From the moment that bitcoin, the digital, decentralised, peer-to-peer currency, first arrived in early 2009, its revolutionary ambitions were clear. Here was a currency that made transferring value as quick and easy as sending an email, designed from the ground up to be immune from manipulation or corruption. In a world still reeling from the GFC, bitcoin seemed to say, “never again”. Its more radical adherents described a bankless future, where the sclerotic institutions of modern finance would dissolve in the face of a currency that no one actor could ever control.
Whether you believed that, there was something intoxicating about the promise of an entirely digital currency, or cryptocurrency, as bitcoin and its descendants have come to be known. In the same way that the internet had transformed so many things, bitcoin promised to transform money. In the space of a few years, the price soared from a fraction of a cent to more than $US1200 at its November 2013 peak. Stories abounded of early adopters made millionaires overnight. One Norwegian man bought $US27 worth in 2009, forgot about it for a few years, and then discovered that his off-hand purchase was worth about $US886,000.
Yet bitcoin has had a tortured adolescence. The price tumbled in early 2014 after a string of regulatory run-ins and high-profile hacks wreaked havoc with the exchange ecosystem. Analogies were drawn with the Dutch tulip mania of 1636, when the price of tulip options rose 2000 per cent in three months, before abruptly collapsing.
As the hype evaporated, people started asking what the purpose of bitcoin actually was. Buying drugs, certainly – the success of illegal marketplaces online such as the Silk Road was one of the only reasons bitcoin had any value at all for its first five years. But the oft-promised consumer adoption failed to eventuate and institutional interest was tepid at best. Banks in particular had little interest in investing in a direct competitor, let alone the official currency of the black market. Internecine warfare broke out within the bitcoin community and the technology stagnated, as did the price.
But in the background a fundamental shift was occurring. The corporate interest that had eluded the bitcoin currency started paying attention to bitcoin’s blockchain. The blockchain is the single, universally shared ledger of every transaction that has ever occurred on the bitcoin network. When people talk about the fact that bitcoin is incorruptible, transparent and trustless – that is, not reliant on trust – this is what they mean. There’s no need for a middle man or bank to certify that a transaction has occurred and that it was allowed to occur. The system reconfirms the accuracy of the entire transaction record each time a computer, or “miner”, solves a cryptographic equation, thereby producing more bitcoin.
People realised that you could take this basic idea and expand its application outside the realm of mere currency. Indeed, a shared, trustless ledger could solve many of the most intractable administrative issues of our globalised economy. The transfer of property, international transactions, regulatory compliance, resource allocation, supply chains – these all depend on a vast international network of trusted intermediaries to certify that each of the parties involved has, in fact, done what they said they were going to do. These intermediaries are the reason why it can take days to send money overseas, or to finalise a trade on the sharemarket. It’s the reason why shipments go missing, invoices don’t get paid and hundreds of millions of human hours are devoted to paperwork.
Blockchain technology holds out the prospect of essentially eliminating this entire system of human redundancies. If everyone is working with the same information, and you know that information is correct, then you don’t need a third person to authenticate it. The range of possible uses – and the potential addressable market – is staggering.
Leading the charge is Ethereum. Whereas bitcoin is a currency built on a blockchain, Ethereum is more like a blockchain built on a currency. Every time you use the Ethereum blockchain you have to pay a certain amount of “gas”, which is denominated in ether, Ethereum’s value token. In return you get to trigger auto-executing “smart contracts” that allow you to build databases, run applications or even create new cryptocurrencies, all on the shared, immutable Ethereum ledger. As with all blockchains, the more people use it, the more valuable and secure the ledger gets.
In February, Ethereum announced the creation of an Enterprise Alliance, a global consortium that aims to develop a universal protocol for use of the Ethereum blockchain by private companies. Some of its early members include Toyota, Merck, Microsoft, BP, Intel, UBS, Deloitte, Samsung and the Depository Trust & Clearing Corporation, the company that settles the vast majority of America’s financial transactions. It joins a number of other consortiums, including R3 and IBM’s Hyperledger, each trying to establish their own standard for the blockchain future.
