Blockchain – who invented it?

17 May 2016

Blockchain – who invented it?

Bitcoin, blockchain, smart contracts–these are three terms that have recently been given more and more media coverage. According to the Süddeutscher Zeitung (“South German Newspaper”) a veritable “fever” has broken out around the supposedly new technology. But the concept is not so new.

A principle that has existed for centuries

The underlying principle has already existed for several hundred years. Rai, a stone-based currency, originated on the Micronesian island Yap. With great effort, it was produced on the neighbouring island Palau and shipped to Yap. This prevented the currency from being duplicated at will and thus guaranteed its intrinsic value. The only negative point: the stones weighed several tons. Carrying the stones from one owner to another to pay for products or services proved to be very impractical.

The solution: the transactions involving this stone money were passed on orally and filed away in everyone’s memory. Thus, every inhabitant was able to track who the owner of each respective stone was. Even today, Rai is considered an official means of payment, although it is of a symbolic nature. In the meantime, Yap has employed mainly paper money in business transactions.

Blockchain and distributed ledger technology

This rather brilliant system reminds one strongly of the cryptocurrency, Bitcoin. As with the stony currency Rai, owners exchange no physical coins or banknotes. Instead, the transactions are durably and unchangeably recorded. Thanks to modern technology, even a good memory is no longer required. Each market participant has a constantly-updated digital copy of all previous payment transactions.

Precisely this chain of all previous payment transactions is a hallmark of the blockchain principle. For one thing, the current balances of all market participants arise from the entire chain, just as with an account ledger. Additionally, the origin of the bitcoins is put on record. The real names behind the transactions remain secret.

With data storage, distributed ledger technology (DLT) springs into action. In this way, the bitcoin blockchain is not saved by a central entity, but rather distributed to every market participant. Therefore, bitcoin is a combination of blockchain and DLT.

The first climax reached

The first wave of hype surrounding cryptocurrencies on the basis of these two technologies is already gone. The dramatic rise of bitcoin created a speculative bubble that burst in 2014. This decline was exacerbated by Mt. Gox, one of the most important bitcoin trading platforms. Thus, it is no surprise that the innovation study by Gartner recently sees stock markets for cryptocurrencies as already having arrived in the valley of disappointment.

The hype around distributed stored cryptocurrencies was able to persist both in 2014 and 2015. The blockchain technology evolved away from pure payment (blockchain 1.0) to smart contracts (blockchain 2.0). Thus, 650 further transaction units were brought into being, most notably Ether and Ripple. Even here, the first wave of hype seems to have been already passed by, and the fight for few standards on the market has already begun.

Making early use of the blockchain opportunities of the next 10 years

Overall, it can be concluded that DLT and blockchain, after passing through their first waves of hype, are still in a very early stage of development. Within the next five to ten years, standards in this segment should be established. By a further development of legislation, legal security will be created for DLT and blockchain.

The use of the technology also requires further derived services and interfaces to other technologies. Therefore, waiting for market maturity is not recommended, even despite the early innovation stage. It is better to make contracyclical use of the present development opportunities during the waning of the hype, in order to claim an early stake with a strong market position. Through the development of standards and services, entry barriers for new market arrivals can be increased, and customers can be tied down at an early stage.

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