Cryptocurrencies and Blockchains

Quinn DuPont

• Publisher: Polity
• Year: 2019
• Print ISBN: 9781509520244, 9781509520237
• eBook ISBN: 9781509520275
• Edition: 1
• Topic: Social Sciences
• Subtopic: Media Studies
• Index: Social Sciences

From their shadowy origins in Bitcoin to their use by multinational corporations, cryptocurrencies and blockchains are remaking the rules of digital media and society. Meanwhile, regulators, governments, and the public are trying to make sense of it all.

In this accessible book, Quinn DuPont guides readers through the changing face of money to show how blockchain technology underpins new forms of value exchange and social coordination. He introduces cryptocurrency and blockchain technology to readers in terms of their developers and users, investment opportunities and risks, changes to politics and law, social and industrial applications - and what this all means for the new economy. The author argues throughout that, rather than being a technical innovation, cryptocurrencies and blockchains are social technologies enabling developers and users to engage in unprecedented experiments with social and political levers.

Cryptocurrencies and Blockchains dispenses with hype and offers sober reflection on this crucial and timely topic. It is essential reading for students and scholars of culture, politics, media, and the economy, as well as anyone who wants to understand, take part in, or change the future of work and society.

CHAPTER ONE
Experiments in Digital Society

I bought Bitcoin at $20. I bought Ethereum at $4. I’ve bought coins, tokens, and “crypto” of every kind. As I write this, Bitcoin trades near $20,000, Ethereum above $1,000. Blockchain startups launch in the millions or hundreds of millions. By the time you read this, these prices may very well seem quaint.

But I’m no investor, and this is no investment book. I lost money when the Mt. Gox exchange bankrupted, and then again when The DAO crowdsourcing experiment was hacked. I bought penny coins that stayed penny coins. Those Bitcoins and Ethers? I sold them long ago, making profit enough for a couple of nice dinners. This book is no guide to riches.

This book is a guide to understanding the wide, and yes sometimes wild, world of cryptocurrencies and blockchains.

It is remarkable how quickly the topic has grown in interest and importance. Just a few years ago cryptocurrencies and blockchains were considered fringe topics largely of interest to only a niche community of software developers. Today, banks and institutional investors are actively trading cryptocurrencies, international engineering and standards associations are helping shape the future of blockchain technologies, blue chip enterprises are leading research and development, and government agencies both big and small are deploying the technology for their constituents. By 2016, billions had already been poured into research and development. Through 2017, cryptocurrency and blockchain venture capital funding (US $3.7 billion) surpassed the entirety of all other technology seed funding (F. Wilson 2017), and there are no signs of investment slowing down through 2018 and forward. Hype and general interest, combined with confusion, has also grown rapidly. Issues facing cryptocurrencies and blockchains—from hacks to the hunt for Bitcoin’s inventor—are regularly featured on the front pages of leading newspapers, in magazines, and in the daily television and radio news cycle. The inexact science of online search volume is also indicative of the hype and confusion—searches for cryptocurrency and blockchain keywords are now several factors greater than the big technology stories of the last decade, besting Web 2.0, Cloud Computing, and VoIP (Figure 1.1). Perhaps the truest measure of widespread interest is the number of times I have heard conversations about cryptocurrencies and blockchains at my local café or bar, and even the deli.

The key insight I develop in this book is that cryptocurrencies and blockchains are more social than technological. In fact, few technologies require as much from people as cryptocurrencies and blockchains, yet developers, advocates, critics, and users often ignore this fact and fail to see the broader applications and implications.

It all started with the digital money Bitcoin. An unknown software developer by the name of Satoshi Nakamoto started developing Bitcoin around 2007–2008 and continued to do so until 2011. Without much fanfare, Nakamoto then disappeared to let the open-source software community collectively develop the code, much like other successful open-source software products. In the early years, the bitcoins produced by the Bitcoin system were practically worthless and the whole enterprise was a fun diversion for geeks and an online community known as “cypherpunks.” Within a few years, however, Bitcoin became valuable and people started treating it like the money it was meant to be (albeit money without state backing). Some retailers began accepting Bitcoin, a few Bitcoin automated teller machines (ATMs) were installed, and digital “money” started to flow across the globe. Bitcoin also facilitated illegal purchases on the “dark web” and startups claimed to offer lower transaction fees and better service than incumbents while dreaming of banking the unbanked across the globe.

