Encore: Crypto Wars | New Kids on the Blockchain | 5

0:00This series originally aired in 2021.

0:11January 2014, Florida, one month before the fall of Mount Gox. Vitalik Butorin steps out of the Miami Beach Convention Center into the bright sunshine. He pauses as the humid air embraces his spindly body like a warm bath. Butorin is 19, and he's just made his public speaking debut at the North American Bitcoin Conference. When he walked on stage, this Russian-Canadian brainiac was just another crypto geek. Now, he and his revolutionary blockchain project, Ethereum, are the toast of the scene. A dozen jubilant men follow Butorin outside. They're his disciples, a a ragtag gang of programmers whose brains lit up when they read Butorin's proposal for Ethereum.

1:02Now, they're helping him to turn his idea into functioning computer code. One of the gang, a bald man in his 40s, catches up with Butorin. Vitalik, our Ubers are here. Come on, let's get back to the house and celebrate. Butorin follows the man into one of the waiting Toyotas. Before he can shut the door, a younger member of the team scurries over. Room for one more? The lanky Butoran shunts over to let him squeeze in. As the Uber pulls away from the curb, the younger developer grins at Butoran. You crushed it, man. You crushed it. A standing ovation. Eh, I stumbled at points. Ah, who cares? You floored the room.

1:48People are dying to buy into Ethereum. The younger developer checks the message on his phone as the Uber cruises over the bridge crossing Biscayne Bay. Whoa, my pal in Israel says the crypto forums are going crazy. He says we'll raise way more than$5 million from the crowdsale. The crowdsale, or initial coin offering, is crucial to Buterin's plan. He doesn't want to go cap-in-hand to venture capitalists to get the millions needed to create Ethereum. Instead, he's going to ask the Bitcoin community to fund the project by buying his new cryptocurrency before it even exists. Vitorin smiles. More than five million would be amazing.

2:32Let's calm down. We still need to think about the legalities of selling the Ethereum crypto. Ether. The currency is called Ether. Of selling Ether. Legally, it'll probably be classed as a security like a stock or a banknote, so it'll be regulated by the SEC. Yeah, we don't want heat from the SEC. Let's get a lawyer and register with the SEC before we start selling. Buterin looks out across the bay. Ethereum is really going to happen, isn't it? Yeah, it sure is. This morning, Ethereum was a low-key project based on a dream of taking Bitcoin to the next level. Now, people are clamoring to buy a theoretical cryptocurrency for a non-existent blockchain.

3:20Ethereum and its novel ground-level fundraising method are about to change crypto forever and ignite a buying frenzy. And when that happens, it'll launch crypto prices into the stratosphere.

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5:20From Wondery, I'm David Brown, and this is Business Wars.

5:47On the last episode, the Winklevoss twins returned to the fray with the Gemini Exchange, and Coinbase CEO Brian Armstrong battled to speed up Bitcoin payments, only to get blocked by China's Bitcoin miners. But now, the buzz about a brand new blockchain called Ethereum is growing, and it's about to become the latest flashpoint in the fight between Coinbase and Gemini. This is Episode 5, New Kids on the Blockchain. Shane.

6:24It's May 2016, and the crypto crowd are in the Marriott Marquis Hotel in New York for the Consensus 2016 conference. In the lobby, Vitalik Butorin hunches over his cup of green tea as a YouTuber positions his camera. A passerby photographs the 22-year-old crypto guru as he squeezes juice from a lemon wedge into his tea. It's two and a half years since Buterin wowed Bitcoin fans in Miami. Since then, he's raised$18 million in his initial coin offering and taken Ethereum from idea to reality. The YouTuber switches the camera on. What's up, Crypto Land? I'm here at Consensus 2016 with Vitalik Buterin, creator of Ethereum.

7:11Buterin waves at the camera. Now, I'm into my crypto. I love my Bitcoin. Love my Litecoin. But I'm a non-technical dude, so can you explain Ethereum to me? Everyone says it's the next big thing. Buterin turns his head to face the YouTuber. His Ethereum blockchain and its cryptocurrency, Ether, are generating a lot of buzz among the crypto connociente. But he still needs to get the word out because cryptocurrency trading exchanges like Coinbase and Gemini still don't let their customers buy and sell either. Bitcoin is great as digital money, but it barely explored the possibilities of blockchain technology.

