Onomy Protocol
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Onomy Protocol

A Complete History of Cryptocurrency

Cryptocurrency is going mainstream. Despite the recent market downstream, we have trillions at stake, thousands of tokens listed, hundreds of comprehensive whitepapers, and potentially millions of first-time investors looking to get a taste. Yet how did we get here? How did our future become guided by nonces and hashes, and out of what maelstrom did this new understanding of value emerge?

Hashing It Out

In the beginning there was the hash. These puzzles, which grind any set of data into one encrypted output, are the backbone that links each block to block, with miners validating each block by solving the hash it emits and thus proving the previous block is accurate.

It was Satoshi Nakamoto, in a singular (we presume) stroke of genius who figured these connecting blocks could be used for a direct, peer-to-peer currency, whose governance and truthfulness could be overseen by a decentralised and widespread network of computers, and thus be unplugged from the levers of control that are exercised over typical fiat currencies by national governments.

It would also, crucially, solve the double-spend problem through its proof-of-work mechanism, a mechanism which also ensures the mathematical ‘impossibility’ of corrupting the transaction ledger. It would be a currency of the people, overseen by everyone who participates, which can never be manipulated. And thus Bitcoin was born, and the cryptocurrency epoch — a vast neon arcade, technological labyrinth and once-in-a-generation gold rush — began.

The Genesis Block

The first block has a message encrypted on it. Satoshi Nakamoto, assumed to be a singular person for this article, although plenty of people believe his identity to be a collective, inscribed a quote. One that will be famous for eternity, should Bitcoin indeed be the currency of our eventually conquered solar system.

“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”

The Chancellor, for non UK readers, was the then Chancellor of the Exchequer Alistair Darling — the head of the UK Treasury. After the 2008 global financial crisis brought the world to its knees, with economic turmoil laying waste to industries left and right, and millions losing their jobs and homes. The banks, who had violently leveraged the economy with lightly regulated casino hustle, became insolvent — and the knock on effects shattered the prosperity of the early millenia. Governments around the world, terrified of the ongoing damage, mortgaged their treasuries to the hilt to stop more banks collapsing. To finance this, many began a program of quantitative easing: printing money, lots of money. People saw savings devalued as the government raced to overcome the liquidity crunch. This has never stopped. Only now, nearly fourteen years on, are governments considering raising interest rates, to try and sever the economies addiction to the joy of cheap credit,

And people were angry. The banks, whose avarice and disregard caused all this, effectively got away with barely a slap on the wrist. Films like the Big Short and Margin Call, who called the banks and hedge firms out on their practices, were well received but ultimately ignored. At the end of the Big Short, Mark Baum says ‘It will all happen again. Nothing will change’. And it didn’t. Yet don’t be alarmed, to quote Jeremy Irons at the end of Margin Call ‘It’s just money. It’s made up.

Satoshi knew that the bailout was not a news event, but rather an eternal truth. You must bear responsibility for your failures. The system does not.

Ten years ago, the first blockchain transaction was made, with Satoshi sending 50 BTC to Hal Finney, who is often suggested to be Satoshi himself. And history began. At this early stage, there was no thought that Bitcoin would become what it did. So how did we get here?

How Bitcoin Became a Port in Financial Storms

The aggressive fiscal levers used to bandage the 2008 crash has never stopped. In the last two years, the US Federal Reserve has printed well over half the U.S dollars that have ever been in existence. Satoshi designed Bitcoin in such a way as to be both deflationary and a full-reserve (rather than fractional reserve) system. With only 21 million Bitcoin ever available, there is a hard-coded terminus to the money supply. What’s more, each block gets harder and harder to mine.

Proponents of Bitcoin argue that this creates a dual-stability, where the wealth of the people can’t be eroded by the diktat of the state, and where money cannot be magicked into being, and all wealth lent out is at the conscious consent of the wealth-owner, rather than the current situation where your $100 can be used by the bank as collateral to borrow $1000 that is then used to gamble on Indonesian housing futures, or anything else for that matter. The second stability is decentralisation. With Bitcoin, no Chancellor can ever unilaterally adjust the money supply.

