Blockchain for Beginners


I spent the first part of my presentation
doing an [introduction] about Bitcoin. You may have heard this other term “blockchain.”
It’s on all the posters: “blockchain” and “cryptocurrency.” What on earth is a blockchain?
[How] does it [relate] to Bitcoin? Bitcoin is the foundational technology that started it all.
Bitcoin is the parent and has spawned many children. As a successful technology, it has
created a number of opportunities. When people use the term “blockchain,” they are
referring to one technology that is part of Bitcoin, perhaps the most visible [aspect], which is
the database that stores transactions; The public ledger [is] a list of all
transactions that have happened. It is a decentralized, replicated database, for those
of you who are interested in the technical terms. That is what a blockchain is, but people
don’t use [the word “blockchain” correctly]. People use the term “blockchain” to mean things
that are kind of like Bitcoin, or do what Bitcoin does… “and then some,” other applications
that have nothing to do with money. The banks [say that blockchains] “do some of the
things we do, so we would like to call it a blockchain… to [make it appear as if we are
doing something] innovative.” The consultants go to the banks and say, “You can
[use a blockchain by] doing exactly what you used to do, business-as-usual, without being disrupted at all!” “We are sure that we can make it
work for you, if you pay us enough.” As a result, nobody knows what “blockchain” means.
“Blockchain” is now an industry. We have a saying that the most [popular use case] of
“blockchain” is to go to Silicon Valley, [find a] hotel room, turn off all the lights, stand in front of the mirror,
say, “Blockchain, blockchain, blockchain!” three times. Ten venture capitalists will jump out of the closet
and throw millions of dollars at you. [Laughter] That is true, I have seen it… “Blockchain,” in itself, is meaningless. “Blockchain” is
what we use to say “the technology behind Bitcoin.” [That] is a bit like saying, “Network
is the technology behind Internet.” Of course, if you are in one of the industries
being massively disrupted by the internet, maybe you want to say, “Hey, we can do Network too!” “We don’t want to do the open, public, messy,
unprofitable, freedom-bringing internet.” “We could do Network all day, as long as it is privately
controlled and profitable charging by the minute.” If you think that is just fiction, it is exactly
what happened [with] the internet in the ’90s. The phone companies tried to create private internet,
an internet without any of the interesting things. It was an internet where you needed
a license and registration, an account. Now a lot of companies are trying
to do that with the Bitcoin space. So “blockchain” means some interesting things,
but it also means some not so interesting things. It also means some things that are just attempts by
consultants to confuse people and make some money. I will focus on the interesting things. How do you tell
what a blockchain is and what a blockchain isn’t? What are things that are interesting about Bitcoin?
What are things that are interesting about the internet? Is the internet interesting because it offers “Network”?
Is Bitcoin interesting because it does payments? To me, the interesting things are certain characteristics. What is Bitcoin? Bitcoin is a system of payments that
is open, meaning anyone can access it and participate. Anyone could innovate on this system without
asking for permission. That is what “open” means. It is borderless. There are no borders on
the internet, there are no borders in Bitcoin. The protocol simply does not see distinctions
between countries. [Borders] are meaningless. It is neutral. It doesn’t care if a participant is male or
female, Christian or Muslim, old or young; rich or poor, brown or black or white. The protocol doesn’t care. It is neutral. It validates
transactions, [not characteristics of people using it]. It is decentralized. There is no central point of control. It is censorship-resistant. You cannot freeze [accounts],
cancel or [reverse other people’s transactions]. Those are the things that make Bitcoin interesting.
Arguably, also [what] makes the internet interesting. Right? That is why it is powerful. Other blockchains that also share [some of] those
characteristics. People took the recipe of Bitcoin… and created two or three alternative
coins (“altcoins”) within the first year. Since then, every year, more and
more [alternative coins are created]. Today there are more than 1,500 blockchain-based
systems that use the basic recipe of Bitcoin, variations of those design principles, to create
[platforms for] currency, trade, and various other things. These are blockchain [which] share the
interesting characteristics of Bitcoin. They are open, borderless, neutral, censorship-resistant. Of the 1,500 blockchain-based systems, [most] do not.
