To know the present we have to know the past and then perhaps we can see the future. So we will start at the beginning.

After the banking collapse in 2008, many were looking for a solution to what they saw as a very flawed system.

There were protests. Occupy Wall Street, the Tea Party Movement and in Arabia a people’s uprising which in some parts unfortunately turned into tragic war.

Not one of them proposed a solution. They articulated the problems, which is all good, but how do we now solve them?

Some of the digital generation, those mainly in tech or keeping up with tech developments, where introduced to a decentralized global public network that had managed to create, for the first time, digital scarcity.

At first introduction, everyone is usually skeptical, but somewhat neutral. Now some of them might perhaps mindlessly dismiss it due to whatever they may have seen in a 5 minutes TV report, but back then it was the techies that were having a first look in 2010-2011.

This was at a time when a public, but peaceful, revolt of sorts by the pen was raging, spearheaded by Wikileaks most famously through their leaking of diplomatic cables and war footages.

The times were somewhat dark and they got darker and darker until perhaps hopefully this year when we can see some sunshine and we can hope there has been a change of direction generally speaking.

Yet there wasn’t much that could be done about it, so when people looked at bitcoin they wondered whether this is something which can do something about it in a peaceful way and in a beneficial way for all.

Some techies were saying yes, some no, with a somewhat collective decision reached in 2011 after the hacking of the then biggest bitcoin exchange.

It can’t work, was the general view. Your money can just be stolen. So Wired declared bitcoin dead, everyone sort of forgot it existed at all.

Everyone except ancaps. Most know what anarchists are. They believe that we can organize ourselves in such a way that there is no hierarchy. They believe in rules, of course, but they don’t think there should be any one person or group that has the power to either make the rules or enforce them.

They’re most often aligned with communism whereby we all share our farms and so on. Logically, after about two minutes studying that idea you understand why USSR collapsed – there are no incentives.

Ancap has the same beliefs as above, but instead of all being equal economically, or instead of applying communist economics, they believe this society of no rulers can operate on capitalistic principles.

As ancaps are capitalists, they naturally were interested in this decentralized money that effectively has no rulers. So they kept bitcoin alive and were the last ones standing and stood as a floor for the price in 2011-2012.

Two years later, in or around March 2013, an individual went around reddit randomly tipping people bitcoin to the value of $2,000 or so per tip.

Naturally, everyone stood to look. For those that had looked before, their first reaction was: this thing still exists? For all, their reaction was: wow, this guy is giving people money online? Can I have some? – they wondered with the then Reddit more of a digital space for poor university students with plenty of time on their hands.

So everyone looked at bitcoin and started paying attention after it rose somewhat parabolically like in December 2017, but back then from $2 to $260 or so.

MT Gox, the then effectively one and only bitcoin exchange, probably couldn’t handle the load. They claimed DDoS, but it probably was a natural DDoS which led to MT Gox going down for a few hours.

People panicked, so they sold and sold with many experiencing their first crash. Some might have waited for the bottom of $50 and perhaps bought a small amount to then move on with work or study, so again forgetting this thing exists.

Until perhaps November 2013 when they may have read somewhere that bitcoin was going parabolic, rising to a price of $1,000.

China was making an entrance, and just as they were being introduced to bitcoin, so did MT Gox finally exit in a bankruptcy.

Many left in disgust, just as many others realized that bitcoin – and back then it was effectively just bitcoin with a market share of 95% or more – needed to have many exchanges to decentralize that aspect, so they argued and perhaps rightly so that at least to some extent this bankruptcy was a good thing.

Then kind of nothing happens – except for many household brands announcing they now accept bitcoin – until 2015 when a former JP Morgan executive started to make an entrance by arguing that blockchain is a great innovation, but bitcoin is rubbish.

Her gravitas gave her ears, with the rise of the blockchain in a meaningful manner starting in 2016. There were a number of factors here at play, and all are interrelated.

First, those 2010-11 students of some reasonable intelligence probably realized by now that this ancap idea doesn’t quite work.

As a simple example, you can’t have five hospitals in a neighborhood competing with each other, or five schools, because the resources are simply not there. There’s not enough space, there’s not enough doctors or teachers and so on.

Likewise, you can’t have five railtracks in less popular areas. Again, there’s just not enough space. And in any event, that idea was too radical and one can see why it might not work, so it should be tried first maybe in a small island or wherever.

Thus, the then dominant narrative of bitcoin being some sort of trojan horse that will take down governments or banks was seen to not quite be based on a sound intellectual foundation.

Its intellectual foundations instead lay with Friedrich Hayek, one out of the two most famous economist of the past century who in many ways still guides government policy on economics.

In the Denationalization of Money, Hayek basically describes bitcoin conceptually thinking. He argued that central banks will always be wrong in how much money they print or how little or what interest rate they set and so on, simply because they don’t have enough information and thus can’t be right.

That wrong decision, Hayek says, leads to unproductive – or not as productive – booms and destructive crashes.

His solution was to have many competing currencies so that the market can choose which is best managed. Thus in the future, rather than being stuck which just say Venezuelan Bolivar, you can use bitcoin or eth or whatever with the market eventually primarily settling on one dominant currency in a probably 80%/20% distribution.

