One of the many hats I wear is that of a "community engagement consultant" for the state of Hawaii's Digital Currency Innovation Lab (DCIL).
As you may know, Hawaii has a rather dreadful reputation in the crypto space, as state regulators classify cryptocurrency exchanges like Coinbase, Gemini, and Kraken as "money transmitters," like ye olde Western Union. This classification comes with onerous licensing requirements that prompted most exchanges to refuse servicing customers here.
Unable to change the law, the Division of Financial Institutions (DFI), which is charged with enforcing Hawaii's financial regulations, partnered with the Hawaii Technology Development Corporation (HTDC) to create the DCIL as a pilot program that temporarily allowed participating exchanges to service Hawaii customers without fear of regulatory action, in exchange for statistics on their Hawaii operations.
It's been a successful pilot. Nearly 70,000 Hawaii residents signed up with the exchanges, and have conducted over $600 million in transactions.
But the program sunsets at the end of June this year. The hope is to use the information collected via the pilot to inform legislation to incorporate digital currencies into Hawaii's financial regulatory regime. But if something doesn't pass this current session, the DCIL ends, the exchanges shut down Hawaii accounts, and we're back to square zero.
Its success is not guaranteed, as the path from bill to law is long and convoluted. Key to its becoming law is testimony from the public, which has been pretty sparse. I'm continuing to try and change that.
Essentially, my role is to translate the jargon and technical mumbo jumbo of crypto for members of the public and legislators, who can't be expected to be experts in every field for which they set policy. As a result, I'm often asked to explain Bitcoin and blockchain.
If there was any remaining doubt that crypto had tipped into the mainstream, Super Bowl LVI in February flushed it away. Mixed in among million-dollar ads for pickup trucks and light beer were several commercials from crypto companies — firms and websites inviting the masses to join the exciting new world of Bitcoin, Ethereum, and other digital assets.
These companies enlisted celebrities like LeBron James and famed skeptic Larry David to position crypto as the next big thing, the way of the future, the next technological revolution. The ads, priced at up to $7 million each, were aimed at the majority of Americans – about 84 percent, according to a November 2021 survey by the Pew Research Center — that had not yet dabbled in the cryptocurrency space.
To true believers, the high-profile positioning of crypto was just another milestone in the advancement of a technology behind a market worth more than $3 trillion last year. (At least briefly.)
To naysayers, the hype evoked the dot-com boom of the 2000s, where a sock puppet selling pet food became an icon of the tech industry mere months before the bubble popped and it took more than 15 years for the economy to recover.
And even as mainstream interest has begun to peak, crypto is now known as much for its volatility as it is for its promise. The Super Bowl ads came mere days after yet another dip in the crypto market, which plunged by $1.4 billion as Russia joined China in banning crypto activity. The U.S. dollar price of a single Bitcoin, which peaked at $60,000 in April 2021, was meandering below $40,000 earlier this year.
More notably, technologies related to crypto have also entered rough waters.
Digital collectibles called NFTs are being pitched by everyone, from the NBA to Martha Stewart to Taco Bell. Entire swaths of the technology marketplace are downright hostile to the NFT craze, including gamers, who are still considered by many to be the main arbiters in determining a product’s potential.
And then there’s the metaverse, the latest iteration of virtual reality, which has come around as "the future" every decade since 1970. Now no less than Facebook is betting its future on the space, a bold move that has sparked as much disdain as it has excitement, where talk of a truly free and independent “Web 3.0” is dominated by the same players that control “Web 2.0”
For such a short word, crypto seems to encompass everything that everyone sees as the future, for better or worse. Will it transform world economies and finally give independent creators a chance to make money and control their own destiny? Or is it just the latest massive hype-filled bubble that will eventually crash and again set the tech industry back another decade?
In truth, while the headlines amplify the hype and scandals, the underlying concepts are well established and are already the foundation of many transformative technologies. Any new tech initiative today must take crypto into account — whether to incorporate or avoid it.
Given the frenzy that we’re seeing over crypto today, it’s almost reassuring to learn that the fundamental idea that serves as the basis of all its variants was first proposed in 1991.
In the same year that the first web page went online and Intel introduced its 486 PC processor, two researchers at Bellcore Labs — the software and research spinoff of historic Bell Labs, founded in 1925 — wanted to come up with a way to secure digital documents. Specifically, they wanted to design a way to make it impossible to modify a digital contract, or to verify that such a contract was authentic.
Put more plainly, they were developing a way to timestamp a document so that you could guarantee that its contents were unchanged. Each document had a unique fingerprint that mathematically authenticated its contents. The concept was pitched as useful for every kind of document and information, from bank records to movies.
As with most innovative ideas, this method of trusted authentication was too far ahead of its time. In fact, the patent expired in 2004, never put into practical use.
It wasn’t until 2008 that someone – or a number of someones – took the concept and focused it specifically on the idea of digital currency, or crypto currency. Using the name Satoshi Nakamoto, this still mysterious entity proposed a digital, virtual currency called Bitcoin, published a research whitepaper, and developed the first blockchain database to facilitate it.
To understand Bitcoin the cryptocurrency, then, is to understand blockchain the technology.
At its most basic, a blockchain is a means of storing data or information. Much like a spreadsheet or database of fields and values, a blockchain is a series of blocks of data aligned in sequence — a chain.
