Blockchain Bubble or Revolution: The Present and Future of Blockchain and Cryptocurrencies

by Neel Mehta

We’d be remiss to ignore the first Ethereum DApp that made headlines, and perhaps the most popular DApp of all time: a virtual cat breeding game called CryptoKitties.

As intricate as CryptoKitties’ breeding algorithm and economy are, what’s truly interesting is its model of ownership.

But with CryptoKitties, your ownership is stored on the blockchain, so you will “own” the cat as long as the Ethereum blockchain stays alive (which is to say, as long as someone, somewhere is running the Ethereum software).

These properties led art critics to hail the blockchain as the potential future of arts and culture: there’s finally a way to prove that you, and only you, own a piece of digital art.

Potential investors would send money (in the form of ether) to The DAO, and in exchange they’d get voting tokens.

Ethereum tokens are virtual trinkets that any smart contract (or DApp) can make and hand out to users; users can trade tokens around and, in some cases, “redeem” them with the smart contract.

Anyway, investors would use their voting tokens to vote on startups they wanted to invest in, and winning startups would automatically get a slice of the fundraising pie. It was a radically new model of venture capitalism: partners and hierarchy were out, and democratic decision-making was in.

In July 2016, the pro-fork activists were tired of the debate and decided to hard fork the Ethereum blockchain, creating a new version of the currency that returned stolen money to investors. This new version, confusingly, kept the original name Ethereum. The anti-fork group continued to recognize the original, unaltered blockchain as the official one; this currency took the name Ethereum Classic.

Ethereum’s ERC-20 tokens[rr] are quite powerful. In fact, you can actually create a whole new cryptocurrency with these tokens: you just need a smart contract to hand out a limited number of tokens to users. Then, as long as there’s someone willing to exchange your tokens for ether (or dollars) and vice versa, you have a scarce asset that can be traded around and can be converted to or from other forms of money. In other words, you have a currency!

These token-cryptocurrencies behave a lot like normal cryptocurrencies (which have their own blockchains), except tokens can’t be mined; they’re usually handed out by some other institution or algorithm.

The basis for payment is attention. Brave users are given BATs based on how much attention they pay to ads, and publishers are given BATs based on how much attention Brave users pay to ads on their platforms.

But BAT seems able to align the incentives properly: everyone benefits when a user views an ad, and everyone loses when ads make a website experience bad.

The best-known stablecoin is called Tether: each Tether coin (known as a USDT, for US Dollar Tether) always trades at $1.

In economics terms, maintaining a fixed exchange rate like this is known as a peg. Many governments, seeking stability in their economies, peg their currencies to bigger, more established currencies, maintaining a constant exchange rate between their currency and the bigger one.

Pegs are implemented by offering a simple trade: a central bank (or Tether) creates a currency board, a sort of bank counter that anyone can visit to exchange currencies at the predetermined rate.

This points at a more fundamental problem with Tether: the stability of the currency is determined by the actions of a privately-held company — a middleman, so to speak.

These crypto-fundraising moments are known as initial coin offerings, or ICOs[539] — a crypto version of initial public offerings, or IPOs, when startups start selling shares on the stock market.

Average people may not be able to match you to your address, but the cryptocurrency exchanges you use sure can, and thus so can any government who can exert control over the exchanges.

Monero, which is popularly known as a privacy coin, uses a technology called CryptoNote to obscure the identities of the sender and receiver of every transaction.

Perhaps the most famous, and insidious, use of Monero is in in-browser mining. You can have your web browser run a snippet of JavaScript code — the same kind of code that makes websites like Spotify and Google Docs interactive — to mine Monero coins.

This is possible because Monero’s mining algorithm is ASIC-resistant. While Bitcoin’s mining algorithm only cares about how many trillion hashes a mining rig can do per second, Monero’s algorithm requires computers to use a lot of memory (RAM) while mining.

So, in 2017, a startup named CoinHive started letting website owners embed a small snippet of Monero mining code (written in JavaScript) on their websites. Visitors’ browsers mine XMR, which flow to the website owner.

Games can also find a new revenue source by offering virtual goods, like extra lives or gold pieces, to users who let their browser mine for a few minutes.

In 2017, the popular torrenting, or digital piracy, website The Pirate Bay started running CoinHive on visitors’ browsers without letting them know or giving them anything in return.

This wasn’t a harmless trick, either, since all that mining activity heats up visitors’ computers, makes their fans kick into high gear, and drains their batteries.

