Bitcoin: The “Big Bang” of Blockchain

It’s one of the great mysteries of history: who invented bitcoin?

On Halloween 2008, a costumed character going by the name of Satoshi Nakamoto released a white paper called “Bitcoin: A Peer-to-Peer Electronic Cash System.”² To this day, no one has ever discovered who was behind the mask.

In the paper, the anonymous author painted a vision for a new kind of “e-cash” that could be sent worldwide as easily as sending an email: in short, moving money from paper money to digital money.

Like many blockchain pioneers who were to follow, Satoshi attracted a small band of developers and enthusiasts who were attracted to both the technical challenge and the political ramifications of a money developed “by the people, for the people.” This early community helped test and develop the bitcoin software, set up the first bitcoin network, and create (or mine) the first bitcoin.

Mine: The process of earning bitcoin by contributing computing power to the network.

At this point, bitcoin had no real value. For most of the early enthusiasts, it was a hobby, an interesting experiment. But as the size of the community and the codebase grew larger, those early pioneers began to excitedly whisper: what if this bitcoin actually became valuable? What if this was not just a geeky techno-libertarian project, but, like, real money?

Why Bitcoin Has Value

In 2010, one of these early community members, Laszlo Hanyecz, conducted a landmark experiment. To prove bitcoin had real-world value, he suggested using bitcoin to make a real-world purchase: a couple of pizzas. He sent bitcoin to another early enthusiast, Jeremy Sturdivant, who arranged to have two pizzas delivered to Hanyecz’s house. To pay for the pizzas, Hanyecz sent Sturdivant the somewhat arbitrary number of 10,000 bitcoin.

Seven years later, those pizzas would be worth $100 million.

The experiment proved that bitcoin had real-world value: that is, people would accept bitcoin as payment, and assign a value to this money in US dollars. The post-pizza price of bitcoin began to take off: within 10 days, users were willing to buy and sell a single bitcoin for $.08 each.³

Satoshi’s dream of digital money was coming true! The reclusive programmer continued to work tirelessly behind the scenes, suggesting changes, making improvements, managing the scrappy team of volunteer developers. Mysteriously, Satoshi communicated only via email or message boards; no one ever met the creator of bitcoin face to face.

Later that year, Satoshi began handing over all the source code for bitcoin to the top developers…and then vanished.

Satoshi left behind accounts worth some 1 million bitcoin (BTC), which seven years later would be worth nearly $20 billion. To this day, no one knows the identity of Satoshi, or even whether Satoshi really exists. (Competing theories hold Satoshi to be a woman, a group, or even a government.)

It’s a remarkable origin story, because it’s absolutely true. And it teaches us one of our first lessons about successful blockchain projects: have a good origin story. The story of your blockchain project is how you get people interested in joining your blockchain. And getting people to join your blockchain, as we shall shortly see, is the primary challenge facing blockchain leaders.

Blockchain begins with bitcoin. If blockchain is the Internet of Money, bitcoin was the first money to start flowing on it.

Within your enterprise, you also have “money,” if we broadly define money as being “units of value.” Perhaps your “money” is customer reward points. Or data shared between vendors in your supply chain. Or maybe it’s actual money, flowing between international offices or through a global network of customers. Wherever money (i.e., value) is flowing, there is a potential opportunity for blockchain. Blockchain begins with bitcoin, not just because it’s the most successful blockchain project to date, but because it provides some excellent lessons on how to build your own successful blockchain project.

How Bitcoin Works

It’s easiest to think of bitcoin as peer-to-peer money.

Peer-to-Peer (P2P) Money: Money that can be sent between users, without having to go through a central bank.

If you’ve never used bitcoin, the best way to understand it is to buy a little bit. (It’s a business expense.) Even if you invest only $100, you’ll learn a great deal just from the process of buying it. You can purchase any amount of bitcoin through a service like Coinbase, which will convert your US dollars into bitcoin, depositing the bitcoin in a digital wallet (like an online banking account).

