2 August 2018

Bitcoin: (r)evolutionary stone money?

Yoeri Paesschesoone

Director of Business Center Brugge at ING Belgium, Blockchain devotee

The second Exportbeurs trade fair run by Flanders Investment & Trade was the setting for an infotainment presentation about bitcoin and blockchain. Yoeri Paesschesoone, Director of Business Center Brugge at ING Belgium and blockchain devotee, took the attendees on an exciting journey, looking at the possibilities and challenges of cryptocurrencies and their underlying technology.

"In 2013, Antonopoulos gave a lecture on blockchain and bitcoin to an audience of three."

“I’m speaking today on my own behalf,” was Yoeri Paesschesoone’s opening remark. “Blockchain and bitcoin are my hobby, my passion. That may sound strange for a banker when you consider the potential destructive impact of this technology on the banking world.” He showed a photograph of bitcoin pioneer Andreas Antonopoulos to illustrate the recent boom in interest in bitcoin. In 2013, Antonopoulos gave a lecture on blockchain and bitcoin to an audience of three. “I myself am more fortunate today,” said Paesschesoone with a glance at the 40 or so people listening, not all of whom had managed to find a seat.

Blockchain as an exponential revolution

“Does anyone know what Eisenbahnscheinbewegung means?” asked the speaker. “It’s the German term for the false sensation of movement you feel when you’re in a stationery train and you see a vehicle alongside you depart.” A lot of companies are in a similar position right now. They think that they’re moving in the right direction, but in actual fact they’re standing still.

Paesschesoone used this metaphor to demonstrate that sometimes new technologies or economic movements come along that take flight exponentially and which turn the future of business and the world on its head. Blockchain is one of them.

De day after tomorrow

Renowned technology entrepreneur, keynote speaker and author Peter Hinssen developed a simple model that stipulates that companies need to spend 70% of their time on today, 20% on tomorrow and 10% on the day after tomorrow. In reality, the distribution is 93%, 7% and 0%, respectively. And that is a missed opportunity because the day after tomorrow is where the long-term value of a company lies. That’s why it is so important to look further ahead and to think about what might happen within five or ten years. 

The relationship between bitcoin and blockchain
“You have to see bitcoin as the tip of the iceberg, where blockchain represents the far bigger structure below the surface."

When you ask people what bitcoin is exactly, most do not get beyond the general expression ‘virtual money’. Actually, you will only properly grasp what bitcoin is if you understand the underlying technology of blockchain. “You have to see bitcoin as the tip of the iceberg, where blockchain represents the far bigger structure below the surface,” explains Paesschesoone.

In 2008, Satoshi Nakamoto published his bitcoin white paper in which he described the concept and technical details of an electronic peer-to-peer cash system. In this he resolved the double-spending problem, making electronic money without a central authority a possibility.

How does Blockchain work in 1 minute (in French)

Bitcoin is like the stone money on the island of Yap

On the island of Yap, rai were used as money for a long time. These round stones were carved out of the rocks on a neighbouring island and brought by boat to Yap. There they found a permanent home on the island, never moving from their spot even though they changed owner. Everyone on the island knew which stones belonged to whom and after a number of transactions the new situation was communicated to all the residents during a kind of information meeting. Thus, they created a system where theft and double use were impossible. Bitcoin is based on the same principle.

The technology behind bitcoin

Bitcoin is not a physical currency; it is a piece of code that is encrypted and sent via a peer-to-peer network. Bitcoin uses the SHA256 key to encrypt the data, so you receive an entirely different code. Then the miners get to work. Two things happen when mining bitcoins:

  1. Validation of the number of bitcoins of the sender and the recipient.
  2. Search for a mathematical solution using the SHA256 key to validate the transaction.

These days, mining takes roughly 10 minutes and is called proof of work. The key that is found is then added to the next block. When a change is made to a data block, you receive a completely different key which therefore also affects the next block and all subsequent blocks. This system ensures that the transaction is secure and lies at the heart of blockchain technology. It is a sequence of data where there is always a link to the preceding block.

Mining or buying bitcoins

To mine bitcoins you need computers with massive computing power. The processors required have to be cooled continuously. Central Mongolia, where the temperatures are low enough all year round, is therefore one of the choice locations for organising profitable mining activities.

If you want to collect bitcoins yourself, you have two options:

  • Mining bitcoins: as a miner you yourself also receive a unit of bitcoin (if you have found the key).
  • Buying bitcoins: you can obtain bitcoins from special bitcoin ATMs, from someone from whom you buy bitcoins, or from a platform like Coinbase.

These days, there are around 17 million bitcoins in the possession of some 25 million people. A total of exactly 21 million will be created. However, these can be divided into very small units which in turn are called satoshis (1 bitcoin = 100,000,000 satoshis).

Challenges of bitcoin
"A bitcoin network would consume as much energy per year as a country like Slovenia or Turkmenistan."

Despite the meteoric rise of bitcoin and the great advantage that a central body is not required for transactions to take place in a secure and efficient manner, cryptocurrencies are still experiencing a lot of teething troubles.

  • Unpredictable price: bitcoin’s price movements are still very erratic, and fraud cases have triggered huge price drops in the recent past. In addition, trading platforms are often flat when there are big falls.
  • Huge energy consumption: large processors that consume a lot of energy are needed for mining bitcoins. According to calculations, a bitcoin network would consume as much energy per year as a country like Slovenia or Turkmenistan.
  • Limited number of transactions per minute: every second only 5 to 7 bitcoin transactions can take place, compared with 2,000 for systems like Visa.
  • Market fears: the tax authorities have decided to tax bitcoin profits at 33%. In addition, the law in Belgium prohibits banks from selling or providing advice on cryptocurrencies.
What can you do with bitcoins and blockchain?
"In China, there are even beggars who ask for bitcoins rather than ordinary cash.”

Despite the risks and teething troubles, the popularity of bitcoin continues to increase. “The number of places where you can survive purely using bitcoins is noticeably on the rise,” says Paesschesoone. “In Belgium, too, there are plenty of cafés, restaurants and shops that accept bitcoins. In China, there are even beggars who ask for bitcoins rather than ordinary cash.”

Blockchain offers immense possibilities. The number of new applications for a distributed system like this that has no central database or middleman is increasing fast, posing a serious threat to existing business models and established market players in all sorts of sectors. This applies not only to the financial world.

In Sweden, testing is well underway for using blockchain to register land ownership. Primalbase is a system for sharing, selling or renting out offices on the basis of the blockchain platform Ethereum. Filecoin is a distributed network for data storage that uses its own cryptocurrency.

What is ING doing with blockchain?

ING has been hailed as the most progressive bank in the area of blockchain. At our Blockchain University, a team of 20 people are working continuously with this technology. They are researching ways in which blockchain can help make processes better, cheaper and more secure and efficient for customers.