7:50Its blockchain is limited to exchanges of Bitcoin between two parties. Ethereum is a more powerful form of blockchain. Ethereum lets people put apps onto its blockchain. The computers on the Ethereum network then execute those apps. Hold up, hold up. Apps? Like on my phone? So it could, like, do Twitter? Yes. Ethereum can perform any task that can be described mathematically, just like your smartphone or any other computer. The difference is that in Ethereum's case, the network is the computer. So, yes, Ethereum could run applications like Twitter or Angry Birds or eBay. Wow. So it's like a virtual supercomputer built out of thousands of computers spread all over the world?

8:35Hmm. Yes. That analogy is acceptable. Ethereum also makes it easier to create new cryptocurrencies. New crypto? Yes. On Ethereum, a digital currency or token like Bitcoin needs just nine lines of code. These digital tokens could also represent more than currency. they could represent ownership of some form of property, like land, shares, baseball cards, whatever. Transferring ownership would then be as simple and as quick as email, and the transfer would be permanently logged on the Ethereum blockchain. Mind blown. Is that what you created Ethereum to do? I created Ethereum to make smart contracts possible.

9:18Smart contracts? A smart contract is an agreement where the terms of the transaction are written down in code on the Ethereum blockchain. The blockchain then automatically checks for when the terms of the contract are met. And when the terms are met, the contract is automatically executed without the need for attorneys, courts, or some other trusted third party. Here's an example. You got here by Uber, right? Yeah. Well, that was a transaction between the driver and you as the passenger. Uber is not really needed to make such a transaction, but you and the driver are strangers. You don't trust each other.

9:55So you need Uber to be the trusted third party. In return, Uber takes a fee. Gotcha. A smart contract could remove the need for Uber. You see, once you and the driver agree on a smart contract, the blockchain is the trusted third party. It makes sure you have the money to pay, but it won't pay the driver until you reach your destination. So, Ethereum's disrupting Uber? Hmm, potentially. Any organization or individual that acts as a trusted third party in a transaction can theoretically be replaced by a smart contract. Huh, okay, but what about Ether? That's Ethereum's crypto, right? Where does that come in?

10:40Well, Ether is the currency and fuel of Ethereum. Every calculation Ethereum performs costs users a tiny amount of Ether. This makes excessive use of the network prohibitively expensive. Right. And how much Ether will there be, like, ever? Well, unlike Bitcoin, there's no total limit on the amount of Ether that can be mined. Ether's value is driven by people needing it to pay for the tasks they want Ethereum to perform. Buterin checks his watch. I'm sorry, I need to go. Okay, okay, so bottom line, Ethereum and Ether are going to change the world. Well, I don't know. Ethereum is a tool. How people use it is their choice.

11:25But change the world? I just can't say. But the Winklevoss twins hope Ether can change their world. They need ways to help their six-month-old Gemini exchange gain ground on Coinbase. So Gemini adds Ether to its exchange. The move makes Gemini the first regulated exchange in the U.S. to let people buy and sell Buterin's cryptocurrency. It's a canny move. Ether's price is soaring. It's gone from$1.25 to more than$12 in nine months. Customers eager to buy into Ether rush to sign up with Gemini. Soon, Gemini is enjoying not just a boost in user numbers, but extra income from the commissions it earns whenever people buy and sell crypto on its exchange.

12:16But while Gemini embraces Ether, Coinbase dithers.

12:26May 2016. Coinbase headquarters, San Francisco. In a meeting room, co-founder Fred Ersam paces the room, ranting at the colleagues gathered around the table. Ethereum is the bleeding edge now. Going from Bitcoin to Ethereum is like going from a pocket calculator to a personal computer. The senior Coinbase employees around the table nod along. Ever since Vitalik Butorin dropped by to tell them about the Ethereum blockchain and its cryptocurrency Ether, they've been converts. They all want Coinbase users to be able to buy and sell Ether. But there's a problem. And he's in the room. Coinbase CEO Brian Armstrong.

