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<p> By <a href="http://observer.com/author/michael-craig/">Michael Craig</a> • 02/05/15 8:00am </p>
<p><strong>The Race to Replace Bitcoin </strong></p>
<p>There’s an epic battle for the future of money, and the outcome is murky. It might have several winners. It might have no winners. But one thing is crystal clear: The most exciting battle in this long war is taking place in San Francisco, and the town isn’t big enough for both Ripple Labs and Stellar, two of the contenders hoping to replace not just Bitcoin but the almighty dollar. The coining of digital money (“cryptocurrency”) has the potential to be the most important financial development of this century. On one side are governments, fiat currencies and the world banking industry. On the other side are hundreds of young companies backed by brilliant cryptographers, complex programming and security protocols and varying degrees of anti-establishment fervor. </p>
<p>The United States government, European Union and other currency-creating governments will use every means to keep control of money. Likewise, banking giants such as JPMorgan Chase, Bank of America, Citigroup and Wells Fargo are strongly invested in the status quo. The result of this fight will decide, among other things, the fate of developing economies, access to financial services, inflation, terrorism, all forms of economic crime from insider trading to drug dealing, the ability of governments to spy on citizens’ financial transactions, tax collection and the relationship between governments and the governed. The best-known cryptocurrency is Bitcoin. Bitcoin was created in 2009 by Satoshi Nakamoto (likely a pseudonym for a group of cryptographers). Bitcoin has a massive head start and has already developed significant brand equity. But among aficionados, there is wide consensus that the weaknesses in Bitcoin are fatal and unfixable. We’ve already seen two major breaches: Mt. Gox, the biggest Bitcoin disaster to date, in which almost 4 percent of the finite supply of Bitcoin (at the time worth $450 million) was lost; and just two weeks ago, Bitstamp, which coughed up $5 million to hackers. There will be a “Bitcoin 2.0,” and it will likely emerge from one of the hundreds of currencies that have been started in the past couple years. </p>
<p>This article focuses on two of those cryptocurrencies, Ripple and Stellar. They share a city (San Francisco), a founder (Jed McCaleb) and a lot of bad blood. Ripple, founded in 2011, is a relative veteran in this business. Its gross currency value of $527 million in mid-December puts it second behind Bitcoin’s $3.6 billion. (In third place is Litecoin at $50 million). Stellar, started in July 2014, is one of the newcomers (market cap of $17 million). It garnered publicity and presumptive credibility inside the industry from its anti-establishment rhetoric, high-profile advisors and derivation from Ripple. The company creating the Ripple protocol is Ripple Labs (originally called OpenCoin). Ripple’s currency units are XRPs. The company creating the Stellar protocol is Stellar Development Foundation (originally Jed McCaleb’s Secret Bitcoin Project). Stellar’s currency units are STRs. Bitcoin’s currency units are BTCs. Because of Bitcoin’s ubiquity, the cryptocurrency business is sometimes called “the Bitcoin business,” or, further confusing things, “the bitcoin business.” The interpersonal story of Stellar and Ripple Labs is emblematic of the turmoil roiling the entire industry. It has everything: Sex, huge money, fraud, genius, betrayal, international intrigue and government raids. The<em> Observer</em> is not in a position to predict the outcome of the clash among cryptocurrencies or against the combined power of world governments and banks. But the <em>Observer</em> is a place for storytelling, and Stellar-Ripple is the best story going in the vital young cryptocurrency industry and maybe in the financial-technology (“fintech”) world. </p>
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<p><strong>The Surfer King of Putnam County</strong> </p>
<p> The story starts in a Williamsburg apartment in 2008 with a positive pregnancy test. Two people who barely knew each other, Jed McCaleb, 32, and MiSoon Burzlaff, 30, decided to go for it and start a family. Ms. Burzlaff gave birth to a daughter and, 14 months later, a son. They moved upstate to Patterson. Mr. McCaleb, however, was not cut out to ride a John Deere across a spacious lawn in Putnam County, an odd place for a dedicated surfer. Mr. McCaleb also happened to be one of the world’s foremost cryptographers, arguably in a class with Alan Turing, the father of artificial intelligence and modern computing. He was also a pretty damn good coder. In 2001, Mr. McCaleb co-founded eDonkey2000, a Napster-like file-sharing program that earned him enough credibility in the programming world that he survived its cease-and-desist order and agreement to pay $30 million to avoid copyright infringement lawsuits by the RIAA. Co-founder Sam Yagan also escaped the eDonkey2000 wreckage to start OkCupid; he is now CEO of <a href="http://match.com/">Match.com</a>. </p>
