In May of 2010 Laszlo Hanyecz wanted to see if he could get some pizzas with his relatively new and hard-to-spend Bitcoins. The coins he offered were worth something like $40. After a few days someone took him up on this, and, in exchange for two Papa John pizzas, received 10,000 bitcoins. That would be worth about $25 million today…
The hype around cryptocurrencies (AKA crypto) and blockchain ebbs and flows, but it has never entirely eased since the 2008 release of Bitcoin by the mysterious Satoshi Nakamoto. For better or worse, blockchain and Bitcoin were initially and still are often conflated, as Bitcoin is by far the best- known implementation of blockchain technology (at least to the general public). But the blockchain technology has far more general applicability than just crypto.
Out of curiosity, I decided to look into blockchain technologies. This required me to learn more about the state of the art, the history, and the terminology. The world of crypto and blockchain is large, rapidly changing, and full of contradictions. Always on the lookout for my next blog, I decided to summarize my investigation into the state of crypto and blockchain, the current use cases, and the technologies involved.
Note that there is so much here that I can only scratch the surface and discuss prominent examples. This domain changes quite rapidly, so the information I am presenting will rapidly age.
Despite the wide variety of possible applications of blockchain, Bitcoin is still the most widely recognized one, and the most valuable. As of this writing each Bitcoin currently has a value of around $25,000, with a total market cap of $501 billion. The second-most-popular blockchain-based cryptocurrency, Ethereum, has a value of around $1,500, with a market cap of about $196 billion.
The next three largest crypto currencies, as noted by coinmarketcap.com, are:
The total market cap for cryptocurrencies is around $1.03 trillion. As of March 2023 there have been around 22,904 ICOs (Initial Coin Offerings, or new cryptocurrencies) of which something like 8,832 remain somewhat active. The others never properly launched, were outright scams, or failed after launch.
There are a few key points surrounding crypto:
- There is serious money in crypto.
- A few currencies dominate but most are worthless.
- There is rapid, sometimes dramatic, change in the world of cryptocurrencies.
Cryptocurrencies do not enjoy wide acceptability as compared to government issued fiat currency, such as dollars and pounds. But you can use the most popular currencies to make purchases from some major companies, including Dish, Newegg, PayPal, Rakuten, Tesla, and Starbucks. There are also products such as Visa crypto debit cards that allow you to spend your crypto anywhere. The list of currencies accepted and the companies that accept them regularly changes.
There are somewhere around a billion crypto transactions per year, but the vast majority of these are transfers that remain on their respective blockchains. It doesn’t take $25 million to buy a pizza with Bitcoin today, but it still isn’t easy!
Philosophy and Challenges
Bitcoin was created after the 2008 financial crisis, which sowed widespread distrust in the banking system. Early proponents trumpeted the new technology as a safer long-term alternative to banks and traditional currencies.(New York Times, paywall)
In the early days of Bitcoin much was made of its independence from any particular government or banking system. Because of the cryptographic anonymity provided and the decentralized nature of the consensus mechanism, the idea was that people were free to use it, assuming they could find a place that would accept it, without interference from Big Brother.
Lack of oversight of crypto may have fostered freedom, but it also fueled bad behaviors.
The Silk Road became the most famous illicit market for online drugs (and other things) until it was brought down by the US government a decade ago. The possibility that it will be used for money laundering is considered a real problem with crypto. As mentioned above, a majority of crypto currencies have failed or are failing, and quite a few of them have been outright scams
These challenges have illuminated the need for some sort of legal/government involvement. The popularity of Bitcoin and other cryptocurrencies ensure that they will eventually be regulated.
One key question governments had difficulty answering in regards to how to regulate crypto was whether Bitcoin and the others were currencies, as they are commonly considered, or securities, like mutual funds, stocks, and bonds. Good arguments can be made both ways. In June of 2023 the Security and Exchange Commission (SEC) sued Coinbase, one the biggest names in crypto trading, for evading disclosure requirements. In the US at least, the SEC is coming down on the side of securities.
Interestingly, the current chair of the SEC, Gary Gensler, offers a free Blockchain and Money lecture series on MIT OpenCourseware. It was recorded in 2018 so it is aging a bit. In addition, Mr. Gensler was not an expert on the technical aspects of blockchain so struggled to explain the technologies involved. Where the course really shined is in its discussion of the role of crypto and blockchain in markets, society, and government. You can gain some insight into the SEC’s current moves by watching him discuss his philosophy
An argument that is regularly repeated is that a regulatory focus, such as clarification of which asset class crypto falls into and the application of tax laws, is actually a good thing (some crypto fans will disagree). Regulation provides a safety net and provides recourse, which in turns fosters confidence in the system. It also provides a framework with which to crack down on scams. Companies and individuals are far more likely to invest in technologies and accept currencies if they are comfortable that there is reasonable legal clarity around them. The wild west days of crypto may be coming to a close.
Direct Government and Banking Involvement
Beyond creating legal frameworks for crypto, governments around the world have taken steps to either ban it or issue their own digital currencies or both. For instance Thailand once declared Bitcoin illegal, but now permits its usage as a digital asset. China recently ruled that crypto is protected as legal property despite official bans on trading and mining. Previously China hosted the world’s second largest mining industry, and miners there may be continuing to operate off-grid.
Meanwhile, China has issued its own digital currency, the digital yuan (e-CNY). The digital yuan leverages a permissioned blockchain–a private blockchain in which only permissioned users are allowed to make changes. This is significantly different from the open, distributed nature of public blockchains like Bitcoin and Ethereum. Most governments and corporations that are experimenting with blockchains favor this private/permissioned approach. More on this topic later.
Numerous other countries are exploring the idea of a Central Bank Digital Currency (CBDC), a digital form of fiat currency. As with most projects that are crypto and blockchain related there is still quite a bit more talk than actual implementation. The world trends toward less cash and more digital payments anyway (Sweden is the extreme example) so it makes sense for governments to get more directly involved. Consider this idea: if a government issues a centralized digital currency, it could implement an interest rate (positive or negative) on all of the digital ‘cash’ used in its economy.
The blog title teased blockchain, but this first article focused on crypto. From a technical perspective there is no requirement that these two be tied together, but in reality their fates are still intertwined: hype surrounding crypto has driven irrational exuberance about blockchain. Blockchain has been promoted as a solution for everything, driving the ecosystem at a fast pace, obscuring its best use cases, all of which often far exceeds its actual utility. In future installments, I will focus more on blockchain, then use cases and, finally, on the technologies involved.