For some reason, it is not in the mainstream conversations here in Kenya; but in the rest of the world people are already picking sides. Depending on who you ask it is either a revolution for the internet and countless industries as we know it or the greatest ponzi scheme in history. Accused of being all these thing is the world of cryptocurrency or the other labels associated with it; from NFTs, blockchains, web 3.0 and everything that comes with them. About a month ago, I asked for your opinion on cryptocurrency. The replies I received were just as I expected. Some of you praised it as the future of currency others don’t understand it while some labeled it as a scam. What is it with Bitcoin that it seems to stir up controversies and polarization wherever it goes?
I tried for a long time not to look into this topic and just let things be, but I think Bitcoin has grown so in our face that it can’t be ignored any longer.. From the onslaught celebrities’ promotions to eye-watering numbers and headlines to the grandiose claim about its potential. Many individuals have their social media profile changed to laser eyes images, every public post has some cryptocurrency related advert in it. Which all begs the question, what exactly is going on?
The more I tried to answer this question the more intrigued I got about the whole thing. For example the fact that Bitcoin’s creator a person, or a group, under the pseudonym Satoshi Nakamoto remains unidentified to this day and is said to own 1 million Bitcoins. But Nakamoto is one part of what makes this saga so fascinating.
Bitcoin is a story. A story about the very thing that influences our actions today. A piece of paper called money. Bitcoin was set to solve this problem. Wait a minute how is money a problem? To understand this let’s have a little history class.
We all know the transformation of trade. From barter trade to trading using uneven pieces of precious metals to the modern currencies that is used today. What most people don’t know however, is that when countries started using paper money similar to the one in place today; the currency was backed by gold. In other words, a certain amount of money could theoretically be exchanged for a certain amount of physical gold that was held at the country’s reserves.
This system was known as the gold standard. However, in 1971 under president Nixon, this system was abandoned.
This meant that the dollar was not backed by gold and that it had value just because the government said so. Hence the name fiat currency. And since the dollar is the reserve currency then all currencies are backed by nothing but trust in the government. This allowed governments and Central Banks to have more sway on money supply. More of this on “Money: The Open Secret”
There exists arguments for and against fiat money, but the important thing to note is that it relies on trust in the government. But what if you don’t have that trust?
Cypherpunks
In the 80s, the cypherpunks was a movement that was publicly against centralized institutions and authorities. They were advocating for what is known as cryptography; ways in which information could be secured without the presence of third parties, through the use of encryption. They saw a clear contradiction between their values and the financial system. Banks to them were centralized institutions with power to print as much money on their terms.
In other words, they didn’t trust it.
And during the 2008 global financial crisis, their point was proved.
And it was perhaps no coincidence then that during the shadow of the 2008 crisis a white paper titled ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ circulated in the cryptography mailing list.
A nine-page paper written under the name Satoshi Nakamoto. This manifesto was a blueprint in which Nakamoto described a purely peer-to-peer version of electronic cash which would allow payments to be sent directly from one party to another without going through a financial institution.
Nakamoto took the technological innovation of former cypherpunks and put them together into what we now call blockchain.
Put it simply he laid down a framework using mathematics, computer science and cryptography to create a currency that can be used for transactions without needing to trust a central authority.
Trust was the problem Bitcoin was set to solve.
Here is where things can get a little bumpy. Now that we know the motivation behind Bitcoin, what exactly is it? How is it decentralized?
Magic Internet Money
As much as Bitcoin’s poster or ad may say otherwise, it is not a physical coin. It is a digital currency.
For the sake of understanding, think of Bitcoin as a transaction on a ledger. For example Ben paid 2BTC to Jane and Jane paid 2BTC to John. These transactions are recorded in a ledger and so on for every transaction that comes after. Banks work in a similar way, recording transactions in a bank account and making sure that someone can’t spend more than they have in their account.
Bitcoin however is intended to be decentralized, meaning that there is no third party to overlook the transactions. Now comes the question, how can transactions be verified as legitimate? Or that Ben even had 2BTC to begin with?