Figure 1.1 Online search volume for questions about technologies

Other digital “coins” soon entered the market, sometimes clones of Bitcoin, and sometimes with different philosophies, designs, or technologies. For example, Dogecoin (2013–) satirized the hype and mania of the time by issuing coins based on the Internet meme “doge.” Soon, despite being a satire, the hype and mania drove the price of Dogecoins up, which eventually became valuable enough for its community to help send the Jamaican bobsled team to the 2014 Winter Olympics. Namecoin (2011– ) sought to use the underlying technology of Bitcoin to create a new kind of decentralized Domain Name System (DNS) to make a more resilient Internet; Litecoin (2011– ) was designed to improve on perceived issues with Bitcoin; and so on. These alternative or “alt” coins now number in the hundreds. Collectively, these are known as “cryptocurrencies” because they are currencies based on technologies derived from cryptography.

The next big shift occurred when a nineteen-year-old Russian-Canadian Bitcoin enthusiast named Vitalik Buterin decided to break away from the prevailing belief that cryptocurrencies were only useful as money. Buterin invented a generic and fully programmable system called Ethereum (2015– ). Unlike Bitcoin and the alt coins previously, Ethereum was designed to be a general-purpose distributed computing environment that would sit on top of the peer-to-peer ledger technology used in Bitcoin. Because this technology used “blocks” of bundled transactions that are “chained” together, it became known as “blockchain” technology. Almost immediately large corporations recognized possibilities for Ethereum and began investing heavily.

No longer shackled to the concept of money, Ethereum and other blockchain technologies were adopted by industries to solve existing technical challenges, and by those companies that simply wanted to look “cool.” The financial sector, itself going through a “fintech” moment, was especially eager to adopt blockchain technologies to facilitate transfers between banks and financial institutions (see Chapter 5). A quasi standard Ethereum-compatible token design called ERC-20 emerged and was widely deployed by startups. Blockchain technology also made possible “smart contracts,” an idea first theorized in the 1990s but brought to life within the programmable and secure environment of blockchains. With blockchain-based smart contracts, lawyers could create digital notary services, or try out entirely new ideas in law (see Chapter 6). Because blockchains are so good at tracking digital things, sectors like logistics and supply chain management developed blockchains specific to their challenges (see Chapter 7). Most ambitiously, entirely new kinds of autonomous and decentralized businesses were dreamt up (see Chapter 8). Blockchain companies soon proliferated, and investment in research and development from startups and established corporations grew quickly.

Throughout this book you will find evidence of this shift from Bitcoin to blockchain. As I discuss in Chapter 2, Bitcoin was invented and popularized by a fringe community with unusual ideas about politics and economics. The turn to blockchains that I discuss in Chapter 4 was more than just a technology upgrade. Banks and blue-chip corporations liked the technology and saw many possible applications but needed to steer well clear of the illegal and unregulated use cases and the fringe politics associated with Bitcoin. To do so, these industries created a new narrative, completely eliminating any talk of Bitcoin and cryptocurrencies, and instead developed blockchain technologies that evolved out of this milieu. In fact, even the term “blockchain” was seen by some as tainted, so the banks created the hollow bowdlerization “distributed ledger technology” (DLT) as a politically safe way to describe the same thing.

To some extent, the introduction of a new, “serious” blockchain pushed out the early community, who saw their invention morph from a technology to remake the world in their image to plumbing for dominant capital. Everything got professionalized and standardized (even major organizations like the IEEE and ISO got involved), and the idea of using Bitcoin as money faded almost completely. Today, it is nearly impossible to actually “buy” anything with Bitcoin (except for drugs), and early Bitcoin evangelists now suffer this pathos. Blockchain has no charm or revolutionary spirit, and the gears of progress and industry “disruption” are now largely owned by incumbents like IBM, Microsoft, and Intel (and the startups who want to become them). The consolation prize is that early Bitcoin users are now rich beyond their dreams.

