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As the first column in a series of critiques of how blockchain is both changing and challenging the ecosystem, Cairo-based Nour Haridy reflects on what he has been watching the past few years.
Despite the rise and fall of the recent cryptocurrency bubble, the growing business interest in blockchain, the underlying technology, remains unchanged. Each day, another “tech entrepreneur” gets sold on the technology and how it fits their business perfectly. Whether it’s a startup, SME, or larger company, weeks later, after hours and hours of research and consultancy, they usually end up in frustration with blockchain realising that there was nothing wrong with their SQL (Structured Query Language) database in the first place. This is not only due to the blockchain illiteracy spread among entrepreneurs globally, but also due to the fact that blockchain technology was never designed for business; it was designed to abolish it.
Cryptocurrency and blockchain are two interdependent inventions. They were both invented for each other. Blockchain could not have existed without cryptocurrency; and vice versa. That is the reason why both were first introduced together in the same paper known as the Bitcoin whitepaper. In order to grasp why business is inherently incompatible with blockchain technology, one needs to apprehend the full history behind the invention of Bitcoin. A very widely spread misconception is one that portrays Bitcoin as the first attempt to create online digital money. While there were multiple failed attempts, Bitcoin was merely the first success only because it avoided earlier mistakes.
Most early attempts to create a form of online digital money occurred within the 1990's. Among these, there have been a few; such as BitGold and B-Money, that were simply never implemented in code and therefore were never experimented with in practice. However, the earliest known functional attempt to create a digital currency was in 1989, when American cryptographer David Chaum conceptualised a centralised digital currency known as Blinded Cash which could be transferred between people privately over the internet while preserving their privacy using cryptography. Although the DigiCash company, issuer of Blinded Cash, went bankrupt in 1998, some of the cryptography implemented in their product is still used in many of today’s post-Bitcoin cryptocurrencies. Blinded Cash’s centralised architecture was simply not reliable enough for the currency to outlive its own issuing company. Another example of a failed centralised digital currency was e-gold. Unlike Blinded Cash, e-gold did not rely on any cryptography for security. It lived entirely on a web server operated by the issuing company Gold & Silver Reserve Inc. e-gold Ltd allowed users to open a web account associated with a balance denominated in grams of precious metals such as gold. It also allowed users to make instant transfers of value to other e-gold accounts on the server. Between 1996 and 2009, e-gold grew up to five million registered accounts and processed $2 billion worth of gold transfers per year at its peak. E-gold's success in addition to its insecure single point-of-failure architecture made it prone to financial malware, denial of service attacks, security penetration attempts and phishing scams by increasingly organised cybercriminals. The first ever cyberattack against a financial institution was made against members of the e-gold mailing list in 2001. Today’s notorious bank account phishing attack was originally designed specifically to be used against e-gold and later used to attack other financial institutions. The increase of online crime linked to e-gold led to complaints to government law enforcement by defrauded account holders. In 2007, the e-gold directors were indicted by the U.S. Federal Government of running a money transmitter service in the U.S. without a license and the e-gold service was effectively shut down by the U.S. government. E-gold’s trust-based model and single point-of-failure architecture were insufficient for the currency to survive malicious actors and regulatory action.
Briefly after the downfall of e-gold, and coincidentally with the financial crisis of 2008, a pseudonymous person or group of people under the name of Satoshi Nakamoto published a whitepaper online under the title “Bitcoin: A Peer-to-Peer Electronic Cash System” describing a better system of digital money that leverages reliability through decentralisation. Satoshi described an architecture that combined cryptography, economics and distributed systems in order to achieve a system that is reliable by design; one that does not depend on one person or group of people to continue to function as intended. Therefore, it can outlive any single human being or entity. The distribution of control, availability, liability and points-of-failure made Bitcoin the world’s first truly trust-less electronic system. A system where the user does not trust anyone with their money’s custody (e.g. a bank) or value (e.g. a central bank). The decentralized property of Bitcoin required it not to be backed by a company or an individual, functioning similar to a natural phenomenon; larger than anyone and everyone and that just happens to exist persistently in spite of civilization. Otherwise, Bitcoin would have eventually failed for the same reasons as precedents such as Blinded Cash and e-gold.
Every center is a single point-of-failure, single points-of-failure are unrealiable and, especially in finance, unreliability is vulnerability. Distributed systems have proven to be reliable by design, this was not only proven by the blockchain experiment over the past decade, but also proven by other distributed systems such as torrents and, to some extent, web microservice architecture. However, businesses are each centralised by design. Moreover, a seemingly decentralised system governed by a center is completely centralized (e.g. web microservices). Therefore, a business cannot launch, maintain, operate, control and monetize a service on top of a blockchain and truly claim it is decentralized, trustless, reliable or even secure due to the fact that the security of that blockchain would be bound by the security and/or the lifespan of its center; the business. Instead of business-to-consumer services, blockchain technology offers us a better alternative to businesses themselves: peer-to-peer.
Although Satoshi Nakamoto took no role in the growth of Bitcoin after he made the decision to disappear in 2013, he made a fortune by accidentally inventing the utility-bound token business model. Because Satoshi was the earliest Bitcoin miner, he had the opportunity to mine Bitcoin at a very low mining difficulty and a very high mining reward. He is estimated to own about 1 million Bitcoin today, meaning he was worth about $19 billion at the peak of Bitcoin’s price surge. Bitcoin was an unusually profitable venture for Satoshi although there was never a Bitcoin Inc. This same phenomenon reoccured with Vitalik Buterin, the 24-year-old founder of Ethereum, who owned hundreds of millions of dollars worth of Ether at peak. While the Ethereum blockchain development itself was governed by a swiss non-profit called the Ethereum Foundation. Most of the wildly successful blockchain projects today followed a similar path. Such projects have proven that profit and business are not always inseparable, and that providing an autonomous pure utility to the public can be very profitable without a business maintaining or monitising it in perpetuity.
The views revealed in this column do not necessarily represent those of Startup Scene's.
Main Image: A conceptual image of the future vegetable markets in Cairo, relying on Bitcoin.
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