This is where we are introduced to the concept of peer-to-peer or distributed ledger system that Nakamoto outlined in his white paper. Instead of a central authority owning the ledger that records all Bitcoin transactions, the ledger is instead distributed among all the other computers or nodes in the Bitcoin network. A network that anyone with a computer can join by downloading the Bitcoin software.
Now each time a transaction is made on the ledger, every computer on the network attempts to verify whether this transaction is legitimate by solving complex algorithms. When a consensus is reached on the network and the transaction validated, it will be permanently stored on the ledger. When a single computer attempts to validate an incorrect transaction, all the other computers will reject it.
After certain amount of transactions are made on the ledger a new one is created that contains a certain type of code otherwise called a hash that links back to the previous ledger, or block. Hence the name blockchain. Each of the ledgers contain a certain number of transactions that are then linked to the previous.
It is worth to noting that no public identity is used when transacting on the ledger. Instead every individual has a private and a public key which appear as a random string of numbers and letters. A private key is used to create a digital signature while a public key verifies the signature without revealing the private key.
The process of validating transactions on the block is known as mining. Miners receive a reward of a few Bitcoins for every block they successfully mine as an incentive to continue adding to the blockchain.
The Bitcoin network allows you to see every transaction that’s ever been made since the very first block. In other words it is a decentralized form of currency that does not require trust in the parties for transactions to occur.
You can still find the very first block on the Bitcoin blockchain today. Mined by the mysterious Nakamoto in 2009 showing that he was given 50 Bitcoins as a reward. This block is referred to as the genesis block. Nakamoto had also set the supply limit for Bitcoins as 21 million. There are approximately 2 million bitcoins left to mine.
But one question still remains, how did Bitcoin reach the price it is at today?
For every economist, price is a matter of demand. So how did the demand ever reach at the point of Bitcoin going for $68,789?
In early 2009, after the release of the infamous white paper, Nakamoto mined the Genesis block, setting into motion a series of events that would change its future forever.
The early adopters of Bitcoin were those from the cypherpunk’s movement, and others who mined Bitcoin just as a hobby. In the mainstream media it was just a thing for nerds. No one took it seriously or tried to understand the revolutionary technology and idea behind it.
Until 2010, Bitcoin was worth practically nothing. Then, during that year a man named Lazlo Hanyecz created a post on a Bitcoin discussion forum offering to pay 10,000 BTC for 2 large pizzas. Two days later Lazlo reported that he had successfully traded 10,000 BTC for $25 worth of pizzas. This was the first recorded transaction in which Bitcoin was used to purchase a tangible item. And just like that Bitcoin took a step and was now recognized as having real world utility. The 22nd of May was officially dubbed ‘Bitcoin pizza day’.
By the end of 2010, Bitcoin had gone from being worth nothing to 39 cents, and the very first exchange, MT GOX was setup.
In April of 2011, Bitcoin reached a price of $1. Then suddenly there was the emergence of other cryptocurrencies. These alt coins all aim to solve their own problems by making changes to the original Bitcoin.
While Bitcoin’s intention is to become a digital currency, other cryptocurrencies like Etherium is attempting to do something entirely different using blockchain technology both of which recquire their own research.
There are thousands of alt coins out there and some of which are ponzi or pump and dump schemes that serve no use purpose.
Bitcoin kept rising to $20,000 in December of 2017, then, due to a series of government crackdowns, it begun to tumble down. It fell back to $3200 in December of 2018. but then it rose to an all time high of $68,789 on Nov. 10, 2021.
But why?
What separates a retail investor from an institutional investor? Money. Like a lot. It is for that reason that the recent institutional interests in Bitcoin that fuels the insanity witnessed today.
As fear of inflation grows stronger the narrative around Bitcoin changes. In its initial white paper Bitcoin was intended to be a currency, but more and more investors look at Bitcoin as a store of value instead.
But it is important to acknowledge that institutional interests in Bitcoin was something that was previously lacking. Before, Bitcoin was just something for nerds but then it was adopted by the mainstream. Bitcoin ultimately has to rely on people’s beliefs in its ability to be a currency or as some view it; a store of value. I think trust is not something that we can just get rid of that easily.
