Excerpts from The Age of Cryptocurrency

Thoughts on April’s #FinTech Book Club

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The Age of Cryptocurrency is a whirlwind tour of the bitcoin world. Michael Casey and Paul Vigna do an excellent job placing bitcoin in its historical context, explaining the ideas that came before Satoshi Nakamoto’s creation, and all the work that has been done to build the bitcoin world. Vigna and Casey also emphasize the features of bitcoin and the blockchain that have created so much buzz.

However, I left no more convinced of the role bitcoin will play. The focus of this book was on blockchain as currency, and therefore competition to traditional fiat currency. That conversation was interesting and informative but also distracted from what I see as the blockchain’s broader potential. While Bitcoin as unit of exchange is the first broadly understood application of the blockchain, that doesn’t mean it is the best application of blockchain. Moreover, there are some serious technological limitations that stand in the way of Bitcoin being the currency of the future that Casey and Vigna envision.

Below, I quote some of the key passages from the book and try to provide a few additional questions for further conversation. I’ve also added in a couple comments from my own perspective and included a timeline of events to bring everyone on the same page.

Personally, I think the most interesting parts of the book were on the different roles bitcoin and cryptocurrencies could play in the future. See the last section, “The Future of Bitcoin,” for excerpts on that.

Note: I am explicitly skipping a technological review of how the blockchain works. I think the book gives novice readers a good feel for how blockchain works, but there are much better resources.

Some Early History of Bitcoin

Bitcoin was born out of a crypto-anarchist vision of a decentralized, government-free society, a sort of encrypted, networked utopia. It got its early growth from a small band of young, tech-minded people who were repulsed by the excesses and abuses of the financial system. But the next stage, the bitcoin boom, has been driven by something far easier to understand. The crypto-anarchists aren’t driving bitcoin anymore.
Bitcoin’s wild ride (by the way, the price has recovered to record highs)

October 31, 2008: Nakamoto publishes the whitepaper that outlines bitcoin. He sends the paper around a cryptography mailing list and is met with mostly skepticism.

January 9, 2009: Version 0.1 is released and the first bitcoins are mined.

January 12, 2009: the first bitcion transaction is between Nakamoto and Hal Finney, a developer and early collaborator on bitcoin

October 5, 2009: the first exchange rate for bitcoin is $1 = 1,309.03 BTC. This was calculated on the cost of electricity it took to mine bitcoin.

December 30, 2009: in response to increased computing power in bitcoin community (largely because of new method to use GPUs towards mining), the difficulty of mining increases for the first time.

May 22, 2010: the first real world transaction using bitcion: Laszlo Hanyecz buys a pizza for 10,000 bitcoins (today, worth ~$12,000,000 but at the time worth ~$25). Laszlo did a number of publicity stunts to draw attention to the bitcoin ecosystem

July 17, 2010: Mt. Gox, the infamous bitcoin currency exchange, is created

October 2010: Financial Action Task Force issues money laundering warning for new digital currencies

November 6, 2010: total value of all bitcoins exceeds $1m

June 9, 2011: Tradehill (an early exchange) stops trading days after huge crash in the market value of bitcoin in response to theft

February 13, 2012: Tradehill shuts down citing regulatory issues among others

March 2013: Cyprus financial crisis leads to large investments in bitcoin

May 8, 2012: SatoshiDICE, a bitcoin based casino, is responsible for over half of transactions

June 2012: Coinbase founded

January 22, 2013: BitPay surpasses 10,000 transactions

March 28, 2013: total value of all bitcoins exceeds $1bn

April 20, 2013: Bitcoin crashes, losing more than half its value from recent highs

June 10, 2013: Documentary Life on Bitcoin is made showcasing a newlywed couple living exclusively on bitcoin for 90 days

July 2013: Winklevoss Bitcoin Trust is filed

October 16 2013: Silk Road, the illegal marketplace fueled by Bitcoin, shuts down

November 2013: Bitcoin over $1100

December 2013: China’s Central Bank bans banks from accepting deposits against the yuan. Price crashes 50%

February 28, 2014: Mt. Gox, once the largest bitcoin exchange in the world, shuts down citing flaw in protocol. It has lost 850,000 bitcoins, valued at $500m at the time.

