Bitcoin used to be an attempt to replace Visa and Mastercard, but today that doesn’t seem like the case. Now Bitcoin seems to plan to replace gold, and Bitcoin Cash – the fork – plans to follow the original vision of Bitcoin. Same goes for Dash.

But as we dig into decentralization, we can see the potential is much, much bigger. Blockchain and proof of work are interesting, but I believe the new innovations we see now – the ones made possible just like the 4-minute mile made it possible for many runners – will be the game changer.

To continue down this path, and in this final chapter of the post, I will look into some of the industries that could change. After that, we will look at the even bigger implications on a country and government scale. Finishing off, we will look at the state today – how far away are we – and how does 2020 look? And the question you really want – should you invest in Bitcoin?

Industries that could be (largely) affected by blockchain

Bitcoin and blockchain have been criticized for not having any killer apps. Some negative – but smart people – look at it and say: “Look, the technology has been here since 2009, and it hasn’t done anything. It’s a scam!”.

I don’t blame them. But I think that’s because people get it very wrong. People try to look at a bank and say “hey, a bank work pretty well today!”, and go on and say that some lower fees won’t really change the game.

But what changes the game, is the removal of the bank. Because why is it we trust a bank to hold our money? Why is it this is not a protocol? Why is it you are not in control – you, who actually owns the asset? Why is it you are paying enormous fees to a huge inefficient body such as the bank?

This does not mean banks doesn’t have a future. Of course, they have. But I believe we are going to do the same we did with e-mail. Take the money layer – the rules of the money system and who owns the assets, and then decentralize that. We are going to have banks. But the banks are more like big apps – just like Coinbase – who are our gateway to Bitcoin.

Of course, we still need someone to store our assets. We need a nice user interface. We need nice mobile apps. We need help if someone steals from us. All of this is still needed – and also has a need to be regulated. This doesn’t change the underlying difference.

This could challenge a whole lot of industries.

Lets look at some very different examples, and how that could play out. I believe there are serious use cases in nearly any industry, but some are significantly more obvious and short-term than others.

 

Insurance. When you buy an insurance, you’re basically buying a contract. You pay some money for the contract, and then IF something happens, you’re getting paid by the insurance company. The total sum of payments from all people who pay for the insurance, minus the amount that’s being paid out to people, is the profit of the insurance company.

It’s not unlikely to imagine a fully decentralized insurance system. Imagine the contract you sign is made in Etherium, and written into code. When you get sick and you can prove it, your money is paid, if certain conditions are met. Because it would be a decentralized token system, no profits would be made to a central party. This could probably make your insurance bill half the size of today.

This system obviously, however, needs some serious innovations.

How do you avoid moral hazard (people treating their stuff worse because they know they have an insurance)? How do you judge the details if something should be paid out? There are many issues which aren’t solved here.

However, imagine taking the governance system of Dash, and use it here. Every month, you need to buy an amount of InsuranceCoin. This goes into a shared treasury, which is our total amount of money we can spend on paying out. The miners would be professional insurance people, who judge the incoming cases. The master nodes, those who own a lot of our new InsuranceCoin, could vote who should be the professional insurance people who judge the incoming cases. By doing this, both the master nodes who vote and the miners who are the professional insurance people get paid. There is no profit – and the price for the insurance would change on a bi-yearly basis to be as low as possible.

Would this revolutionize the industry? Totally. Is this possible today? Most probably not, because we need to make more innovations in the decentralized governance. I know little about insurance, and an insurance expert could come up with ten reasons why this would never work.

But what happens when this insurance expert understands blockchain and decentralization? I think insurance could be in for a fun overhaul.

Patent system. Both when working in enterprise, or if you’re a startup, patents are pretty essential in some industries. When Motorola Mobility got sold to Google, it was said a big reason was Google needed patents.

Patents are not something most people think about much. But in those industries where they are essential to have a business case that earns money – for instance, smartphones or medicine – they’re a pretty big part of managing your business. Today, all countries have their own patent offices. Some are assembled in bigger unions such as in the European Union, where you don’t have to apply in every single EU country.

As a general concept, it sounds wrong that something that is supposed to be world-wide, is country specific, and you need separate databases to maintain them. In addition, patents are very expensive and you pay for each “region” you want to cover.

Just like insurance, I am not an expert in this field. Again, an expert in patents would probably scold me for even suggesting this could be possible! I am sure there are many reasons why this is completely unthinkable. I just can’t help but think, with blockchain you can proof that YOU actually published something at a specific date. I can upload a document at a given date, and I can prove I was the first. This technology is free and available worldwide.

