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

by Neel Mehta

So, instead, your broker or stock trading website turns to third parties known as clearinghouses, which are the eBays of stock trading: they match millions of sellers and buyers to each other so people can quickly and efficiently find trading partners.

All money and stocks are represented as tokens, and all stock sales are represented as blockchain transactions. All transactions are mediated by a smart contract, which takes in money tokens from the buyer and stock tokens from the seller, runs some checks, then swaps them.

One report found that the stock exchange industry could save $20 billion from blockchain-based clearing.

But the ASX’s blockchain adoption had some hitches. The technology was so new that the ASX’s solution took two years to develop,[681] and even then the launch got delayed by six months.

Another issue is that the law hasn’t had time to catch up with blockchains, which is problematic for heavily-regulated industries like finance.

Current financial laws and regulations don’t have any concept of crypto-tokens, distributed ledgers, and smart contracts,

Here’s another way to look at the problem: royalty payments required accountants to manually compute royalties based on complex rules, and all the data needed to make those computations was scattered across many different data sources.

Xbox wanted to automate royalty computations and bring all data into one place. So Xbox decided to build a blockchain-based royalty settlement system.

Xbox didn’t build the whole blockchain system itself, though. It didn’t create its own nodes, install servers to store the blockchain, and write all the necessary code. Instead, it turned to Microsoft’s cloud-computing arm, Azure, and used Azure’s blockchain-as-a-service feature.

What’s more, storing all data in a blockchain forces it to be in a single, structured format.

Now that data is in a single format, publishers can easily pull it into data analysis and visualization software to understand, say, how their music payments have grown over time and where they can cut costs.

As you can see, blockchain technology has a remarkable amount of overlap with some of the other hot technology trends: cloud computing, big data, and machine learning. That’s no accident; each of these technologies feeds off the others, and they work best when used together.

If we step back and take a broader look at these private blockchain success stories, one surprising fact jumps out: the groups that have had the most success with private blockchains have not been scrappy startups but rather behemoths like Walmart, IBM, Microsoft, and stock exchanges.

This is especially odd when you consider how strongly the crypto space emphasizes startups and the disruption of incumbents. Why have big, slow-moving incumbents gained so much from a “disruptive” technology like private blockchains?

We’d argue it’s because implementing a private blockchain isn’t really a technical challenge at all; it’s a social challenge.

The blockchains used by Walmart, the ASX, and Xbox aren’t much more complex than Bitcoin’s or Ethereum’s, and cloud blockchain offerings like Azure’s make it easy to set up a blockchain even if you have little prior knowledge.

Building the blockchains has been the easy part. In all three cases we explored, the hard part has been the people part: Walmart needed to get all its suppliers to buy into an untested new technology, the ASX had to maintain legal compliance and keep traders calm as they switched to a brand-new system, and Xbo...

Big companies, for all their slowness in picking up new technologies, are very good at these people problems.

Startups may have better blockchain technology, but for most private blockchain projects, it’s not the technology that matters — it’s getting adoption, getting people comfortable with change, and working out all the legal and financial difficulties that come up.

China’s approach to Bitcoin is indeed strange; it benefits greatly from dominating the Bitcoin space, yet it also wants to shut it down.[730] Some people suspect this is because China wants to develop its own cryptocurrency, so it wants to grow the crypto space in general while taking down Bitcoin, which would be the biggest competitor to this hypothetical Chinese cryptocurrency.[731]

Because cryptocurrency users are tech-savvy, often more so than regulators, any individual nation’s attempts to crack down on currencies don’t always work since traders and miners can easily shift operations to more permissive areas.

In fact, other countries under sanctions, including Russia, Turkey, and Iran, have looked into raising money through state-issued cryptocurrencies as well.

Getting to an IPO is incredibly difficult, though — it takes years of paperwork, intense scrutiny by regulators and auditors, and countless sales pitches to potential investors.[759] And, these days, tech startups are staying private longer and longer,[760] meaning that only venture capitalists can invest in startups for most of their high-growth early years — everyday investors are locked out until the IPO, at which point much of the company’s growth is behind it.[761]

So the crypto world has created a parallel to IPOs, known as initial coin offerings, or ICOs. ICOs let a blockchain- or cryptocurrency-based startup offer crypto-tokens for sale early in the startup’s life, thus letting the startup raise money and letting investors bet on the startup’s success.

