When bitcoin gained some notoriety in 2013, I did a little research and then put it away to work on it later. This summer I decided to dedicate part of my vacation to bringing myself back up to speed on “Blockchain” and “Bitcoin” by reading the book by Don and Alex Tapscott titled “Blockchain Revolution -- How the technology Behind Bitcoin Is Changing Money, Business, and The World”.
I’m now leaning toward the thought that the blockchain has the potential to impact society in a way that might surpass the birth of the internet. Core to this impact is the “disintermediation” that it will bring. The millions of people that intermediate transactions and profit off of the exchange of wealth will largely be removed. Entire industries may be shoved into upheaval. What Apple did to the phone industry, music industry, application industry, gaming industry, etc... blockchain has the potential to transform financial industry, real estate industry, securities and stock markets, music industry (again), government voting, corporate governance, and more.
I’ll use a slightly modified quote from BusinessWeek to summarize what “blockchain” is.
“Blockchain is a cryptographically secure, distributed database of linked, time-stamped blocks of data such as transactions... Each block in a blockchain contains a cryptographic hash (think fingerprint) of the previous block, which secures the integrity of the transaction data.”
I’ll go into the detail a bit more below, but the real power of the blockchain design is the way it stores transactions in blocks on a chain where one link (block) holds a cryptographic fingerprint to the previous block. Combine this linking with the distributed servers of the “global ledger” and the result is a list of timestamped transactions on a public ledger that is infeasible to change. Once a transaction is entered on the blockchain it can’t be altered without breaking the chain.
After reading the Tapscott's book I was more than intrigued and decided that I needed to take another look at Bitcoin to better grok their thesis that blockchain, the foundation of bitcoin, is going to revolutionize civilization as we know it. As I continue my research, 2016 seems to be a tipping point for buzz on blockchain and bitcoin, but not adoption. Said another way, it’s moved solidly from novel idea that drives bitcoin, to a focus of research for most governments and every major financial institution. For example, financial-services conferences are now including keynote speakers on blockchain technology for the first time. Although it may just be the result of my increased attention, I’m seeing a lot more buzz from multiple sources on blockchain, and not just tech journals or industry specific resources like coindesk.com. Examples include Forbes, Bloomberg, CNBC, and CNN. You’ll find links to many blockchain oriented articles that I’ve curated HERE.
Blockchain was created to support bitcoin. Initially, people were mostly focused on bitcoin. Bitcoin is a cryptocurrency that can be exchanged between two entities with no intermediation other than the servers functioning as the “world-wide ledger”. Bitcoin gained notoriety when it started to be used by criminals for payment of illegal goods, most famously on “silkroad”. Bitcoin also receives a lot of press when on-line crypto-currency tradings firms, like “Mt Gox”, are hacked, and users lose hundreds of millions of dollars. But the real story here is not about bitcoin, it’s really about blockchain, the key foundational technology that enables bitcoin and other uses. Blockchain can be used for more than just digital currency.
If you think of blockchain as the “world-wide ledger”, the technology could be used to record all kinds of transactions, from voting, to exchanging anything of value. In fact, today, it’s being used by Artlery.com to sell shares in art, Ascribe.io is using it to prove copyright ownership, goabra.com allows users to send money to relatives anywhere in the world with nothing other than a cell phone, threatening Western Union’s core business. Banks, and all of the large financial services companies are conducting research on how they can leverage blockchain technology to lower their costs.
As I watch the buzz build, it looks like blockchain technologies will initially be used by banks and other financial institutions to settle inter-bank transfers. It’s not a giant leap to predict that the first industry to be disrupted is the financial services industry as various parties are disintermediated from all kinds of transactions. A visible disruption indicator will be when companies like Western Union file for bankruptcy. This article describes some testing that is already happening on the interbank transfer front.
In the first section of the book “Blockchain Revolution”, the authors describe how migrant workers transfer wealth from the countries they work in, to their families all over the world. What was interesting was the number of people that profit from being a trusted intermediary. Prior to the invention of blockchain, workers without bank accounts would need to go to a local Western Union agent with cash, submit a transaction to transfer the wealth to the other party, say located in the Philippines. The cost of this transaction can exceed 10% of the value of the transfer and take a day to more than a week. Now, with digital currencies, users can convert local currency to cryptocurrency at a ATM and send the value to anyone using a simple app on their phone within minutes with fees that are less than 1% of the value. Users that receive the digital currency can spend with vendors that accepts it, or convert it into the local fiat currency at an ATM or mini-exchanges. Another example in the book is of the movement of financial currencies is are institutional cross-border payments which can take weeks to settle and require multiple banks and other intermediaries, all taking a small cut of the action. With a world-wide financial blockchain, the costs would drop to almost zero and the time to settle the transaction would be minutes. E-currencies have the potential to be extremely disrupting to a financial services industry that hasn’t changed the basics in over a hundred years.