There are several characteristics of blockchain data storage that distinguish itself from the Excel spreadsheet on your computer hard drive, however.
First, because a blockchain is arranged in sequence, like a ledger, it becomes a one-way record of data and transactions. Unlike a database of tables, a blockchain presents a timeline, with each complete block essentially “set in stone” and fixed as the blockchain grows longer and longer.
Secondly, a blockchain is distributed, not centralized. Ideally, no one entity owns or controls a blockchain, and there is no single “master copy.” Instead, a blockchain is mirrored, or duplicated, widely and publicly. For Bitcoin, there are over 12,000 nodes, or peer-to-peer copies. Anyone can look up and track the movement of Bitcoin using these copies.
Finally, blockchain relies on complex math to ensure that it is secure. This is where “crypto,” or cryptography, comes into play. Rather than requiring a third-party to authenticate that some chunk of data is valid, the blockchain itself provides a trust model that can be used by anyone to prove that the information is correct.
For example, a given block of data in a blockchain will typically also include two mathematically derived signatures. One of them can be used to verify all of the data in the block, making sure that nothing has been changed. The other signature comes from the previous block in the chain, so its integrity can be verified as well.
This complex math allows for new blocks to be added to the distributed, duplicated chain without relying on a centralized authority. If the math checks out for everyone, consensus is reached and the blockchain continues to grow. More importantly, math ensures that any attempt to change the data will create a cascade of errors down the line as the signatures no longer match.
The first and most prominent blockchain is Bitcoin, which again was specifically designed to function as a currency or medium exchange. The mysterious Nakamoto pitched it as “a new electronic cash system that’s fully peer-to-peer, with no trusted third party.”
Thanks to the blockchain model, Bitcoin cannot be controlled or corrupted by a single entity, relying on cryptography and a peer-to-peer distributed system to ensure that it is secure and sustainable. Bitcoin merely uses blockchain as a public ledger of payments, and the unit of payment is the Bitcoin, itself a cryptographically secured chunk of math.
Nakamoto designed the supply of Bitcoin to be finite, with each newly “minted” coin taking more and more computing power to solve, or to “mine.” (This is why Bitcoin and cryptocurrency are seen as environmental threats.) There are about 19 million Bitcoin in circulation today, and there will ultimately be only 22 million in the end, a milestone estimated to occur in the year 2140.
This limited supply is one of the ways Bitcoin is designed to hold value. The first Bitcoins were worth $0.0008, or eight-hundredths of a cent. A California man famously bought a pizza for 10,000 Bitcoins in 2010. Those Bitcoins would have been worth $600 million last March, when Bitcoin value peaked at $60,000.
To his or their credit, Nakamoto never intended the Bitcoin to be the main unit of payment. He proposed a Satoshi as the smallest unit, worth 1/100,000,000 Bitcoin. That would make 10,000 Satoshi worth about 35 cents earlier this year.
Today, Bitcoin is far and away the most popular and recognized digital currency, with a market cap over $700 billion and seeing more than $25 billion in transactions per day. Bitcoin is accepted as a payment method by dozens of retailers, managed as an asset by banks and investment funds, and addressed by name by the IRS (which classifies virtual currencies as property, with capital gains taxed as with real estate or stocks). Its success, and its decentralized nature, has many calling Bitcoin the end of centralized banking.
And yet, Bitcoin is just the tip of the spear when it comes to digital currency and blockchain technology.
On the cryptocurrency charts, Ether is solidly but distantly in second place behind Bitcoin. But what it lacks as a currency is more than made up for by its underlying blockchain, called Ethereum. Ethereum is decentralized, like Bitcoin, but its blocks are more than just static chunks of data. They can host applications, or executable programs, making the Ethereum blockchain a kind of computing platform or operating system.
The ability to run apps on Ethereum opens up an entirely new dimension in blockchain, demonstrating its potential as more than a secure transaction ledger. These decentralized programs can be accessed and run by anyone, regardless of what devices they use or what jurisdiction they live in.
Blockchain setups like Ethereum also open up the potential of “smart contracts,” simple programs with countless applications. These contracts can execute automatically and in a secure and verifiable way, reducing fraud and disputes and the need for intermediaries like notaries or attorneys. Or even banks.
Ethereum is the forerunner in a movement known as DeFi, or decentralized finance, aimed at creating an entirely new global financing system outside the control of governments or private commercial interests.
Blockchain applications are beginning to achieve the ambitious vision of its first creators at Bellcore Labs. A distributed, verifiable, public ledger could easily be implemented in real estate (sales recording) or agriculture (traceability) or manufacturing (supply chain management), or any existing business or industry.
Of course, for those looking to push the envelope, blockchain and crypto technology is also creating new products.
NFTs, or non-fungible tokens, use blockchain technology to authenticate ownership of digital assets, often compared to virtual baseball cards. And while collecting digital art can be fun, things get messy when it’s pitched as an investment opportunity. Celebrities have famously paid six and seven figures for drawings of cartoon apes. Christie’s auction house sold a collage of photos for $69 million last March.
And then there’s the metaverse, which at first glance is difficult to distinguish from the world pitched in 1990s sci-fi, or by Second Life. The difference this time is blockchain, and decentralization.
The crypto world is changing by the day, and nobody can say which tools and technologies will turn out to be revolutionary and which will fade into obscurity. But one thing is certain: these are still the early days, and we’ve only seen the tip of the iceberg of what blockchain can do.