Why blockchain technology is flourishing

> BY KATE WILSON

On the morning of October 29, 2013, a Waves coffee shop in downtown Vancouver had an unprecedented number of visitors. Regular customers at the Howe and Smithe streets location jostled for space with national journalists, all wielding tape recorders and cameras in an attempt to get an interview with those standing in front of a bulky, one-and-a-half-metre-tall, blueand-white machine. The kiosk was the world’s first bitcoin ATM, and this was its opening day of trading.

The machine lived up to the hype. By the end of the week, it had exchanged more than $100,000 worth of the virtual currency.

That enthusiasm reflected a fervour for bitcoin that had been quietly growing in Vancouver since its inception in 2008. Knowledge of the cryptocurrency started small. In the wake of the global financial crisis, a mysterious individual or group authored a paper under the pseudonym Satoshi Nakamoto, titled “Bitcoin—a Peer to Peer Electronic Cash System”. Posting the document on a mailing list dedicated to cryptography, “Nakamoto” laid the groundwork for the software to become publicly available in 2009.

Soon after, Vancouverites began meeting to discuss the idea’s implications. Early conversations whispered that bitcoin could operate without the control of central banks, that it could exchange money more swiftly, and that it could drastically reduce transaction fees. Many were fascinated by how bitcoin’s exciting underlying technology, called blockchain, would support it.

The most passionate individuals formed the Vancouver Bitcoin Club— a group closely associated with those who would go on to operate the first bitcoin ATM. Leasing a space underneath a downtown barbershop, they established a location to meet, code, and talk shop about cryptocurrency and the untapped promise of blockchain. They dubbed the new hub DCTRL.

“My first experience of the spot was when it was more of a hacker space,” Chelsea Palmer, a community organizer, tells the Georgia Straight from one of two worn leather couches in its main room. “My friend was playing a DJ set here in December 2014. I was finishing my master’s degree on the social theory of tech, and while I found everything that was going on there really interesting, I knew I wouldn’t complete my thesis if I didn’t focus in on that. The next summer, I came back.”

DCTRL is now unofficially known as the cradle of Vancouver’s blockchain ecosystem. Of the city’s most prominent companies using the tech, many have roots in the community incubator. Businesses such as Mike Olthoff’s Coincards—a cryptocurrency-to-giftcard service—have been launched from the hub’s artistically decorated backrooms, and once-hoodied hackers have transitioned into high-flying jobs in downtown startups.

The place is funded by the group’s most dedicated members, who invite those intrigued by the technology to visit for meet-ups and conversations.

“We specialize in outreach at DCTRL,” Palmer says. “We try to connect with people that are super new to the technology. What I like most about our community here is that it’s always been free, welcoming, and publicly accessible. We hold discussions that anyone can follow and make it clear that anyone can ask questions. That’s something I’ve tried to push: ensuring you’re not using a bunch of highly specialized language without explaining what it means. We don’t want anyone to feel unintentionally excluded or to blame themselves if they don’t get it.”

In Palmer’s view, bitcoin and blockchain are easy to understand with the right explanation.

HOW BLOCKCHAIN WORKS Historically, when individuals wanted to transfer money or valuable commodities, it was necessary to have a central authority like a bank or government authorize the transaction and make sure it wasn’t fraudulent. Those middlemen ensured that both parties were acting in good faith, and they kept a record of what was exchanged so that documents couldn’t be faked.

Bitcoin, however, offered a way to transfer electronic cash directly between individuals. Payments could be made with a high level of trust to strangers, without requiring anyone to facilitate the transaction. This could be done using blockchain technology.

A blockchain is a type of ledger or database that records information. Unlike a bank’s ledger, which is controlled by an entity such as RBC or BMO, a blockchain is decentralized. The database is replicated precisely on any computer connected to the network, and is synchronized through the Internet to make sure that it is always up-to-date. As a result, no one person or organization owns the records.