Blockchain was originally designed by a person going by the name of Satoshi Nakamoto in a paper published in 2008 as a foundational component to support bitcoin transactions. The source code for his idea was published “open source” in 2009. Think of blockchain as a database that is located on servers all over the world where records are stored in a long chain. This is how it works in simple terms.
- Each transaction to move some amount of bitcoin from one wallet to another is combined with other transactions to make a block
- A block is digitally signed and timestamped
- Each block is digitally linked to the previous block using a hash (or fingerprint) and added to the chain.
- Different blockchains use different approaches to decide who has the next block in the chain. The bitcoin blockchain uses a process that is computationally difficult, and once a solution is found all of the servers in the blockchain network trust and accept the new block into the chain.
The power of this “ledger” is that transactions are visible to all and impossible to modify without it being noticed. In order to alter any transaction in the chain, a malicious actor would need to modify all of the blocks in the chain and to do this, this actor would need to; a) have massive compute power to break the cryptography, and b) have control of 51% of the blockchain servers, both of which is impractical in the bitcoin network. In the case of the bitcoin blockchain, servers are decentralized with 1000s of them located all over the world controlled by various non-government entities, thus making it impossible to gain control of the blockchain network. In addition, there is no central authority that can be hacked. Because blockchains are typically public, verifying that a transaction did take place is a trivial affair since each transaction is available to all to see.
One thing to mention is that just because a transaction is recorded on the blockchain, doesn’t mean it’s correct, it just means that the time it was added is accurate and it hasn’t been tampered with. To ensure non repudiation of a record, there will need to be a trust model established. Today, this is accomplished for bitcoin via digital signatures using public key cryptography system. Although the cryptographically secure bitcoin trust model has been established, other assets, like property documents will need their own approach. For example, documents could be cryptographically signed by one or more trusted entities.
Bitcoin is the first application of blockchain. Bitcoin is considered a “cryptocurrency” and it uses the blockchain to solve the “double spend” problem of using digital cash. Said another way, by using the blockchain to record transactions, it prevents malicious actors from spending bitcoins twice. By design, the bitcoin blockchain agrees to a new link in the chain (hopefully with your transaction) within 10 minutes to reach a final settlement although you don’t have to wait that long to see the transaction in-progress. Once the transaction is recorded, the distributed public ledger verifies what “wallet” a coin belongs to. For example, if I transfer some portion of bitcoin to you, your wallet will look on the blockchain for the transaction address, and once recorded, all users on the network agree that you are now the holder of those coins until you transfer them to another user. To speed things up a bit, if a receiver trusts the sender they’ll let approve the transaction as soon as they see the transaction is in progress. Bitcoin is no small banana. The current market cap for all bitcoin ranges from 9 to 12 billion USD, with over 8.5 million wallet users.
According to Wikipedia, in February of 2015 the number of merchants accepting bitcoin for products and services passed 100,000. And for retailers, instead of paying 2-3% typically imposed by credit card processors, merchants accepting bitcoins often pay fees in the range of 0-2%.
What’s interesting about bitcoin is that it’s a world-wide currency. That is, it’s nationless and therefore, it can’t be tampered with, or controlled by any government. The money supply is controlled by an algorithm that will stop producing bitcoins by the year 2020 unless the consortium of bitcoin developers and community agrees to a change. Today, the bitcoin value is more stable than many country fiat currencies. In 2015 Greece economic troubles, there was a sizable bump in people trying to move Greece’s fiat currency to bitcoin. Just after the brexit vote, there was another surge to convert local currency to bitcoin as it was seen as a bit of a safe haven or hedge against chaos and was referred to as “digital gold”.
Although I started my research on Bitcoin back in 2013, I didn’t get far. First, getting actual bitcoin into a digital wallet was difficult. I setup an account on a popular trading platform but never completed a money transfer. I wish I had purchased some bitcoin, since the value has grown by 4400% since then. To date, I’ve used a popular trading platform to move money from my bank accounts via credit card, electronic fund transfers, and ATMs to an online wallet as well as to a digital wallet on my phone. Moving bitcoin between wallets, or at the retailers that accept bitcoin that I’ve tried is easy.
There have been a few high-profile break-ins and theft of bitcoin at online wallet services like Mt. Gox and a few others. The problem with online accounts, is that you have to trust them to hold your “digital keys” to your bitcoin wallets (rather than holding them yourself on your computer or phone). Because these services hold a large concentration of bitcoin, they provide a lucrative target for thieves. The industry has worked to mitigate attacks in a couple of ways. The first is to store a large portion of the bitcoin offline, not accessible to the rest of the system, insulating a large portion of the currency from a breakin. The second is to use a multi-signature (multi-sig) method of confirming a transaction. A multi-sig transaction requires two or more keys from one or more people to release funds. This means that an attacker would need to compromise multiple systems in a very complex way. Most in the industry think multi-sig may be the “final solution” but are scratching their heads as to how a recent theft of an online bitcoin wallet company that uses the technology was compromised (look for updates later).
