What Are Bitcoin, Ethereum, and Blockchain?
You may have seen the words “blockchain,” “Bitcoin,” and “Ethereum” littered around the Web, but few people truly understand how this technology works. Fewer still understand how it can affect the future of finance and the economy.
Anthony Di Iorio is one of those few. Not only did Di Iorio co-found Ethereum—the Bitcoin rival that has gained immense popularity in the last year—but he is also Chief Digital Officer of the Toronto Stock Exchange Group.
In other words, he is squarely between traditional finance and the emerging technology that threatens to consume it. I figured he would have a unique perspective on how blockchain, Ethereum, and Bitcoin can affect the economic landscape, so I tracked him down at the inaugural Techweek conference in Toronto.
The following is a transcript of our conversation. It has been lightly edited for clarity.
Gaurav Iyer: How would you describe Bitcoin to someone who has never heard of it before?
Anthony Di Iorio: Bitcoin is a digital currency that runs on the Internet and it’s also a payments system, so it has two parts to it: the currency and the payments platform. Both are called Bitcoin but one is with a lowercase “b” [the currency] and one is with an uppercase “B” [the system].
Basically, the platform is a decentralized network, which means it has no central authority that controls or issues anything. It’s actually run by a network of computers all around the world that put processing power into the platform and are rewarded with these little tokens called bitcoin. That token has value because you can send bitcoin globally on the Bitcoin platform, for free and without accessing third parties, like banks. It’s the first example of what we call blockchain technology.
Gaurav Iyer: How does blockchain work?
Anthony Di Iorio: Blockchain is a ledger system that tracks ownership of digital assets. It’s done in a way that you can’t duplicate assets. Before Bitcoin, you could always copy something digital; blockchain makes that impossible. You own a part—a key—on this ledger system and that key goes wherever you transfer your assets. It’s like sending an e-mail. It’s instant.
Gaurav Iyer: So it’s free? There’s no fee extracted for transactions?
Anthony Di Iorio: There are fees. The people powering the network get rewarded with new bitcoin and transaction fees, but they’re not percentage-based, so it only costs a few cents to send millions of dollars in bitcoin. It’s really negligible.
Gaurav Iyer: Most people are aware of Bitcoin because, as you said, it’s the first example of blockchain technology. But you co-founded a competitor to Bitcoin called Ethereum, and it has gained immense popularity in the last 12 months. How does it differ from Bitcoin?
Anthony Di Iorio: Bitcoin first came out in 2009. It’s a great payments system, but it’s very limited in what it can do.
I can send you money and although your identity is hidden behind an anonymous key, the transaction has a history on the blockchain. You can’t say I didn’t send it. Everyone can see it there on the blockchain. But other than being able to transfer value, Bitcoin has a limited programming language.
What we did with Ethereum is introduce a feature called “smart contracts.” These contracts are basically automated code that self-execute on the platform. So, any non-value-added service can be turned into an automatic function with a few lines of code, like legal contracts, for instance. Standardized legal contracts should be converted into code so people can access them without the added, inefficient cost of it being processed by someone sitting behind a desk.
That’s the difference between Ethereum and Bitcoin: we created a virtual machine that processes all of these contracts using blockchain technology. But we needed tokens to fuel the platform, so we created Ether, which—
Gaurav Iyer: Is that a currency?
Anthony Di Iorio: I don’t like to use the word “currency” because we’re moving beyond that. Bitcoin can be considered a “cryptocurreny,” but Ether is a fuel that’s required to power our platform. Every line of code requires Ether to keep running, so malicious code will simply die out when it runs out of Ether. It exists to incentivize people to get on the platform. The token value of Ether is now $1.0 billion.
Gaurav Iyer: How long did it take for Ether to reach $1.0 billion? What timeframe are we talking about here?
Anthony Di Iorio: We did a crowd pre-sale of Ether in 2014. It started trading on exchanges in 2015, so between mid-2015 and now I’d say it rose from $0.50 to about $14.00.
Gaurav Iyer: Can retail investors buy Ether and bitcoin?
Anthony Di Iorio: Absolutely.
There are exchanges all over the world that you can get in and out of. I bought bitcoin at $10.00 back in 2012 and sold some of them at $1,000. I actually have a bitcoin ATM for people who want to buy and sell, but I don’t want to give investment advice. Everyone should do their own research and understand why these things are worth so much. Don’t fall for the scam coins, because they’re out there.
Gaurav Iyer: What threat does Ethereum, and blockchain in general, pose to companies like PayPal? People usually talk about how blockchain endangers banks, but how much damage could it cause to native digital payments companies like PayPal?
Anthony Di Iorio: I think it offers opportunities.
Many of these companies view blockchain as a way of saving money because it automates so many manual processes. There are huge cost-savings in getting rid of processes or people who aren’t adding any value or doing things you can do with code. So, right now, it’s about cost-saving.
Down the road, there will be potential to monetize, but that’s difficult because blockchain is fundamentally about disintermediation technology. How do you make money by removing the middle man? That part still needs to be figured out.
Gaurav Iyer: It sounds like what you’re saying is that Ethereum can kill all rent-seeking businesses. And by rent-seeking, I mean any company that inserts itself as a third party to extract profit without adding any value. Is that right?
Anthony Di Iorio: Yeah.
Gaurav Iyer: If that’s true, why are the banks getting involved in blockchain? I know Goldman Sachs filed a patent for one in December last year—
Anthony Di Iorio: They’re all getting into blockchain.
Gaurav Iyer: Right, except that finance has grown tremendously as a portion of the economy since the 1980s, and we know it’s done that as a rent-seeking industry. So why would banks embrace a technology that kills rent-seeking when rent-seeking is their bread and butter?
Anthony Di Iorio: They believe this technology has a lot of opportunity to disrupt them, which is why they’re experimenting with blockchain. The thing is they want to create private systems of blockchain, but I don’t see why anybody would use those private systems when public ones like Bitcoin and Ethereum exist. The public systems are open and transparent.
Gaurav Iyer: If blockchain is the future, what business model does it offer to replace the rent-seeking model?
Anthony Di Iorio: That’s the thing. I think of intermediaries as the old way of doing business, but the new way has to be thought about.
We’re going to see a reduction down to zero-percent commissions and by that time, people will have figured out how to make money because there’s a genuine value-add here. That’s what human evolution is all about: adding value.
If people can interact with each other without a middle man taking fees, that’s what they’re going to do. We see enormous opportunity in getting to scale right now because the big companies are so, so behind on this technology.
There are going to be winners in this space. The question is how do you become that winner? You become it by connecting with the smart people, the problem solvers, and the small startups that aren’t getting any attention.