When each exchange is carried out, it is grouped with any other agreements that have occurred in the past 10 minutes, and sent out to the network. These collections of transactions are known as blocks. When a block is created, any information it contains is officially verified, and the data can no longer be changed or removed.

Building these blocks can be done by anyone with a motherboard, some graphics-processing chips, and a simple piece of software. The people who choose to do so, known as miners, use their computers to solve very complex math puzzles. Each miner competes against the others to solve the problem, and create a new block. The first person to do so receives a reward— which, on the bitcoin blockchain network, is currently 12.5 bitcoins (about $100,500).

As each new block is validated, it is marked with the time of its completion and is attached to the previous one. The blocks are placed in chronological order and “chained” together. The chain is copied onto all the computers in the network in real time, allowing individuals to read the transaction history in a simple, linear way.

There are many advantages, advocates say, to choosing blockchain technology over the conventional banking system. Blockchains are publicly visible and accessible anywhere in the world, meaning that anyone can see what dealings have taken place. Because the ledger is decentralized and exists in a large number of different locations, its creators believe it can never be hacked, as a fraudster would need to erase a transaction on more than half of the computers connected to the network—a number that can run into the hundreds of thousands. Secure, open, and democratic, blockchains have the power to transfer control from central organizations back to individuals.

Although the technology is most commonly associated with bitcoin, that is only one of a number of applications. Right now, Palmer points out, hundreds of companies are attempting to use blockchain for alternative ideas.

“Bitcoin is currently a more recognizable term than blockchain,” she says. “That means that its killer app has succeeded. But a lot of us believe that these unalterable databases will create opportunities for things like radical selfgovernance, banking the unbanked, and offering greater ethics in research. The tech has a lot of potential.”

HOW COMPANIES USE IT In Vancouver, local businesses are imagining diverse and creative uses for the technology.

Among the most exciting is newly minted company Hypervote—a business spun out of local research group Blockchain@ubc. Voting in elections can be time-consuming, and—as the U.S. presidential election publicly highlighted—ballot results are sometimes challenged. Hypervote’s platform reinvents the process. Rather than going to a polling station, individuals can vote using their cellphones from anywhere in the world. Its software allows citizens to track that their choice has registered, and it offers greater security and trust by placing the selections on a blockchain that has, so far, proven impossible to edit. Every ballot can be audited if contested, and no voter can change their choice once it’s been inscribed, tackling issues of voter fraud.

Social impact, too, is the driving factor behind another Blockchain@ UBC project: the creation of digital identity cards for people living in the Downtown Eastside. Dubbed Canada’s poorest postal code because of its low median income, its streets host many who have lost their government ID. Without official documents, citizens can be turned away from vital services such as food banks, shelters, or detox clinics, driving the cycle of poverty and addiction. To combat that, the UBC ilab is building an app that allows users to upload an authenticated copy of their B.C. Services Card to a private blockchain. The information will let organizations verify an individual’s identity, and offer better care.

Although Vancouver boasts innovative upstarts, its blockchain community is anchored by a few influential companies. One of the largest and most mature is the Vanbex Group. As in many local businesses, the organization’s founder, Lisa Cheng, was a prominent member of DCTRL. Graduating from being a self-described “computer nerd” to a vital employee of early cryptocurrency organization Mastercoin, Cheng next started her own company with Kevin Hobbs, who was working as a corporate foreign-exchange trader. Together, the pair created a multifaceted organization using the technology that, in Hobbs’s words, “would change absolutely everything”.

“I guess how I’d describe the Vanbex Group now is that we’re a full-stack professional-service-and-development company, but one that specializes in blockchain,” CEO Hobbs tells the Georgia Straight from the firm’s downtown office, a location that he says it has already outgrown. “We started as a marketing and consultancy company. We’ve expanded to do community, and social, and branding, and legal guidance, and white-paper-writing for any company that wants to incorporate blockchain into its product. On the other side, we’re a full incubator. We help people mould their company and adapt blockchain into their business model for future success.”

One of the ways that the Vanbex Group makes the technology accessible to other outfits is with its own blockchain-based platform, named Etherparty. Its first creation, Rocket, launched this summer.

The Rocket software addresses two of the most prominent uses of the blockchain in the professional world— developing “tokens”, and completing an “ICO”. The concept is revolutionary. Previously, if a private organization wanted to borrow cash to cover its costs, it would pitch to venture capitalists or accredited investors. Each would then take a percentage of the company—known as equity—in return.

Blockchain technology instead established a way for private companies to ask everyday people to invest. In order to reach the public, those organizations create their own token: a digital coupon tied to a product or service. Tokens are bought by individuals, who can then redeem their value by spending them on the product they’re asso

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ciated with after it’s been developed, trading them to another person, or selling them for major cryptocurrencies like bitcoin. Those cryptocurrencies can then be converted into more traditional “fiat” currencies, like U.S. or Canadian dollars.

Tokens are created and distributed through a process known as an initial coin offering, or ICO. Similar in some ways to an initial public offering (Ipo)—the undertaking where private companies sell their stock to the public for the first time—an ICO lets any interested party put as much or as little money into the company as they like. Unlike an IPO, however, buying tokens does not mean that the individual can vote on the direction of the business, and the company doesn’t need to give away any equity. Instead, the process operates in a similar way to crowdfunding platforms like Kickstarter, giving organizations a large amount of money up-front—sometimes hundreds of millions of dollars—to develop their idea. Investors then hope to recoup the value of their venture as the product or service grows in popularity, increasing the price of the token, or by buying the product the token is associated with at a discounted price.

Since the world’s first ICO in 2013, tokens continue to be created at staggering rates. In the first four months of 2018 alone, businesses worldwide collectively raised $6.3 billion through the process. Despite that enthusiasm, though, ICOS are often long, complex, and fraught with controversies. Rocket, the Vanbex Group says, will simplify the ICO process, and can be used by companies to assure interested buyers that their tokens are legitimate.

BLOCKCHAIN’S LIMITS Although the technology has—in theory—the capability to transform fundamental services, a number of blockchain companies have been criticised for making overly optimistic claims. At base, a blockchain is a slow ledger that is ill-suited to handling complex data. Although the hype around the tech has inspired companies as diverse as Long Island Iced Tea or the Massachusetts Institute of Technology’s diploma-granting department to incorporate it into their business, there are, for the moment, few instances where blockchain can fulfill an organization’s goals. For Hobbs, those unrealistic statements could damage the industry’s reputation.

“People are promising the world,” he says. “They say they’ll do this, that, and everything just to get the blue-sky investors in. A lot of people are naive and don’t really know about the technology, and while they understand that there are lots of great things about it, there are many issues. We’re still at dial-up and everyone is promising high-speed.

“We still need to solve things like storage, capacity, and speed,” he continues. “People talk about doing a financial transaction online. Often when you’re sending money overseas, people might want to see a picture of your driver’s licence. You can’t store a picture of your licence on the blockchain. It just can’t hold that much data. So if you can’t send the information of the transaction together with the image, you have to send it from different places. And when you have to go outside of the blockchain for something, is it really still valuable? Not really. Because now you have a record of a transaction that happened, but if your data is corrupted outside of that, you can’t trust that audited transaction.”

In Hobbs’s view, the best way to combat those deceptive promises is through education. Rather than relying on the media or government to push the idea into the mainstream, another local company found a left-field way to speed up understanding.

KITTENS ON BLOCKCHAIN In October 2017, four individuals from Vancouver company Axiom Zen decided to reimagine how blockchain technology could be used. Frustrated that programmers were limiting their imagination to financial transactions, the group attended the prestigious Ethwaterloo hackathon with the goal of launching one of the first blockchain experiences for everyday people. Dressed in rainbow-coloured cat T-shirts and sporting cat-shaped balloons, the group announced themselves as the Cryptokitties team.