Decentralisation, and the ability to be able to have a functioning money system that never has to pass through a financial institution, is the second great innovation of cryptocurrency. It’s also the innovation that has spawned a thousand new use-cases. If we can decentralise money, what else can these DLTs (distributed ledger technologies) be used for? On evidence, much of this is still being worked out — but we will look at examples later of how cryptocurrency has evolved to encompass a vast range of possibilities that go far beyond just the transferral of value.

Decentralisation is also where crypto gets its Libertarian streak from. It’s well known some of the biggest early supporters, and indeed Nakamoto himself, were fervent advocates for the lessening of the state’s role in an individual’s life.

So, with the birth of Bitcoin, we got the cryptocurrency markets. Made of things like smart contracts and Metaverses, where geeky kids are turned into massive winners and even the dice rollers get great scoops of the trough, but to what end?

Luckily, we evolved past the casino narrative. Cryptocurrency is constructing a new social contract, a new way to assign value between us all, and by doing so, rearranging the social bonds, and the overseers who govern them, by creating, ‘a peer to peer electronic cash system’.

Hey Bit Spender! Pizza Purchases, Gamers, and HODLers

The early days of crypto were full of smart people, HODLs, and those who just wanted to access Silk Road, or purchase in-game items or hacks. The true early adopters though were the spenders. For all the laughter, the man who spent 10,000 bitcoins on two pizzas has done far more for the growth of the crypto markets than any latter day whale investor.

There have been many tales: burnt out hard-drives, forgotten seed phrases, and boating accidents, contributing to lost crypto. Some of which would now be worth hundreds of millions of dollars. One such tale of woe is the man whose hard drive is in landfill, and is willing to share half the funds if it is ever recovered. So far, the council has refused to let him look for it. The libertarian ethos of crypto means taking personal agency for your funds in the form of your private key. Indeed, the wastage effect was built into the deflationary model from the start, with lost coins driving the overall price up.

The term HODL comes from a typo on an early bitcoin forum. One person, down on their luck after a hard day, slammed the keyboard in a drunken tirade during an early lemming manoeuvre by Bitcoin and birthed not just a meme, but sage investment advice that penetrated in the consciousness of many young people who buy and invest in crypto today. For all its wild volatility and trader bros, cryptocurrency has a powerful retail contingent that is happy to just clutch their coins close and enjoy the occasional 10,000% returns.

Early Trading, Exchanges and The Mt Gox Hack

Buying and selling Bitcoin early on was hard. If you were not mining yourself, or earning it by doing surveys on random websites, you either had to send money to an anonymous PayPal and hope to get Bitcoin in return (and to be fair to most of these early merchants, you almost always did), or use an exchange.

Centralised exchanges are somewhat anathemic to crypto’s original vision as a peer-to-peer exchange mechanism with no financial institution in between. CEXs take custody of your crypto (or your fiat) and let you buy and sell crypto at instant pace. This opens the door to more familiar daytrading, speculation, and options-exchange that you see in the traditional markets.

If you can trust the CEX, many argue it’s no problem. Others would say Satoshi, if he is indeed dead, would be rolling in his grave. However a brutal reminder of the importance of on-chain self-custody of your wealth was coming.

Mt Gox was the largest Bitcoin exchange. Started in 2010, by 2013 it was handling 70% of all Bitcoin transactions worldwide. Bitcoin itself was on one of its biggest bull runs up to that point and Mt Gox was the go-to destination for trading. The future looked bright.

Until the hack. The thing about giving your keys to exchange is, as well as trusting them, you have to trust they are keeping it safe for you and that they’d prepared for every eventuality. In Mt Gox’s case, they did not. Their user database was leaked, and the hacker began buying Bitcoin for as little as one cent each by manipulating the exchange’s central computer. The hacker also stole from Mt Gox’s central account, as well as burning a large amount of tokens by sending it to a dead address. Mt Gox scrambled to recover the funds in time, but it was too late.

Thousands of their users lost their investments, and the price of Bitcoin crashed off the back of the event — with trust broken in the ability to trade it safely, especially considering how popular and central Mt Gox was to the trading scene at the time. This was the first major ‘crypto winter’, when faith in the market, which was still very young, crashed as a whole, and it was a jarring blow to the early adoption of crypto.