13:10As Ersim makes his case, Armstrong listens without a flicker of emotion on his face. Ersim starts smacking his fist into his palm as he paces the room. Ethereum's at the forefront now. We have got to put Ether on our exchange. Armstrong interrupts. Bitcoin is proven. Ethereum is not. Ether's total value has gone from zero to a billion dollars in nine months. There's your proof. That doesn't mean that the excitement will last. So add it to the exchange, and if it fizzles, drop it. What about security? Ethereum could have undiscovered security flaws. Ersem stops pacing and stares at Armstrong. You know who you sound like right now?

13:59Who? Microsoft's Steve Ballmer dismissing the iPhone. We're already late to the party. Every other crypto exchange now lists Ether, including Gemini. If we don't offer Ether, our customers will just go buy it somewhere else. Everyone looks at Armstrong. They want this. But it's his call. And time after time, he's slapped down any suggestion that Coinbase deals in anything other than Bitcoin. But Armstrong knows Ether is different. It's not just digital money. It's also the oil of the Ethereum network. Besides, he can't ignore the competition. Okay, let's add Ether. Airsome punches the air as the team clap and cheer.

14:48Yes! I knew you'd come around. We're going to do this. We're going to smash through that brick wall. In July 2016, Coinbase adds Ether to its exchange. By October, more than a million new customers sign up to trade crypto on Coinbase, bringing the total to 4.7 million. It's a big boost, but the Winklevoss brothers' Gemini is still gaining on Coinbase. Alarmed, Armstrong orders his team to go all out to beat Gemini. But while he's focusing on his New York rival, a new threat is about to emerge on the other side of the Pacific.

15:34Spring 2017, Chengdu, China. In a vast restaurant, 500 crypto entrepreneurs are tucking into a lavish hot pot dinner. They're here at the invitation of Chandler Guo, the boss of one of the world's top Bitcoin mining operations. He greets his guests as he weaves through the restaurant towards the dipping sauce counter. At the counter, he notices a familiar face spooning soy sauce into a bowl. CZ, glad you could come. What are you doing these days? I'm starting my own crypto exchange. It's called Binance. Guo's interest picks up. He's not just a miner. He's an investor, too. Oh, really? Yes, it's going to be a pure crypto exchange.

16:20No renminbi or dollar trades, just crypto for crypto. Huh, interesting. You wouldn't even need a bank account to run a business like that. Exactly. Binance will exist totally outside the legacy financial system. Whoa, reaches for the sesame oil. So, how will you fund it? Venture capital, probably. Do an ICO. An ICO, or initial coin offering, is the latest fad in crypto. Inspired by Ethereum's$18 million crowd sale, crypto startups are now raising funds by selling their digital coins to people who want to buy in early, hoping for big gains. CZ looks doubtful. Hmm, I'm not... Guo leans closer. No, you do an ICO.

17:10You'll raise millions without having to go cap in hand to investors. Do an ICO. CZ does what he's told. He builds a cryptocurrency called Binance Coin and launches it with an ICO that raises$15 million. But Binance Coin is more than just a fundraiser. It's a loyalty program, too. People who use Binance Coin to buy crypto on Binance are charged vastly reduced transaction fees. The tactic fuels demand, pushing the price of Binance Coin from$0.10 to$10 in just six months. By the year's end, Binance will be the world's top crypto exchange, handling half a billion dollars worth of trades every single day.

18:04But there's another reason for its success. Since Binance doesn't handle national currencies, it doesn't interact with the existing financial system. And that means it can take a more laid-back approach to checking who's using its services. It doesn't have an office either. Like the crypto it trades, Binance exists only in cyberspace. Everything is run by a remote workforce that are mostly paid in Binance coin. Binance's crypto-to-crypto exchange is perfectly timed, too. By fall 2017, every day seems to bring yet another new crypto launched with an ICO. And people buy them. These ICOs raise millions, tens of millions, even hundreds of millions of dollars.

18:53Soon, there are cryptocurrencies for everything. From dentists who want to swap patient data, to people who want to buy mining rights on asteroids, And the prices of many of those currencies are soaring. The world's got a serious case of crypto fever. And comedians like John Oliver and The Daily Show's Ronny Chang are having a field day. There are now over 1 ,500 cryptocurrencies that you can buy with names like Titcoin, Trumpcoin, Jesuscoin, Insanecoin, Electronium, Wax, Particle, Deep Onion, Snovio, Pluton, NewBits and Clams. A list so insane that you can't tell which ones are real and which are made up because they're all real.

19:37I didn't make any up. There is no way all these people buying cryptocurrency have any idea what the hell they're investing in. And it's not just Bitcoin. Ethereum, the number two cryptocurrency, has risen 5 ,000 % since the start of this year. Why? So I decided to make my own cryptocurrency. But that has to be an incredibly complex... Done. That was easy. I did it. It literally takes 10 minutes to go on a website and make your own coin. Time to make it rain chain coin and kickstart the financial revolution. You accept chain coin? Chain? Chain coin is like Bitcoin. It's disrupting global financial...

20:13But the jokes deter no one. Week after week, money pours into the latest ICO hyped on Reddit and YouTube. Driven by greed and fear of missing out, people pump their life savings into every passing coin. A blockchain promoted by former Mighty Ducks actor Brock Pierce raises$4.2 billion. The Long Island Ice-T Corporation renames itself the Long Blockchain Corporation, and its stock price soars. The Winklevoss twins watch the value of their bitcoins breach the billion-dollar mark. The crypto industry is spewing out new coins like a haywire Las Vegas slot machine. And as demand for crypto goes supernova, Coinbase finds itself straining to keep itself together long enough to reap the rewards.

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23:23December 2017, Coinbase headquarters, San Francisco. CEO Brian Armstrong exits the elevator and enters a scene of chaos. People rush past in all directions. There are staff sitting on the floor all around frantically typing on their laptops. Wall-mounted screens display live data on crypto prices, trading volumes, and more. Armstrong doesn't bat an eyelid. It's been like this for weeks. Coinbase began 2017 with 5.5 million users. It now has 20 million. And every day another 100 ,000 sign up. Armstrong heads for his office. crossing paths with a senior exec. Hey, Brian, daily trades just hit a new high.

24:13Four billion dollars! Armstrong high-fives the passing exec, but keeps moving. An assistant races over. Couple of updates for you. Bitcoin is now worth the same as a pound of gold. Bitcoin miner payment processing fees are up again, and it's now cheaper to send money via Western Union. Thanks. Armstrong notices his engineering and training chiefs up ahead. They're outside the conference room, arguing. We need that room. I got 40 recruits in there halfway through being onboarded. We need them ready to work so they can deal with a customer complaint your team failures are causing. The training chief spots Armstrong.

24:52Brian, I'm in the middle of training recruits and he's trying to kick me out. Can you please put him back in his box? Armstrong turns to the engineering chief. Why do you need the room? The site keeps crashing with these huge waves of traffic we're getting. My team needs somewhere it can thrash out a battle plan. Armstrong turns to the training chief. Give him the room. But where am I supposed to train these recruits? Use the games room. No one's got time to play anymore. Armstrong pushes forward. He sees the new chief operating officer parachuted in by the company board, making a beeline towards him.

25:31Brian, I've been digging under the hood and frankly I'm shocked. We're using off-the-shelf tech that's not designed to handle these kinds of transaction volumes. Our system could get overwhelmed at any moment. It's a ticking time bomb. I'm telling you, this needs fixing right away. Companies have blown up on less. No, we're in the eye of the storm. We start fooling around right now, we could break something. We ride out the storm first. Armstrong moves on. He's almost at the office when another employee races over. Brian, I found out why Bank of America credit cards aren't working on the site.

26:08Shoot. It's not just us. The banks are worried about the number of people maxing out their credit to buy crypto. So they've stopped all their customers from buying crypto on credit. Armstrong frowns. JPMorgan Chase did the same last week. It's a bad omen. But he doesn't have time to deal with it now. All that matters is getting through the crypto boom intact. Coinbase is now a unicorn, a startup worth more than a billion dollars. Armstrong's decision to market Coinbase as the safe place to buy crypto is paying off big time. Millions of Americans are investing in crypto for the first time ever, and most of them are signing up to trade at Coinbase.

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