Have you read headlines like these recently?
‘Five Ways Blockchain Could Change The World.’
‘How Blockchain Will Change the Way We Work, Play and Stay Healthy in the Future.’
And of course: how to onboard 'the next billion users.’
Whether so much optimism is really justified largely depends on who you’re asking. Anything related to blockchains and cryptocurrencies often inspires either unconditional love or deep-seated mistrust.
Optimists seem to believe that widespread adoption will solve the world’s most pressing problems, from economic inequality to climate change. Pessimists seem to be convinced that blockchains and cryptocurrencies are an unnecessary hype at best and a scam at worst. They also believe that Bitcoin, Ethereum and others are largely used by criminals and that NFT projects have no intrinsic value. Warren Buffett, one of the world’s most famous investors, has even stated that bitcoin is both stupid – as it’s likely to go to zero – and evil because it undermines the current financial system. It’s not a particularly consistent position but it’s certainly a nice quote.
Overall, there is not much common ground for debates. More nuanced views are rare and easily drowned out. That's why I wanted to write this article. It's an introduction for anybody who doesn't know much – or anything at all – about blockchains or cryptocurrencies. It also offers some perspective to crypto enthusiasts and crypto skeptics.
Personally, I'm convinced that blockchain technology will be part of our lives in the future, but it will take years of gradual progress. Blockchains can help to solve some global issues, but they are very likely to create new ones which few people have even considered. In the meantime, there will be economic opportunities – and much potential for hypes and scams. Overall, it may be similar to every technological shift since steam engines were invented.
All of that translates into some general advice: Look at the potential upside with a healthy degree of skepticism. That’s vital for the technology overall and for individual projects in particular. Over the past decade, debates have often focused heavily on tech without a view of the wider implications for societies or existing organisations. (A bunch of highly intelligent 20-somethings may be able to capture most financial services in code, yet the result is likely to be extremely different without the relevant regulations.) Blockchain proponents tend to be male and relatively young; this lack of diversity has arguably contributed to a toxic view of any critical views.
In 2007, the first signs of a financial crisis were impossible to ignore. Eventually, huge banks either disappeared from the market or had to be bailed out by governments because they were 'too big to fail'. Many people lost trust in the financial system. In practice, however, that didn't mean much. There was no real alternative. You still needed a bank to get a loan or pay an invoice. Bitcoin was created to change that.
In 2008, an anonymous author who went by Satoshi Nakamoto published a whitepaper. It was based on decades of research in computer science and mathematics. In addition, it was inspired by a lack of trust in centralised institutions such as governments or central banks. Nakamoto introduced a unique digital currency: decentralised, regulated by code, governed by the community.
It's important to understand the difference between the two building blocks. On the one hand, there is a blockchain which saves data in a specific format. Once it is part of the blockchain, data cannot be changed or manipulated. Bitcoin – the blockchain – was solely created to record transactions of a digital currency, also called bitcoin. (Blockchains had been under development since the 1980s. The innovation was the combination with a digital currency that was not subject to centralised regulation.)
The currency is stored in a digital wallet, just like you put cash into a physical wallet. You can transfer bitcoin within minutes at low fees, and it doesn't matter whether you send it to a neighbour or another country. All transactions are transparent – everybody can see them on the blockchain. However, as long as nobody knows the owner of a specific wallet, payments are anonymous, and there are other ways to further ensure anonymity.
Bitcoin remains a fascinating concept but it's easy to see why early adopters included right-wing libertarians who were sceptical of central governments as well as criminals selling drugs on sites like Silk Road. It was also extremely volatile, attracting speculators and price manipulation. When bitcoin went from $200 to more than $1000 in November 2013, it even led to a warning by the European Banking Authority about virtual currencies.
Around 2016, stories about the use of blockchains for purposes other than digital money started to appear. Ethereum had been released the previous year. As a new type of blockchain, it enabled something called distributed computing.
Bitcoin was merely a record of all bitcoin transactions. It works very well, but recording bitcoin transactions is really the sole purpose of the corresponding blockchain. Ethereum, however, enabled 'smart contracts'. The term is unfortunate because they're neither contracts in the legal sense nor particularly smart. In a nutshell, they are blockchain-based software applications which are executed when certain conditions have been met.
