The Blockchain Model T Ford


"If I had asked people what they wanted, they would have said faster horses."

Henry Ford


Crypto-currency is gaining acceptance as a medium of exchange. The list of merchants who now accept bitcoin includes Subway, Microsoft,, Whole Foods and Bloomberg. The Wall Street Journal noted (12/1/18) that PricewaterhouseCoopers in Hong Kong for the first time accepted payment for services in bitcoin (BTC $15,088 1/8/18). Ripple (XRP $2.41 1/8/18) has signed up more than 100 banks to test its network. NEO (formerly Antcoin $101.95 1/8/18) has the full backing of China’s government. The regulatory leader of the United States Federal Reserve has called for more research into “limited purpose” digital money to help settle interbank transactions.


110 years ago, Ford began manufacturing the Model T, “a car for the great multitude.” Until then, horses were the accepted mode of personal transportation. But when Ford made a dependable, affordable vehicle powered by an internal combustion engine, even cowboys started driving them. Twenty-five years ago, America Online launched AOL Mail, and electronic messaging became available to anyone with a telephone line, computer and modem. “You’ve Got Mail,” announced the arrival of a geographically distant communication, delivered nearly instantaneously (if both sender and receiver were online) without the use of paper or mailman. Ten years ago someone, or some group named Satoshi Nakamoto, wrote the open-source software that most everyone knows as bitcoin (BTC). Talented computer operators became able exchange worth, as if in a barter transaction, without having been introduced or even knowing the names or locations of the parties involved.


Although Model T’s still exist, few are used for transportation, but the quarter-billion automobiles on the road today were produced using Henry Ford’s assembly line process. Everyday communication by email is more customary than by post, but users of AOL Mail are about as common as drivers of Model T’s. Karl Benz developed a gasoline-powered automobile in 1885, but it was Ford’s manufacturing process that put America on wheels. Email via ARPANET was used by the United States Department of Defense beginning in 1969, but invitations to "Try American Online FREE" in the 1990’s got America to put down its paper and pen and latch onto a mouse.


Ralph Merkle patented the “hash tree” in 1979, and in 1992, Dave Bayer, Stuart Haber and W. Scott Stornetta incorporated Merkle trees, which allowed several documents to be collected into one “block.” But it was not until 2008 that Satoshi Nakamoto described the bitcoin as “A purely peer-to-peer version of electronic cash that would allow online payments to be sent directly from one party to another without going through a financial institution.” On May 22nd, 2010 Laszlo Hanyecz paid 10,000 bitcoin for two Papa John’s pizzas and the age of digital currency had begun.


According to Don and Alex Tapscot, in Blockchain Revolution: “The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.” Bitcoin is a blockchain performing the most primitive of mathematical functions in a highly complex way. Bitcoin counts. What once is counted, cannot be uncounted. Bitcoin has counted more than 500,000 blocks without a break in the chain. The longer the chain, the harder to trace back to the start of its encrypted maze. Its length and strength are trusted more with each additional block. This simplest of arithmetic, repeated every ten minutes for nine years, has been trusted with over $250 billion. The more bitcoin secures, the more it is trusted.


But using blockchain as a currency is as artless as using an iPhone as a paperweight. Blocks in the chain can store any coded information. Bitcoin stores currency transactions, a common function that has been prevalent since the first shekel was traded for food over two and a half millennia ago. Bitcoin is but a practical but rudimentary demonstration of what blockchain technology is capable. One of bitcoin’s problems which later-created coins attempted to address is the size of its blocks. Its one-megabyte capacity seemed immense when, in its infancy, each block was around eighty kilobytes. Now, because of its popularity, transactions are delayed waiting for the next block to be created as the previous was filled to capacity. The Bitcoin Cash (BCH $2408 1/8/18) “hard fork” in August of last year attempted to address that difficulty with an eight-megabyte capacity that is touted as expandable to thirty-two.


Another problem, which Ethereum (ETH $1362 1/10/18) addressed with its launch 2014, is bitcoin’s inflexible programming. ETH enabled “smart contracts” with its Turing complete programming language. Smart contracts allow agreements as well as transactions between anonymous parties without relying on a central authority. Ethereum’s ability to “scale” its programmed blocks to fit the needs of the parties in a transaction recently became its “Achilles heel.” A recent project called “CryptoKitties” caused a slowdown on the ETH network and dramatically increased the volume of unprocessed transactions. Stakeholders” on the ETH network have not been able to agree on a fix for this problem, just as they could not agree after $50 million was lost in 2016. That led to a hard fork and the creation of ETH while Ethereum Classic (ETC $34.17 1/8/18) continued on the original blockchain.


Possibly the most serious issue crypto-currency miners will eventually face is the law of diminishing returns because bitcoin and Ethereum both use a proof of work (PoW) system in order to certify that only one new block is mined every ten minutes. Mining involves decrypting a long string of numbers, like solving a complex problem by attempting as many solutions as possible. Miners receive a transaction fee paid in the currency they have mined. Only those miners with the most computing power have a decent chance of winning the ongoing competitions among miners for the digital reward.


Computers that are able to compete in such a contest cost a great deal, but that is a fixed cost. Miners’ greatest expense is their ongoing need for electricity to accomplish such computational feats. In the United States, the lowest cost of producing one bitcoin is $3224 in Louisiana. A miner in Hawaii would pay $9483 for that same amount of power. As the cost of producing bitcoin increases with increased competition among miners, so may the potential reward for each new coin decrease. Miners with less computing power may call it quits and leave the mining to those who can better afford the activity. That could eventually lead to a tragedy of the commons where few miners control the majority of the industry, the supply of bitcoin, and the price.


Singapore-base QTUM (QTUM $53.27 1/10/18) pursues solutions to the limited capacity of bitcoin, the Ethereum programming uncertainty, and the exorbitant cost of power of both with a hybrid of their key elements. QTUM is a fork off BTC that includes an ETH-like “virtual machine,” but uses an “x86” architecture optimized for mobile platforms. It resembles BTC but also includes an “Abstract Accounting Layer” to provide smart contract functionality. QTUM includes “protective clauses” that function like templates for business contracts and reduce the possibility of infestation by unwanted pests like CryptoKitties. Because Qtum uses an alternative known as proof of stake (PoS) as its method to validate transactions, computing power and cost of electricity are reduced as factors for mining success. A PoS miner may mine only the percentage of each transaction equal to the percentage of the crypto-currency the miner owns. A holder of 1% of all outstanding Qtum is limited to mining 1% of transactions in each new block. Instead of a race to solve a cryptographic puzzle that is usually won by the rider of the fastest digital horse, Qtum’s proof of stake method apportions the winnings among paid participants.


Blockchain is the future of all recordkeeping. Pity the poor middlemen who will be replaced by robots, just as will long-haul truck drivers be supplanted by autonomous 18-wheelers in the twenty-nine US states where theirs is the number one occupation. Title-insurance companies are making preparations to use blockchain for real estate transactions, records of which can now only be viewed by visiting a town clerk’s office. France has said it will allow use of blockchain technology in the issuance of stocks and bonds. Hyperledger, a Linux Foundation project, seeks to allow multiple interconnected distributed ledger database projects under one umbrella of interoperability. In Estonia, the “digital republic”, a government data platform called X-Road “links individual servers through end-to-end encrypted pathways.” In the event of another Russian invasion, Estonia’s elected leaders might scatter across the globe but continue running their country from their laptops.