Bitcoin’s Problems
Behind all the memes and the hype, there has been a civil war within the Bitcoin community for some time now. One that questions its legitimacy as as currency. It is known as the blocksize war. It is an internal threat, a problem that was built into the very foundation of Bitcoin itself. A problem of scalability.
Satoshi Nakamoto programmed that each block of the Bitcoin’s blockchain can hold up to 1 megabyte worh of transactions. And to make things trickier, there’s a set difficulty level on the Bitcoin’s blockchain ensuring that it takes exactly 10 minutes to generate every new block.
With this single decision Nakamoto unintentionally lit the flames for conflict. Let’s run some few numbers.
An average transaction size is roughly about 380 bytes. Every block on the blockchain contains 2759 transactions and if every block takes 10 minutes to generate it means that Bitcoin can guarantee only 46 transactions per second. Let’s now put this into perspective. Visa can handle over 24,000 transactions per second.
Nakamoto’s design decision caused a split in the community. A split between the big blockers and the small blockers. Big blockers argue that any legitimate currency need to handle a lot of transactions, they advocated for the increase in the blocksize limit. On the other hand, the small blockers argued that increasing the blocksize would mean that the average person would not be able to run the Bitcoin network due to its sheer size and scale causing it to be run by bigger corporations causing it to be centrally owned , the very thing that Bitcoin was set to destroy.
Then we have the issue of energy consumption. Bitcoin was accused of using too much energy. How much? More than an entire country apparently. Now you may be asking, how is Bitcoin using too much energy? Well, because Nakamoto designed it to be so. Every computer on the Bitcoin’s network cast a vote to say whether a transaction is valid or not. But can’t someone simply cast as many votes as they can to rig the system?
This is where Nakamoto’s outlined his proof-of-work system. A computer on the Bitcoin’s network will have to prove the work that it has done to cast the vote. It proves this by solving a complex numerical problem that essentially forces the computer on the network to consume energy in order to solve it. The first computer to do so claims a reward.
Nakamoto had made it so that it takes exactly 10 minutes to solve any one equation, this means that the numerical problem would adjust in complexity so that it would take any one computer 10 minutes to solve. So the more computers on the network the more complicated the problem would be in order to keep the generation time at 10 minutes and in turn the more energy and power is required to solve it. It’s a viscous cycle that goes on and on.
During the early days of Bitcoin, a regular computer could be used to mine Bitcoin. But now there are firms in warehouses with powerful computers dedicated to mine Bitcoin.
With climate change and global warming, it placed a big ethical burden on Bitcoin.
Then we have the issue of whales. These are individuals with large sums of Bitcoin, market movers if you wish. The whales have been accused of manipulating the price of Bitcoin with transactions they make.
So that’s it then? Bitcoin’s scalability, market manipulation and poor energy efficiency render it a poor currency? If that was where the story of Bitcoin ended it would be a bleak one. But where the problems of Bitcoin arises is where the world of cryptocurrency and something much bigger begins.
Everyone gets caught up on Bitcoin because it was the one that started the domino effect. But Bitcoin is a small part of what is a bigger picture.
The year is 2014, a 19 year old by the name Vitalik Buterin stood on a stage at a Bitcoin’s conference unveiling his plans for what he called the Ehterium Network. A teenager who decided to quit his favorite video game World of War craft after his warlock character had a damage control component removed by the game developers. He says that he cried himself to sleep that night and that that was the day he realized the horrors of centralized services.
He then discovered Bitcoin in 2011 and started writing for a Bitcoin magazine. It appealed to his ideals. But he saw that blockchain technology was something much bigger than Bitcoin and had potential far beyond the world of finance.
In 2015, Vitalik and several other co-founders launched their version of blockchain invention. It was called Etherium. Ehterium had its own blockchain and its own currency called ether. It had one important difference to Bitcoin though. The Etherium network gave its users the ability to create decentralized applications or contracts. If Bitcoin was a spreadsheet think of Etherium as an excel spreadsheet that allowed users to create functions to perform different tasks.
It was a glimpse of hope finding the revolutionary use case the cryptocurrency world needed to justify the growing value being pumped into the system.