Despite my limited domain knowledge in this space – I wouldn’t be surprised patents look very different and have blockchain systems to the core in the future.

Tickets systems. Today, when I have an event, I want to sell my tickets to as many people as possible. To do this, I pick an event platform – for instance EventBrite – and start my marketing here.

But why is this? Eventbrite and their competitors are centralized companies. That means they have your data, and you cannot use multiple platforms. Say you also have some tickets you want to give to friends, you need to go to Eventbrite website and remove those tickets from the sale.

This works, but it has a couple of limitations. First of all, you cannot have your event published on multiple big event sites. Another problem, which I have experienced myself, is that if I want to buy a ticket from another person, I cannot verify If the ticket is legit or false. Especially for concerts and festivals, this causes a lot of problems because of fraud. 

Imagine that instead, the company hosting the event, makes all the tickets available on a blockchain we call the TicketCoin. Now, all users would be able to verify if their ticket is legit. In addition, we would still have Eventbrite and their competitors, but instead of they own the data, they would just be a frontend that makes going to events easy, but they would not own the data and own your event. 

For sold-out events, we would also end up having a marketplace for second-hand selling. If I have a ticket to the world cup, I could sell it to the highest bidder, and the highest bidder would know my ticket is legit.

This makes a lot of sense to me, and if I wanted to host an event I would like this freedom. But just as our examples before, there are multiple issues. Why would EventBrite every accept this? The answer is, they wouldn’t. They would lose power. But that’s why this kind of thing would have to start at the companies hosting the events – and then if some very important events started doing this – they could force this change.

NGO’s. Every company that today relies on donations have a big problem. The problem is you cannot show those who spend money, how the money was spent.

Cash and bank transfers don’t leave an open trail, and you cannot see it. On a yearly basis, the NGO’s makes a report and makes a nice diagram showing how many percentages was spent on which things.

However, because every transaction made in a blockchain system is made visible – you can see how the money was spent. Obviously, you cannot see exactly what you bought, but you could track every time money was spent. It’s not unlikely to imagine that some merchants are labeling their “public addresses”, so you can see every time an address comes from a specific company. By doing this, you could track exactly which transactions the NGO’s made.

Another problem for NGO’s is the distribution of resources in crisis situations. It’s very difficult to get means provided to those who are hit in a crisis situation. Imagine instead that all those hit by the crisis for a cash amount sent to their wallet. By doing this you could much faster and without friction get the required help to the people hit. This would obviously not help if there is a simple lack of food in the area, but from what I’ve understood, the problem is often the distribution and not only having the resources.

I don’t know if this could work. But people such as Bill Gates has shown serious interest in this, and I can see why this could matter a lot.

Social media platforms.  This is a bit more of an ideological idea because I don’t see it will happen anytime soon. However, recent years has shown that having huge companies such as Facebook, Twitter, and Google owning our social infrastructure has problems. Especially those few that gets blocked from the platform – they simply lose access to a big part of the modern world.

I would be significantly more comfortable with all my profile data is being in a decentralized system. Since this data obviously isn’t “free” to host, I would need to pay for it. In this case, it’s not unlikely that you could do two things: either you would need to pay our newly made SocialCoin every month, or you could choose that the platforms could monetize your data showing ads. This idea would obviously need some more work, but is this really so unthinkable?

Again, you would still have Facebook. Facebook and Messenger are to be the best apps on my phone, and I love them. But would I prefer the apps more if they were based on a decentralized setup? Absolutely!

The reason I don’t think this will happen anytime soon is that of the sheer size these platforms have already. Challenging Facebook on the number of members is not something you just do… That’s insanely difficult.

E-commerce platforms. Today we have a couple of very big e-commerce platforms. We have one type which is Amazon, that sells everything you can imagine. A growing amount of products sold through Amazon are from third parties, and they’re more a platform than purely a webshop now. A different type is eBay, which is for buying and selling stuff between people.

Starting with eBay, it’s pretty easy to imagine in a decentralized system. Some years ago, OpenBazaar, started out with an attempt to make this. So far the results have been disappointing – because making a decentralized platform is really difficult. But the idea makes sense.

