Bitcoin – It’s not all about the money
Bitcoin’s blockchain ledger may turn out to be more important than the currency
Bitcoin’s rise to prominence over the last five years reminds me of the early, heady days of the internet. I remember lots of news articles and TV features introducing it in the same way and asking the same big questions: “So, what is the internet, anyway?” Nobody really knew what the internet was, what it meant or what it would become. What might seem obvious to us now eluded most people back then.
Bitcoin has reached a similar stage, and while many people are familiar with what it is, there seems to be little consensus on exactly what its future is. Will it really become a major global currency? Will it revolutionise banking? The secret to Bitcoin’s future might become more apparent if we take a closer look at the technology underpinning it — the blockchain.
What does the blockchain do?
The big problem that the blockchain solves is this. Imagine Alice has two units of a digital currency — two coins. If she spends them by buying something from Bob, what’s to stop her copying the coins and spending them again in another transaction? Counterfeiting cash is famously tricky, but with digital currencies it’s trivial. So how can we prevent forgery? One way is to keep a ledger of all transactions made with the currency. However, this raises other problems. It’s impossible to reverse a cash transaction without physically taking back the money, but changes can be made to a central ledger by whoever controls it. And nobody really wants anyone to have that kind of power.
Bitcoin uses a ledger to prevent people from ‘double-spending’ their money, but it also solves the issue of control by decentralising the maintenance of that ledger and making it unfeasible for anyone to reverse or falsify transactions held inside it. Bitcoin’s ledger is known as the blockchain. Put simply, the blockchain is a permanent, irrevocable, provable record of transactions, one that’s freely available anywhere in the world. This makes it a powerful concept and one that can be applied in many other situations.
How does it work?
To fully understand the potential of the blockchain, it helps to have some technical understanding of how it works. The blockchain is maintained by a network of participants called ‘miners’. Roughly every 10 minutes, the miners on the Bitcoin network collect transactions together into a block. They validate each transaction and then fingerprint the entire block of transactions using a hash algorithm. This creates a 32-byte string unique to the block which behaves like a tamper-resistant seal — even the slightest change made to the block would completely change the hash. The miners race to be the first to produce this hash, which must contain a long string of zeros at the beginning, changing a “nonce” (an arbitrary number), on each attempt until they succeed. This is difficult and requires billions of attempts using expensive, high-powered equipment. Upon success, the block is considered solved. The miner broadcasts the winning solution to the network and is permitted to include with it a transaction awarding themselves 25 freshly-minted bitcoins. These bitcoins are effectively brought into existence by consensus. This ‘proof of work’ algorithm ensures that whoever does the most work will probably win the bitcoins, a paradigm similar to gold mining. That’s why participants in this process are known as miners. Not only does this reward of 25 bitcoins serve as an incentive to process the transactions, it also serves to protect the integrity of the blockchain.
So how does it do that?
Before a miner begins mining a block, they include within it the hash for the previous block, which links them together in a chain. Any attempt to alter or falsify a transaction in the block would change its hash and so the block would need to be recalculated to meet the leading-zeros requirements. Each block that follows would need to be recalculated too. Achieving this is considerably difficult and would require controlling more than 50% of the computational power in the network. This makes the blockchain a very safe place to store transaction information.
A more in-depth and technical explanation of how bitcoin works are covered in this article and is well worth a read.
What else can the blockchain be useful for?
A lot of thought is now being given to how blockchain technology could be used to record transactions for other things, not just money. It could mean we no longer need to rely on third parties to broker transactions, vet customers and enforce contractual obligations. Can it be adapted to record the transfer of property ownership rights? Can complex financial derivatives be brokered, executed and cleared reliably using the blockchain? Could it make it harder to rig elections? What else can this be used for?
A very simple example of the adaptability of bitcoin’s blockchain can be seen at ProofofExistence.com. The concept relies on the notion that any document, image or other digital assets can be uniquely fingerprinted using a hash function. No other document can be created that will generate the same fingerprint. By embedding that fingerprint in a transaction in the blockchain, it is possible to prove that the digital asset existed no later than when that block was created. Intellectual property disputes could more easily be resolved if artists, musicians and other creative professionals begin publishing fingerprints for their work in the blockchain as soon as they create it, along with a statement declaring their ownership of it.
Keybase is a new service making it easier for people to identify the ownership of an encryption key using just their social media username. They’ve started using Bitcoin’s blockchain as a way of publishing their database of keys so that people can independently verify the data Keybase presents about a user’s ID.
More elaborate implementations include one by journalist and technologist Chris Ellis who has used this technique as part of an ambitious system for creating digital passports and baking them into the blockchain. Other schemes in the works, like Coloured Coins, mark bitcoins to create new currencies – a bit like taking a bundle of currency notes and stamping them with a seal to indicate they can be used as units of a currency of your own invention. It’s something of a kludge and looks unwieldy to implement, support and test. Yet, the feverish enthusiasm for ideas like this suggests a future that will become more dominated by blockchain technology that handles more than just currency.
Several projects are pushing the idea far further. Instead of building on top of Bitcoin’s blockchain, projects like Ripple and Ethereum all use their own blockchains and consensus algorithms and aim to be much more than just simple transaction ledgers. Ripple, and also Stellar, hope to become global payment systems allowing people to make payments and exchange fungible assets anywhere in the world without having to pay big transaction fees and depend entirely on banks. There’s nothing really new about the idea except for the ledger system it uses. They use blockchain ledgers that are open and distributed. This effectively creates a banking API which can be used by smaller organisations to trade debt.
Ethereum is a hugely ambitious project led by Vitalik Buterin, a Russian programmer who has written a lengthy whitepaper explaining Ethereum. He believes the project, which recently received over $18m in crowdfunding, will take blockchain technology to the next level.
Ethereum centres around the idea that rather than just storing transactions in a blockchain, ‘smart contracts’ can also be maintained there. These contracts contain code governing their behaviour. A contract code runs whenever a sum of money is sent to the contract (which contains its own coin wallet which it governs). What the code does is up to whoever writes the contract, but it’s able to see things like the amount of money sent into the contract, the date of the transaction, the state of its internal data store and even the state of other similar contracts running in the system.
Once embedded in the blockchain, the contract looks after itself and can run independently of a third party — as long as it’s got enough Ether (Ethereum’s native cryptocurrency) to pay the network to validate and execute the code whenever it receives funds, it will run forever. This reduces the dependency on intermediaries to monitor the performance of a contract and to adjudicate any disputes. Instead, it’s all done in code. This could transform the legal system.
There’s plenty of room for rich expression within a system like this. Applications mentioned in the white paper include identity and reputation systems, financial derivatives, decentralised file storage and token systems. The project code has recently been formed by a team at IBM for their Adept project. They hope to use it to create a framework for governing networks of Internet of Things devices.
The future for the blockchain
Despite all the innovation that’s taking place right now, there are still more questions than answers. Even if we separate blockchain technology from its use in the bitcoin system, It’s not clear exactly how it will transform public record keeping, and it may be some time before the technology is mature, but what’s obvious is that it’s a flexible innovation with a huge amount of potential.