Bitcoin — The Tip of the Iceberg
A new global community has appeared in the last 8 years. A community full of software developers, technology enthusiasts, libertarians, fraudsters, speculators and entrepreneurs that has grown up around Bitcoin since its launch in 2009. There is a lot of hype in this ‘crypto’ community; after all Bitcoin is the world’s first currency that is accessible to all and not owned or controlled by any state or organisation whose value has risen 55,000% in the last 5 years to reach a market value of $90B. It is a gold rush for speculators, a wild-west for fraudsters, an open global market for libertarians and an anonymous payment system for criminal activity. Much of the hype and drama — good and bad — surrounding the Bitcoin currency over the past few years has been reported in the international press, yet the technology behind Bitcoin is not widely known. It is this technology, its potential to evolve and the prospect of far-reaching new applications that has technologists, software developers and entrepreneurs deeply excited. The currency, as groundbreaking as it is, is just the tip of the iceberg.
Currency
As a currency, Bitcoin is a new form of money fundamentally different to any that we’ve had before. It is a new step in the path from coins to notes to credit cards and now to digital cash. Unlike any existing card payment system or internet payment system like PayPal or Apple Pay, Bitcoin is the first digital currency in which, like cash, the user owns and controls their own money and can make direct payments to other users securely and anonymously, without a bank or other organisation acting as an intermediary. Anyone can hold and spend Bitcoin regardless of location, age or credit history, and without having to identify themselves or be authorised first. All they need to do is download an app to a phone or computer. Bitcoin, like gold, is global, has no central authority controlling its issuance and has a maximum supply that is slowly ‘mined’ over time at an ever decreasing rate. Unlike cash and gold though, Bitcoin payments from fractions of a penny to billions of dollars can be made between any two parties directly across the internet, internationally without borders, instantly, and for little or no cost. It is also the first form of money that can be fully owned and transacted by machines without any human control, making it money for the internet age.
Programmable Transactions
When you place your contactless card against the card reader in a shop you are entering into a contract to make a payment. The platform that executes that contract beeps to tell you its been accepted. What if the platform could support and enforce other types of contract with a beep? For example, “I will pay you $30 provided I receive the goods within 28 days”; or “I will pay you $30 and you promise to repay it if I don’t receive the goods within 28 days unless this trusted third party arbitrates in a dispute that the $30 should go to you or back to me”; or “I will pay you $1 per mile (or every three minutes, whichever is sooner) to taxi me to my destination up to a maximum of $30”. Bitcoin technology enables these and other examples by encoding the rules of the contract in software and enforcing these rules automatically on its global network.
Transactions on the Bitcoin network are in fact small computer programs. In its current form Bitcoin restricts the language of those computer programs to a simple set of financial actions but, in principle, the technology can allow you to enter into any contract that can be described in software, such as insurance contracts, legal contracts, ticketing, peer-to-peer lending, supply chain management and digital rights management. The Ethereum network was the first to do just this. Ethereum was developed from the ground up based on Bitcoin technology and was released in 2015. It’s aim was not to compete against Bitcoin as a global currency but instead to allow the user to write general purpose contracts by removing all restrictions on the programming language used in transactions and adding support for contracts to maintain their own state data over time. In a sense it is a global computer, one that is currently being used by developers around the world to explore what so called ‘smart contracts’ can do.
Global Platform of Trust
Instead of a bank or a corporation like PayPal providing a central hub through which all electronic payments are made, Bitcoin is a global network of computers running open-source software, communicating peer-to-peer to reach a common agreement over the payment ledger. The owners of those computers are anonymous; no-one is in charge and no-one is in control. In fact, anyone can (with a bit of technical know-how) download the Bitcoin software and contribute to the running of the network. The ledger is decentralised — there is no central point susceptible to attack from hackers, disruptors or authorities, nor is there a central authority susceptible to corruption or persuasion or with control over the money supply.
The decentralised Bitcoin ledger is a record of every transaction ever made on the network since its inception in 2009. The ledger (also known as the blockchain) is held on every participating full node on the network and forms a globally accessible historical record of all Bitcoin transactions. This record cannot be changed by any person, group, company or government and cannot be hacked — in fact, the Bitcoin ledger is the single most secure historical record mankind has ever created. However, the decentralised ledger technology that powers Bitcoin can be used to record not just financial transactions but, in principle, all kinds of information. When information is read from the ledger it can be trusted to be correct without reference to any human, corporation or state authority. In this sense, the technology provides us with the world’s first global platform of trust.
