2017: The Second Era of Bitcoin Begins

Akin Fernandez gives a passionate overview of the cryptocurrency industry's year – 12 months that he says prove "there can be only one bitcoin".

AccessTimeIconDec 17, 2016 at 3:18 p.m. UTC
Updated Sep 11, 2021 at 12:45 p.m. UTC

Akin Fernandez, also known as Beautyon, is the owner of London-based bitcoin voucher service Azteco. He is also a writer who has extensively covered bitcoin and related services, and a software developer with 15 years of experience.

In this CoinDesk 2016 in Review special feature, Fernandez gives a passionate and personal overview of the cryptocurrency industry's year – 12 months that he says prove "there can be only one bitcoin".

2016 has been a fascinating year, where cellular mitosis has been bitcoin's guiding model.

The different camps previously in one group or cell have split. There are those who understand bitcoin and remain in its cell, and those that do not, and who are now in their own offshoot cells, “experimenting” on branches that are essentially non-viable.

The market participants who know how everything works, those in bitcoin, understand that there can only be one bitcoin.

There has been some excellent analysis making this crystal clear, and the fundamentally transformative work being done to extend bitcoin is categorical proof that this is true.

Bitcoin is the market winner because it is the first mover and definitive transaction layer. It is immutable not only in terms of the software rules, but the single minded, rational ethos of its protectors, who will not allow any corruption, hysteria or short-term thinking to spoil or endanger the project.

Radical change

Segregated Witness solves the transaction malleability problem, but more important than that, it makes all arguments about bitcoin’s transaction capacity limits a thing of the past. When SegWit activates, transactions using it will show up as spendable instantly – and there will be vastly more of them per second – killing another frequent and frankly, silly objection to bitcoin’s utility.

You can get a glimpse of what this will look and feel like with this beautiful colored coins demonstration of Lighting.

How bitcoin is used is about to change radically, and for the better. The final perceived limitations to it have been destroyed with SegWit. Now all that is left is building the software and businesses that will take advantage of this new, high-capacity bitcoin.

Spectators learned again this year that bitcoin is the only solution, and the roll out of SegWit is further proof of this, and it will cement bitcoin’s premier position. A small group of malcontents will always be attached to any software project, and if the history of software is anything to go by, these miscreants will eventually fade away because they have no software or solutions to offer.

If they don’t fade away and manage to scupper progress, then bitcoin was always doomed, and they deserve to win.

The resolution of the R3 experiment

All of the companies working from versions of the bitcoin software that is now two years old have forked off onto a path that doesn't have the incredible genius of Bitcoin Core underpinning their software. This year, they've struggled to find a use case for their software forks, have failed to attract developers to their GitHub repos and are still trumpeting secret “trials” with corporate sponsors which are nothing more than PR fluff.

These sponsors will eventually tire of funding insurgents who don’t have the skill to add fundamental game changing features to the bitcoin software they downloaded, and the first market participant working with SegWit-enabled bitcoin, clearly demonstrating what it does, will cause the hapless sponsor firms to pivot away from these worthless trials and the Snake Oil companies in them.

After claiming that bitcoin was "dead", R3 has managed to produce literally nothing. Incredibly, they asked their members what they want to see in a new platform, rather than innovating to provide one.

Part of their plan (which is now under way with their Corda repo) is to tap the mystical “Open Source Energy” where software magically comes from. None of these people, the bitcoin forkers or R3CEV, understand what they are dealing with both in terms of what bitcoin is and what it is for; why regulation can’t be built in to any software project whose aim is to replace bitcoin; or software development in general and how that process works. They have all been “Trumped”.

During the writing of this round up, there have been several interesting announcements. Goldman Sachs has left the R3 Blockchain Consortium, indicating once again that they have literally nothing of value to offer. I have no doubt that they are the first of many to abandon that ship without an engine, and you can be sure that this Emperor’s New Clothes affair is doomed to end up in Davy Jones’ repository.

Circle has dropped support for bitcoin payments. The grown ups are tired of bitcoin. But wait, the ex-CEO of Barclays has joined the board of Blockchain! One wallet maker drops bitcoin, and the ex-head of one of the world’s biggest banks joins the biggest bitcoin wallet.

Is bitcoin dying, or is it the next big thing? These people can’t decide!

Men without conviction

Coinbase, the company desperately trying to find out what it wants to be, adopted ethereum just before it was mortally wounded by the DAO disaster.

More on that below, but more importantly, they have just been served by the US government with a “John Doe” request for their users' information. This is an absolute disaster for them. Defending this attack will cost them millions of dollars in legal fees and may take years to resolve.

During this time of uncertainty, no one in bitcoin will trust them, drying up their already slow user adoption. The one good thing to come out of this is that the case against giving your details over to companies like Coinbase and Circle is now set in stone. Handing over your identity to a bitcoin company is not only worthless to you as a consumer, but it's very dangerous, and should always be avoided without exception.

Here’s why: even if their users have done nothing wrong, Coinbase is now set to be compelled to reveal their names, addresses, bank details and their bitcoin addresses and transaction records, and you can be sure these users will be brutally audited by the IRS.

So, regardless of whether they have done anything wrong and have paid all “their taxes”, they will now – at their own cost – have to prove their innocence (guilty before proven innocent; a complete violation of the US Constitution and Anglo-Saxon legal principles).

This attack on Coinbase demonstrates why ethical bitcoin companies have railed against KYC/AML.