That’s obviously not how things are done or have ever been done. Arguably there was a period during free banking, but that was paper based, making conversion of money difficult. While digitally you can imagine a design where any money is accepted at the point of sale with it automatically converted into whatever currency the merchant wants with the value between the different money then more a matter for traders.

That’s a complex idea with many foreseeable problems, but also promises. We won’t take it further, however, in this short history of cryptos except to say the narrative was moving towards a more logical, reasonable, intellectual, and thus mainstream use case.

As Hayek was making an entrance, a very public debate arose on the question of whether bitcoin can technically perform its function as a currency.

By technically, we don’t mean the economic definition of store of value, means of exchange and unit of account because bitcoin has all three, although perhaps not at the same extent as the dollar at least for now.

We mean whether bitcoin nodes can handle the needed level of transactions to operate even as a local currency.

The bitcoin development team was effectively split in half in their views. Gavin Andresen and Mike Hearn thought bitcoin can handle transacting demand and not just for a local section, but for the globe. Gregory Maxwell and Peter Todd thought it can’t.

These four individuals, all of an expert level knowledge, had been arguing with each other on this matter effectively since forever in bitcoin time, but begun doing so very publicly and quite ferociously – as far as words go – starting in 2015 or so.

The matter was settled at the end of last year, with Todd and Maxwell winning the debate. Now with hindsight, probably rightly so.

The current design of public blockchains is a dumb version or a very simple version. All nodes have to maintain all history starting in 2009 until basically forever.

If we have a long enough perspective, we can see that this ever growing history and thus resources may well lead to a situation at some point when those who follow us worship as a god the one node that is still running.

Thus in bitcoin they’re keeping new history at a relatively small level of 1MB per ten minutes while hoping that the Lightning Network will be able to allow bitcoin to serve as a currency for commerce.

Others had different views and did or did not quite share the view of Andresen and Hearn who had offered 8GB blocks in 20 years with the latter not “agreeing” to miner’s “offer” of 45MB in 8 or 16 years or 8MB ad initio.

They might have been of the view that while the long term problem needs to be addressed, there needs to be a short term respite. More correctly and or more succinctly some of them begun wondering whether Maxwell and Todd actually plan to address the long term problem at all.

That’s because at the time they were saying the Lightning Network will effectively solve everything, but that question of ever growing history applies at 2MB, 8MB, and at 1MB. It’s just a matter of speed, the end result is the same.

Andresen had suggested sharding perhaps in 2013. Maxwell and Todd appeared to think it wouldn’t work. So the debate wasn’t really about numbers, but a more principled debate on how public blockchains can be constructed to handle world level capacity.

Principles however got drowned into 1MB or 2MB and he or she is a bad man and so on, with this necessary debate handled in perhaps the worst possible way it could be handled by the above four main protagonists.

Anyway, those that thought the side that appeared to be winning – through the use of some digital force like censorship – had no plan, aim, or desire to scale on-chain in a sustainable manner, begun looking for alternatives and they found ethereum.

This was in 2016 when eth was completely unknown and of no care to anyone as bitcoin still had a market share of some 95%. Eth moreover had kind of been vilified by bitcoiners, so no one took the time to look at it.

Yet it had also managed to build a community and an ecosystem of its own with many developers that appeared to be quite capable and quite reasonable. So people started looking at eth by themselves with some desire for it to be bitcoin 2.0.

What they found was quite surprising. A new innovation in smart contracts. The most surprising thing being that the smart contract doesn’t need a private key. You can send eth to it, with the use of your private key of course, and then the network knows what the smart contract can or can not do with the eth you sent it based on the coded rules. So we basically have programmable money.

Welcoming all the “refugees” or exiles from the Bitcoin Civil War of 2015-2017, ethereum promised them global level on-chain scaling through the use of sharding and so on.

A new stage had thus begun when it was no longer just about bitcoin, but bitcoin and ethereum. The latter took much market cap and mindshare, at one point almost overtaking bitcoin in market cap.

It is probably here when the bull run of 2018 begins. Ethereum introduced a whole new world of Decentralized Autonomous Organizations (DAOs), tokens, ICOs, Dapps and so on.

That innovation gave “legitimacy” to the claim that blockchain tech is transformative and has many use cases in manny industries as many ethereum projects were trying to showcase.

What happened then is a fascinating case study of how the use of words affects perception or common knowledge and awareness and opinions and actions, etc.

That’s because as far as new entrants to this space were concerned, ethereum sort of did not exist. The mainstream media, almost in complete uniform, effectively called ethereum as blockchain, without mentioning the word ethereum once.

At the same time, and probably in every single article that mentions blockchain, they had at least one sentence that said something like: blockchain was first used in bitcoin, or was invented for bitcoin etc. Then usually they went on to describe what bitcoin is.

So casual cryptonians probably thought all this innovation was goin on in bitcoin, thus at least some of them probably bought, with other cryptos seen as kind of a new bitcoin or whatever.

The best illustration of this was when a frontpage reddit meme had a GPU complaining about rendering games with the question of: you don’t want to go to the bitcoin mines do you?