The Rise of Stablecoins: Reserves, Algorithms and Crypto-Collateral

The perma-volatility of early crypto markets and the friction in confidence created by trying to trade assets whose prices jittered on the daily led to the need for some way to store crypto-value to a notional ‘peg’, a holding-pattern currency that would give people a way to move their assets into a safe store of value that didn’t require ‘off-ramping’ — i.e, exchanging crypto assets back for fiat.

Into this breach stepped Tether, the first widely used stablecoin and to this day the one with the largest market cap. Tether’s goal was to create a reserve-backed cryptocurrency, where each issued token has a corresponding real world asset — like stocks, bonds or fiat — backing up its redemption value. Tether proved wildly popular and was a major catalyst in the creation of a more robust trading market on early crypto exchanges.

Since Tether’s inception, and alternatives like USDC and BUSD, there have been other movements to create a ‘pegged’ value cryptocurrency that does not need fiat backing, and retains the decentralised ethos. Prominent examples include MakerDAO, which uses crypto-collateral of all kinds to issue DAI, a dollar-pegged token, and TerraLuna, which has an mint-and-burn algorithm link with LUNA ( its collateral currency) for its stablecoin UST.

Onomy Protocol will converge the Forex market with DeFi through decentralised and crypto-collateralized stablecoins pegged to the world’s major currencies. No fiat collateral, no central issuer, no subjective control over coin emission. By sending $NOM to the Onomy Reserve (ORES), users will be able to mint stablecoins of any denomination they require. This opens up the ability for stablecoins to be used for ultra-cheap, ultra-fast international remittance, as well as breaking open the foreign exchange market, and moving it on-chain, for people of all nations to freely deploy their holdings to the emerging world of decentralised finance.

Ethereum: “Smart Contracts”, Oracles, and Decentralised Exchanges

Ethereum is considered the dawn of the second wave of crypto adoption. Building on the work of Nick Szabo, who proposed the concept of a smart contract back in 1994, Vitalik Buterin and his merry men (the founding team of Ethereum has gone on to instigate current top ten coins like Polkadot and Cardano) formulated that why should decentralised, trustless ledgers be only used for cash? The ability to generate trust through random parties through a trustless network, and to have blocks hold data in such a way that, should specific preconditions of an arrangement be met, and their veracity validated by the blockchain, then ‘contracts’ could be formed as a result — with no third party having to enforce it.

This concept opens the door to complex arrangements, such as fundraising towards a specific goal being safely enacted without having to hold the funds in a third party escrow account, or having to trust that preconditions are set. In effect, the Ethereum virtual machine (EVM) is a vast, decentralised supercomputer processing complex contracts on a distributed ledger.

Smart contracts changed the blockchain and DLTs from a simple ‘currency’ to something far more complex. With smart contracts, the possibility for more complex financial instruments existing on the blockchain became real. Ethereum was the first major cryptocurrency that implemented this as part of its codebase. The functionality meant that, rather than the singular function of transactions, the blockchain could play host to dApps — decentralised applications that could perform a wide range of operations, as long as their contracts and tokens complied with the set standards.

This includes, but is not limited to, decentralised exchanges of value, gaming ecosystems, and artwork verification (in the form of NFTs). It also opened the door to yield-bearing instruments, as the ability to loan and borrow crypto could be trustlessly overseen. With it, DeFi was born — but it would take several years before its full functionality was unlocked.

The scars of the Mt Gox hack had led to a much more keen awareness on the importance of on-chain trading. With smart contracts, decentralised exchanges, or DEXs, were possible. The smart contract technology could be leveraged to create an automated market maker (AMM). By creating ‘liquidity pools’, a pair or pot of tokens whose price adjusts depending on the ratio between the two in the pool, users could trade with no central authority.

These on-chain transactions returned crypto to the vision of ‘peer-to-peer’ value exchange, while also giving holders of tokens a chance to become market makers themselves and earn yield on their tokens, opening up the possibilities for financial instrumentation that has made institutions, in 2022, so keen on crypto. DEXs, like early pioneer Uniswap, are not without their issues. Ethereum, whose smart contracts and ERC-20 standard act as the foundation for this activity, is expensive to use, and the lack of a gatekeeper (anyone can create a pool) means anyone can create a token and tender it out to sale.

Still, for many in crypto, it’s a far better way to transact and trade, and once DEXs which can supply this functionality at a low price, while also offering orderbook features that you would find on exchanges, then a full-scale migration away from CEXs will occur, onboarding billions into crypto.

