Lecture 2 Summary
Author: Rea Savla
I. Pre-Bitcoin: Libertarian Dreams
In the face of increasingly powerful banks and national agencies, the Cypherpunks and Crypto-anarchists of the late 1980s advocated the use of cryptography to preserve privacy, which they defined as the power to selectively reveal oneself. They sought to develop an anonymous digital transaction system.
In October 2008, Satoshi Nakamoto released the Bitcoin whitepaper, which outlined, for the first time, an anonymous, trustless, decentralized cryptocurrency.Bitcoin was built upon a history of failed cryptocurrencies, including Digicash, Hashcash, and B-money. Bitcoin relies on Proof-of-Work, a peer validation protocol introduced by Hashcash, that expends computational power to solve cryptographic puzzles and to cast votes. As in Digicash, each node in Bitcoin maintains their own identity through public and private keys, authenticating transactions using blind signatures. As in B-money, every Bitcoin full node maintains a copy of the blockchain. Bitcoin is a deflationary currency, with 21 million total bitcoins that will be slowly introduced to the bitcoin supply via block rewards.
The first transaction using Bitcoin to purchase a tangible asset occured in 2010, when Laszlo Hanyecz exchanged 10,000 bitcoin for $25 worth of pizza. This exchange gave bitcoins real value, a first step towards legitimacy.
II. Early Bitcoin: Scandals, Hacks, and Illegal Activity
As Bitcoin began increasing in popularity, it also began facing increasing cases of thefts, hacks, and illegal activity. The first was a large hack on Magic: The Gathering Online Exchange (Mt. Gox), one of the first Bitcoin exchange website created in 2010.
Bitcoin was also used for the purchase of illegal substances on the dark web, especially through the website “Silk Road,” nicknamed the “eBay for Drugs.” As Bitcoin became more accessible and useful to the public, it steadily grew in value, reaching a bubble in 2013.
Altcoins, such as Litecoin, ZCash, Stellar, Ripple, Ethereum, Dogecoin, DASH, and Monero, began popping up soon after Bitcoin’s success, each serving a different functionality.
In 2014, merchants, such as Overstock.com and PayPal (with Coinbase), started accepting Bitcoin. Bitcoin startups and wallet companies, including Coinbase, Bitpay, and Blockchain.info, started appearing around this time as well. Around this time, people started to differentiate between the term blockchain from Bitcoin.
III. Scalability Debates and Ethereum
Bitcoin is far from perfect. One of the biggest technological challenges Bitcoin faces is that of scalability. Such issues raise concern of decentralized governance. Currently, Bitcoin users may propose Bitcoin Improvement Protocols on online forums and gather ad hoc community votes on proposed matters.
Another influential blockchain platform is Ethereum. While Bitcoin is a storage of value, Ethereum is a platform designed to execute arbitrary code called “smart contracts”. Users pay for code execution using Ethereum’s internal token, called ether. With Ethereum’s introduction, Distributed Autonomous Organizations (DAOs), programs on the Ethereum blockchain that create a distributed government, gained popularity. “The DAO” was a decentralized Venture Capital DAO that suffered a $120 M hack in 2016. Disagreement about whether to roll back the history of transactions to before the hack led to two versions of Ethereum. Ethereum(the main chain) rewound the transaction history to before the hack, whereas Ethereum Classic continued the original chain despite the hack.
While concerns of the SEC’s reaction to The DAO hack initially lowered Ethereum’s price, the growing popularity of Initial Coin Offerings and cryptocurrency exchange-traded-funds increased Ethereum’s price overall. Economic and political changes in early 2017 along with an expansion of the crypto user base to include millennials further contributed to growth in Ethereum value and transaction volume.
IV. Enterprise Blockchain
Meanwhile, banks started seeking ways to apply blockchain technology leading to an increased interest in “private blockchains.” Enterprise blockchain technologies today include R3’s Corda, Chain, JP Morgan’s Quorum and Juno, Digital Asset Holdings, and IBM’s hyperledger. Blockchain has come a long way — from online ideation amongst Cypherpunks to adoption by JP Morgan Chase.
The blockchain space has expanded to include not only major financial institutions, but also the general public. Initial Coin Offerings, equity-less fundraising schemes for new crypto startups that allow anyone to participate, and the advent of Cryptokitties, an online marketplace for virtual cats, indicate the spread of blockchain across communities and also to popular culture.