From there, you can send bitcoin anywhere around the globe, as easily as sending email. Your digital wallet comes with a public key (like an email address) and a private key (like a password). To send bitcoin to someone else, you enter their public key , then your private key , and the money is transferred.

No banks. Peer-to-peer money.

Peer-to-peer money has the potential to radically disrupt the world economy. Think back to how P2P file-sharing services like Napster changed the game for music and software companies: no longer was Sony or Disney the single point of distribution. Now anyone could download their latest album or videogame by simply connecting to the Napster network, which was run by millions of users running the Napster software. Anyone running Napster became a node in the global file-sharing network.

Node: Broadly speaking, a single computer within a blockchain network.

If you wanted to download from Napster, in other words, you also became a Napster node. (Read that sentence again.) This meant that when you started up the software, you weren’t just a “taker,” you were also a “giver.” Suppose that you downloaded the latest Metallica album. As long as you kept Napster running, other people could start downloading from you.

Napster solved the user adoption problem by making every user a contributor: as you were downloading an album, you were also sharing that album with anyone else who wanted it. By making every user a node, the Napster network exploded like a wildly contagious virus.

Similarly, Satoshi’s original white paper outlined a plan for P2P money, where anyone running the bitcoin software would become a node in the network, effectively decentralizing the network and protecting it from interference by centralized governments or banks. No one would “own” the network, so no one could shut it down. Figure 1-3 shows the difference.

Figure 1-3. Centralized money versus decentralized money

Decentralized: Shared among nodes, with no central authority. Think peer-to-peer software, rumors, potluck dinners, memes, or a catchy song.

This was not just a political statement. Earlier experiments with digital money had failed, either through lack of user adoption (DigiCash in 1998)⁴ or through legal battles with the United States government (E-gold in 2006).⁵ What made Satoshi’s vision different was this idea of peer-to-peer money. It would spread naturally across the planet, and no government would be able to shut it down. Bitcoin would be decentralized.

The Decentralized Ledger

But here we run into a problem: Money has value, and that value needs to be recorded somewhere. We want to know where the money is, and where it’s been. If I pay you a million dollars, I want a receipt. And you want to know that the money landed in your bank account.

Broadly speaking, this is the practice of accounting—and traditionally, we keep track of money in accounting ledgers. Anywhere we keep track of money—Excel files, QuickBooks, even an old-school checkbook—is an accounting ledger.

Accounting ledgers: A central repository for all accounting data (the inflows and outflows of money). Blockchain uses decentralized accounting ledgers, which has both advantages (more trustworthy) and disadvantages (lots of coordination).

Traditionally, these accounting ledgers have been centralized, meaning they’re held by one central party: you, your accountant, your bank. They all work on the basic accounting principle of credits and debits, or inflows and outflows of money.

For example, let’s imagine that Alice transfers one million dollars to Bob, as depicted in Figure 1-4.

Figure 1-4. Alice transfers $1 million to Bob

With blockchain, we are dealing with a decentralized ledger, meaning that it’s not kept on Bob’s computer or a single bank account. So where do we record that transfer? There is no QuickBooks file to record the transaction, just a massive shared database spread across hundreds of nodes. How does the blockchain system “know” that Bob now owns the bitcoin?

Here’s where we make the mental shift to blockchain, to go from paper to digital. Blockchain is a different method of accounting: we write each transaction to a block of data and then “chain” those blocks together, as shown in Figure 1-5.

Figure 1-5. Alice transfers $1 million to Bob, as we’d represent it on a blockchain

Imagine a long line of wooden blocks connected sequentially by chains. Each time a bitcoin is transferred, we engrave this transaction in a new block and then chain this block onto the end of the line. This digital system has benefits over paper:

Unlike an old-fashioned paper checkbook, we can’t go back and erase an entry.

Unlike QuickBooks, we can’t overwrite the file.

Unlike an accounting firm, we can’t convince them to “cook the books.”