To execute, smart contracts need data. On-chain data is comparatively ‘easy’, you can simply read another smart contract and feed the data in — as long as it complies to the standard of the blockchain it is on. Far harder is getting ‘off-chain’ data onto the blockchain in the same trustless, decentralised manner that makes cryptocurrency work. If you had a smart contract that triggers appropriately when the winner of a horse race comes in, or if the weather hits a certain temperature, it’s far harder to do. How do you trust the information? This is where ‘Oracles’ come in. Oracles are networks of computers that collaboratively verify off-chain information and feed it into the blockchain.

Despite these advances, they were still in their infancy in 2017. At that point, people were still into their currency, and their ‘magic internet money’, and Bitcoin’s extraordinary investment return between 2009 and 2017 from less than a dollar to over $22,000 led to a cascade of copycats, before the resultant fallout led to the second crypto winter.

The ICO Boom and Birth of Meme Tokens

ICO, or initial coin offering, is a process whereby a crypto is minted (called a token generation event) and then offered out to the public for sale through a website or other portal. The extravagant returns made by Bitcoin led to many retail investors looking for the ‘next big thing.’ It did not take long before a deluge of token launches, hyped up by twitch streamers, 4chan forums, and anyone with an audience, hit the market.

The difference is, rather than being mined over time, these coins were dumped wholesale on the market in the hopes of cutting through the noise. Famous examples like Waltonchain, Big Brain Chain and Verge had their supporters stirred into a wild frenzy about unseating bitcoin and being the ‘currency of the future’. The insane hype that accompanied these launches led to vertiginous upswings as — egged on by their favourite internet personalities — retail consumers looked for the ‘next Bitcoin’. In 2017, the ‘ICO boom’ took place. 2017 was Bitcoin’s best year yet, and mainstream interest in cryptocurrencies reached fever pitch.

Of course, it ended in tears. These blockchains, although their technology was often the equal or better of bitcoin (crypto’s dirty secret is that it’s not actually that difficult to create a simple, functioning currency with a few weeks work), had no principles behind them. Their early token supply was often majority held by a few, select individuals who either created or hyped the project, before then dumping their tokens on the retail market — in what is referred to as a ‘rug-pull’. The sourness and bitterness this created among huge sections of retail caused a grievous wound to many’s confidence in this bright new technological innovation, and created a distrust in cryptocurrency that still — in part rightly — exists today.

Meme tokens — tokens with no ‘inherent value’ (whatever that actually means) but which tap into humanity’s capacity to laugh at itself — still exist to this day. Some are benign, a simple joke that people can buy to share. Others are carefully designed to fleece any guileless investor which comes across them. And others, like Dogecoin, were simply made to prove a point, or ‘a joke’, with rampant inflation built into the token as a knowing counterpoint to Bitcoin’s deflationary economics. Shibetoshi Nakamoto, or Billy Marcus, created the dog-themed crypto in 2013 as a direct riposte to those who said that creating a currency was difficult, in the interest of showing people how many people with darker intent could do it. He presaged the ICO boom tears by four years.

Of course, the metaverse is not without its sense of irony, and Dogecoin’s popularity has skyrocketed since its inception in 2013. Its success remains. In 2022, it is still a top twenty cryptocurrency, and has spawned a vast legion of copycat tokens (some of which like Shiba Inu have seen meteoric success). Of course, Doge wouldn’t be where it’s at without having a cheerleader in Elon Musk, but it remains a telling reminder of humanity’s eternal affection for man’s best friend. The lesson it tried to teach, sadly, was lost. And to this day nefarious ‘rug-pulls’ like Squid Game token continue unabated in the crypto markets, with investors finding themselves unable to sell their tokens while the founders get rich.

These days, ICOs are not commonly used. The potential for manipulation is too great. There are a variety of new ways coins are offered to the market. IDOs (initial dex offerings), IEOs (initial exchange offerings) and airdrops to users have come to the fore. With IDOs, tokens are sold at a specific price and then pools are set up on an decentralised exchange that users can interact with, quickly establishing a fair market price for the new token. IEOs give the reins of the sale over to a CEX, who hold the liquidity to ensure that a token sale goes smoothly. Airdrops are when active users of a protocol are given the token for free to put it into market circulation, the most notable of which was Uniswaps’s airdrop to anyone who had used the dApp once.