It also shows by inference that bitcoin is anonymous enough to thwart the State, and they can only go after users if those users voluntarily attach their identities to bitcoin addresses controlled by companies in toxic jurisdictions. They can’t be easily identified in absentia of that voluntary self incrimination.

If this were not the case, the IRS would go directly to the users without referring to Coinbase at all. The fact that they can’t shows bitcoin is anonymous enough.

I expect more consumers and businesses will realize this in 2017. Perhaps President-elect Trump can stop all of this with his new America-centric administration. It’s abundantly clear to any capitalist that this John Doe action is 100% pure anti-American, and exponentially increases the risk of pushing bitcoin businesses to foreign jurisdictions.

I wrote about this before, in a consultation response to the British Government on how bitcoin should be handled.

Out of the ether

One of the most interesting events in 2016 was the “Ethereum Event”, where everything Bitcoin Core and others have been saying about the inherent difficulty and risk involved in writing complex cryptographic software came true, thanks to a single bearded man on a laptop running FreeBSD.

Since it was launched in Switzerland, cryptocurrency and bitcoin competitor ethereum has sought to radically extend bitcoin’s capabilities to a new separate database, one that was seen for a short time as the inevitable market winner over bitcoin. This is why Coinbase recklessly took the risk of offering ethereum's native token, "Ethers", to their customers.

One of the capabilities ethereum enables is the ability to create smart contracts, or agreements based entirely in software that execute rules – loosely speaking it's clauses – entirely in code. Smart contracts are an extra-legal way of parties agreeing on how business is conducted and matters settled.

It’s radical, extremely exiting, and the biggest smart contract ever, The DAO, the first “Decentralized Autonomous Organization”, attracted over $140m in investment from people around the globe – and then it was hacked.

But it wasn’t really hacked. An attacker found a fundamental flaw in The DAO’s software contract clauses, and contractually drained $59m worth of ether from it, into another contract beneath it. “Ethers” are the equivalent of bitcoin in the ethereum public database and software ecosystem.

In response to this attack, ethereum, which is the skeleton that the DAO was built on, had its permanent record reversed by the developers who control it, to reimburse investors who lost ether in the DAO.

This is anathema to people in the cryptocurrency space, and caused a group to “fork” ethereum at the point in the transaction record at which the DAO contract hack took place. Forking means the new developers made a complete copy of the ethereum transaction record, and started recording their own, separate record of transactions on to the end of it.

There are now two diverging ethereae – one called “ethereum” and the other, “ethereum classic”.

Both of the database records of these systems are identical up to the DAO event, their native tokens float freely on exchanges, and as of this writing, the prices of both have essentially collapsed.

By any metric, it is a fiasco, and it is an object lesson of why there can only be one bitcoin, and why bitcoin should not fork lightly.

The big lesson for 2017

Rather than seeing the DAO event as a perfect example of why what are now called cryptocurrencies require regulation, the DAO is in fact a vivid illustration of why bitcoin and software should not be regulated.

This DAO event cost a statistically insignificant amount of money to teach a powerful lesson to all market participants, including companies like Coinbase. Without an expensive lesson like this, markets would be less efficient in finding the best models and, as a result, more vulnerable due to the speed of iteration being slower.

Those advocating for regulation should bear in mind that these experiments would be taking place in free jurisdictions, and some of them are guaranteed to succeed, like the SegWit extension to bitcoin. If the additions like Segregated Witness were subject to regulation, the pace of bitcoin improvement would slow to a crawl.

An example of this innovation stifling in the medical industry are the over 4,000 medicines awaiting FDA approval in the US. This backlog is directly analogous to new bitcoin business models – software – being blocked from release to the public.

This is exactly why no bitcoin regulation or legislation must be passed, or even considered openly, as it will signal to entrepreneurs that they are better off in another jurisdiction, just as people travel to free countries to try experimental drug treatments when all FDA approved medicines have failed to cure their disease.

The risk of bitcoin is spread evenly to the people who voluntarily choose to work with it. Trying to control bitcoin pushes a far greater risk of a generational national loss on all citizens, one that can never be recovered from once the centre of bitcoin is captured and rooted in another place.

In order to foster innovation and to allay any fears of a possible explosion of legislation that will make turning a profit in bitcoin impossible, the jurisdiction that wants to win the battle for bitcoin businesses should enact a single law – a 150-year moratorium on any legislation that touches bitcoin.

Up for grabs

2017 is going to be very interesting, and the most welcome change on many fronts is the coming Trump administration, that will hopefully eschew computer illiteracy and embrace The American Constitution and bitcoin, which is synonymous with the frontier mentality of risk taking and American entrepreneurialism.

America can still win the bitcoin prize, just as it won with Silicon Valley. The title of “World Center of Bitcoin” is still up for grabs in 2017.

And in this piece, I haven't mentioned the looming prospect of the inevitable Venezuelan hyperinflation event, or the appalling fallout of the first shots in the war on cash in India, which triggered a 30% premium on bitcoin in that extraordinary country.

If there ever was a time for a service like Azteco, 2017 is it – a frictionless means of buying bitcoin, that reduces complexity to almost nothing and is perfect for the consumer. Combined with the welcome international expansion of Purse.io, the sublime and revolutionary OpenDime and the other products and services that are sure to follow, 2017 is going to exhilarate, entertain, enrich and enrage like never before!

Follow the author on Twitter and check out his Medium blog here.

Have an opinion on blockchain in 2016? A prediction for the year ahead? Email editors@coindesk.com to learn how you can contribute to our series.


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