Some users opt to hold most of their bitcoin on a wallet that they have full control over. But this method brings with it the full responsibility of protecting your wallet and ensuring that it is somehow backed up. The two wallet apps that I’ve tried out have ingenious ways of helping you “backup” your wallet in case of disaster. Bread, uses a set of words that you write down that allows you to re-constitute your wallet. Airbitz creates an encrypted wallet using a combination of a username and password. They backup your encrypted wallet but never store your password. If you lose your phone with AirBitz, you can recreate your wallet with the info and then download your backup. If the AirBitz servers are ever hacked, the attacker only sees encrypted junk. Users that want to hold coins on a PC can use one of many applications. The most recommended free app is Armory but I don’t recommend using a PC based solution unless you’ve really done your homework.
Current thought leaders in the industry feel the best security for large amount of cryptocurrency is to hold it in a off-the-grid computer or storage device. The main component that is protected is the private keys to a wallet. For most people securing their bitcoin is a bit confusing. For now, storing a small working amount of currency on a personal wallet lowers exposure of theft, and reduces your target size, sending thieves elsewhere.
The other barrier to using bitcoin more broadly is having and using a digital wallet. This barrier is slowly coming down via smartphone wallets and easy to use online wallets. Smartphone wallets are getting easier to use and provide multiple ingenious way to “backup” your wallet. Two of the most highly rated iPhone wallets today are from Airbitz and bread.
The bitcoin blockchain can be used for other purposes as well and there is no reason that other public and private blockchains can be created. The bitcoin blockchain has withstood the test of time, and I’m sure multiple attacks. The bitcoin blockchain is highly distributed and is designed to reward the owners of the machines that make it all possible. The initial reward for authenticating and creating new blocks for the blockchain is that on occasion, a server owner, commonly referred to as a “miner”, would be rewarded with a bitcoin (currently worth ~$580.00). In addition, the protocol also supports the idea of “fees”, micro-payments that are included with transactions to reward the server owner (known as a miner) that is able to complete a difficult encryption problem the fastest and add the transaction to the blockchain. This ensures that the distributed network of machines is self sustaining.
In addition to currency, the authors of Blockchain Revolution discuss multiple uses of financial services for people in countries that either don’t have a bank near them or are not of enough value to a bank to get an account. The uses of blockchain aren’t constrained to just money or security transfers.
Other Uses Of The Blockchain
Asset transfers & Property Ownership
The Tapscotts pointed out that property ownership in many third world countries is extremely difficult to determine and ownership can change when there is a local governing regime change. Using the blockchain, property ownership could be recorded in the public ledger, making it clear who owns the property and therefore impossible for corrupt governments to change that record. So can corrupt government officials outlaw a previous blockchain record? Sure, corrupt governments do this all the time (like in Zimbabwe as I write this). What the blockchain provides is a record that lives on in perpetuity and hopefully, once the corrupt government is ousted from power, proper ownership can be restored.
Stocks and other securities are another good fit for the blockchain. Imagine an issuance of stock via digital assets, similar to bitcoin. Now imagine creating a pure digital stock exchange where any individual trades that security asset for bitcoin. Instead of taking three days or more to settle a sale, it can be completed and settled in seconds (although it may take a few minutes to see the final settlement on the blockchain).
Registering creative works.
There is a real need on the internet today to be able to prove that you are the original author. Ascribe is a service that allows you to upload a digital A creative work, like a picture, painting, document, book or any other artifact that can be digitized and uploaded. They then create a digital fingerprint and register that along with attribution details on the blockchain. Doing this doesn’t guarantee an artist will prevail in a copyright, case but it will help support their assertion of when they had control over the artifact. As an example, I uploaded this article as it existed in draft and it registered it to me with the following fingerprint (14om1hiDUKAv1U4PwzvwSHfkVVRJCxfD8E). In addition, I can create editions of my works and then assign them to new owners. As the work changes hands, the new owner can verify providence.
There were several uses of blockchain that governments could use, from voting to issuing licenses for trade, or granting special writes. To add transparency, the government blockchain would be visible by anyone allowing the citizens to hold their government accountable.
E-Estonia is an interesting project by the country of Estonia that uses the blockchain to vote, conduct business, banking, and file taxes. From their website:
“e-Estonia means voting in elections from the comfort of your own living room. Filing your income taxreturn in just five minutes. Signing a legally-binding contract over the Internet, from anywhere in the world, via your mobile phone. These are just a few of the services that Estonians take advantage of on a regular basis.”
There are untold number of uses for a public ledger that allows us to record transactions, votes, and persist the current state of being on a public ledger that is immutable. Like the internet evolved to realize things that it’s creators never imagined at the time, so too will the blockchain technology.
Like there is no one network, there is no reason there needs to be a single blockchain ledger. I expect that there will be additional blockchain implementations, both public and private, that may be designed to solve various problem domains.
As stated earlier, financial institutions, and governments are experimenting with the technology to lower costs and increase the speed at which they can operate. For example, Swiss bank UBS is working to building a blockchain network and issuing tokens to speed up interbank transfers. A group of Japanese financial institutions are also looking to create a blockchain-based platform for many of the same reasons.
Barriers & Issues
Government laws are one issue. Government not only moves at a slow grinding rate, but at times law are completely disconnected from reality. It will take time, trial, and error for governments to catch up with the times and introduce laws and governance that enables broader adoption and use of blockchain and digital currencies. There is promise however. I’m detecting that many governments are closely watching the technology, trying not to impinge on the innovation that it brings while they figure out where they need to step in. Right now, it looks like the technology will lead and government will step in post-disaster in some cases, and make adjustments as outdated laws confuse and slow progress.
Massive scale is another barrier. Blockchain technologies are fairly new. The bitcoin development community is working to improve the bitcoin blockchain in order to scale it up. Although it’s working today, the March 2016 peak of 276,448 transactions per day isn’t enough when you contrast it with PayPal’s 10 million transactions per day in 2014, or Visa’s potential to support 24,000 transactions per second (Source for Visa test: based on testing conducted in 2010 by IBM). According to the Tapscotts, the system showed it’s lacked the transactional capacity that would be needed to on-board ten million people in Greece, representing a tenfold increase in user base.
Below is a quick summary of some of the other barriers for bitcoin and its blockchain referenced in the Tapscott’s book:
- It is inaccessibility to the average person (lack of digital wallet for all cell phones and ATMs)
- It needs a better scheme to tie a bitcoin addresses to an individual (today, the typical method is for the person receiving bitcoins to transmit to the sender an address that is made up of 34 random characters. The address can be re-used or the receiver can generate a new address. Future wallets may need to support an address book of sorts to resolve this or a global directory may need to be created.
- Some worry about illiquidity because bitcoin is finite. The argument against this is that the current protocol supports breaking up the bitcoin to a “satoshi”, which is a hundred millionth of a bitcoin (0.00000001 BTC). There is no reason that this needs to be a hard limit either.
- Bitcoin blockchain is considered “high latency” because it takes up to 10 minutes for transactions to completely settle. Developers have already come up with was to improve this but some say it’s still too slow for what the internet of things will need in the future.
- Behavioral change, getting people off of credit cards and banking will be difficult but thinking about how you backup the keys to your e-wallet is another issue that is even more difficult. Currently, all risk is owned by the bitcoin holder, not something that much of society is use to.
- There is a lack of laws and legal recourse when things go wrong.
- Creating and maintaining bitcoins and the network is too energy intensive. There are several reasons for this but what’s interesting, there is no data to do a comparison on what it costs, energy wise, in our current system.
There are a few more issues outlined in the book but I’ll stop there and add a couple of my own.
What happens if you can’t connect to the block chain for a bit? The bitcoin blockchain is highly redundant so if one servers is down, there are 1000s of others you can hit, but if you are depending on always connected devices to hold your wallet and route your currency, we need to come up with ways to conduct some amount of business if that device can’t connect.
We do need better security. There have been several high profile break-ins to online wallets but security will never be foolproof. As we improve security, we need to also come up ways to limit exposure when systems are hacked.
I hope this article helped you better understand this new technology, blockchain, and the promise that it holds and the potential for it to be a major disruptor. What other uses can you think of? How might your organization be able to leverage the technology? I highly recommend the book “Blockchain Revolution” by Don and Alex Tapscott if you’d like to learn more and stir up your creative juices. In addition, because this technology is born from the internet the list of resources that go into any level of detail on any of the topics discussed is endless.
- Blockchain Revolution - Don and Alex Tapscott
- Capitalizing on the Wide-Ranging Impact of Blockchain Technology - The Boston Company
- Airbitz iPhone bitcoin wallet software
- Bread iPhone bitcoin wallet software (not recommended by the author)
- 7 myths about the Bitcoin Blockchain - CIO Magazine
- Bitcoin: Greece's new euro workaround? - Fortune
- Blockchain Charts - blockchain.info
-- Christian Claborne
(aka chris claborne)