“A blockchain is a magic computer that anyone can upload programs to and leave the programs to self-execute, where the current and all previous states of every program are always publicly visible, and which carries a very strong cryptoeconomically secured guarantee that programs running on the chain will continue to execute in exactly the way that the blockchain protocol specifies.”
-Vitalik Buterin, creator of cryptocurrency Ethereum, early software contributor to Bitcoin
Blockchain and its related system of technologies are often evangelized as some sort of magic machine that will catapult us to the next technological echelon. What started out as a fringe interest for cyber-liberatarians and tech-utopianists has turned into a formidable giant. Bitcoin, the first major cryptocurrency based on blockchain has a market cap of 122 trillion dollars and has spawned global server farms, financial institutions, and corporations solely dedicated to its industry. It’s attracted viral attention from celebrities — Dennis Rodman, a frequent visitor to North Korea had one of his trips sponsored by PotCoin, a currency for buying and selling weed. It’s attracted high profile attention from EU and US regulators, branding ICOs (Initial Coin Offerings – a way for blockchain startups to attract seed funding) as dangerous and highly risky.
I’m not the only one who is skeptical of blockchain and Bitcoin’s potential. I believe this technology is still in its infancy. The Andressen Horowitz podcast a16 discussed that it’s in its infrastructure phase, dealing with issues with scale, governance structure, and purpose. Unlike the internet protocols, whose governance structure is quite stable, the politics of bitcoin can be quite messy.
Andreas M. Antonopoulus, a scholar who is well known for explaining issues in blockchain to governments and engineers uses a good analogy for explaining the relationship between Bitcoin and blockchain by comparing it to apps and the internet. Just how apps run on an internet protocol, bitcoin runs on a blockchain protocol. Bitcoin’s blockchain protocol and related software and wasn’t designed to scale or mitigate unforeseen cybersecurity issues. As such, the protocol needs to update and change to accommodate with current issues and needs, like how a government needs to revise its laws to keep up with the times. The process by which large stakeholders in the technology come to an agreement about the protocol is called consensus. Newer cryptocurrencies and cryptoservices that run on a blockchain protocol look to Bitcoin’s blockchain protocol for history lessons in what works for better consensus.
Bitcoin’s major stakeholders are roughly divided into three types of actors:
Exchanges – These are corporations that provide services that exchange fiat (e.g. USD, GBP) into Bitcoin. They provide the basis by which Bitcoin can be used as an store of value (like gold), a speculatory asset (like stocks), or an exchange medium (like Venmo.) These comapanies are subject to governmental regulations that either impede or facilitate its function. Consumers of exchanges are responsible for driving the demand of bitcoin, which can be measured by its price in a fiat.
Miners – These are owners of enormous server farms that perform a computationally intensive service for the protocol called mining. The protocol requires a large amount of distributed computational power in order to be secure. In return for mining, the protocol creates new Bitcoin and hands them to the miners, thereby increasing the supply of cryptocurrency in the market. Because of the specifications of the blockchain protocol, Bitcoin mining is exponentially harder to do as more people use the protocol. A decade ago, it was profitable to use your computer to mine Bitcoin, but now, it requires server farms with acres of land, cheap electricity, and expensive dedicated hardware. Many of these server farms are in China, which has a government that tries to regulate and inhibit bitcoin mining.
Pretty much everyone else – Users of Bitcoin that use it as a store of value or an exchange medium play an important role. They develop software that increases its utility, or use it for financial services like micro loans, asset liquidity, and currency portability.
These three entities need each other, and although they have differing demands on what the blockchain protocol should provide for Bitcoin, they’ve been able to work together to address major flaws in blockchain’s cybersecurity, scaling issues, and governmental regulations.
However, the political drama starts when a subset of exchanges, miners, and users a have a different vision for the purpose of the blockchain protocol. If enough people agree on a different version of the blockchain protocol, they create a fork where a separate version of Bitcoin is created. (read: fork as in fork in the road) This happens all the time, and creates a large amount of controversy and volatility in the cryptocurrency markets. Some of the biggest forks are the split between Ethereum and Ethereum Classic, or Bitcoin and Bitcoin cash. It’s unfortunate, but these forks create currencies with similar names that involve extremely technical and nuanced changes that are hard to understand but have profound effects on the blockchains’ functionality. These forks means that exchanges, miners, and users have to make an irreversible decision between the two options of the fork. These forks are like the Wild West of the cryptocurrency world, where people embark on an uncertain journey into uncharted protocol territory, incurring risk in hopes of creating a better system of governance, consensus, and functionality. How will these forks affect the functionality of blockchain and its implementation in widely used, mainstream services? I guess we’ll have to wait to hear back from those brave settlers in uncharted territory to see how they’re doing.