The Battle of Block Chain: Barbarians at Bitcoin’s Gates?
A Chat with an Armchair Economist and a Coffee Shop Strategist
We all know that Crypto-Currencies become have become increasingly popular and increasingly publicized in recent years. And whether due to its Block Chain technology – a decentralized ledger that maintains a public record of all transactions – or due to luck, first mover advantage, and good timing, Bitcoin has emerged as the market leader in virtual coin. It’s built the House of Crypto, with tall hedges surrounding its 50-perch plot in the virtual landscape.
All is fair, however, in the world of Web real estate: a new currency, Ether, emerged earlier this year to threaten Bitcoin’s position as the world’s number-one Crypto Currency.
Resident economist Ruzaiq Badurdeen and technology strategist Gitendra E. Chitty help us understand what’s going on in a rare interview. Let’s hear what they have to say about this Ether(eal) world of eMoney…
GEC: So what’s it all about, Ruzaiq? Coins used to be metal, and dollars were paper. Virtual Currency is just a different name for online bank transfers, right? Even the name Block Chain is idiotic – sounds like a string of bricks tied together, not fancy technology. Honestly, I think people are running out of URLs and just pasting random words together these days. Like I don’t get why we’re even discussing this.
RB: Well, naming conventions aside, you have to admit that today, money isn’t just physical nickels and dimes. With eCommerce and virtual money transfers, and things like ezCash letting people send dollars or rupees across the country and around the world, currency equivalents cropped up with the promise of minimizing the impact of currency fluctuation. Bitcoin was the first virtual currency, enabling the citizens of the Web to trade, buy, transact, and communicate in a predictable and stable fashion without being tethered to a central bank, and still being convertible into traditional fiat currencies like US Dollars or Japanese Yen.
GEC: That’s my point - it’s just a check, replicated in bits and bytes rather than bills and little metal circles that jingle in your pocket. Online players of Massive Multiplayer Online Games needed a way to “buy” castles and swords and fantastic beasts without having to use credit cards and worry about data theft.
RB: To some extent, yes, but there’s more to it than that. Block Chain is theoretically not just for money. It’s a concept where messages and data flow are broken up into discrete “blocks” that can be securely transmitted across the open Web. The sender of the data and the recipient both have unique passkeys that let them put all those blocks into the correct order, convert it to something that tells a story, and effectively relay that story to someone else on the other side of the globe. That story can be “I’ve now paid you X dollars”.
GEC: Right - basically currencies that can be easily tracked. If Block Chains are also able to maintain a record of all transactions they’ve been part of, well that effectively makes it nearly impossible to use them for black market transactions – it would make forgery pretty difficult unless you’re some master hacker. Donald Trump and his ilk wouldn’t be very happy about it, would they?
Anyway, jokes aside, I get that these e-coins have advantages over traditional currency, but what’s the big deal with Ether - why is everyone saying that it’s knocking on Bitcoin’s door? It’s basically the same thing with a different name.
RB: Simply put, yes, they both have the same conceptual origin and similar security features. But there are some important distinctions. While both currencies rely on that block-chain technology, Ether [through its proprietary technology Ethereum] offers users inbuilt “smart contracts” that allow the currency to automatically execute the terms of a contract once its terms have been met, effectively cutting out middlemen and lowering transaction costs. Bitcoin, by contrast, relies on manual execution and manual conversion from the sender to the recipient. The latter works for individual users who want to send some cash equivalent, but has no model for corporate use.
GEC: So it’s a payment mechanism competition, and the auto-execution is Ether’s point of differentiation.
RB: Pretty much. Let’s take an example. Imagine you want to buy a car…
GEC: Actually, I just tried to do that. Found an electric car dealership in Colombo 8 that had a BMW i3 on order that was exactly what I wanted and couldn’t find anywhere in Sri Lanka at a reasonable price.
RB: Well, here’s where it gets interesting. Imagine you’re buying a car you saw on eBay instead from a dodgy place called Sparky Electric Cars in Borella.
GEC: OK, I’m with you so far... Believe me, I’d much prefer to have bought a car on eBay, given that I got defrauded for over a million rupees by these idiots who never delivered the car I paid for!
RB: If you’d used Ether, you’d probably have saved yourself a lot of headache and a whole bunch of cash because you’d have seen the car in person before your bank account got debited.
GEC: What??? Explain. How on earth would that have happened?
RB: Remember how we said that Ether automates transactions in virtual currency? If you’d paid for the car with Ether, the guy and his wife at the so-called dealership couldn’t have stolen your money. The transaction would only have taken place if certain defined conditions took place.
GEC: I think I’ve got it. If I “paid” the deposit with Ether, on the condition that I was going to get the car in a certain number of days, then I’ve effectively proven my intent to purchase by pre-paying. Except if Sparky didn’t deliver the car, the money wouldn’t have been transferred, and I’d still have that million five in my bank account. Rather than in the pockets of a thief who’s claiming bankruptcy while driving a red Tesla around Colombo.
RB: Basically, yes. You could have set the condition on the payment to say something to the effect of “once car is (1) cleared by customs and (2) delivered to buyer with the appropriate registration book and title, then (3) execute transaction to pay seller”.
GEC: And then I wouldn’t have ended up with a hole in my bank account, a WhatsApp picture of a phony Customs Declaration, and dozens of written and verbal promises to pay back my deposit while my garage sits empty and some smug huckster takes vacations to the Grand Hotel while his crook of a wife claims she can’t feed her children because of their debts.
RB: All makes sense now, doesn’t it? This way, your money and your fictitious car wouldn’t be hanging out somewhere in the ether and the owners of Sparky wouldn’t be running up tabs at the Cinnamon Grand. Puns, naturally, intended.
GEC: Sigh. Where were you when I got fleeced?
RB: Probably surfing the web in my living room, learning about Block Chains.
While Bitcoin continues to thrive in the grassroots economy that it built, it has doubled in value against the US dollar since the start of this year – not too shabby a return, for sure. Ether, by contrast, has already been adopted by several large organizations including J.P.Morgan, Reuters, Microsoft, and Samsung – giving it critical validation as a stable payment mechanism and a scalable, secure method for companies that need to execute financial transactions, and thereby solidifying its value as a true-but-virtual currency. These companies have formed the Enterprise Ethereum Alliance (https://entethalliance.org/), an organization that aims to collectivity promote the use of Ether in corporate transactions, particularly in derivatives trading and other financial investing.
Ether’s resultant success has thus been well-documented and effectively proven. Its real-world value is evidence enough: while the price of bitcoin has doubled over the last year [increasing to a market cap of almost USD 40bn], the price of Ether has risen by 2000%, and its market cap to USD 27bn in the same time period. That’s a faster growth rate than Facebook usage since its 2006 launch. Ether, the new kid on the Block [Chain] has quickly become a force that the Bitcoin community can no longer ignore.
Barbarians at the gate, indeed.
Ruzaiq’s background includes a stint as a Moody’s analyst and a MA in Political Economics from Kings College, London. Gitendra has two decades of corporate strategy experience in the Fortune 100 and a number of startups, and holds an MBA from Yale University. Together, they lead KPMG’s Strategic Advisory Services.