Imagine that we made a new blockchain based system. Everyone can then create their own store, you can see their products, see ratings and buy products. Everyone can open one. Because it’s based on the blockchain and is decentralized, everyone can sell everything – and no one needs a commission. Today eBay lives on the commission, and Visa/MasterCard enjoys their fees too. If we had a decentralized version, not only wouldn’t we pay Ebay – we would also avoid the transaction fees of the payment method because cryptocurrencies, in theory, should allow very low transaction fees. This could probably be 10-15% cheaper than today.

Amazon, however, is a different beast. The reason Amazon is very difficult to beat, is not only because they have the biggest inventory in the world. They also have the best prices.
How do you get the best prices? Well, you mass produce.

It’s ignorant to believe that a decentralized Amazon where people buy and sell from each other, could replace Amazon. There are many products I WANT to be mass-produced in a cheap way.

But imagine we had a huge decentralized EcommerceCoin. Now, we cannot register products in the blockchain because of size limitations – I will come back to this in a moment – but we could definitely store all purchases. We also need an incentive system to host the huge database of products, which would need some kind of miner fee.

It’s not unlike to think up a system where both Amazon, Alibaba, eBay and all the other platforms used an underlying decentralized database. This would obviously reduce the power of the big platforms, because smaller local merchants could just sell outside Amazon and directly on our new EcommerceCoin.


E-commerce is the obvious, not the first target. Today it’s relatively easy for new merchants to sell products, the big ones work extremely well and a decentralized platform wouldn’t make things significantly cheaper – if cheaper at all. The reason I decided to include it, is to show that in every industry – blockchain could play a role. This does not mean it will, but it’s important to understand it could if you’re in a given industry.

My point with these industries was not that above 6 is the killer apps of blockchain. I think there are lots of more obvious use cases, especially starting with moving money around. To me it makes a lot of sense to start with banking the unbanked in the poorest regions, solve the 10-15% fees for remittance when people send money abroad home to families and have some cryptocurrency compete with VISA and MasterCard. But the apps above shares some thoughts on industries many people don’t usually think about when they hear Bitcoin and blockchain.

But just like the Internet started slowly. The Internet started with sharing information and some simple e-commerce, blockchain will start slowly too. And then, maybe, it will actually take over every industry.

Who knows?

Reverse network effects

In Silicon Valley, you have a couple of startups that an investor will shoot you for suggesting.

If you go to a serious investor and say with a straight face, you plan to build a better Facebook, because you have a better interface, they’re not going to be friendly to you. Because that’s a fucking stupid idea. At least, you need to have some strong angle on the project.

The reason this is a fucking stupid idea is that of network effects. The reason Facebook is so powerful is that all of your friends use Facebook. Even my friends who HATE Facebook, feel so left out, they end up joining Facebook. Maybe not to post on the wall, but to take parts of events, chats, and groups.

Network effects are very difficult to beat. That’s why Uber is growing so insanely fast with an impressive loss every quarter, why Airbnb gets billions in funding to grow and why no one has really managed to take up the “search engine” fight with Google. The bigger you are, the more people use your platform. With more people using your platform, the more data.

You simply cannot beat a platform that has network effects, if they’re growing stronger than you – unless you can beat that growth.

But, this is another reason blockchain is extremely interesting. Let’s take the example of FileCoin before – the decentralized storage system which could be a competitor to DropBox. DropBox has *massive* network effects, and even better, massive benefits of being the leader in the market. They can buy storage much cheaper. If we were to make a competitor to DropBox today, it would be … a fucking stupid idea.

FileCoin, however, is an entirely different beast. The second you make a blockchain based system, you have tokens. These tokens are also called the utility tokens. As we talked about before, the tokens have two usages: first of all, they’re the “token” the system use. If you buy storage, you pay in this token. But the different usage is that the token has a value. If people believe in FileCoin, this underlying token grows in value.

This means early adopter actually go from having the worst experience (like you did if you were an early Facebook user with no friends on the platform and Uber user with few cars), to getting rewarded for being early. IF you hit something that is great, you can become filthy rich.

This also brings a different effect. If you become an early user in a system you believe in, what is going to happen? You are going to tell your friends and everyone that has at least one ear. You become an evangelist.

The early stages of the product are just as bad as normal startups. If we make a decentralized TaxiCoin, it’s still going to suck to find a taxi because so few drivers use it. But because we’re early and can get plenty of coins, we have an incentive to change that.

This means that early users go from being optimistic test users who get a crazy bad experience, to becoming co-investors and evangelists. This is super interesting for new concepts, because it will help the early growth a lot.

This also leads to… ICO’s.

