Bitcoin is dead. Long live Bitcoin!

According to Robert Cailleau in his 2010 interview with Netzwoche, “The internet as an institution is suffering from the absence of two essential functions: On the one hand, it is impossible to reliably verify anyone’s identity online, and on the other hand, it lacks a built-in billing system.”

Cailliau worked at Cern, where he was not only the boss of Tim Berners Lee, the inventor of HTML, but a significant contributor to the development of the internet as a whole. He played a key role in establishing it as a neutral, open, and non-proprietary platform that would go on to conquer the world. Now, after 25 years one of his wishes may have been fulfilled with the launch of cryptocurrency Bitcoin and the blockchain technology on which it is based.

Blockchain does not really do anything more than log all transactions within a computer network on a public ledger, in order to verify each one. All the nodes that form this ledger are always updated in real time, which makes it almost impossible for a blockchain to be modified or manipulated.

Power-hungry technology

The technology behind Bitcoin is especially impressive in that it does not require a central authority to regulate everything. In the case of Bitcoin, software prescribes the number of Bitcoins that will be issued and in what frequency. This is achieved through ‘mining’. Anyone is able to ‘mine’ Bitcoins through operating a Bitcoin core, thus providing computing power for the verification and storing of transactions in the public ledger. In return for the service, the operator of the Bitcoin core receives a fee, as well as newly minted Bitcoins.

As elegant as the system is, it has a major drawback. The entire blockchain (in the case of Bitcoin, this is currently over 50 GB) must always be processed for every transaction. This takes time and computing power. Moreover, Bitcoins are limited to a maximum quantity of 21 million currency units. Bitcoins can also only be issued at a certain rate. According to projections, the last Bitcoin will be mined in 2048.

Scaling the Bitcoin to become a global currency for transactions would be especially problematic for another reason: the design does not allow more than seven transactions per second. For comparison, handles 1,736 transactions every second in the United States alone. The power consumption involved in ‘mining’ Bitcoins is an even bigger issue. It is reported that the entire Bitcoin system already tops the energy consumption of major city today. It is therefore hard to imagine Bitcoin ever really becoming mainstream.

A reliable proof of concept

The same does not apply to cryptocurrencies per se. Bitcoin has provided a very effective proof of concept. In so doing, it has opened the door to a new economic era: the era of the cryptocurrency. In spite of this, nobody will be giving Bitcoin’s founder, Satoshi Nakamoto, a Nobel Prize for his great achievement. This is because, up until the time of writing, Nakamoto has chosen to remain anonymous.

Vitalik Buterin, on the other hand, has been far from afraid of the limelight. The 21-year-old Russian-born Canadian created Ethereum together with Jeffrey Wilcke and Gavin Wood. Together, they set up the ‘Decentralized Autonomous Organization’, or DAO for short, in Baar, Switzerland.
The DAO has 15 million dollars of starting capital at its disposal. It is understood this was collected via crowdfunding, and in Bitcoins, of course. Contributors received ‘ethers’ in return. The new currency was then launched last August, at the same time as a new supporting blockchain platform.
Ethereum excels in a particular aspect of blockchain technology that makes cryptocurrencies very disruptive to conventional currencies, and that is programmability. Ethereum is not just creating another currency, but an entirely new form of currency with inherently different properties. No matter whether people are paying in shells, gold, coins, or dollar bills – the principle behind the money is always a social contract, an understanding that the value of the money corresponds to the value of goods for which it can be exchanged. In the modern world, this value is guaranteed by a central state power.

Electronic money is nothing new in this respect. It is ultimately nothing more than database entries in a bank’s IT system, which themselves are recorded as deposits in the systems managed by a central bank. The move towards cryptocurrencies is a groundbreaking one, as debt registries are public and constantly replicated and therefore guaranteed through a network of computers rather than a central bank.

Power to the algorithms

Ethereum now makes it possible to structure any kind of debt contract according to exact needs and program this directly in the blockchain. This means that platforms like Ethereum could be used to process any kind of transaction between one person and another, without any intermediaries. Rather than sending an amount to airbnb, Uber, or Amazon, which is then forwarded to the seller as soon as the service has been provided, this is done directly – on the basis of firmly established rules.

Banks, insurance companies or online platforms have not done anything different to date: they simply create trust between providers and consumers. Ethereum guarantees these processes through algorithms, which makes just about any form of transaction possible. These are offered as apps, and people pay in ethers, which themselves are only ‘minted’ by the issuer when a user completes a transaction.

The range of applications is simply unlimited. Aside from complex financial products, another area of interest is micropayment solutions. This could also add a new element to the internet of things, where the exchange of data in exchange for money could open up entirely new revenue streams. Company foundations, insurance policies, and completely new sharing platforms could all be managed using the Ethereum currency, without any need for a central intermediary.

This could be the next big thing to fundamentally change the face of the internet. Platforms like Amazon, Facebook or YouTube are likely to evolve to become decentralized peer-to-peer applications. And this, in turn, opens up new possibilities for Swiss software developers. Blockchain technology is already offering a number of specialized service providers on the Swiss market the opportunity to reinvent themselves. Add to this the generally liberal legislation and trustworthy image of Swiss-made products – and it is clear why Ethereum is not alone in choosing to settle in Switzerland: a great number of promising cryptocurrency and blockchain projects have also sprung up in the country.