Understanding the Decentralized World through the Crypto Winters
What we don’t understand, we fear. What we fear, we judge as evil. What we judge as evil, we attempt to control. And what we cannot control…we attack
I don’t recall how I exactly discovered Bitcoin. But I do remember distinctly what led me to take notice. I had joined as a Product Manager at a fast-growing startup in India. We had recently moved to a new bay. There were a bunch of young engineers right out of college who sat nearby. Every now and then in late evenings, I would find them having animated conversations and getting excited looking at charts on the screen. I would overhear unfamiliar words such as Ripple and Ethereum. Upon discussing, I learned these folks owned cryptocurrencies.
Curiosity got better of me and I started reading about cryptocurrencies. My first reaction was that of skepticism. Satoshi Nakamoto, the inventor of Bitcoin, had introduced Bitcoin in their whitepaper titled Bitcoin: A Peer-to-Peer Electronic Cash System. At that point in time, I was unsure how something that had mutated into an instrument for speculative trading with unnerving volatility can emerge as a global decentralized currency.
Sam Altman, the former President of YCombinator made similar observations in his post from 2013. He did share a metric to track Bitcoin’s adoption which was the growth in the number of legitimate transactions. Since he had written the post, it seemed this metric had been growing fast.
Irrespective, when there are smart young kids that are this enthusiastic about something new and a niche community with strong convictions backing a technology, you need to pay attention. I created an account with the first crypto exchange that showed up on Google and looked legit and started putting in a small amount of money every month buying bitcoin. Heck, I even bought a bit of Bitcoin Cash too which was a fork of Bitcoin launched to make transactions cheaper and faster.
Experiencing the first winter
One fine day my credit cards stopped working on the exchange. On April 6, 2018 RBI, the Central Bank of India had issued a circular prohibiting entities from dealing with Virtual Currencies.
In view of the associated risks, it has been decided that, with immediate effect, entities regulated by the Reserve Bank shall not deal in VCs or provide services for facilitating any person or entity in dealing with or settling VCs. Such services include maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them and transfer / receipt of money in accounts relating to purchase/ sale of VCs. — RBI
Bitcoin dipped from a high of $19K in December 2017 to $7K in March 2018. That was a 63% decline in 3 months. People associate the onset of Crypto Winters with the bitcoin price crash. In India, it was losing access to the crypto exchanges. I was no more overtly skeptical. But neither would I call me a believer back then. My personal perception about Bitcoin was that of a cautious optimist.
Years passed. I had stopped actively tracking the developments in this space. But things started changing sometime in 2020. The Supreme Court of India reversed the restrictions introduced by RBI. Bitcoin started yet another bull run and for some reason, it seemed more people were taking notice to the extent that my Mom who is over 60 asked me if I owned any 😲. This time I decided to delve deeper. What I learned, opened my eyes to a new world.
The Resilience of Bitcoin
The ban of crypto exchanges and the crash of 2018 marked my first experience with the Crypto Winter. Bitcoin however had survived much worse in its ten years of existence.
In 2010, a vulnerability in the Bitcoin verification process was exploited to generate 184 Billion Bitcoins and transferred to two addresses. The Bitcoin community spotted the anomaly and the patch was deployed and the network was reverted to the corrected version in 5 hours. This remains to date the only vulnerability identified in Bitcoin in over 12 years now.
Back in the early days, Mt. Gox was handling over 70% of Bitcoin trades. In 2011, Mt. Gox got hacked and the hackers were able to crash the price to 1 cent. It managed to recover. But again, two years later, Mt Gox filed for bankruptcy when it was discovered that it had lost over $500 Million worth of bitcoins of its customers to multiple hacks. Bitcoin outlived the demise of the largest crypto exchange.
Bitcoin survived multiple government bans. China notably had been cracking down on Bitcoin since 2013 and this year they made Bitcoin Mining an illegal activity. This was at a time when 65% of Bitcoin hashrate was based out of China. Hashrate” refers to the total combined computational power that is being used to mine and process transactions on a Proof-of-Work blockchain, such as Bitcoin. The hashrates crashed but then started picking up again from July 2021.