ICO’s – financing of the future and the scam of today

The media cares about money, and people becoming rich. If you’ve read an article on social media about blockchain or Bitcoin, it’s probably either because of the new impressive prices of Bitcoin, or ICO’s.

An ICO is an “initial coin offering”. Our darling from before, FileCoin, also had an ICO. The way a company such as FileCoin work, is that we have a group of smart people. These people make a company, just like today. This coin then develops the technology and write a white paper – which describes their idea.

Then, these companies say “look, we are going to give you a chance to get the early tokens!”.

So what these people do is they take a period of 7-14 days, and sell their first tokens. So if we make a new coin, let’s say we keep 50% of all the tokens in the system for yourself, and sell the rest 50% on the market. This means instead of starting out with some few test users, we’re blasting this out to all happy new investors, who think this idea is smart. In the initial coin offering, the coins are bought and sold, and after the ICO, the token can usually be bought and sold just like Bitcoin and the other cryptocurrencies.

Now, if this sounds highly scammy, slightly illegal and not very trustworthy – you’re right. This is the scam of 2017, and unfortunately, probably also 2018. This will get regulated, and I think 99% of all ICO’s can currently be called dog shit. Just don’t do this if you don’t understand it deeply.

But, the concept of an ICO is interesting. The biggest problems startup have, is a lack of cash. A startup ALWAYS NEEDS CASH. Big companies who you can buy and sell on the stock market do not have this problem the same way. They always have cash on hand, because all their stocks are possible to sell same day on the market which gives cash in the bank. Startups, on the other hand, rely on external funding. This gives power to the investors, and the startups are often at the mercy of the investors.

The ICO’s change this game. Here the founders have their underlying token, and they can buy and sell it on the market from day one. That means the startups doesn’t have the same problem with cash as today.

This will probably revolutionize venture capitalists and be a huge part of the future financial markets. But I need to leave the warning today: it’s dog shit. And it smells.

The bigger picture

So, by now, we have seen that blockchain could be very, very big.

It could be “Internet level” big. And potentially even more – who knows?

So if we do this, then we can also go one level further. The obvious first step is that blockchain could solve online voting. This would probably get more people to vote, and that would be great. The voting numbers in especially the US is scary low. So that would be nice,

A key thing the blockchain do, is to replace trust. Today we trust authorities. If we go down to our bank or insurance company, we trust them. We trust the company and the people that work there. The problem, is that this doesn’t always work that well.

The blockchain replaces trust in people, with trust in math. From feelings to code. From soft processes to rules.

It’s obvious that whenever we work with decisions, contracts or ownership blockchain could play a big role – but how about with countries?

What is a country anyhow?

How does a democracy work?

This is where the conversations and thoughts get pretty big. I have a friend that believes he can build the software for managing a country in a decentralized way, and I hear many people that have very interesting opinions on this topic in general. Do we really need countries?

Just like an NGO could show exactly how they spent their money, why shouldn’t public organizations work the same way?

Why should votes and budgets not be publicly visible and voteable from people who are selected by the country (and unlike Dash where owning 1.000 Dash gives you a master node, amount of votes you get from people gives you power).

The opportunities are pretty much endless!

A (very) cold bucket of ice in your head

So far we’ve been very, very, very positive.

We’ve talked about this is just the start, and by now you’re probably ready to sell everything you own to buy not only Bitcoin but also Etherium, Bitcoin Cash, ICO’s, Dash and much more!

But by now, it’s time for a very, very cold bucket of ice. Not the Ice Bucket Challenge cold, colder.

When many smart people talk about blockchain, they compare it with the Internet boom in ’98. How we’re now inventing the future of banking, insurance, and all the other industries! And we just need a few more years and this is all going to be awesome.

I see this, very, very differently. We are not in ’98. We’re not in ’90. We’re just years after we started the Internet. We don’t have the graphic user inteface yet. We don’t have the browser.

Being honest, nothing is in place yet. If you don’t dig into the details, all of this sound very promising.

But let’s not forget:

  • The transaction fee of Bitcoin is easily 20 Dollars
  • No cryptocurrency would sustain even 1% of the volume of VISA and MasterCard at peaks
  • Smart contracts sound smart, but they’re stupid. They can’t even communicate with the outside world. Want to make a contract so you get paid when you hit a certain weight on your weighing scale? Forget it, you can’t. Etherium can’t access anything outside their blockchain
  • We occasionally hear about millions of dollars Bitcoins and tokens being stolen
  • The things that get money from the Dash treasury is embarrassing
  • We have no regulation anywhere

This is the wild, wild west.

I believe it’s ridiculous to start even talking about serious applications yet. Remember FileCoin? They raised 200 million USD.

They don’t have a downloadable product!!!

We are not a few years away from usage. We’re further away. And this is very, very important to understand.

Take the products when we had the Internet boom in ’98. Look at those products. Many of them made a lot of sense! We might laugh at pets.com today, but you cannot tell me a with a straight face the ICO’s we see today makes much more sense.

This is insane.

AND THIS IS WHY THE CONVERSATIONS OF BITCOIN AND BLOCKCHAIN SUCK.

On one side you have very smart people. They say it’s a bubble, and we have no underlying value. And they’re absolutely right. A 0.5 Trillion market cap which all cryptocurrencies have right now – is insane – it’s insane with the current level of applications which is comparable to nothing.

On the other side, you have people who say blockchain will be the future. They’re probably also right! Blockchain technology has an even BIGGER potential that many of the people in this group even know and understand.

But we need to talk about expectations. They’re not aligned. We are not in Internet ’98 – back then we HAD a browser.

By now, we don’t even have a stable server.

So what to do?

I want to use a quote I love a lot. “Most people overestimate what can happen in a year, but (greatly) underestimate what that can happen in a decade”.

And this, I believe, is very true with blockchain. I believe we’re going to see huge levels of disappointment in how blockchain delivers on the short horizon. But if we’re patient, and look past the horizon, I think we can see a very, very interesting future.

… And this leaves us with the question you really wanted to know:

Should you buy Bitcoin? And is it a good investment?

By now, you should be able to answer this yourself. First a disclaimer. Every asset, either it’s stocks, bonds, commodities – and yes – Bitcoin, has a price because some very smart people agree that’s the price. Very smart people are selling the asset at this price, and very smart people are buying the asset at this price.

If Bitcoin is 15.000 USD, it’s because some people means it will grow in value. Some people believe it’s a scam and should be sold right away.

It’s even more dangerous to look at those who already became rich. Every time something grows in value, you will have winners. Even a monkey can become lucky. So don’t look at someone who just made a lot of money in crypto and think he or she is a hero – the past does not equal the future.

Bitcoin, as I see it, can go two ways. I personally have the assumption that blockchain will be huge in the future, but even this assumption can be wrong.

Maybe decentralization isn’t as cool as it sounds. But if my assumption is right, I see Bitcoin can go two ways.

The first scenario is that we will see many different cryptocurrencies and tokens grow in value. Bitcoin will probably get surpassed because it’s expensive to use and maybe being gold isn’t the best use case.

The other scenario, is that Bitcoin is a “symbol” of cryptocurrencies, and when other currencies grow, Bitcoin will too. Because Bitcoin is the household name and thing people know, that will grow with all the others.

I don’t know which of the scenarios that are most likely.

So what will be Bitcoin price be in 2018? In 2020? And 2025?

My guess. In 2018 we will see a huge hit on the market, and blockchain technologies will suffer in general. Lots of people will lose their money, because they bought in and didn’t understand what it was. I wouldn’t be surprised to see a 5.000 USD Bitcoin most year.

In 2020, I think we will see the new “hype” of crypto, but this time with more infrastructure in place, and better suited to actually deliver real value. I would guess we could hit a 25.000 Bitcoin again in 2020.

In 2025, I think blockchain will have started to be serious. It will be a part of many industries, and be a very important technology. Here I wouldn’t be surprised to see a 100.000 USD Bitcoin. If Bitcoin becomes the symbol of cryptocurrency, I wouldn’t be surprised to see even 3-500.000 USD pr Bitcoin. But it’s worth remembering, the scenario that Bitcoin is being surprised and replaced by other alternatives are probably just as high – and then Bitcoin would be worth peanuts. 

What do I base all these guesses on?
You got it, guesses. I’ve no idea, besides what you’ve read in this post.

None the less, please take this in. As a crypto lover and early adopter, I die a little each time I see another post about the “get rich” schemes. Blockchain and Bitcoin are so much more, and that everyone focus on just the price is sad.

Please read this. Please share it. Please tell about this to your family. Please send it to a journalist. Please send it to someone who is planning to buy. We NEED a better debate about blockchain. We need a better and nuanced view, and it’s tearing me apart to see the current one.

For a better world, let’s talk about blockchain. It can change the world.

I hope you liked the post!
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