8. July 2022 By Dr. Christina Mpakali and Alexander Eppenberger
Blockchain blog series: How this new technology is finding its way into the Swiss banking world
Introduction
In 2015, Bitcoin and the blockchain will celebrate its 15th anniversary. We’re starting a blog series on the topic and are convinced that blockchain is a forward-looking technology that is no longer in its infancy. Soon to be 15 years old, blockchain is growing up - with all the ups and downs. With blog articles including a glossary with description of the most important blockchain-relevant terms, we want to provide an insight into how the technology has developed during this time, where it stands today, and how it has influenced fintech and banks in the Swiss financial center.
An overview of the development of blockchain technology over time:
| When | What |
|
2008 |
An anonymous author going under the pseudonym Satoshi Nakamoto (whose true identity remains unknown to this day) publishes a description of the Bitcoin payment system in a white paper. It should be mentioned in this context that the attempt to create a digital currency goes back to the 1990s, when the cypherpunks had already realised the importance of data protection in the early age of the internet. Several attempts were made to develop digital money that couldn’t be issued and controlled by a state or a bank. With the introduction of Bitcoin, a concrete tradable digital currency emerged. |
| 2009 |
Bitcoin emerges as an open-source reference code on the blockchain. Aside from Bitcoin being available for purchase as a cryptocurrency, not much happens yet on the blockchain. |
|
2010 |
Bitcoin has a value of 0.08 US cents. For the first time, a purchase is made with Bitcoin in the United States - namely two pizzas for 10,000 BTC (!) |
|
2012 |
Non-fungible tokens (NFTs) are created for the first time on the Bitcoin side-chain counter-party. A meaningful application is not yet taking place at this point. This needs the important contribution of Vitalik Butterin, a Canadian programmer. |
|
2013 |
Butterin is bothered by Bitcoin's limited programmability and so develops Ethereum. |
|
2014 |
The development of Ethereum opens up new use cases for the crypto community. These applications are also based on blockchain technology. |
|
2015 |
One of these new use cases lies with Ethereum, which is expanded as smart contracts. These not only allow tokens to be stored, but also other assets such as contracts, bonds etc. And so the Blockchain 2.0 era begins! |
|
2017 |
NFTs go mainstream with CryptoKitties, an online game that allows players to buy, sell, collect and breed different types of virtual cats as NFTs. The same year, the Bitcoin price rises from around USD 920 (January 2017) to over USD 13,000 (December 2017). |
|
2018 |
In the following two years - until 2020 - important foundations are laid for future NFT mass applications. In the meantime, NFTs have penetrated numerous other sectors of the economy: sports, film, music, leisure, finance, and collectibles. |
|
2018 |
In the same year, the movement towards Decentralised Finance (DeFi) starts. DeFi is analogue banking going digital. This means that all financial services (cryptocurrency trading, lending, derivatives, insurance, etc.) are freely accessible to everyone via the blockchain - independent of banks or other intermediaries. |
|
2020 |
It is the year of the coronavirus lockdowns, during which many DeFi applications are developed. DeFi starts to boom this year. One of the triggers is Compound (COMP), which works like a traditional bank in the sense that one deposits various cryptocurrencies and receives annual interest. Rapid developments in the field of DeFi give rise to a new ecosystem of financial applications. By the end of the year, the price of Bitcoin has risen enormously, almost to the USD 30,000 mark. |
|
2021 |
Bitcoin reaches its all-time high of almost 67,000 USD. A drive owed, among other factors, to a pandemic that curbed the global economy and made investing in cryptocurrencies reach small investors and ordinary people. Meanwhile, NFTs experience hype. NFT marketplaces rise and become economically attractive for artists. It is therefore the artists who bring about this change in the general public. |
|
2022 |
The Bitcoin price falls below the USD 30,000 mark again in May. The market also witnessed for the first time a stable coin going virtually bankrupt - something that shouldn’t have happened. TerraUSD was supposed to maintain its stable value around 1 USD. However, within a week it collapsed by 90%. What happened? In order to keep the price stable, those behind the stable coin had to balance the investments in it by investing in USD to the same extent. In the case of TerraUSD, this didn’t happen. Instead of USD, investments were made in the cryptocurrency of the Terra Blockchain (LUNA). Therefore, whoever ‘destroyed’ a TerraUSD worth 1 USD created an equivalent LUNA coin. Such stable coins are called ‘algorithmic stablecoins’. However, as LUNA's market capitalisation fell below that of TerraUSD, there was no longer enough capital to maintain TerraUSD's peg to LUNA. And this led to the price collapse. |
What started with a white paper by Satoshi Nakamoto 15 years ago led to the emergence of a digital financial world based on technology and the users themselves. Not only institutions are venturing into this new territory but small private investors are also looking to profit.
Is blockchain technology already mature enough for the large mass market?
Not yet. Even though interesting use cases are already finding their first applications and regulators in some countries have benevolently set their guard rails for innovations in this area, there are still some challenges to overcome.
One of these challenges is scalability, i.e. a low transaction rate and long transaction validation time. For example, the Ethereum blockchain manages 15 transactions per second with a validation time of 3-10 minutes - in comparison, the VISA system manages 65,000 transactions per second with a validation time of one transaction within seconds.
Another weak point is high energy consumption. The Ethereum blockchain, which is the most widely used, uses the proof-of-work principle, which requires many computers to solve a task. More energy-efficient is the proof-of-stake principle, where only one computer is selected to solve a task. According to this principle, as well as the use of larger blocks, not only can energy consumption be reduced, but the blockchain is accelerated enormously. The EOS project, for example, deals with this.
A further important weakness is the lack of interoperability between different blockchains. In recent years, numerous blockchains have emerged, but they are not yet able to communicate with each other (data exchange). Without this communication, each blockchain is severely limited and this issue also slows down mass adoption. There are already projects (REN protocol) that deal with seeing and accessing information across different blockchain systems. However, these still need to mature and find acceptance.
Blockchain developers are already working to address these weak points. In the coming years, we will see this technology reach the next level and trigger mass adoption.
The introduction of Bitcoin nearly 15 years ago was the result of a long search for a secure, digital currency. During this time, blockchain technology has undergone an impressive development. The technological basis for a completely new, anonymous, digital, decentralised financial system, detached from states and national banks, is now available. However, weaknesses in this technology have already been revealed. If these are solved in the near future, nothing will stand in the way of the development of the decentralised financial ecosystem and the resulting mass adoption.
Outlook
In the next blog post, we’ll take a look at the Swiss financial centre: How has the fintech scene developed in the area of blockchain since the banking crisis and the birth of Bitcoin?