Any new technology is likely to find eager early proponents. It was no different in 2016 when various articles promised that global supply chains or the music industry would soon be revolutionised. Future potential and actual capabilities are two different things though. Together with smart contracts, Ethereum also introduced the 'blockchain trilemma': Any public blockchain aims to be secure, scalable and decentralised, yet it can only be optimised for two of those things.
Ethereum was mainly aimed at being decentralised and secure but in 2016, it was not even close to mass market adoption. An alternative were very scalable (and fast) systems which are secure and therefore accessible all the time. It's possible to distribute servers all over the world, but when all servers are controlled by the same entity the system itself is not decentralised. Going back to the invention of bitcoin, however, decentralisation was at the core of a public blockchain. It’s the only way to guarantee that the respective blockchain cannot be switched off by a company or a government.
In hindsight, it is hardly surprising that the optimism in 2016 was too early. It didn't stop further developments though. Various blockchain projects tried to solve the trilemma. At the same time, developers started to use Ethereum for decentralised applications, many of which issued their own tokens.
Tokens are an interesting concept. They can be used for governance, giving holders the right to influence important decisions of a decentralised application. The concept is similar to stocks, but decisions are carried out when needed rather than during one annual general meeting. In addition, tokens can be used as an internal currency or to reward users. However, when more tokens are brought into circulation without additional value being generated, the price is likely to go down.
In 2017 and early 2018, many new tokens were issued. They seemed to be a perfect fit to provide start-up funding, and many people got involved with the crypto market for the first time. There was a lot of potential, leading to significant hype and inflated prices. Inevitably, the bubble finally burst, just like the dotcom bubble in March 2000. It took around two years for crypto markets to recover.
In November 2021, the combined market capitalisation of cryptocurrencies reached almost three trillion dollars. (At the time, Apple was the most valuable company in the world with a market capitalisation of around $2.5 trillion.) In early July 2022, the crypto market had lost around two thirds of its value. Losses for the top cryptocurrencies were similar to large tech stocks, yet around $60 billion were wiped out almost overnight when the Terra/Luna ecosystem crashed in May. Shortly after, crypto lenders such as Celsius and Vauld had to pause withdrawals for their customers who had relied on such platforms to generate high yields for various cryptocurrencies. Another crypto lender, Voyager Digital, as well as the hedge fund Three Arrows Capital even had to file for bankruptcy.
Challenging macro-economic conditions – ranging from high inflation to rising interest rates – are part of the story. These conditions were exacerbated by the demise of large entities such as those above. It had been easy for centralised platforms to establish themselves as seemingly reputable gateways to the largely unregulated crypto market when prices were rising in 2020 and 2021. When the market turned, however, many small-scale investors suffered losses because they had been comfortable with high interest rates and didn’t feel the need to read the fine print.
Actual regulation is therefore moving ahead. (It doesn’t seem too far-fetched for an industry that provides a self-described stablecoin called Magic Internet Money.) Any kind of regulation would have been unthinkable less than ten years ago but there are now concrete examples, e.g. in the European Union and the United States.
Meanwhile, the industry can point to a growing number of actual use cases. Examples include simple cross-border payments, complex Decentralized Finance (DeFi) protocols or various implementations of non-fungible tokens (NFTs). Despite the shortcomings, these are solid stepping stones for further adoption.
Whether new users will adopt traditional crypto values such as decentralisation or transparency will be interesting to observe. Regulation is very likely to play a role and self-described crypto skeptics are lobbying to shape future policy as well. Some of their arguments, such as the environmental impact of blockchains, might be dismissed relatively easily. With Bitcoin and Ethereum, there are only two blockchains relying on an energy-intensive mechanism yet Ethereum will soon use a new method to maintain the blockchain. Moreover, the debate really should be about why so much electricity around the world is still generated by non-renewable sources.
Frequent scams are another important argument. While these are hardly unique to the crypto industry, they have been fueled by social media and market valuations which have been ‘driven by excessively loose central bank policy.’ In the coming months and years, the focus for any serious blockchain-related project should therefore be on actual use cases rather than a mere vision of the future. If founders are able to turn the bear market into a build market, growth opportunities are certainly significant. ‘Generation Blockchain’ may be just around the corner.