Yet, for all of the investment and focus placed on the serious business of developing blockchain technologies to solve real-world computing problems, money and economics still matter. Even blockchains work best when their abstract “tokens” have some value. The fledgling study of this is known as “cryptoeconomics.” Companies soon realized that cryptocurrencies—valuable tokens—can stand in as a kind of budget version of stocks (free from the hassle, regulation, and safety of existing stock markets). Launching a new “crypto” company with sellable assets became known as an “Initial Coin Offering” (ICO)—the cryptocurrency version of an Initial Public Offering (IPO), when a private company goes public. The investment returns from ICOs now regularly outperform existing stock market picks, and these companies rake in hundreds of millions in investment—sometimes for untested business models, zero sales, or no products. While the enthusiasm and potential are exciting, many of these companies go bankrupt, fail to launch, or simply steal investors’ funds.

Cryptocurrency investors have also gotten more serious. Investors feverishly buy up ICOs and cryptocurrencies, even politically unsavory cryptocurrencies like Bitcoin (see Chapter 5). Hedge funds and traditional financial institutions invest alongside hobbyists and a few geeks holding out from the early days. Index funds and derivatives are now common, with more sophisticated financial instruments on the horizon. Investment activity has driven up the price of cryptocurrencies to truly unbelievable levels, shooting through bubbles on an upward and very volatile climb. But these are not investments for the faint-hearted, since cryptocurrencies regularly lose 20 percent or even 50 percent of their value in a single day. Of course, financial regulators, tax agencies, and concerned politicians have also noticed this, and occasionally reassert control. The danger of writing about cryptocurrency markets and prices, I fully appreciate, is that today’s marvel is tomorrow’s curiosity or calamity.

I have learned from studying cryptocurrencies and blockchain technologies since 2012 that there is never a dull day in this field. The fact that I am one of a few academic experts, with a mere half-decade of experience, is surprising by itself and suggests that many radical changes and interesting opportunities remain on the horizon. The academic research field is nascent and struggles to keep up with changes but is itself developing rapidly. Technical topics are actively researched and a number of previously dormant areas of computer science have since become hot topics (such as consensus systems for distributed computing). Social and behavioral topics are broadly represented too, but there are few truly unique areas of study (an exception is governance and governance systems, which are widely seen both as necessary for the success of blockchain companies, and an interesting proving ground for new ideas about coordinated action, social decision-making, and peer production).

To help visualize the history of cryptocurrencies and blockchains I have created two timelines. In the first (Figure 1.2), I show some of the notable events that have transpired since Bitcoin’s inception. In the second (Figure 1.3), I offer my characterization of the relative levels of interest in use over time. Neither figure is necessarily rigorous or scientific, but these figures do represent a long learned and lived take on changes in cryptocurrencies and blockchains over their early years.

Figure 1.2 Notable events

Figure 1.3 Author’s interpretation of interest in use

But let’s step back. With a market for cryptocurrencies in the hundreds of billions, and billions of research and development dollars being spent on blockchain technologies, where is all the real-world impact? A great joke told to me by Stephan Tual in 2016 supplies an answer: “What’s your favorite blockchain app?” The joke worked in 2016 because there were none, and in 2018 the situation isn’t much different. Today, no single “killer app” has emerged from cryptocurrencies and blockchains (among the hundreds of services and apps that have been developed) and no industries have been “disrupted.” Yet, despite there being little more than hype, speculation, and possibility today, there are reasons to be cautiously optimistic about the future of cryptocurrencies and blockchains. The technology itself holds promise (even though it is constantly attacked by critics who lament that it is nothing new or unique). More consequential, to my mind, are the social changes underway that are driving innovation. With all of this money, labor, and interest there is almost no way cryptocurrencies and blockchains won’t have significant impact in the future, whi...

Table of contents

• Cover
• Front Matter
• 1 Experiments in Digital Society
• 2 Origins and Futures of Cryptocurrencies
• 3 Digital Money
• 4 Blockchain Media
• 5 Finance and Capital
• 6 Law and Society
• 7 Internet of Things, Logistics, and Smart Manufacturing
• 8 The Promise of New Organizations
• References
• Index
• End User License Agreement