<p> As Mr. McCaleb and Ms. Burzlaff started a family, the cryptographers behind the pseudonymous Satoshi Nakamoto launched Bitcoin. Individual currency units of Bitcoin, BTCs, are created through servers that mint (or “mine”) coins based on a mathematical formula limiting the total number that can ever be created (to 21 million). Once coins are minted, they can be transferred based on an open-source Internet protocol. Unlike wire transfers, credit cards or checks—or even online payment systems like PayPal—there is no intermediary. There is no bank collecting a $15-$45 wire fee or 4 percent merchant fee or any of the other toll payments that make banks the most profitable companies in creation. There is also no bank-to-government pipeline of information about the transaction. On the other hand, there is no recourse if something happens to the protocol’s non-centralized ledger. Mr. McCaleb became attracted to the possibilities of Bitcoin, and he had some big ideas about cryptocurrency. As a brilliant programmer–something like 75 percent of the 40 people interviewed for this story used the word “genius”—he knew plenty about decentralized peer-to-peer networks and operating beyond traditional boundaries of property and government control. Mr. McCaleb was the first to realize that for a decentralized currency to thrive, it needed a place to trade. In July 2010, he created Mt. Gox, a Bitcoin exchange. (Mt. Gox was an acronym for his short-lived fantasy trading-card exchange, Magic: the Gathering Online Exchange; he already owned the domain.) His idea and implementation was the first major turning point in the Cryptocurrency Era—even bigger than the invention of Bitcoin itself. Within three years, Mt. Gox was handling more than 70 percent of Bitcoin transactions. Each BTC soared in value during 2013, from $13 to $900, briefly trading above $1,100. Everybody knew about Bitcoin. Mr. McCaleb did not invent cryptocurrency any more than Netscape invented the Internet. Netscape took a decades-old technology nobody was using and put a familiar face on it. With Mt. Gox, Mr. McCaleb created a familiar environment for people to store, trade, and buy things with Bitcoin. Mt. Gox popularized Bitcoin, and then nearly destroyed it. In February 2014, Mt. Gox suspended trading, filed for bankruptcy and is in the process of liquidating. It initially announced that 850,000 BTCs (then worth $450 million) were missing and likely stolen, though about a quarter of those have since been recovered. So Mr. McCaleb, by the force of his ideas and coding skill, developed two game-changing companies, both of which eventually collapsed. Then in 2011, he had his greatest inspiration. He uniquely understood Bitcoin’s flaws and decided to create a cryptocurrency immune to those flaws. The mining process is a bizarre abstraction to most people, but Bitcoin needed it to create and limit the BTCs. People love hot dogs, but don’t want to see inside the slaughterhouse. The same is true with digital currency. </p>
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<p><strong>Jed McCaleb and Arthur Britto Create Ripple Labs</strong> </p>
<p>To create a new and better cryptocurrency, Mr. McCaleb sought the assistance of the smartest people on Earth. He met with David Schwartz and the two discussed how a consensus network could work. David joined as CTO and later became Chief Cryptographer. In a coffee shop in the East Bay, Jed and David convinced Jesse Powell to invest $100,000 into what was then known as Opencoin Inc. Soon after, they brought aboard legendary futurist Arthur Britto, who became the venture’s chief strategist. Despite IQs that look like professional bowling scores, no one in the trio could actually operate a company. With eDonkey2000 and Mt. Gox, Mr. McCaleb had found someone else to handle the business responsibilities, what he still needed was a grown-up to mind the store. Chris Larsen completed the all-star team as CEO of what became Ripple Labs. Mr. Larsen had already taken a pair of complicated start-ups and built them into thriving businesses: E-Loan, one of the first online mortgage companies, which IPO’d and is now part of publicly held financial services company Popular, Inc.; and Prosper, one of the first peer-to-peer lending marketplaces. Mr. Larsen had a reputation as a “disruptor” who could also shepherd a new idea to mainstream success. E-Loan and Prosper went on to process billions of dollars in transactions, adapting their new business models to comply with traditional securities and banking regulations and developing relationships with established financial services companies. </p>
<p>It was a dream team. With Mr. Larsen presenting a suit-wearing, responsible front to the bankers and Mr. McCaleb cast as the mad genius who would innovate and disrupt, Ripple quickly became the consensus successor to Bitcoin. It had brilliant technologists, backed by banking relationships and wise management. It was clear to the fintech world that Ripple could match and potentially overtake Bitcoin in shaping the future of cryptocurrency. </p>
<p>#bitcoins #steem #steemit #upvote #ripple #stellar</p>
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