ICOs offer tokens to raise money for a crypto startup; IPOs offer shares of stock to raise money for a traditional startup.

There are two major types of ICOs: those offering security tokens and those offering utility tokens.

Security tokens work pretty much the same as stocks: the startup hands you these tokens (tracked on a blockchain) and you get voting power and sometimes a share of the company’s profits.

Utility tokens are unique: you buy the tokens that are used to pay for the startup’s services.

This means that a utility token’s price is determined by two things: the value of the service itself and also investors’ opinions of the company’s success.[769]

When you invest in an ICO, usually you have little to go off besides the whitepaper. You trust that the company will deliver on the promises it made in the whitepaper; only then will the tokens you bought gain value. But companies often fail to live up to their promises, and worse, there’s nothing stopping a fraudulent company from taking the ICO funds and running without even building the product.

This scam is known as an exit scam:[777] it’s when a company raises money based on a whitepaper but disappears before building anything.

the “returns” investors got was just money that newer investors had put in! (This is the textbook definition of a pyramid scheme.)

In short, ICOs suffer from the classic cryptocurrency problem: removing all gatekeepers makes innovation faster and easier, but it also enables scammers and criminals.

The SEC has a longstanding test, known as the Howey test, to check if an asset is a security. The test says that an investment is a security if “a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”

ICOs would be banned in the United States; crypto-startups hoping to get American investors would have to make a Security Token Offering, or STO, which is similar to an ICO but gets regulated similarly to an IPO.

They had two choices: either keep their ICOs and just ban Americans from participating, or go through the legal and regulatory work of getting an STO. Many startups chose the first option since it’s less hassle.

Exchanges offering STO tokens or cryptocoins for sale have to do know your customer (KYC) and anti-money laundering (AML) checks on buyers — basically checking to be sure that real humans are buying the tokens, not robots, and that these humans aren’t criminals.

(Incidentally, KYC and AML checks are why you now have to upload pictures of your passport or driver’s license when you sign up for an account on Coinbase or other exchanges.

STOs give crypto-startups a choice: either register your offering with the SEC like a traditional IPO, or don’t register but only sell to people who know what they’re doing (accredited investors).

In June 2019, former PayPal head David Marcus, then the head of Facebook’s cryptocurrency division, unveiled Facebook Libra (later renamed Diem[819]), a new stablecoin that it would run with 27 partners, including Visa, eBay, Uber, and, yes, PayPal.

But why would a social networking company get into crypto? The most obvious reason was that it would help Facebook track exactly what people were spending money on, which would be extremely valuable data for advertisers — thus helping Facebook target ads better and charge a higher price for ads.

But, second, Facebook had long shown interest in evolving from a social network to the app for all economic activity.

The reason crypto is important is that it works the same no matter how much money you’re sending or where you’re sending it.

Depending on the setup of the AmeriCoin, the government may be able to track more transactions to crack down on tax evasion and get a better sense for the state of the economy.

The move off the gold standard made the economy more stable because the government could freely create or destroy money when the economy was too weak or too strong, respectively — it’s much easier to create bonds out of thin air and sell them than to create gold out of thin air!

A $100,000 bill from the 1900s. It was only used for bank-to-bank transfers.

Reserve currencies are the lingua franca of currencies: countries around the world use reserve currencies to pay off international debts, buy commodities like gold and oil, and trade with other countries.[868] The International Monetary Fund (IMF) has an elite list of the world’s top reserve currencies: the US dollar, the euro, the British pound, the Japanese yen, and — as of 2016 — the Chinese yuan.

Our hunch is that China will eventually ban all non-government-controlled cryptocurrencies because it’s uneasy about technologies it can’t control;

In other words, for IoT to succeed, IoT devices need a secure, tamper-proof, and decentralized way to store, access, and share data.

This alternative, known as the tangle, lets many people add transactions at once. Instead of a single linear chain made of blocks, the tangle connects a bunch of transactions in a spaghetti-like[899] structure: