A History of Silicon Valley

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These are excerpts from Piero Scaruffi's book
"A History of Silicon Valley"


(Copyright © 2016 Piero Scaruffi)

The Selfies (2011-16)

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Bitcoin

Bitcoin became a world-wide phenomenon before its value crashed in 2013, and bitcoin mining became a lucrative activity in its own. Bitcoin relied on a distributed consensus system and on a "secure hash algorithm" called SHA-256, which, ironically, had been invented by the National Security Agency (NSA). This process, that basically consisted in adding records to a shared public ledger, had the fundamental property of being easy to verify but (purposefully) difficult to execute (in order to deter counterfeiting). In other words, its usefulness and safety came at a price: it was computionally very demanding. In 2013 the first ASICs (application-specific integrated circuits) for bitcoins, known as "bitcoin hash chips", became available. They specialized in "mining" SHA-256 cryptocurrencies, Soon there were farms of custom-built servers, capable of solving very complex math problems, linked to Bitcoin's network via high-speed Internet connections. Each "miner" was rewarded with some bitcoins. Avalon (China, 2012, later renamed Canaan Creative) was the first company to manufacture ASIC mining chips. 21 Inc, founded in 2013 in San Francisco by Balaji Srinivasan of Andreessen Horowitz (who also founded bioinformatics company Counsyl Genomics) with the motto "a bitcoin miner in every device and in every hand", introduced an embeddable bitcoin mining chip in 2013 and then the first computer with native hardware and software support for Bitcoin in 2015. In 2015 BitFury, founded in 2011 in San Francisco by veteran entrepreneurs Valery Vavilov and Valery Nebesny, introduced a "green" ASIC chip capable of delivering a minimum computing power of 100 gigahash per second. Bitcoin mining hardware started popping up all over the world. At one point there was a farm of 45,000 special-purpose computers in northern Sweden.

In 2014 former Google engineer Mike Hearn and Gavin Andresen, a Silicon Graphics veteran and one of the original founders of the Bitcoin Foundation in 2012, proposed an alternative platform for Bitcoin, Bitcoin XT, to fix limitations of the Bitcoin transactional system.

Bitcoin was neither the first nor the only cryptocurrency. Cryptsy, the largest "altcoin" exchange, listed dozens of them: Namecoin, Litecoin, Dogecoin, Reddcoin, Darkcoin, Bitshares, Feathercoin, Mastercoin, Devcoin, etc.

Some, like Omni/Mastercoin, introduced by JR Willett in 2013, used the same blockchain as bitcoin. Others, like Litecoin (created by former Google engineer Charles Lee in 2011, second for market capitalization in 2015), Ripple (introduced by Vancouver-based Ryan Fugger in 2012), and Primecoin/PPCoin/Peercoin (all created by an anonymous "Sunny King" between 2012 and 2013) employed different "proof of work" algorithms. Primecoin was also an example of a cryptocurrency that worked with a proof of work less demanding in computational power, more "green".

The implication of Bitcoin extended beyond the world of currencies. For example, in 2013 the Russian-born Toronto-based Bitcoin fan Vitalik Buterin launched Ethereum, superficially a platform to develop Bitcoin-like "currencies" but in reality a broader interpretation of what a digital currency is. Ethereum aimed at executing any kind of secure service as a digital contract. That was the essence of the "block chain" mechanism driving Bitcoin. Ethereum was an "app coin".

The Bitcoin blockchain offered a new method to register and transact physical and intellectual property. "Smart property" was property whose ownership was controlled via the Bitcoin blockchain; but the killer application of Bitcoin was "smart contracts" that opened up a whole new horizon of applications. A smart Contract was a program stored on the blockchain that could automatically execute the terms of a contract. With smart contracts, auto-executing code replaced the legal process of enforcing a contract. In a sense, smart contracts made the legal system redundant. Two open-source projects, Codius, invented in 2014 by Stefan Thomas and Evan Schwartz at San Francisco-based Ripple Labs, and Ethereum provided platforms for smart contracts.

Austin-based Factom, founded in 2014, was the first to provide notary services via blockchain technology.

Ethereum ignited the imagination of the counterculture. Ethereum didn't store massive data within the blockchain itself. IPFS (InterPlanetary File System), developed by Juan Benet in 2015. IPFS stored data by distributing them over the network like MaidSafe and provided an encrypted address for each piece of information. The "dark net" counterculture viewed IPFS protocol as nothing less than a potential replacement for HTTP: it could reengineer the Internet. In 2016 Ethereum consisted of three main blocks: contracts (the "decentralized logic"), IPFS (the "decentralized storage") and Whisper (a "decentralized" messaging system, still under development). Ethereum was "Turing-complete": it could implement any program. The counterculture of the Internet began to view Ethereum as the "world computer" of the future.

Fintech spread to the bitcoin world. Andrew Cook founded his Cook Investment Firm in Chile in 2011, when he was 20 years old, and in it remained the world's largest bitcoin investment fund for a while. Quickcoin, founded in 2014 in San Francisco by Nathan Lands and William Cotton, integrated a bitcoin wallet with Facebook to send bitcoins as messages. CoinBase, founded in San Francisco in 2012 by Fred Ehrsam and Brian Armstrong, offered a bitcoin marketplace and a platform for bitcoin payments. Epiphyte, founded in 2013 in San Francisco by Edan Yago, offered banking for crypto-currencies. Circle, founded by Jeremy Allaire in 2013 in Ireland, allowed users to send bitcoins to friends and family. NextBank, founded in 2015 by Dimitry Voloshinskiy, aimed to become the first all-bitcoin institution.

BitShares, founded in 2013 in Virginia by Daniel Larimer, offers financial services (including exchange and banking) on a blockchain (not bitcoin's blockchain). In 2016 CoinCloud, a trader of bitcoin for cash, installed a "bitcoin machine teller" in Menlo Park. The blockchain was already being used for applications outside fintech. For example, Gems, launched in 2014 by Daniel Peled in Israel, used the bitcoin blockchain to implement a social messenger (therefore a "decentralized" social messenger); and Skuchain, founded in 2014 in Mountain View by Srinivasan Sriram, applied the blockchain to the supply chain of manufacturing.

The Counterparty platform was created in 2014 by Chris DeRose to provide a peer-to-peer financial market within the Bitcoin protocol. It enabled the creation of peer-to-peer financial applications on the Bitcoin blockchain; basically the foundations for setting up exchanges of digital currencies, smart properties, and anything else priced in bitcoins. The platform included a protocol that allowed Counterparty nodes to communicate with each other via the Bitcoin blockchain, a native currency (XCP) and wallets (both browser-based and mobile). In particular, Counterparty allowed users to create their own currencies inside the Bitcoin blockchain. Anyone could now launch their own "coin" on Counterparty.

Swarm, formed by Joel Dietz in 2014 in Palo Alto, was an incubator of Counterparty projects; a platform for launching Counterparty projects and for the initial mentorship and funding. Ethereum and Counterparty (and MaidSafe) were some of the "Bitcoin 2.0 technologies" for developing decentralized applications ("dapps"). Counterparty used the bitcoin blockchain, whereas Ethereum used a non-bitcoin blockchain. Eris, founded in 2014 in New York by two lawyers, marketed itself as a "universal blockchain platform" because it could clone Ethereum, Bitcoin and many other blockchains. Etherparty, founded in 2015 in Los Angeles, and based on Ethereum, was cloud-based: no programming required for developing dapps. A decentralized application was a smart contract with an unlimited number of participants. By definition, these were applications that used no server: the blockchain (distributed all over the network) served as their "backend". These applications did not use a centralized intermediary like the business applications that ran on, say, Oracle or SAP backends. They were the descendants of projects like Tor, BitTorrent and MaidSafe.

Smart contracts and dapps enabled a whole new form of organization. A contract based on laws is legally binding, but interpretation of the law is flexible, and often the outcome of a trial depends on the rhetorical skills of the defense attorney. A contract based on an algorithm (like the blockchain) is not legally binding, it is technologically-binding. Software inexorably executes the contract. The auto-executing software replaces the legal system and, to some extent, even the police. A DAO (decentralized autonomous organization) is defined by smart contracts. It is therefore an unmanned organization under the control of an incorruptible algorithm. The algorithm is, in turn, implemented in an open-source software that can be publicly audited. DAOs are autonomous; DAOs are self-enforcing; DAOs are transparent; DAOs cannot be manipulated by external agents; DAOs have no central control.

Decentralization had historically meant chaos, but the blockchain was a system based on decentralization that actually guaranteed order. Its technology was basically enforcing order through chaos. It also provided a much more secure exchange of information than government databases and corporate databases, because the security of a transaction was guaranteed by all the computers in the network.

In 2014 Susanne Tarkowski Tempelhof launched a platform to create DAOs, Bitnation, with the motto "Create your own Nation in 140 Lines of Code". A DAO provides the same services that traditional governments provide, but in a decentralized way: there is nobody in control of those services. Potentially, a DAO implementes a D.I.Y. government.

In 2016 a German startup, Slock.it, created a DAO that can act as a venture capitalist, funding startups (like Slock itself). Within a few months it collected the equivalent of $150 million on Ethereum, thereby becoming the largest crowdfunded project ever. The investors will have the power to vote on each startup that wants money. The next step was the "Distributed Collaborative Organization", a concept introduced in 2014 by Primavera De Filippi of Harvard University and by Houman Shadab of the New York School of Law to integrate blockchain-based distributed organizations (DAOs) with the existing legal system.

In the mid-2010s, many of the bitcoin heroes moved into the "Crypto Castle", a three-story five-bedroom San Francisco house.


click here for the other sections of the chapter "The Selfies (2011-16)"
(Copyright © 2016 Piero Scaruffi)

Table of Contents | Timeline of Silicon Valley | A photographic tour | History pages | Editor | Correspondence