I would say more than 90% are worthless. Of those, more than 90% are probably scams, with
their primary purpose being to enrich [the creators]. They see something successful [like
Bitcoin] and they try to rec-reate it. We have seen the emergence of a very large number
of scams that are, in essence, Ponzi schemes. Who is familiar with the term “Ponzi”?
Did you know that is the name of a guy? Mr. Charles Ponzi inadvertently became famous. Multi-layer marketing systems, pyramid schemes… If you try to ‘sell’ Bitcoin to someone, I don’t.
I talk about it as an experimental technology. You should only invest if you really understand how
it works. You should primarily invest in [education], learning the technical skills that can turn into
an innovative industry, a startup, or career. Some [long-term] opportunity for you as an individual. It is not a stock investment. If you hear someone
tell you that this is a “safe, risk-free” investment, or even worse “guaranteed to make you
rich quickly,” run away as fast as you can. Those characteristics are shared by only one category of
investments: scams. Nothing in life is easy or risk-free. Beware, especially in Southeast Asia, where you have
very large numbers of newly middle-class people… entering investment markets for the first time. Scam coins, ponzi schemes, and multi-level
marketing schemes are extremely popular. When you hear, “This is like Bitcoin, only it will make
you rich,” run away. Bitcoin may not make you rich. It can make you poor, quickly. It is a volatile,
experimental system that comes with risks. I am advocating the understanding of this
technology, which is enormously powerful. [I am not advocating] the use of it as a speculative
investment, unless you need & know how to use it. Let’s talk about some of the other systems out there, There are probably about a dozen cryptocurrencies. “Cryptocurrency” is another term we use for these open
blockchains, these public ledgers, systems of trust. Some of them are very explicitly currencies. I will
mention just a few that you may have heard of: Dash, Monero, Ethereum, Zcash, and Litecoin are
cryptocurrencies based on open public ledgers. They represent interesting [developments]
alongside Bitcoin. Many others are growing. I do not recommend that you use those as speculative
investments either, but understand what they do… and how they are different, [to] get a better
picture of this [whole] industry as it emerges. My next book is on Ethereum, which I haven’t talked
much about. How many are familiar with Ethereum? Great, a very large number of people. For those of you who have not heard about Ethereum,
it started [with] a paper published in 2013, by then 19-year-old Vitalik Buterin. I [read] that paper before it became public and
called Vitalik to get some more information about it. I was very skeptical, but I have been interested
ever since. I’m writing my next book on it. The idea behind Ethereum is, if we have this public
ledger that allows [for trustless] computation at scale, how about instead of using it for money,
we use it to run [decentralized applications]? And their results are recorded in a way that is
immutable and trustworthy by all participants? Global, secure, decentralized computation. It has a [coin] called ether, but what [ether]
really allows you to do is run smart contracts, taking contractual arrangements in commercial or
transaction law, encode relationships and obligations… in software programs. ‘If this happens, then do this; else, do that.’ [Taking] a contract written in a human
language, encoding it in software, and then executing that [legal]
program on a global platform. Not money, but it is part of this [trustless] system
based on the same blockchain phenomenon. Blockchains [aren’t] just about money. People have suggested using them for a number of
non-financial applications [where trust is a problem]. One very common application is registration of assets,
the ownership of tangible or non tangible things. This is a big problem in developing nations,
an area where blockchains can have an impact. The registration of title over land,
the ownership of assets like homes. Using a [secure, decentralized] blockchain, it is possible
that if you record something, it cannot be modified. It can be immutable. This [trustless] system prevents
anyone from reversing, overwriting, changing the past. It creates permanence, an immutable record of history.
In a real-estate transaction, that is important. That allows you to independently pass title
of a piece of land from person to person, with no one being able to falsify that
record and steal your land [on paper]. One of the most common forms of
land theft is the falsification of paper. You don’t have to go into someone’s
land with guns and take it from them… if you can [show up at] the local land registry office,
bribe someone to change it into your name, and send the police into their land with
guns to take it from them, on your behalf. That kind of [theft] can be prevented by a blockchain.
