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A Brief History of Blockchain

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A Brief History of Blockchain

by

 Vinay Gupta

February 28, 2017

Many of the technologies we now take for granted were quiet revolutions in their time.
Just think about how much smartphones have changed the way we live and work. It used
to be that when people were out of the office, they were gone, because a telephone was
tied to a place, not to a person. Now we have global nomads building new
businesses straight from their phones. And to think: Smartphones have been around for
merely a decade.

We’re now in the midst of another quiet revolution: blockchain, a distributed database
that maintains a continuously growing list of ordered records, called “blocks.” Consider
what’s happened in just the past 10 years:

Insight Center

 Business in the Era of Blockchain

How technology is transforming transactions.

 The first major blockchain innovation was bitcoin, a digital currency experiment.
The market cap of bitcoin now hovers between $10–$20 billion dollars, and is used
by millions of people for payments, including a large and growing remittances
market.
 The second innovation was called blockchain, which was essentially the realization
that the underlying technology that operated bitcoin could be separated from the
currency and used for all kinds of other interorganizational cooperation. Almost
every major financial institution in the world is doing blockchain research at the
moment, and 15% of banks are expected to be using blockchain in 2017.
 The third innovation was called the “smart contract,” embodied in a second-
generation blockchain system called ethereum, which built little computer
programs directly into blockchain that allowed financial instruments, like loans or
bonds, to be represented, rather than only the cash-like tokens of the bitcoin. The
ethereum smart contract platform now has a market cap of around a billion
dollars, with hundreds of projects headed toward the market.
 The fourth major innovation, the current cutting edge of blockchain thinking, is
called “proof of stake.” Current generation blockchains are secured by “proof of
work,” in which the group with the largest total computing power makes the
decisions. These groups are called “miners” and operate vast data centers to
provide this security, in exchange for cryptocurrency payments. The new systems
do away with these data centers, replacing them with complex financial
instruments, for a similar or even higher degree of security. Proof-of-stake systems
are expected to go live later this year.
 The fifth major innovation on the horizon is called blockchain scaling. Right now, in
the blockchain world, every computer in the network processes every transaction.
This is slow. A scaled blockchain accelerates the process, without sacrificing
security, by figuring out how many computers are necessary to validate each
transaction and dividing up the work efficiently. To manage this without
compromising the legendary security and robustness of blockchain is a difficult
problem, but not an intractable one. A scaled blockchain is expected to be fast
enough to power the internet of things and go head-to-head with the major
payment middlemen (VISA and SWIFT) of the banking world.

This innovation landscape represents just 10 years of work by an elite group of computer
scientists, cryptographers, and mathematicians. As the full potential of these
breakthroughs hits society, things are sure to get a little weird. Self-driving cars and
drones will use blockchains to pay for services like charging stations and landing pads.
International currency transfers will go from taking days to an hour, and then to a few
minutes, with a higher degree of reliability than the current system has been able to
manage.

These changes, and others, represent a pervasive lowering of transaction costs. When
transaction costs drop past invisible thresholds, there will be sudden, dramatic, hard-to-
predict aggregations and disaggregations of existing business models. For example,
auctions used to be narrow and local, rather than universal and global, as they are now on
sites like eBay. As the costs of reaching people dropped, there was a sudden change in the
system. Blockchain is reasonably expected to trigger as many of these cascades as e-
commerce has done since it was invented, in the late 1990s.

Predicting what direction it will all take is hard. Did anybody see social media coming?
Who would have predicted that clicking on our friends’ faces would replace time spent in
front of the TV? Predictors usually overestimate how fast things will happen and
underestimate the long-term impacts. But the sense of scale inside the blockchain
industry is that the changes coming will be “as large as the original invention of the
internet,” and this may not be overstated. What we can predict is that as blockchain
matures and more people catch on to this new mode of collaboration, it will extend into
everything from supply chains to provably fair internet dating (eliminating the possibility
of fake profiles and other underhanded techniques). And given how far blockchain come
in 10 years, perhaps the future could indeed arrive sooner than any of us think.

This article also appears in:


HBR’s 10 Must Reads on AI, Analytics, and the New Machine Age

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Until the late 1990s it was impossible to process a credit card securely on the internet —
e-commerce simply did not exist. How fast could blockchain bring about another
revolutionary change? Consider that Dubai’s blockchain strategy (disclosure: I designed it)
is to issue all government documents on blockchain by 2020, with substantial initial
projects just announced to go live this year. The Internet of Agreements concept
presented at the World Government Summit builds on this strategy to envision a
substantial transformation of global trade, using blockchains to smooth out some of the
bumps caused by Brexit and the recent U.S. withdrawal from the Trans-Pacific
Partnership. These ambitious agendas will have to be proven in practice, but the
expectation in Dubai is that cost savings and innovation benefits will more than justify the
cost of experimentation. As Mariana Mazzucato teaches in The Entrepreneurial State, the
cutting edge of innovation, particularly in infrastructure, is often in the hands of the state,
and that seems destined to be true in the blockchain space.

Read more on Technology and analytics

 VG

Vinay Gupta is the founder of Hexayurt.Capital, a fund which invests in creating the
Internet of Agreements. He was instrumental in creating the Dubai Blockchain
Strategy, project managed the Ethereum blockchain platform release, and
invented the hexayurt refugee shelter. His areas of expertise include disaster
management, energy policy, and computer graphics.

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