What is money? How does it compare to bitcoin?

“Contracts are not valuable for the material they are written on, but because a court will recognize the words contained on them as evidence of an enforceable agreement…

“What exactly is the contractual agreement conveyed by a dollar? If you have one in your hand, it contains a rather obscure promise, an affirmation from the U.S. government that it owes you the value of that dollar. Uncle Sam promises to accept those IOUs and net them off against the debts that you in turn owe him‚ (your tax bill, fees, fines, etc.) …

“In a practical sense, your dollar’s value depends entirely upon everyone else consensually recognizing that your dollar can be redeemed for an agreed-upon measure of goods and services. If that consensus were to disappear, your dollar’s value would fall away very quickly. A dollar’s value does not reside in the fact that a bank acknowledges a liability to you or that the bank registers a claim on it with the Fed; rather, it hinges on society’s willingness to accept it in settlement of a debt…

“For most of its history, currency has been issued by those who rule, be they kings or democratically elected governments. Consistently, those rulers have stamped their authority — both figuratively and literally — on their currency, reminding citizens of the deep connection between money and power. …”

These powers have then taken a cut (referred to as seigniorage) by printing themselves extra money or debasing the coins of the metal they’re meant to contain. This is the cost of having a central organization issue money.

“The history of money reveals a central challenge: how to design a system that most effectively facilitates the exchange of goods and services and generates prosperity while preventing the institutions that manage that system from abusing the trust that comes with that role.”

Bitcion, then, is an attempt to have a system that facilitates this exchange of goods without the centralized organization controlling the system. It uses a decentralized process to create consensus on valid transactions and claims. This consensus allows people to trust the results of the system without trusting any one input. In theory, this eliminates the need for a centralized organization.

“What is needed is an electronic payment system based on cryptographic proof instead of trust.” -Satoshi Nakamoto

Question: Currency is based on trust. Will people ever trust a system they don’t fully understand more than a centralized body they can never truly monitor?

As Vigna and Casey say, “the problem is that the average joes targeted by bitcoin advocates see its mystery as a reason not to trust it. ‘Mysterious in the case of money is not so good,’ says Jeremy Allaire, founder of bitcoin financial firm Circle.”

But it isn’t just the seigniorage that is problematic with the current fiat system. The current payments infrastructure was designed around our central banks and organizations leading to high transaction costs that are often hidden from customers.

“From the whopping $11 trillion in payments that Visa and MasterCard processed in 2013 — about 87 percent of the global market — we estimate these operations cost merchants $250 billion that year. Benefiting from a global explosion in e-commerce, which is projected to double between 2013 and 2017, total payment-card volumes are increasing by about 10 percent each year. Add in the cost of fraud, and you can see how the cogs of the global payment system represents a hindrance to growth, efficiency, and progress.”

Bitcoin is not free. There is the cost of mining (and in the future there may be transaction costs). There is the price volatility, which poses a big risk. There is the security risk. Once bitcoins are stolen, they are unrecoverable, and hackers have had major success stealing bitcoins from seemingly secured locations.

“The security/volatility issue can and should be overcome with the cryptocurrency innovation unleashed by its open-source model. Already, bitcoin security has made great strides since the Mt. Gox debacle; it’s now virtually impossible to imagine such a massive loss occurring again. Volatility in bitcoin’s price will also eventually decline as more traders enter the market and exchanges become more sophisticated.”

Question: how big will adoption of bitcoin need to be to reach a point where merchants are no longer willing to pay traditional costs? In other words, is there a tipping point where people will move towards bitcoin?

