Blockchain Beginnings: the story through the eyes of a beancounter

Blockchain and bitcoin, what it is, why it exists and a taste of what it can do for the world

I recall first reading about this brand new type of currency a, digital currency, back in 2012 at the end of my first year at University. I had just spent a year learning a host of new concepts in the classes I attended and was just starting to piece together how concepts I was exposed to in Economics and Financial Accounting lectures fit into the world and shaped the realm of money and finance. It was the first year of the greatest period of my life. University was a dream.

I wish I still had the article and the author’s name; it was a brilliant read that caught my eye and the key concepts stay with me to this day. I laid in bed early one summer’s morning reading about this thing called bitcoin and the techie in me was screaming that this was something that I should take note of. The accountant in me was doing somersaults because the price had increased from $4 to $12 in that year (2012) alone. History shows us that that was a mild year when it came to this emerging asset in terms of price action, still I was intrigued and it left me contemplative. Armed with this newfound knowledge I did a brief search online and, the 19 year old me, found almost nothing outside of some obscure forums discussing this cryptocurrency and how they are “mining” it. There were a few discussing the best way to participate in the network by running a node, as well as more than a few articles calling it a scam. That scam moniker is one that persists today, as they say somethings never change. When people talk about bitcoin (and more broadly what we call cryptocurrencies) today they tend to do so in extremes. You’re either a believer or a denier, either you feel it will solve all the worlds’ issues or you believe it is one massive Ponzi scheme. I’ve been in both camps at various points in the almost 10 years since I first read about it. After all that time learning and seeing it scale I firmly believe that it is the future of finance and a means to make the world a better and more equitable place although the not without a fair amount of hurdles to overcome.

Now, this article is about blockchain (I promise we will get there) but its first important to understand the roots of the space and how it came to be. Bitcoin was not the first blockchain solution to exist when the white paper was published in 2008 but it certainly was the one that made the technology a household name. It was the first true wide scale application of blockchain technology that had a solid foundational use case and that had a network built around it. That network was both digital and physical, though people who had the foresight to see the potential inherent in what at the time was just an idea or, some might say, an answer to a question only a few people were asking but increasing asking today.

What is that question? It is one that many people do not think about or take for granted but it is such a key one, what is money really and who controls it? It sounds like something a 4 year old would ask followed by several “why’s” after you tell them it is to pay for things but really can you answer it? Naturally it is a multifaceted question and really from a philosophical standpoint everyone will have their own view of what money is, some think it is evil, some worship it, some have so much they can live thousands of times over and never run out, some leave this world because they have none of it to survive. Our view of Money is shaped though multiple factors including our upbringing and how much we have of it, how much we want and so many others. So each person views it differently, but for our purposes, let us focus on the practical aspect of the question.

We take it for granted when we reach into our pockets for a fiver or to pay for something with our bank cards that the money we are using to pay for that coffee we just purchased is ours, after all what we just bought (the coffee) is ours now right? The truth is the money in your bank account or under your mattress is not yours at all, in fact, it belongs to the central authority that issued it. What it is, is essentially a promise… a promise that the central bank that issued it has “value” that backs it. That bank controls the supply of money and how much is created or destroyed. They use two tools to do this, fiscal and monetary policy each with their own unique objectives and mechanisms to achieve and exert that control.

Couple the above with the complexity and obscurity of the debt based banking systems (which is also a ‘creator’ of Money). As well as the way money flows through a multifaceted and increasing digitised labyrinth as it changes hands and multiplies through the economy. You will quickly realise why people do not know how Money works, how it is created and what it means. I don’t blame them; I do not fully understand it myself, most finance professionals that have studied accounting or finance for multiple year don’t fully understand it either. Economists argue over what it is but I do know enough about it to know, definitively, that the current system which controls what we call ‘money’ is deeply flawed as I and many others no longer trust that system or the banks behind it.

The financial crisis in 2008 (the first of several apparent once in a life time event that have happened in the past 20 years) was a major factor behind this mistrust.