Obviously GPUs have not been used to mine bitcoin since 2012, but they were and are used to mine ethereum, with eth’s price rise sending GPUs out of stock. Hence the meme, but not the credit where it was due.

Ethereum of course also rose to new highs, but for the casual cryptonian, bitcoin was the whole crypto space with these other things there as well of which they probably know as good as nothing.

So that bitcoin debut to at least ordinary American people and much of Europe led to a considerable increase in demand which included an increase in transactions.

The Lightning Network was however no where near ready, and still isn’t, while capacity was capped at 1MB per ten minutes, or about 300,000 transactions a second. To be one of those 300k, you had to bid through the fee against all the other 300k. Thus fees went parabolic to a high of $80 or more per transaction.

At or around the same time, an ethereum dapp went viral to the point it almost instantly took almost all of eth’s capacity which too runs at 1MB per ten minutes, but at 15 second blocks. Fees begun increasing there too. Thus price begun moving downwards.

So the history of cryptos so far is the history of infrastructure and infrastructure bottlenecks. Each time there has been a crash, it has been due to an upper limit of what the technology or ecosystem or the infrastructure can handle.

The first crash in 2011 was because Gox was incompetent and/or was not very careful because knowledge and experience had not yet established that you can just hack steal cryptos so you need certain processes and implementations to make very sure people can’t hack steal them.

Thus the Ycombinator alumni of Coinbase saw the opportunity to provide the solution and eventually best practices that time has shown to work have been established, like cold wallets, chopping addresses, and so on.

However, as our tagline of bringing you tomorrow today implies, knowledge is not instantly spread throughout the globe, but gradually. That lesson above of 2011, for example, was only learned this year by the Japanese and South Korean exchanges who did experience a number of astonishing hacks.

We can expect that other locals will likewise learn the same lessons by themselves in a sort of laddered gradient as knowledge trickles down to some in years and to some in decades.

Coinbase, however, was of no care nor use to anyone back then. Everyone had Gox, so who cares about the Silicon Valley boys.

Until of course Gox was unable to handle demand in 2013 and then went down completely at the end of the same year. With the lesson there too being that if the infrastructure is to be resilient it needs to be decentralized. Or in economic terms, you need competition.

So that was solved by the many new exchanges that rose to prominence in US, Europe and then Asia. Leading to the most recent infrastructure level bottleneck. Or rather, two of them.

The first was that crypto was bitcoin and bitcoin was crypto. That’s obviously not a healthy state to be in because we do hope nothing happens to bitcoin, but something could. So it became bitcoin and eth.

The other, and more importantly, is the infrastructure bottleneck in regards to the level of transaction capacity that decentralized public blockchains can handle.

Obviously we knew there was a problem regarding scalability because we argued about it quite epically for three years, but arguably a general realization of the seriousness of the problem and the need for a real solution wasn’t quite reached until we saw first hand fees going to the stratosphere and probably mainly due to it we saw everyone leaving.

The infrastructure could not handle them, so they had a run towards the door, quite logically. Yet the seriousness of the matter was not appreciated even in ethereum until perhaps the second half of 2018.

Even then, they appeared to be taking a somewhat lazy attitude towards addressing the problem. So the market punished them and quite severely. Now they scrambling to launch 10x capacity in ethereum 1.x and then 1,000x in sharding or whatever.

So that’s why cryptos crashed. Obviously there’s also the aspect of Proof of Work inflationary new supply, which can make crashes quite brutal. But that explains only half of the story.

The lower the new supply, you’d think, the less the almost straight down vertical fall, but that’s only if there is a demand.

If demand is above new supply then inflation doesn’t matter. For much of this year it has clearly been below it. The reason most probably being that the network is not quite ready to handle new demand because of that scalability bottleneck.

So they’re now working hard to address it in ethereum, with the cycle thus potentially repeating once it looks like it is solved or within sight.

If  and/or when it is solved, then the question will be if there remains any other bottleneck. Usually it is only reality that shows them, so we can’t quite know until after some time has passed.

If there is no new bottleneck, then cryptos would be at the beginning of entering the mature stage where we no longer talk about what we are building, but where we build it and people use it or don’t.

Like in the 90s we used to talk about the internet is going to do this and that, but now no one talks about we’ll build the next Facebook or whatever, they just use it. So giving Facebook some huge profits.

We’re no where near that end-game, which would probably take another decade or two, as right now we’re trying to figure out how to turn blockchain dial-up into broadband.

Which we kind of know how to conceptually. Bundle the nodes, maybe pruning, maybe rent. Then we’re set for a time when hopefully they come and some bottleneck doesn’t force them to go away as has been the case so far.

This is still a very new baby which you might now say is a child. Children need to learn. To figure out stuff. Then they grow into hopefully very capable young men and women.

In other words, cryptos have gone through a learning experience that can be described as trial by fire. Whether that is nearing its end where we have sort of learned the basics of what is to be learned, remains to be seen, but it is probable that we’re just at the beginning of the most exciting phase where new innovative dapps can run their course unhampered by any bottleneck except the judgment of the market.


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