What does it mean to be decentralized?

“The threat of double-spending is the great vulnerability of digital money. Satoshi Nakamoto solved it, not by strengthening the security of a currency token, but by a real breakthrough in social technology, in the system of credits, debits, and balances.

“We’ve said that one of cryptocurrencies’ great advantages is that they are decentralized. What does this mean? It comes down to the use of a common, fully public ledger.

“It was impossible to create a decentralized system in the vast scope of the global economy. But then the Internet solved a big part of the problem by creating a network for instant universal communication. The next steps were (1) creating a mechanism to publicly display each record-keeper’s work and to maintain the integrity of the one common ledger that everyone agrees to be accurate, and (2) providing the right incentives for enough individuals or firms to dedicate resources to the upkeep of that ledger. Bitcoin neatly handled both of these challenges.

“Bitcoins don’t exist per se, not in the sense that you can peer into some electronic vessel and isolate a set of self-contained coins. Bitcoins exist only insofar as they assign value to a bitcoin address, a mini, one-off account with which people and firms send and receive the currency to and from other people’s and firms’ addresses. Bitcoins do not constitute documents or other digital files. The balance you see in your wallet is simply a net value of spending power based on an accounting of the incoming and outgoing transactions.

“This is an important distinction because it means there’s no actual currency file or document that can be copied or lost. Your right to bitcoin is defined as the balance that the ledger recognizes as yours. You can lose your ability to exploit those balances and shift them to someone else‚ that is, if you lose the password needed to release them‚ but you can’t literally lose bitcoins since they don’t actually exist.”

In the end, decentralized means that the nodes of the protocol can agree on which transactions are valid and should be included in the ledger without trusting each other or a central figure. That is pretty powerful, but will that impact the real world.

How significant is decentralization? Why should we really care about it?

What is the Future of Bitcoin?

“No one imagined Twitter or Wikipedia or YouTube or all these amazing inventions that have happened over the past ten to twenty years. It would be very hard to find anyone in 1993 who predicted all those things. ‘Those unimaginable possibilities exist with bitcoin, Dixon says, because extensible software platforms that allow anyone to build on top of them are incredibly powerful and have all these unexpected uses. The stuff about fixing the existing payment system is interesting, but what’s super-exciting is that you have this new platform on which you can move money and property and potentially build new areas of business.”

“DApp, for decentralized autonomous application, describes the kind of specialized software programs that could thrive in blockchain-based settings. He excitedly reels off various examples of such DApps: a completely decentralized stock exchange; a network of interlinked computers that contribute to and draw from a collective pool of hard-disk space, all paid for with cryptocurrency; a ‚Äúmeshnet,‚Äù where users are paid to contribute bandwidth to a low-cost network of Wi-Fi connected users who get to bypass the cable and telephone companies that currently function as centralized Internet service providers.”

This is the bull argument in a nutshell. Decentralized consensus can mean… well who knows what it can mean! And isn’t that exciting. Personally, I’m bullish on blockchian in enterprise settings at first, and if it takes a foothold there, then the possibilities could be used in many ways. But like all technologies, there needs to be a sequencing that brings it to the real world.

Financial Inclusion

“The 2.5 billion unbanked are not unreachable, not by a long shot, and one of the biggest and most exciting prospects bitcoiners talk about is using their cryptocurrency to bring these billions of people roaring into the twenty-first century.”

I’m skeptical that a decentralized inclusive currency has advantages over a centralized one like M-Pesa. After all, one main reason M-Pesa worked is because it was welcomed into the regulatory framework of Kenya. Many similar endeavors have failed in different markets because the regulatory costs have been too high, particularly after banks recognized the threat of mobile money and lobbied their local government. Why will bitcoin have more success in emerging markets, particularly when there is no centralized organization to advocate for it?


“China is a tantalizing market to bitcoiners, as it is to nearly all businessmen. On paper, the appeal of independent cryptocurrencies to Chinese citizens is compelling.