Blockchain Technology and by extension the emergence of the Bitcoin network were driven by the need to solve issues inherent in the modern electronic payment systems facilitated by financial institutions and to provide an alternative ‘hard’ version on money. Those institutions (mostly banks) are tasked with facilitating payments made between people or entities and are seen as a third party who should be entrusted to facilitate the transfer of funds between the parties involved. The inherent issue in this system is that it relies on trust which is in itself fallible as trust can be broken as is inherent in the human condition.

In response to this Satoshi Nakamoto published the Bitcoin white paper which outlined “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.” (Nakamoto, 2008).

Rather than asking participants in a transaction to trust that it will be facilitated by a single third party Nakamoto envisaged a system where the transaction will be based on cryptographic proof as an alternative where transactions will be verified by the network of the payment system.

The use of Cryptography was key in this white paper as it enshrines the concept of privacy and pseudonymity envisaged by Nakamoto. This was heavily influenced by the cypherpunk movement who value data privacy highly and also had the foresight to see the value that personal data and by extension information will have and sought to keep that private. The concepts envisaged had to be hosted on some sort of network or system that would give credibility to the idea and that is where the concept of a blockchain comes in.

Blockchain technology is a type of distributed or decentralised digital record of information stored in a ledger which is shared between network participants. Transactions are verified through consensus which are then recoded as new blocks on the larger blockchain. Consensus essentially means all participants in the network need to come to an agreement for the same outcome. All network participants have access to all transactions in the ledger which, once verified by participants, are immutable. Cryptography is key to the security of the blockchain ledger (Baggetta, 2021), the type used most is Asymmetric Cryptography. This uses a system of two keys per user: a public key and a private key (Baggetta, 2021). The public key is used to send a user information and the private key is used to decrypt that information to unlock and receive it. This is a similar type of technology that allows you to use your credit card online to pay for things without the wider network seeing you card details.

In summary the key components of the bitcoin blockchain include the following:

•   It is run in a decentralised manner using multiple ‘nodes’ spread across locations to facilitate transactions on the network

•   Provides an immutable record of transactions through a distributed ledger of transactions that have been verified across the network through consensus

•   Use of Asymmetric Cryptography to ensure that transactions are secure and private through the use of a private and public key.

The above provides a strong foundation for a solution to facilitate peer to peer transactions between two parties without a bank but bitcoin sought not just to provide the rails upon which payments can be made, but also the unit of exchange used in that system. This is where the true beauty of the white paper Satoshi Nakamoto published comes to play. The idea behind making it a new type of hard money.

The Bitcoin network is designed so that there can only ever be a finite supply of bitcoin tokens on the network, 21 million of them. To take that a step further every 4 years that go by the rate at which bitcoins can be mined or created is reduced by half, a phenomenon which has been dubbed “the halving” by the community. At present around 19 million have been mined, with the effect of the halving considered the last bitcoin will be mined in 2140. (Blockchain.com, 2022)

Why is this relevant? Because it is a stark departure to the way fiat currency works which I likely the currency in your bank, wallet, or purse now. Fiat currency is a government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it. The value of fiat money is derived from the relationship between supply and demand and the stability of the issuing government, rather than the worth of a commodity backing it. Most modern paper currencies are fiat currencies, including the U.S. dollar, the euro, and other major global currencies. (Chen, 2021). In other words, fiat currency is that that promise of value noted at the start.

Fiat currencies as we noted earlier are controlled and issued by central banks. The majority of the time these currencies are inflationary which is to say an increasing amount gets printed and put into circulation each year. This fits in with the growth model most economies are built on. To grossly oversimplify things, so long as GDP grows at a higher rate than the money supply then it should work out fine, except that is not always the case and since 2008 central banks have been stretching the rules in terms of just how much Money they are creating and how they are adding it to the economy through mechanisms like quantitative easing for example. This has led to high amount of inflation reflected in the increases seen in the cost of goods in the short term over the last year but also staggering growth in equity markets and property prices since 2008 through asset inflation. Essentially it had thrown the system out of kilter.

