The Advent of Blockchain

Author: John Boyce III

In late November of 2017 Forbes published an article written by Ari Paul, a Forbes contributor and the CIO of BlockTower Capital, claiming that mass adoption of cryptocurrency was at 0.5% at the time of publication.[1] The adoption of cryptocurrency is in its infancy stage as is the use of blockchain technology en masse. Blockchain technology has the potential to revolutionize industries much like CRISPR-Cas9 is revolutionizing genetic engineering, but what do the two have in common? The general public knows very little about them. This article will attempt to educate its readers about blockchain technology by discussing the evolution of currency, the obstacle of trust in the digital age and the cryptographic progress made to solve this obstacle.

Skeptics of cryptocurrency point to the absence of physical bank notes as evidence of its lack of true value. What many fail to realize is that the value of most currency, especially the U.S. dollar, is backed solely by trust. Before the development of currency, trading goods and services for other goods and service was the norm. Although these were simple transactions, they had to be more regional and required trust that the other person would fulfill their promise to deliver. As the world began to shrink and governments grew larger, the need for a more standardized monetary system increased.

The first government issued currency is believed to be the Lydian Stater, a gold coin issued by King Alyattes of the Lydian Empire (r. 619–560 BCE). This set the standard for government issued coinage. [2] From the time of the Lydian Empire to the Italian Renaissance most currency remained regional and government controlled.

With the birth of the Italian Renaissance came the rise of the Medici family through the Medici Bank. In Florence, Giovanni di Bicci de’ Medici started the Medici bank, which specialized in exchanging currencies, allowing them to give out loans on the basis of receiving commission instead of interest. The Medici bank grew large enough to do business across major European cities such as London and Bruge. Their success relied on keeping superb records in their ledger and they are believed to be the first financial institution to use double entry bookkeeping to keep track of debts owed and debts paid.[3] By innovating their use of a ledger the Medici built enough trust and started the first model of contemporary banking.

Unlike the banks of today, the Medici bank was largely decentralized with regards to their operations management. Since the Medici Bank, more centralized financial systems emerged. In 1913 the United States Federal Reserve was formed initiating a single fiat system backed by gold. In 1966 the U.S. abandoned its gold standard and to this day the value of the U.S. dollar is primarily sustained by trust.

The stark reality that many struggle to understand is that currency has always relied on trust: backing a currency with precious metals only served to expedite the mass adoption of trust in money. However, since 1966 money has become more digital. According to the United States Federal Reserve, as of March 21st, 2018, $40 billion in circulation was not printed fiat.[4] Since the inception of digital technology in global financial constructs, the obstacle of maintaining monetary trust through advanced cryptographic security emerged.

Counterfeit prevention has gone from shaving a coin’s edge for proof of gold content to adding serial numbers to bank notes and advanced ledger technology to prevent double spending. The quality of cryptographic solutions are dependent on the technology used to create them. In 1988 a cryptographer by the name of David Chaum described a third party system for people to obtain digital currency and spend it anonymously. This idea was further improved, in collaboration with Amos Fiat and Moni Naor, to allow offline transactions to detect double-spending. In 1989, based on their work, Chaum and his collaborators created the first digital transaction company called DigiCash.

DigiCash issued Ecash for currency, which used a blind signature protocol that allowed for anonymous transactions but gave enough information to identify individuals who attempted to double-spend. The first Ecash transaction occurred in 1994 but the company ultimately failed due to the inability for peer-to-peer transactions and the lack of adoption by most banks and merchants. Even though DigiCash failed commercially, it is remembered as the first example of digital currency for commercial purposes.

Since the onset of DigiCash the race was on to create a successful third party system that increases security and anonymity. From 1989 to today there has been at least 93 electronic payment systems that were established or proposed with PayPal being the most recognized in the industry.[5] Despite this wave of innovation in the financial sector, some of the solutions that blockchain provides were discovered in an attempt to solve a problem in another industry.

Increased internet capabilities has allowed for reliable peer-to-peer (P2P) transactions. The increasing desire for online privacy has led to the evolution of the blind signature to a more sophisticated method called Zero-knowledge proofs allowing for more anonymity between P2P transactions. With the use of a decentralized time stamp and Merkle tree, P2P transactions can be time stamped and validated creating a digital ledger. In November of 2008, a paper was released by someone using the pseudonym Satoshi Nakamoto illustrating that by using these technical and cryptographic advancements, “a purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution… We propose a solution to the double-spending problem using a peer-to-peer network.” [6] And with that came the birth of bitcoin and its revolutionary counterpart the blockchain.

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“Know what you own, and know why you own it.” — Peter Lynch