Blockchain: Blueprint for a New Economy

BitShares’ BitUSD. Others point out that Bitcoin volatility is less than some fiat

currency’s volatility and inflation

(making Bitcoin a better relative value

choice), and that many operations of

Bitcoin are immediate transfers in and

out of other currencies for which the

volatility does not matter as much in

these spot rate (i.e., immediate)

transactions.

Bitcoin’s market capitalization as of

November 2014 is $5.3 billion (see

http://coinmarketcap.com/), calculated

as the current price ($399.40) multiplied

by the available supply (13,492,000

Bitcoin). This is already on the order of

a small country’s GDP (Bitcoin would

rank as the 150th largest world economy

on a list of 200). Unlike fiat currencies

for which governments can print more

money, the money supply of Bitcoin

grows at a predetermined (and capped)

rate. New currency (in blocks) is being

issued at a regular and known pace, with

about 13.5 million units currently

outstanding, growing to a capped amount

of 21 million units in 2040. At a price of

roughly $400 Bitcoin per dollar, Bitcoin

is infeasible to use directly for daily

purchases, and prices and exchanges for

practical use are typically denominated

in subunits of millibitcoins (a thousandth

of a Bitcoin; 1 mBTC = ~$0.40) and

Satoshis (a millionth of a Bitcoin; 1

Satoshi = ~$0.000004).

Regulatory Status

Government regulation is possibly one

of the most significant factors as to

whether the blockchain industry will

develop into a full-fledged financial-

services industry. As of October 2013, a

handful of countries have completely

banned Bitcoin: Bangladesh, Bolivia,

Ecuador, Iceland (possibly related to

using Auroracoin, instead), Kyrgyzstan,

and Vietnam. China, as mentioned,

banned financial institutions from

dealing in the virtual currency as of

December 2013, although trading

volume in Chinese Yuan persists. 26

Germany, France, Korea, and Thailand

have all looked unfavorably on

Bitcoin.27 The European Banking

Authority, Switzerland, Poland, Canada,

and the United States continue to

deliberate about different Bitcoin-

related issues. 28 Countries try to match

up Bitcoin (and the concept of digital

currencies) to their existing regulatory

structures, often finding that

cryptocurrencies do not quite fit and

ultimately concluding that

cryptocurrencies are sufficiently

different that new legislation might be

required. At present, some countries,

like the UK, have classified Bitcoin as a

currency (and therefore not subject to

VAT), whereas other countries, like

Australia, were not able to classify

Bitcoin as a currency due to laws about

nationalized issuance (and Bitcoin

therefore is subject to VAT or GST—the

goods and services tax).29

In the United States, the Internal Revenue

Service treats Bitcoin as property (like

stock) and not as money, meaning that

users of Bitcoin are liable for capital

gains taxes on transactions.30 For

taxation, virtual currencies are property,

not currency. However, nearly every

other US government agency—including

FinCEN (financial crimes enforcement

network), banking regulators, and the

CFPB, SEC, CFTC, and DOJ—regulate

Bitcoin as a currency. 31

Chapter 2. Blockchain 2.0:

Contracts

From its very beginning, complexity

beyond currency and payments was

envisioned for Bitcoin; the possibilities

for programmable money and contracts

were baked into the protocol at its

invention. A 2010 communication from

Satoshi Nakamoto indicates that “the

design supports a tremendous variety of

possible transaction types that I designed

years ago. Escrow transactions, bonded

contracts, third-party arbitration,

multiparty signature, etc. If Bitcoin

catches on in a big way, these are things

we’ll want to explore in the future, but

they all had to be designed at the

beginning to make sure they would be

possible later.” 32 As we’ll see in

Chapter 3, these structures could be

applied beyond financial transactions, to

any kind of transaction—even

“figurative” ones. This is because the

concepts and structure developed for

Bitcoin are extremely portable and

extensible.

Blockchain 2.0 is the next big tier in the

development of the blockchain industry,

an area of prodigious activity as of the

fall of 2014.33 Because the Blockchain

2.0 space is in development, there are

many different categories, distinctions,

and understandings of it, and standard

classifications and definitions are still

emerging. Some of the terminology that

broadly refers to the Blockchain 2.0

space can include Bitcoin 2.0, Bitcoin

2.0 protocols, smart contracts, smart

property, Dapps (decentralized

applications), DAOs (decentralized

autonomous organizations), and DACs

(decentralized autonomous

corporations).

Whereas Blockchain 1.0 is for the

decentralization of money and payments,

Blockchain 2.0 is for the

decentralization of markets more

generally, and contemplates the transfer

of many other kinds of assets beyond

currency using the blockchain, from the

creation of a unit of value through every

time it is transferred or divided.

An approximate technological metaphor

for Bitcoin is that it is analogous to the