Development Platform
The Bitcoin network in its current form can be used to support transfers of value, multi-signature transactions, escrow solutions, time-locked future transactions, basic smart contracts and the storage of small data records. It has been used to pay for goods and services, record marriages, secure data records and transfer remittances across borders. However, Bitcoin is an ongoing project. As the technology develops and scales over time so the range of applications that it can support will evolve, much like the internet has grown since its early days of text-only emails and bulletin boards. Feeding off of innovation in the general community it will enable new applications through protocol changes and new layers of technology.
As a currency, Bitcoin currently does not have the capacity to support the many thousands of transactions per second that would make it an alternative to VISA or the many tens of thousands of transactions per second that would be required to support a global digital cash economy. Nor does it have the usability and security that is needed for general adoption. However, these are technical barriers waiting for a solution and are being worked on by teams of software developers around the world. Over the next few years cryptocurrencies like Bitcoin will likely scale into platforms that can rival existing payment systems, including cash, and scale still further to support a global Internet of Things.
Bitcoin is an open-source computer science experiment built on the back of decades of research and innovation in cryptography that has since spawned hundreds of projects that are just beginning to explore its technology and potential. Some projects simply create new virtual currencies by copying the Bitcoin software and tweaking parameters, or rewrite parts of the software to experiment with key features of the technology, such as anonymity (Monero, Z-Cash) and different monetary policies (Litecoin, Dash). Others are grand projects, often written from the ground up, that explore exciting extensions to the technology, such as smart contracts (Ethereum, Lisk), decentralised computing (Golem, Elastic), decentralised storage (SiaCoin, Storj) and direct artist-to-consumer content distribution (LBRY, MediaChain). Still others build new software layers or apps on top of other projects to add new features (Lightning Network, Counterparty, ShoCard) or create platforms for customers to build their own applications (Hyperledger, Microsoft Azure). Banks around the world are exploring how the technology can be used to facilitate inter-bank settlement with the R3 Consortium and Ripple. These are just a few of the interesting and creative projects being explored in this immature technological space.
Together all of the projects in the crypto community form a new global arena for development and innovation, much of which is open for anyone to download and experiment with without permission. New projects are forming every day to build applications that redefine existing financial, asset and contractual applications and to explore new applications that were not possible before. Future use cases of the technology are varied: from bringing free borderless remittances to the masses to direct peer-to-peer lending; securing health care records to supply chain tracking; secure digital voting to decentralised file storage; automatic escrow services between two people to complex contractual chains between thousands of parties spread across the globe. Everyday smart contract examples could be an open-source version of Uber powered by smart contracts, where 100% of the fare goes to the driver, or a mobile phone contract that charges by the second and automatically distributes payments between the carrier, the handset maker, the distributor, the retailer, and any other suppliers in the chain using a pre-agreed mathematical formula. Trust based examples could be a decentralised identity system that allows users to vote securely online in a general election that cannot be rigged, or an asset ownership system that ensures sales of land, houses, cars and art are legitimate.
Global Reach
The benefit of some use cases over existing online services may not be clear until placed in the context of a country where corruption is rife or where societal trust has broken down. In these societies, decentralised ledger technology provides an independent platform of trust that any citizen may utilise to develop an application that other societies take for granted. A decentralised land registry, for example, may not appear to offer a clear benefit today in many countries but in Honduras it could help eliminate land title fraud and make a marked difference to peoples lives. Given that most of the world’s population has limited or no access to banking services that many of us take for granted, a global financial services platform open to all those with a smart phone and backed by the world’s most creative developers and entrepreneurs could have enormous consequences for people’s lives.
Summary
Given its features as a currency and its potential as a development platform, Bitcoin and its decentralised ledger technology could eventually replace all existing digital payment systems and physical cash while enabling whole new forms of economic activity yet to be imagined. It is open technology on which a global economy can flourish, giving all the world’s population access to the same economic potential. The ecosystem that has emerged from Bitcoin, with its 1000+ new coins and multitude of projects and businesses, is far bigger than Bitcoin itself and the community is just beginning to explore the possibilities. Regardless of whether the Bitcoin currency succeeds or fails, decentralised ledger technology and the crypto community are here to stay. The full magnitude of what’s beneath the tip of the iceberg is not yet known but given time the talents of the global community will undoubtedly uncover its true depths.
Want more info? Try these videos, articles and books…
Books & Articles (Non-technical)
- Blockchain Revolution: How the Technology Behind Bitcoin Is Changing Money, Business and the World — Don Tapscott
- The Internet of Money — Andreas Antonopoulos
- Cryptocurrency: How Bitcoin and Digital Money are Challenging the Global Economic Order
- A Beginner’s Guide to Ethereum
Books & Articles (Technical)