Nobel Laureates such as Paul Krugman and Investors like Warren Buffet and George Soros have called bitcoin a bubble. Prominent personalities including Elon Musk questioned the energy usage of Bitcoin and removed the option of buying a Tesla with bitcoin. Bitcoin had been written off multiple times. Yet, Bitcoin refuses to die and keeps chugging along.
Exponential Growth in Adoption
While I was getting along with my life, the number of cryptocurrency users rose to over 200 Million people across the world. Even more astounding was the fact that the number grew 2X between March to June of 2021.
As I am writing this post, over $20 Billion of transactions were completed on Bitcoin and Ethereum in the last 24 hours. To put things in perspective, Visa processes about $40 Billion of transactions in a day.
Multiple companies such as Tesla and Square started holding Bitcoin. Large multi-national companies are exploring cryptocurrencies as an option for cross-border transactions, especially in geographies where banking infrastructure is not well developed. El Salvador, a Latin American country with a population of 6 Million people passed a law declaring Bitcoin as a Legal Tender. For years, the real-world benefits of Bitcoin and Cryptocurrencies were only talked about. We’re at an inflection point and have started seeing them come to life.
The Underlying Technology
A large part of the resilience demonstrated by Bitcoin and other cryptocurrencies can be attributed to the ethos of decentralization.
There is no single central entity that controls the network. This makes for a more robust financial infrastructure. Contrast the ban of crypto mining by China in 2021 with that of the Subprime Crisis in 2009. The latter led to the falling of big banks with millions losing their jobs and marked the onset of the Great Depression. The former was a blip in Bitcoin Network from which it recovered in a few weeks.
The trustless design enables the exchange of economic value without the participants involved requiring to trust each other or a third party for the system to function. Humans are fallible. We make mistakes. Machines when coded right executes the same way every time. It is faster and cheaper. A few days back two transactions worth $1 Billion each were completed on Bitcoin Network for about $10 fees. For comparison, the last time I did an international wire (for a much lesser amount of course), I paid $20 in fees plus the monstrosity banks charge on exchange rates. To add to that, the Billion Dollar transactions probably got settled in minutes while mine took days.
The Permissionless aspect enables everyone to participate. All you need is access to a phone and the internet. People and groups of people running an institution have vested interests. To get access to banking services, you need to apply and have someone approve your application to open a bank account. This can take anywhere between a few hours to days. Crypto eliminates these biases and inefficiencies. Your religion, nationality, race, or financial situation nothing matters. In crypto, you just need to generate a public-private key pair and a hash to become banked. You can get through all of this in minutes and start accepting or transferring funds to your wallet. Let us take another example. You’re an entrepreneur and are raising an angel round from people around the world. There is a high probability you might end up in a situation illustrated in the tweet below.
Contrast this with former Mozilla CEO Brendan Eich raising $35 Million for building a new browser Brave in under 30 seconds through an ICO. People from over 70 countries participated.
Bitcoin is a bottom-up phenomenon and takes away a lot of control that exists with central entities and passes it on to people. It is 10X more efficient than the current financial infrastructure.
The Road Ahead
As exciting as the crypto ecosystem may be today, these are still early days. Today cryptocurrencies provide benefits to two categories of people; the power users and the marginalized users as shared by Balaji S.
The power users are financiers or developers. For example, if you have a use case where you need to send $10 to thousands of users across 100 different countries or $2million within the next 5 minutes to someone in another country, existing methods aren’t good enough for that.
Marginalized people are either unbanked or unbankable. For example, these are the people who’ll not easily get a bank account. With crypto, they don’t need anyone’s permission to get one — Balaji S
We’re yet to see major tangible benefits for the mainstream audience. There are three key pieces that need to come together to make that happen; an infrastructure that meets people’s capital requirements, a framework to understand ownership of real-world assets, and a bridge between the on-chain and the off-chain world.
We’re at a critical juncture. We have seen two key technology revolutions in the last three decades. The first was the internet and the second smartphones. I believe Blockchain is the third one and will change the world dramatically for the better.