Bitcoin, by design, is deflationary in the sense that every 4 years less is unlocked to be circulated and as such it acts in an opposite way to fiat, this is one factor which has driven its exponential increase in value over the past 12 years. One of many as the concept of value is a complex one. After all how can something you cannot see or hold but exists only on the internet have value in the real world? I guess you could ask the same of the Pound, Dollar or Rand in your pocket too? What really backs it or ascribes value to it? I’ve touched on it a few times above so perhaps this is something to reflect on but certainly is a topic for another day.

In summary bitcoin seeks to change not only the way in which payments are made and verified between parties but also radically change the manner in which the supply of money is generated placing faith in mathematical formula rather than the judgements of central bank governors or chairmen.

The effect blockchain technology will have is vast and rapidly changing as the technology evolves and attracts fresh perspectives and novel ideas into the space. In my view one of the most impactful changes Blockchain technology with have on society is the application of blockchain as an alternative to fiat currencies issued by a nation state as a means of exchange. The first instance of this was seen on September 7, El Salvador officially adopted Bitcoin as legal tender, making the cryptocurrency an accepted means of exchange for goods and services (Fries, 2021). Using a crypto currency such as bitcoin running on the Bitcoin Network simply by participating in the network and running the source code will change the way the concept of money works fundamentally.

“There is only code an open-source online community and the ability for anyone anywhere with an internet connection to run this code and participate in the Bitcoin network. And that is a truly democratising and exciting aspect of where the future of money is going” (Demirors, 2022)

This presents a fundamental shift in the way in which we view and use money. It democratises money as it takes the power to control the amount of money created and circulating among people away from central banks and gives people direct control and ownership over their money and how it is stored or used. This premise, once it is adopted and appropriately scaled, offers an opportunity for the concept of banks to fall away as an intermediary is no longer needed to facilitate the flow of money among people or entities. This function will be facilitated by the blockchain network used, as a result it will also impact business to a significant degree and transform the financial services sector. It will bring the end to modern ills in the world of finance such as financial discrimination in the form of allowing access to financial services to only certain people in society who are deemed worthy or wealthy enough. It offers millions of people who are ‘unbanked’ and have been side-lined by the current status quo access to a way to transfer funds between one another, store their money safely and participate in the economy directly; without the need for permission from a person in a business suit sitting on the 40th   floor in a sky scraper who could never relate to those they would presume to lord over. That, for me, is truly extraordinary and long overdue.

I will spend my next few write- ups discussing the use cases for blockchain, just how concepts like Decentralised Finance (DeFi) and Decentralised Autonomous Organisations (DAO’s) really can change finance but also the way the internet works through Web 3.0. Along the way we will chat through concepts noted above, such as, what value is and how we got to this precarious point post the great recession in 2008 and the role central banks played in the chipping away at the foundations of the monetary system we have currently.

If you found some value in this or learnt something, please do share it as you see fit. If you want to have some constructive discourse about anything above or in the blockchain/finance world please find me on LinkedIn or reach out to me on discord. I look forward to hearing from you!

Works Cited

Baggetta, M. (2021, September 22). Why Cryptography Makes Blockchain Unstoppable. Retrieved from Blockgeeks: https://blockgeeks.com/guides/blockchain-cryptography/

Fries, T. (2021, September 2021). El Salvador has adopted Bitcoin as official legal tender - but will other countries follow? Retrieved from World Economic Forum: https://www.weforum.org/agenda/2021/09/el-salvador-officially-adopts-bitcoin-as-legal-tender-but-will-other-countries-follow/

Demirors, M. (2022, January 9). Oxford Blockchain Strategy Programme - January 2022 Module 1.8. Oxford, Oxfordshire, United Kingdom.

Nakamoto, S. (2008). Bitcoin: A Peer-to-Peer Electronic Cash System. Satoshi Nakamoto.

Blockchain.com. (2022, March 13). Total Circulating Bitcoin . Retrieved from Blockchain.com: https://www.blockchain.com/charts/total-bitcoins

Chen, J. (2021, October 26). Fiat Money. Retrieved from Investopedia: https://www.investopedia.com/terms/f/fiatmoney.asp