Onomy will use a Bonding Curve, which is ideal for sustained organic growth. Whereas the aforementioned methods all have a ‘big moment’, where hype — and price action — are squashed into a small and unsustainable window, a BCO works by establishing a relationship between supply and price through AMM contracts. They provide an instant market with liquidity, rather than a static-priced sale that leads to liquidity anxiety and post-launch dumps. In Onomy’s BCO, liquidity is only taken out of the Bonding Curve once the minted tokens are bridged over from Ethereum to the Onomy Network, as to allow simple trading of the token.

DeFi and Layer 2 Tech

After the ICO Boom and the damage it caused, and Bitcoin’s companion collapse from the 2017 high of $22,000 to a low of $3,000, interest in the crypto markets cooled off among the general public. The media still branded cryptocurrency as a whole as a ‘scam’ (and after the ICO boom, with good reason), and there was mainstream opinion that Bitcoin’s time was up, and cryptocurrencies were due to go away.

Others knew better. DEXs, oracles and smart contracts started evolving rapidly between 2017 and 2019. Bitcoin, despite its massive loss of asset-value, began to climb again — albeit slowly, over these two years. As the crypto community became accustomed to this new technology and began to put it to better use.

Nowhere was this more apparent than the arrival of DeFi, decentralised finance, into the crypto markets. If crypto could replace cash, why not just replace the entire banking system as well? This is the idea behind DeFi, that a decentralised network of users can become the bank — issuing loans, credit, and financing for projects through collaboration with the goal of earning interest.

The economic efficiencies of the blockchain create a way to do finance without the vast wastage implicit in the international banking network, and thus unlocks more yield for lenders, better saving rates for depositors, and better rates of interest for borrowers. For institutions, rather than being afraid of this emerging technology, are starting to take note about how their own asset pools could be more effectively farmed out thanks to these advancements in blockchain technology. 2020 was the year of DeFi, and many credit the innovation as instigating Bitcoin’s 2021 march to an all-time high, which remains the flagship currency for the crypto market, and market mover.

DeFi is still evolving. The current narrative of ‘Defi 2.0’ has been criticised. Whereas initial DeFi projects used efficiency to provide incredible yields, recent DeFi projects have offered thousands of percentages in APY to users. Nothing is that efficient without breaking money itself, and there is genuine fear that newer, so-called degen, DeFi initiatives and their yield-farms are nothing more than glorified ponzi schemes in blockchain clothing.

The Problem of Scale

The resultant pressure on the Ethereum network, though, was catastrophic — and has done much to ‘lock out’ modest investors from DeFi’s possibilities. This is due to the expensive gas fees on Ethereum, and the fact this ancient monolithic architecture has transaction speeds that are entirely unsuited to the world of razor sharp finance. This in turn has led to a proliferation of layer 2 protocols. These protocols aim to beef up transaction speed and reduce the costs of using Ethereum by moving transactional volume off-chain.

There are a plethora of methods to do this, all of which have seen varying success. Layer 2 chains like Polygon and Arbitrum have been vaunted as Ethereum’s saviour, because ETH, as it currently sits, is broken for general use when demand and usage spikes. Layer 2 solutions seek to take the main pain of validation off the Ethereum mainnet by using ‘sidechains’. The sidechain computes all the transactions and validates their authenticity securely, before then sending them to Ethereum for validation within one block.

So far, they have had success, but we’ve recently seen brand new layer 1 chains building on different architectures, and thus capable of computing plenty of transactions efficiently without relying on extra layers.

The rise of Layer 2 is a direct response to the ‘blockchain trilemma’, coined by Ethereum founder Vitalik Buterin. Put simply, the trilemma states that Ethereum can have two of scalability, security, and decentralisation — but not all three, as increasing scalability (in a decentralised manner) puts security at risk. Most projects, with current technology, focus on two out of three — and layer 2 solutions to a blockchain helps to scale secure, decentralised blockchains to power up their utility without sacrifice.

