A smart contract is just like a normal contract between two parties. There are terms and conditions that each party must follow.
The Blockchain 101: The Origin of Blockchain
Right now, cryptocurrency is everywhere. But what is it, and what is the underlying blockchain technology?
Every year, slowly but surely, you have noticed cryptocurrency slip into more conversations — meetings, the headlines and even the family dinner table.
Much of it is shrouded in pure speculation around buying cryptocurrencies and who in our network is a newly minted millionaire because of their investments in it.
But it’s not the most important part of this emerging frontier.
The real excitement begins when you understand the new systems and business models that its underlying technology, the blockchain, allows us to create.
The topic of blockchains can be complicated and often people without technical knowledge are turned off or overwhelmed by jargon and pretence before they even get started.
At Aura Ventures, we’re aiming to make the journey of understanding blockchain simple. Most content available on the internet is either too complex or too basic. We have written a 10 part series that explains complex concepts about the blockchain in plain English with analogies and stories.
Part 1: The Origin of Blockchain
The first time most people hear the word “blockchain” is likely because of Bitcoin. Bitcoin is the first mainstream manifestation of blockchain’s potential. Since the publication of its whitepaper in 2008 by the pseudonymous Satoshi Nakamoto, those nine pages have inspired thousands of other cryptocurrencies like Ethereum, Solana, Avalanche & Terra.
But to fully appreciate its place in technology’s history, it is important to highlight the various revolutionary advancements in cryptography, peer-to-peer networks and market events that led to the launch of Bitcoin (the first successful blockchain).
Modern cryptography saw vast advancements during the first and second World Wars, especially World War II (e.g. the German Enigma machine). As you might have guessed, the primary use case was to encrypt radio signals to secure and protect information against interception.
Until the mid-1970s, intelligence agencies and a few licensed enterprises held an oligopoly on the research and use of cryptography.
Everything changed when three cryptographers known as Hellman, Diffie and Merkle published their work on public cryptography which incited the first major wave of public interest in cryptography.
Why is this significant? Today, public-key cryptography secures most cryptocurrency protocols.
In the 1970–80s, digital communication achieved broad adoption which gave rise to mass surveillance by governments. This led to the Cryptopunks movement (later known as the crypto-anarchist movement) who fought to preserve privacy for individuals by advancing the use of cryptography (read manifesto). It was this sustained competition that extended into the 1990s between the crypto activists and the government surveillance communities that propelled the field of cryptography into what it is today.
Peer-to-peer (P2P) networks
The first generation of peer to peer (P2P) networks were defined by file-sharing across centralised servers. In 1988, the Internet Relay Chat (IRC) was one of the first P2P networks built for sharing text and chat. And by 1999, Napster expanded upon traditional text files used by IRC to enable the sharing of media files across its own servers.
However, being centralised networks, the first generation of P2P networks were often exposed to third-party intervention (e.g. legal authorities). With Napster, one person could purchase an album, upload it to the network for everyone else on the Napster network to access. Such an act that was considered ‘piracy’ would soon result in multiple lawsuits from the likes of Dr. Dre and Metallica. After an injunction was filed against Napster, it was all over.
The second generation of P2P networks removed centralised servers and allowed files to be shared across decentralised networks. Networks such as Bittorent and Limewire are examples of second-generation alternatives that emerged with the idea of decentralisation in mind.
Why is this significant? With blockchains, all computers in the network store an identical copy of the ledger of transactions, which acts as a single point of reference. Storing data across such P2P networks offers greater security and censorship resistance.
Pre-Bitcoin cryptocurrency applications
While file-sharing took off relatively quickly, the journey to create a digital currency was faced with a critical challenge, the double-spend problem. Any electronic document could be replicated as many times as someone wanted, therefore, if a digital currency was merely a digital copy of some currency document, it would not work since it could be copied endlessly, and money would grow out of thin air.
Several mathematicians and crypto experts from the Cryptopunks era played key roles in contributing to the learnings that would ultimately go on to solve this problem. The two most prominent projects pre-Bitcoin were B-Money and Bit Gold.
Wei Dai proposed B-Money as an anonymous, distributed electronic cash system in 1998 via the Cypherpunks mailing list. The protocol would propose an implementation of Hashcash, a Proof-of-work (PoW) consensus algorithm for solving cryptographic puzzles proposed by Adam Back in 1997, as a means of validating transactions and creating new tokens (money). The same that would go on to be used in Bitcoin…
In the same year that B-Money was proposed, Nick Szabo proposed a decentralised currency system with a limited supply of digital money issued to network participants who devoted computing resources, Bit Gold. Nick would propose a new mechanism where a participant would “dedicate computer power to solving cryptographic puzzles, solved puzzles would be assigned to the public key of the solver, each solution would become part of the next challenge, thus creating an ever-growing chain of new property.”
The precursors to our first mainstream blockchain were taking shape.
The Global Financial Crisis (GFC) (2007–08)
The GFC was a consequence of significant risk-taking in the mortgage and finance industries which resulted in the bursting of the ‘sub-prime mortgage bubble’.
The economic costs of the financial crisis were the worst since the Great Depression of the 1930s. However, the most important effect of the financial crisis was arguably political and social, not economic. At the core of the problem was the eventual government bailout of the financial sector. While it may have been the most efficient way to prevent the economic effects of the crisis from worsening, the response was viewed as fundamentally unfair by main street as it was seen as ‘rewarding’ wall street for its ‘misdeeds’.
After the 2008 financial crisis, there was significant distrust between the government and the current centralised banking system.
Bitcoin and the Blockchain (October 2008)
The Bitcoin whitepaper published in October 2008 laid out an inspiring alternative definition of money at a time when faith in the traditional financial system was at its lowest. Deceptively simple, the nine pages brought together the key advancements in cryptography and P2P networks to introduce a form of cash that could be sent peer-to-peer without the need for a central bank or authority to operate and maintain the ledger.
Blockchains were born.
Next in the series, we will dive deeper into what the technology does and how this type of ledger allows value to be exchanged on the internet for the first time in human history.
This information is for accredited, qualified, institutional, wholesale or sophisticated investors only and is provided by Aura Group and related entities and is only for information and general news purposes. It does not constitute an offer or invitation of any sort in any jurisdiction. Moreover, the information in this document will not affect Aura Group’s investment strategy for any funds in any way. The information and opinions in this document have been derived from or reached from sources believed in good faith to be reliable but have not been independently verified. Aura Group makes no guarantee, representation or warranty, express or implied, and accepts no responsibility or liability for the accuracy or completeness of this information. No reliance should be placed on any assumptions, forecasts, projections, estimates or prospects contained within this document. You should not construe any such information or any material, as legal, tax, investment, financial, or other advice. This information is intended for distribution only in those jurisdictions and to those persons where and to whom it may be lawfully distributed. All information is of a general nature and does not address the personal circumstances of any particular individual or entity. The views and opinions expressed in this material are those of the author as of the date indicated and any such views are subject to change at any time based upon market or other conditions. The information may contain certain statements deemed to be forward-looking statements, including statements that address results or developments that Aura expects or anticipates may occur in the future. Any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected in the forward-looking statements. This information is for the use of only those persons to whom it is given. If you are not the intended recipient, you must not disclose, redistribute or use the information in any way.
Aura Group subsidiaries issuing this information include Aura Group (Singapore) Pte Ltd (Registration No. 201537140R) which is regulated by the Monetary Authority of Singapore as a holder of a Capital Markets Services Licence, and Aura Capital Pty Ltd (ACN 143 700 887) Australian Financial Services Licence 366230 holder in Australia.