Australian companies are starting to heed the call. Late last year, Commonwealth Bank used a private blockchain to facilitate the transfer of 88 bales of cotton from Texas to China. Sophie Gilder, Commonwealth’s head of blockchain, tells me the experiment was a resounding success. “International trade is one of the key areas of interest for us, because it’s a system that hasn’t really changed in 50 years,” she says. A single shipment can pass through up to 30 intermediaries between supplier and consumer, leading to fraud, loss, and administrative costs that sometimes reach 20 per cent of the trade value. “It’s pretty incredible that it takes a foot-high stack of paper to send goods from A to B. But with blockchain you can eliminate that stack entirely.”
More recently, Commonwealth Bank partnered with the Queensland Treasury to create an Ethereum-based platform for issuing “virtual cryptobonds” on the capital markets. “If you have a cryptocurrency and a digital asset, you can have instant settlement on the blockchain by achieving delivery and payment in a single transaction,” Gilder explains. “That’s really revolutionary.”
Webjet is another Australian company that’s exploring the possibilities afforded by blockchain technology. Right now, they’re fixing a longstanding bug in the hotel booking system, where the independent databases held by each booking company lead to misallocated inventory and a plague of unpaid invoices for the hoteliers themselves. According to Lynne Oldfield, leader of Webjet’s blockchain initiative, this is a problem that most companies try to solve by “just throwing more arms and legs at it”. But by using a shared Ethereum ledger, “hotels and booking websites can work from a single database that allows them to check in and agree on the data every time a booking is changed”.
Perhaps, then, this is how the revolution really starts. Not with a bang, but with a sequence of minor administrative improvements. The speed at which we’re entering a post-bitcoin age cannot be overstated. At the beginning of March, bitcoin accounted for 85 per cent of the cryptocurrency economy. Three months later, it’s less than half. In the same period, cryptocurrency’s total market capitalisation has risen from $US22 billion to more than $US100 billion, while the price of ether is up more than 2000 per cent. There’s a huge amount of new money flowing into the blockchain space and, for the first time in its history, bitcoin isn’t the major beneficiary.
Despite the current enthusiasm, there are still significant issues standing in the way of wholesale adoption, not least of which is the technology itself. “Blockchain tech is evolving so rapidly that we’re already on our third rebuild of the product,” says Oldfield. “We have a list of features and bugs that we’ve simply had to park until the technology has caught up.”
There are also lingering concerns over the security of Ethereum’s smart contracts. It was less than a year ago that the first major Ethereum project, the crowdfunded Decentralised Autonomous Organisation, was hacked, resulting in the theft of almost $US50 million in ether. While the money was eventually recovered, it served as a sobering lesson in the fragility of cutting-edge code.
But whether it’s Ethereum or another successor, it seems likely that we’re travelling towards a future written in the blockchain. “In a way, it doesn’t really matter whether people understand the technology,” Gilder says. “The average person wouldn’t be able to explain how the internet works, yet they use it every day. It’s more about blockchain being able to deliver user utility that trumps other alternatives so that the adoption snowballs and you get network effects.”
Asher Tan, chief executive of Australian bitcoin exchange CoinJar, believes we’re on the cusp of a whole new digital ecology. “Everyone knows that you can make money or lose money in crypto,” he tells me. “But the whole idea of a permissionless platform where anyone can build anything is kind of amazing. You know someone is going to create something cool really soon.”
As for the future of bitcoin itself, Tan is philosophical. “Will bitcoin survive? Who knows. Perhaps the better question to ask is has it succeeded in its goal of opening people’s minds to the potential of blockchain and digital currency? The answer to that is absolutely yes.
“In the same way that Uber is changing the taxi industry, digital currency is changing the world macroeconomy. Everyone has to reorient their world view if money is truly global. And I think that’s pretty exciting.”
This article was first published in the print edition of The Saturday Paper on June 10, 2017 as "New kids on the block".
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