Weeks later, the idea they started to code at the event had become the world’s most successful blockchain game.

“We make collectible, breedable, and adorable little [virtual] cats,” Bryce Bladon, cofounder and communications manager for the company, tells the Straight on the line from his Vancouver office. “In simplest terms, Cryptokitties is an example of what the technology is capable of.”

To begin the game, new users must buy at least one cat from the online marketplace, with the goal of mating two together. The game’s avatars are reminiscent of digital Beanie Babies, but are much more complex. Each kitty boasts a unique set of characteristics— known as “cattributes”—that can be passed down from two parents to their offspring. Features such as pattern, mouth shape, fur colour, eye shape, and eye colour make each kitten unique, and mixing different traits can produce unexpected results. Collectors privilege some characteristics over others, so players can breed their own cats together or couple with another user’s kitty to create the

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perfect mix of DNA. Each person takes part in the game for different reasons, but for many, the aim is to breed the rarest cat.

“At first blush, the kitties don’t seem like anything that’s too revolutionary—we’ve all owned a song or a movie, for example,” he continues. “But blockchain introduces this idea of digital scarcity. During the dotcom boom of the 1990s, suddenly things that used to be scarce, like the track you heard on the radio and had to grab your tape recorder for, or the movie you had to videotape from TV, became instantly copyable. As a result, we began to devalue a lot of those digital assets. With Cryptokitties, you are the only one that owns that cat, and the ownership can be proven through the blockchain.”

Enthusiasm for Cryptokitties exploded in December 2017. Millions flocked to the platform, causing so many transactions that users became worried it would slow down its blockchain network irreparably. Rarer cats sold for upwards of $100,000, and the company earned profiles in international media, including a feature in the New York Times. Word spread fast, and the game soon saw a large, nontechnical audience signing up.

“Cryptokitties plays a pretty big role in blockchain education,” Bladon says. “There are three ways of explaining something to someone. You either tell them what it can do, show them what it can do, or you let them experience it for themselves. The vast majority of anything blockchain-related is in that first category—it’s a lot of people talking. There are so many discussions about what the technology is, or what it might be, or what it could one day achieve. And that’s cool, but it’s esoteric—it’s meaningless to the vast majority of people.

“Next is showing what the blockchain is,” he continues. “That’s where demonstrating what apps like bitcoin do makes sense, because blockchain technology started to be defined by how bitcoin operates. Showing is better than telling, but it’s still not ideal. That brings us to the last and most effective way of communicating—to let people experience it themselves. That’s what Cryptokitties does.”

Spun off into its own company at the end of 2017, Cryptokitties raised $12 million in funding in March and has now got the nod from the government of China—a country where trading cryptocurrency is banned—to publish the game as a mobile app. In July, it was announced that the business had secured a partnership with HTC to install its platform on its latest phone, the Exodus, as a default application. Despite those successes, though, Bladon’s proudest moment was discovering that parents and grandparents were purchasing their first cryptocurrency in order to play the game.

“We set out to achieve the things in the industry that we wished others were doing—delivering a practical product that was aimed at consumers instead of industry insiders,” Bladon says. “We fundamentally believe that for this technology to reach its potential, it has to be used by everyday people, not just in the niche overlap of tech and finance.”

In Bladon’s view, Vancouver and its blockchain community have been instrumental in ensuring Cryptokitties’s accomplishments. Like DCTRL and the Vanbex Group, the company sees the city as a prime location to continue to grow its business and advocate for the technology.

“Personally, I can’t imagine anywhere else to have a tech or blockchain company that is quite as empowering an environment,” he says. “Vancouver and Canada in general really aligns with our institutional culture and values. We’re definitely an international and very diverse company, not just in terms of culture but in terms of ideas and background and socioeconomic upbringing. We genuinely believe those ingredients make our products better. That’s something that’s integral to what Canada is as a country and what Vancouver is as a city.”