“They promise an escape route for their $12 trillion hoard of savings trapped in Chinese banks, where they earn interest rates too low to cover inflation. Chinese laws curtail their ability to buy or sell foreign currency and offer them only limited alternative investment vehicles. China‚Äôs trapped savers subsidize property speculators and corrupt state-owned enterprises, facilitating a gravy train of artificially cheap bank loans that’s raising the specter of a Chinese debt crisis to rival those of the United States and Europe. With bitcoin, the theory goes, people could bypass that unjust banking system and get their money out of China at low cost.

“However, it’s not just rules stopping Chinese from conducting payments in bitcoin. There are also few financial incentives. The government-controlled UnionPay payment-card network is deliberately designed to incur low transaction fees, so card payments are more financially attractive for both consumers and vendors than bitcoin, which carries the added cost of volatility risk.”

Smart Contracts

“If, some adventurous minds thought, two parties could now securely exchange funds without a trusted third party creaming fees from them, then perhaps this new tamperproof record of verified information could also be used for other exchanges. Contracts could be drawn up and executed without lawyers or courts getting involved; digitized property deeds could be transferred and verified by the blockchain sans real estate agents; financial securities could be traded directly between investors, bypassing a central exchange or clearinghouse.”

“Assurance contracts are just one form of one of the most prevalent Blockchain 2.0 ideas: “smart contracts” an idea first floated by Nick Szabo, who some researchers believe to be Satoshi Nakamoto. At its crux, this idea contends that the blockchain can replace the legal system, the ultimate trusted third party. Instead of having a law firm draft a written agreement to be enforced by a judge, if one party fails to meet its obligations‚ with all the costs and uncertainty that go along with those institutions’ involvement‚ the execution of those obligations is automated by software, with the criteria for doing so verified by the decentralized blockchain. Think of a standard escrow agreement where an indebted homeowner puts away a monthly amount guaranteeing that home insurance and taxes will be paid. Well, in this case, those payments would be made with cryptocurrency and deposited into a neutral wallet, all automatically triggered once the tax and insurance payments fall due. The blockchain keeps everyone honest, and a whole layer of banking bureaucracy is removed, lowering costs.”

“But smart contracts’ need not be limited to finance. When paired with smart property where deeds, titles, and other certifications of ownership are put in digital form to be acted upon by software‚ these contracts allow the automatic transfer of ownership of a physical asset such as a house or a car, or an intangible asset, such as a patent. Similarly, the software initiates the transfer when contractual obligations are met. With companies now busily putting bar codes, QR codes, microchips, and Bluetooth antennae on just about every gadget and piece of merchandise, the emerging Internet of Things should make it possible to transfer ownership in many kinds of physical property in this manner. One creative solution applies to cars purchased on credit. Right now, if an automobile owner misses his or her payments, it’s laborious and costly for the finance company to reclaim both the title to and physical possession of the car, involving lawyers, collection agencies, and, in worst cases, repo men. But under a smart contract, if the payments are not met, the digitized title would automatically revert to the finance company’s digital wallet.”

This is a vision I’m interest in, with some caveats. Not all assets can be initialized in digital form (a disputed land will be disputed in real life or digitally), and not all contracts can be verified.

Will these exist on bitcoin or another crypto-currency? I believe the answer is another. Bitcoin is not designed for this purpose, and other, newer systems are explicitly designed to do this. Ethereum is one example of a blockchain trying to do this. There are many others.