So, what was the first thing people started using Etherium for? Creating their own cryptocurrencies.
Rather than needing to create your own blockchain network, you can just use Etherium’s to create your own cryptocurrency, or as people call them; cryptoassets.
And just like that we were introduced to the ICO mania.
This assets that existed without their own native blockchain are called tokens. A whole wave of these coins were released. It didn’t matter if the idea was good enough or even if it solved the problem it claimed to solve. All that matter was that people believed in the token enough so that the value would rise and it would pay of early investor. Wait a minute. Doesn’t this scheme sound familiar?
It was all about hype, reputation and trust. And this marked the beginning of an unlikely friendship, between those in the crypto space and influencers and celebrities. If tokens were fueled by hype and attention, then celebrities and influencers were running the fuel station.
ICO finally became the casino to gamble unregistered securities. But you have to remember the hidden incentive, no matter how fraudulent and bizarre everything looks on the outside, in the crypto world you have to keep clashing a potential use-case or anything that would justify the value constantly rising to new investors.
While the ICO mania of 2017 was continuing, a whole new idea was coming. Cryptokitties. Cryptokitties was probably one of the first non-fungible assets to make it to the spotlight.
How it worked was, you log into the site, create an account that is connected to your crypto wallet and then you play this game where you would collect, breed and sell virtual cats for cryptocurrency. They key pitch here was that every cat is its own unique token that would exist in the Etherium blockchain making it what you would call non-fungible or as they are now called non-fungible tokens, or simply NFTs.
Cryptokitties became its own mania, generating $3 mil within its first week of launch and accounted for roughly 10-30% of all traffic on the Etherium’s network.
Once everyone started rushing to join in on the hype, the economics of the game faltered as the supply of cryptokitties stretched far beyond the demand, eventually leading to a crash in the price of cryptokitties and fall in average users.
But what remained of that saga was the idea of non-fungible assets. A brand new package. A new pitch. A new root to find use-case for cryptocurrencies and blockchain technology.
The idea was initially pitched to digital artists. The idea was that you would make an artwork then tokenise that artwork. Which just means turning it into a token that existed on a blockchain like Etherium. If you wanted to know who owned the artwork, all you had to do was just go and check the blockchain records and see which wallet was associated with the artwork.
A digital artist called Michael Winkelman, otherwise known as Beeple, began a challenge in 2007 where he would create one piece of artwork every single day and continued to do so throughout the years.
It was reportedly around October of 2020 when Beeple was put in touch with an anonymous NFT artist called Pak. Pak informed Beeple about the world od NFTs. Only a few months later he would end up auctioning a piece of artwork that contained a collage of the first 5,000 images of the everyday’s series, titled; everyday’s the first 5,000 days. He sold it for $69.3 million. One of the largest and arguably the one that shed light on NFTs. It sent the term NFTs skyrocketing. And it is maybe how you came to hear about it too.
But the question is, who decided to by Beeple’s artwork for nearly $70 million? Metakoven. Or as he was later revealed, Vignesh Sundareesan, a crypto entrepreneur who had co-founded a crypto investment firm called Metapurse. Only a few months before this big purchase, Metakoven and his business partner had already bought another collection of NFTs from Beeple for over 2.2 million. They even wrote a blog post about this purchase alluding to the fact that this was only part of a much bigger project they had in mind that would “flip the art world’s status quo on its head”.
And that project was the B.20 token coin. They were going to bundle their purchases and put it in a virtual museum where those who purchased the B.20 token coin could access and view the artwork. Spoiler alert. It flopped big time. So much for flipping the art world’s status quo.
But things get even crazier. It was later revealed that Beeple and Metakoven already had a working relationship before the big everyday’s 5000 sale. When the sale happened the B.20 token rose in value to $23. as people would abviosly looked into who Metakoven was and then discovered the token coins that he owned thereby pushing up its value. People have accused that sale of essentially being a giant marketing stunt to increase the value of the B.20 token.
Despite all of this, Metakoven’s purchase sent headlines. Suddenly NFTs were being created out of internet memes or anything really that was culturally relevant to the internet.
From the outside all you had to know was that NFTs were revolutionary and there was a lot of money to be involved. You didn’t even have to know that they were tied to the world of cryptocurrency or blockchain. Talk of successful repackaging.
Once the sales of memes and other one-off NFT sales cooled down, it became more popular to start buying into NFTs projects. This contained up to thousands of NFTs inside of them usually following a certain theme or concept.
Just as it had been with Bitcoin and token coins, the game here was simple; hype the project and then sell it at a profit. But this time it was much easier because NFTs were ‘cooler’ than your average token coin as they had art behind them. You could show them off by replacing your social media profile picture with an NFT you purchased. More so than ever hype and attention became an important part of growing the value of an NFT.
Which brings us to the apes. The Bored Art Yach Club. This was one of the most significant project created after the Beeple’s sale. It was founded by the company Yuga Labs. The project featured 10,000 different pictures of apes with a distinct bored expressions on their faces. This project managed to arrive at the NFT space just at the right time, about a month after Beeple’s big sale.
There were already popular figures in the crypto world and as they announced their purchase of the bored apes it started creating a buzz inside of the crypto world. Just after 12 hours of its official launch, the BAYC collection sold out, giving Yuga Labs an estimate $2.8 million in revenue.
One of the shadiest part of everything that followed were the blurred lines between celebrities and influencers clearly manipulating the market to pump up the value of their NFTs and genuine posts showing off their purchases.
In some of the celebrity announcements of their purchases, there was this constant reference to a company called Moonpay, thanking them for their help with purchasing their own NFT. Turns out, Moonpay was a company launched in 2019 with a single aim of increasing cryptocurrency adoption.
That begs the question, what is the relationship between Moonpay and these celebrities they are helping buy NFTs?
Isn’t it a little shady that you have the CEO of Moonpay a guy called Ivan Solo-Wright who is an active participant in the NFT market who is clearly well connected to these celebrities and has access to insider information and likely knows when celebrities may purchase an NFT before they do it, use that to his advantage? And later people suspicions were proved to be true when it was later found that Wright had, on numerous occasions do so.
But let’s talk the NFT market as a whole, the pitch makes you think that on the blockchain when you purchase an NFT, there is literally an entry that shows your wallet and the actual image of the NFT right there. But that’s not the case with most NFTs. There is no picture attached to the transaction, instead it is usually a https or ipfs link containing the stored NFT image. So what your purchasing with most NFTs is just an entry in a database that contains a link to an image that anyone else can access. So much for ownership.
But I guess at the end of the day it doesn’t matter when there is money to be made.
The NFT mania grew so big and so ‘in your face’ that people started to get mad and skeptical that they began seeing it for what it really is; a get rich quick scheme. People started hating it, the whole industry at large. As the negativity increased and spread everywhere you start to ask yourself, what gong to happen now?
A whole new packaging. A brand new word was taking the stage. Web 3.0. it kind of reffered to a bunch of different things but the main idea was that it was a new version of the internet, where all your online activities was going to make use of the blockchain and tokens. To some degree or another.
In theory, the now centralized version of the internet, currently in use owned by the big tech would become owned by its users.
The idea that the previoues NFT mania had left was that data on a public database can act as a receipt of ownership over whatever that data contained. And so if NFTs can prove ownership then you can put anything on the blockachain; real estate ownership, university degrees, medical records, legal records, social media sites, video games, everything.
It didn’t matter what it was or how it would work exactly. You could just insert anything and now you have made it revolutionary.
It was literally the definition of solution in search for a problem.
Bitcoin began in 2009, blockchain tech foundations arguably began earlier than that. Its been 15 years since the story began with Bitcoin. 15 years to find a solid use-case or at least one that justifies the hype that it is better than the existing system.
By even making comparisons to the internet is absurd and already assuming cryptocurrency as revolutionary and about to find a mass adoption at some point in future when that is the very future we are putting into question.
Do I think it is the global currency of the future? No. But that doesn’t mean that it has no other uses. And although I have no idea about the future and how blockchain will shape it, it is exciting.
I will end this article with a question. If Bitcoin is worth more tomorrow than it is today
, why would you want to transact with it?
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