Other things are the registration and access to assets. For example, you can have the title of a car,
a boat, or an aircraft registered on the blockchain. We had a discussion in the waiting room
with a gentleman from the airline industry; one of the interesting applications is
the ability to record maintenance records… and parts in a blockchain, [so that] they
cannot be modified. If a plane crashes… I am a private pilot by the way, so this is an
area of interest of me. If a plane crashes… one of the first things you want to do is
look back at the maintenance records, ask “was the jet engine actually inspected after a
thousand hours of operation, like it [should be]?” How can you tell? In the traditional forms,
we have that [information] written down on paper. [Someone] could put a date one month before the crash,
say it was inspected and falsify the record afterwards. You can also falsify a database [entry]
after the fact. Witnesses [may be] unreliable. How do you know what actually happened? A blockchain could allow you to record that an inspection happened; it cannot be modified… or falsified after the fact, cannot be inserted
in the future and pretend to be [from] the past. The same mechanism that is used to create [trustless
systems] for money can be used to record the truth… in a permanent immutable record. These are applications most companies are fascinated
by, beyond money, using the general term “blockchain.” That is the good. Now, let’s talk
about the bad and the ugly. “Blockchain” is also used for a lot of things that do
not have any basis in fact and don’t actually work. [An idea that] has become very fashionable lately
is that you can do a blockchain without bitcoin. As in, “blockchains are good but bitcoin is bad.”
“It is used by criminals, gamblers, degenerates…” “It is just money.” One of the fundamental mechanisms behind the [Bitcoin] blockchain is [proof-of-work for] security. Bitcoin is a decentralized system without a
central point of control by creating a competition… in which those who provide [for the network’s
security] are rewarded in bitcoin, the currency. The bitcoin currency is not just a vehicle for [transferring
value]; it is the basis for the security mechanism, which allows you to have a blockchain operated
and secured by anonymous participants… whose claim to providing security is
the submission [and risking of] energy. In return, they may gain a reward in bitcoin; unless
they try to cheat, in which case they lose everything. That competition, that game [theory],
is the basis of Bitcoin’s security. That system of security allows you to [have a ledger]
managed by everyone, [where] no one is in charge. Here is the problem [with some many blockchain
projects]: if you take away the system of reward, then there is no incentive mechanism for [honesty,
and hence no mechanism for] punishment. If you take away the [incentive] system
[to prevent] cheating, there is no security. Blockchains use a currency because [their]
system of security is based on market forces, on game theory. To use a blockchain without a currency, you [must]
find another way of [incentivising] security. This is where the traditional institutions come in and say,
“I know! How about we assign five trusted institutions, and they validate every block on the blockchain?” “Make it a private blockchain, where
we control and assign who has access.” “If you trust those five institutions, you can trust
the blockchain.” That is business-as-usual. That is a blockchain being used to perpetuate the
system of institutional trust that has failed to scale. Only worse. If you use a blockchain as a closed system,
where trusted is [centrally] assigned [to institutions], if one of those few institutions are compromised… — for example, their keys are stolen — you have
concentrated power in the system and it is not secure. These are the same companies we read
about in the news, when they get hacked. This is who we’re supposed to
trust to run these blockchains? The whole point of Bitcoin’s system of
currency is that it [incentivises] security, [security] that does not depend on
any one individual or institution. If you take the currency away, the security model
disappears. You are [left with] a ledger controlled… by a single entity or a few entities. We have a name for that, it is called a database. Ths is the real question you should ask: how do you evaluate the difference
between a blockchain and bullshit? [Laughter] They both start with a ‘B.’
One of them is real, the other one isn’t. One of them is used as the basis for a $12 billion
global, secure, and decentralized economy; the other thing is [what] consultants [are] trying to sell. How can you tell the difference between
real and not real? Ask the following questions: Is it open? Is it public? Is it borderless?
Is it censorship-resistant? Is it neutral? Can anyone access and use it without permission?
Can anyone innovate on it without permission? If the answer to all of those questions is “yes,” then it has
the values we find so interesting in Bitcoin’s blockchain. For a [small] number of other cryptocurrencies and
blockchains, you can say “yes” [about] those things. But if you can take the entire brochure that describes
a “blockchain,” search-and-replace “blockchain” with… the word “database,” and it still makes sense,
you are not being sold a blockchain. You are being sold a database,
probably by a scam artist. That is the difference between blockchains and bullshit. Thank you! [Applause]

Leave a Reply

Your email address will not be published. Required fields are marked *