With blockchain technology, we have a permanent—or immutable—record of Alice’s transfer to Bob.

Immutable: Permanent.

But how does this information make it back to the nodes? Through a process called consensus. Think of the way a domain name is gradually replicated to domain name servers around the world. Within 24 hours, a website can be up and running at a new address, thanks to the cooperation between thousands of independent domain name servers, functioning like internet nodes that check and agree with one another, as demonstrated in Figure 1-6.

Figure 1-6. A new website domain replicating to domain name servers around the world

Consensus: The way nodes come to “agree” on who paid what to whom. (More on this later.)

This is why, far from being sketchy or dangerous, blockchain-based money is actually more trustworthy than traditional money. As we all know from spy movies, paper money can be exchanged anonymously in the lower levels of parking garages. With blockchain, we can trust the transaction (there’s a permanent record of it), and we even know who made it (their digital address).

We often fear what we do not understand. In the early 2000s, as the technology industry began to experiment with ecommerce, the dominant thinking was that consumers will never trust the internet with their credit cards. Hackers! Criminals! Spies! There was no way the average consumers, who could barely figure out the internet, would trust it with their credit cards.

Today, this idea seems funny, but it’s the same “crisis of confidence” that blockchain must overcome. Like the internet in 1995 or ecommerce in 2000, blockchain is still difficult to use. But in five years, it will likely be “just the way things are done.”

Satoshi’s masterstroke was to combine P2P file sharing (which allowed the network to spread rapidly) with decentralized ledger technology (which allowed money transfers to stay safe and secure). By mashing up these two technologies, Satoshi provided an incentive for users to build the network, by rewarding them with small amounts of bitcoin (which they now trusted) for hosting a node in the network (which was now exploding).

And as the size of the network grew, so did the price of a single bitcoin: from $.08 in 2010, to $800 in 2014, to $8,000 in 2017. This created a virtuous circle: as bitcoin soared in price, the bitcoin network soared in size and power.

Satoshi’s blockchain experiment was working. More important, it was paving the way for the next big innovation in blockchain.

Blockchain Is a Platform

“So…what is blockchain?”

This is the question the enterprise technology manager will need to answer, again and again. “The Internet of Money,”as we’ve discussed so far in this chapter, is a good quick answer (and it fits on a T-shirt!), but technology leaders will want to dig deeper.

Let’s now unpack “The Internet of Money” to say that blockchain is a platform for sharing value.

As the price of bitcoin began to rise, developers realized bitcoin wasn’t the only game in town. Because bitcoin was open source, developers rushed to build their own spinoff projects, essentially “minting their own money.”

Some of these “alternatives to bitcoin” (or altcoins) began to build their own passionate communities—and because the value of a blockchain is directly correlated with the number of people using a blockchain,⁶ some of these altcoins are today worth billions of dollars.

Altcoins: Alternatives to bitcoin, also called cryptocurrencies. Top altcoins include Ethereum, Ripple, and Litecoin. (See CoinMarketCap.com.)

An ecosystem of digital exchanges quickly emerged, allowing users to buy and sell these new altcoins. While skeptics scoffed that altcoins had any value, a new class of “digital traders” started trading them anyway. As the industry matured, the market capitalization (or total value) of these new “digital assets” swelled, and today stands at about $250 billion.

Today, the question for technology leaders is this: where do my stakeholders need to share value? It’s helpful to think of an enterprise blockchain project as creating a kind of “digital money” or “digital value.”

These units of value are variously called “coins” or “tokens,” but it doesn’t matter what you call them; what matters is how users perceive them. What the first explosion of altcoins taught us is that blockchain projects will have the best chance of user adoption if users perceive they are receiving something of value.

In other words, even if you don’t call them money, think about them like money.

The creation of any type of money involves many players besides the “buyer” and the “seller”: you’ll need banks, payment rails, accounting systems, and so on. Similarly, the creation of digital money (or digital value) on the blockchain platform typically involves an ecosystem of players. We explore these in Chapter 2.