“What if Vitalek built an entirely independent protocol and blockchain that could sustain any kind of application written in any programming language, one that was, as developers say Turing complete? What if it could support any decentralized service‚ (currency-trading systems, smart contracts, shareholder registrations, voting systems, DApps, DACs, DAOs, whatever) and let developers construct as pretty an interface as they felt their market needed? The solution he came up with quickly took the cryptocurrency world by storm: a completely redesigned, fully versatile, decentralized blockchain that could function as an open platform on which all manner of contracts and decentralized applications could be installed. He called it Ethereum. “We are hoping to be like the Android of cryptocurrency” said Vitalek”

“A self-taught computer geek and hacker with no formal cryptography background, Buterin first laid out his vision in a white paper. In November 2013, he posted it on GitHub, a key repository for open-source coding projects where coders float ideas and collaborate on software development. ‘I was seriously expecting five or so cryptographers to either immediately dismiss it as worthless and explain the reasons why this can’t work in any form, or to say. Here are the ten projects that are doing this already,’ he says. But it had quite the opposite effect, setting off a spark of imagination among cryptographers and software engineers.”

The Most Extreme vision of a bitcoin future

“In a speech at the August 2013 Turing Festival in Edinburgh, Hearn envisioned an economy composed of autonomous economic agents. He used the example of a driverless taxi, one guided only by sensors and GPS technology. The one-car taxi service would be run by a smart software program plugged into an automated, electronic marketplace Hearn dubbed the Tradenet. There, prospective passengers could post ride requests and receive competing bids from multiple driverless cars. They would choose their preferred taxi based on fare, travel time, and model of car and could negotiate the route based on durations and fares that the service derived by bidding in a separate Tradenetmarket, where variations in traffic conditions would offer differing market-based toll-road prices for each route.

“If all that sounds futuristic but feasible, try this additional feature of Hearn’s imaginary taxi: it has no owner. The car owns itself, more precisely, the operating computer program owns it. This program would pay the car’s running costs and take in its own revenue; all of this would be made possible by cryptocurrency and the invention of the blockchain. I suspect if I tried to go to the bank and open a bank account that’s owned by a computer program, they’d tell me to get lost or they’d think I’m crazy and report me to the police, Hearn said. But bitcoin has no intermediaries. Therefore, there‚Äôs really nothing to stop a computer from connecting to the Internet and taking part [in the bitcoin network] all by itself. All you need to do to generate a bitcoin wallet is to generate a large random number, and pretty much anything can do that.”

Final Thoughts

“Money has three broad characteristics: it is a unit of account, a medium of exchange, and a store of value. For bitcoin, or any cryptocurrency, to achieve all three, that whole concept is going to need broad-based support-if not from consumers then from businesses that will use the technology to cut costs. It may fail to earn that support even if the product is technically solid. To this day, you can find people who will explain why the Betamax videocassette recorder was technically a better product than the VHS. But most people now don’t even know what Betamax was. Cryptocurrency, for all its purported glories, could similarly lose out to a-just-good-enough‚ competitor, one that works through the traditional, bank-centric system but which adds sufficient cost savings and convenience to give it an edge.

Given that bitcoin is by far the most entrenched of all cryptocoins, with a clear first-mover advantage, if any new currency is to capitalize on those benefits, it might as well be bitcoin. This is a digital age, and bitcoin is digital money. In a world where people live on their phones, in a world where so much commerce is done online, simplicity and cost savings are in its favor. All that’s needed is for one of those catalysts described above, and then another, and another, and another. Eventually, it becomes so popular that all three characteristics of money are met and bitcoin is as big as the dollar. Despite its public-image problem and regulatory constraints, the environment isn’t entirely unaccommodating for bitcoin to flourish. Some of the more cryptocurrency-friendly states such as Switzerland, Singapore, the United Kingdom, and Canada could foster hubs of innovation that give the technology an unstoppable momentum.

People like to talk about bitcoin in the extreme terms: yes or no, domination or dustbin‚ but it’s not a simple black-and-white question. What’s likely is that bitcoin will continue to grow, not alongside the real world, but attached to it, the underlying technology adopted by a variety of institutions and businesses to suit their needs. The whole process resembles something you’d see in biology, evolution among and between species. This is what we expect to happen.”

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