Of course, the need for a ‘secondary blockchain’ to make good on ETH’s promise has led to rivals seeking to displace Ethereum by solving the trilemma out the gates. These ‘ETH killers’ seek to create layer 1 solutions that solve the blockchain trilemma without the need for a layer 2. Prominent examples include Cosmos-based application-specific blockchains which are built for clear purposes, and are thus able to accommodate whatever the protocol demands (like Onomy), or the well-known NEAR, Avalanche, Solana, which rely on different consensus & scalability mechanics, like sharding, subnets, and proof of history.

Some believe that Ethereum remains the only institutional chain, whereas the other L1s are only feasible for retail traders looking to escape high fees. We argue that the chain you interact with will grow less important, granted that we’re headed towards a future where most blockchain ecosystems are interconnected through bridges, and where inter-chain trading and cross-chain asset storage are the norm. At Onomy, we are building for that future, with all products designed to be interoperable with the wider blockchain universe.

NFTs and the Metaverse

If 2020 was the year of DeFi, then 2021 was the year of the NFT. The ability to ‘mint’ artwork — i.e generate a code of ownership that can be left immutable on the blockchain, has left many flabbergasted. How, in god’s name, is this low-res jpeg of an ape or pixel art of a punk worth millions and millions of dollars? Why is someone buying Jack Dorsey’s first tweet for over $3 million dollars?

NFTs are the first wave of tokenized asset holding that extends beyond simple ‘fungible’ assets like money, and into a more nebulous class. With the ability to write ownership onto the blockchain for any conceivable thing — regardless of the ‘real-world’ value it might have — it has generated a new conception of cryptocurrency as an opportunity to tokenize a huge variety of different incipient asset classes. Although right now it’s pixel art and jpegs, the fact that the backend utility for all these non-fungible tokens can be unlocked at once the technology for them has come of age, has led to a new speculative gold rush similar to what was seen during the ICO boom.

Because that’s what the future might be. Although still speculative, the ‘Metaverse’ — first coined by Neal Stephenson’s legendary cyberpunk novel Snow Crash — will create an arena for NFTs to thrive. Their ability to represent avatars, virtual land, and video game skins has created a new way to thrust value into the hands of crypto users. Play-to-Earn gaming is a new trend that promises to use NFTs and the ownership they confer to generate value for the people who spend time in the ecosystems they power.

Multi-chain, Cross-Chain, And the Need to Connect the Blocks

Vitalk said the future is multi-chain, not cross-chain. Others would stridently disagree. The fact remains that blockchains do not talk to each other very well. The next challenge for cryptocurrency is to be able to bridge information (or data-value) more effectively between the huge profusion of blockchains that are currently on the market. By creating effective, secure bridges, the opportunities for exponential growth as blockchain utilities can be paired effectively is obvious.

If these bridges are centralised, and there is a crypto-Charon asking for a palm of silver to cross the river, then the ability for Web3 to remain user-built is threatened as core bottlenecks emerge, and single point of failure attack vectors are created. However, decentralised bridges, where the responsibility for the transfer of data-value is spread widely, can usher in a healthy cross-chain blockchain economy.

Blockchains that are built from the ground up to communicate with each other, for example those which are IBC-enabled, as the Onomy Network will be, and those who build bi-directional bridges, as the Onomy Network has, will connect distant stars and sprout heated inter-chain commerce.

What’s Next?

People have spoken at length about the moment crypto gains ‘mass adoption’, where speculation meets real world usage and crypto becomes a fundamental pillar of our day-to-day lives. We are not there yet, but we are growing exceptionally close.

We believe the golden opportunity for mass-adoption resides within our reach. Firstly, DeFi can shake up the oblique foreign exchange markets and provide an on-chain way to trade foreign currencies that opens up new means of interacting with your capital. Secondly, the decentralised user experience has to exceed that of centralised enterprises, whilst offering self fund custody, efficiency, on-chain trading, and support for advanced features. Then, we need a better wallet. Not one for every blockchain, but one for all blockchains, where all assets are stored no matter the chain. Only then can we expect the world’s trillions to flow into DeFi, unlocking novel opportunities for the unbanked, and putting traditional institutions who refuse to advance out of business.

Think of it like the golden ratio, that ultimate formula which equals to success no matter the external pressure. The context to Onomy has commenced with the genesis of bitcoin in 2008. It is now time to go mainstream.

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