This tactic of hijacking a visitors’ browser into mining coins for a shady operator is known as cryptojacking,

Hacks became so widespread that cybersecurity analysts started calling cryptojacking the top malware threat they were tracking.

The blockchain… is the biggest innovation in computer science—the idea of a distributed database where trust is established through mass collaboration and clever code rather than through a powerful institution that does the authentication and the settlement. —Don Tapscott, author of The Blockchain Revolution

After years of tireless effort and billions of dollars invested, nobody has actually come up with a use for the blockchain—besides currency speculation and illegal transactions. —Kai Stinchcombe, co-founder of True Link Financial

On Ethereum, the most popular public blockchain platform, any app can issue tokens to users, and these users can send tokens to others the same way they might send ether (which, again, is the Ethereum cryptocurrency).

(The big difference between tokens and ether is that anyone can create a token out of nothing and issue as many tokens as they want, whereas ether is the only official form of money on Ethereum, and new ether can only be made by mining.

Because blockchains are so resilient — they survive as long as at least one computer has a copy of them — there’s very little risk of the ledger of votes getting lost.

A blockchain project known as the InterPlanetary File System, or IPFS, thinks it can change that. IPFS proposes a new model for the internet. In IPFS, webpages don’t just live on a central server — anyone in the world can keep a copy of them.

All IPFS users have a folder on their computer where they can store files or webpages. Unique fingerprints of these files, known as hashes, are stored on a blockchain. Anyone who wants a file just needs to look in the blockchain to see who has the file with that hash. Once they find the right person, they can copy the file from that person’s IPFS folder. The trick is that, if you get a file from someone else’s computer, you store a copy on your computer as well. Even if the original file is deleted, the copies stay.

Think of IPFS folders as a bunch of public Dropbox or Google Drive folders — anyone can find, download, and copy files from anyone else. IPFS’s blockchain just serves as a directory, showing you who has copies of the file you’re looking for.

You earn filecoins by either hosting files yourself or buying them off the market. It encourages good citizenship — the more you access others’ files, the more files you should host yourself — and lets people with extra storage space make some money by earning and selling filecoins.

So it only makes sense to use a blockchain if the blockchain’s unique strong points are necessary.

Because of the speed issue

In our minds, the top selling points of blockchains are that they’re decentralized, trustless, transparent, and tamper-proof.

But, of course, announcing they were using a giant Excel sheet would not have sent Chanticleer’s stock price soaring 41%. Blockchains were total overkill for this program, but Chanticleer just wanted to cash in on the hype.

Storing things on the blockchain often leads to big efficiency gains, but efficiency is far from the only thing that matters; it’s more important that solutions integrate with existing power structures. Blockchains are great technological innovations, but they aren’t enough to drive social change — you have to think hard about getting people and institutions to change their behavior.

If your ISP decides to remove the entry that pairs a certain website’s domain name with its IP address, you won’t be able to visit that website at all.

the ISPs are a single point of failure, and single points of failure make censorship easy.

Anyone could register their website’s IP address into the Namecoin blockchain, which functioned as a sort of DNS. Anyone could run the Namecoin software on their computer and look up the IP address of any website registered there, no matter what their ISP tried to block.

When you start a website, you need to buy the domain name from a company known as a registrar; each domain ending (.com, .org, .de, .jp, and so on) is managed by a different registrar. But each registrar is ultimately managed by a company called ICANN, which means that ICANN could, in theory, delete any website’s domain name and thus take it offline.

So Namecoin introduced .bit, a new decentralized domain name ending. Anyone could register a .bit website on Namecoin’s blockchain, and anyone running the Namecoin software could visit any .bit website.

There’s little evidence that Namecoin thought hard about these people problems; it seems they just focused on building a cool, technologically stronger product without thinking about how to actually get people to use it.

As we’ve seen throughout this chapter, that’s a common problem for blockchain apps: focusing too much on the technical problems without thinking about the people problems.

Each company would log each movement of products on a Walmart-owned blockchain, which Walmart had co-developed with IBM.[657] Each movement would be entered as a transaction on this blockchain, which is known as IBM Food Trust.

The efficiency gains of Walmart’s new leafy green supply chain were staggering. The supply chain process was now digitized, data was stored in a standardized format (the common blockchain could enforce a certain structure to the data), and everything was in one place.

Walmart was using blockchain’s strengths effectively: