Beyond Bitcoin
What is bitcoin, what does it leave behind, and what are the possibilities?
Starting from Bitcoin..
We may be at the dawn of a new revolution. This revolution started with a new fringe economy on the Internet: an alternative currency called Bitcoin (Swan 2015). Bitcoin is a system designed to create a truly free, open, fair, equal, decentralized & borderless network to facilitate trade between the only two parties that matter in a transaction. A transaction system without buildings, owners or employees. In which everyone can open an account, that does not require identification and is completely free. A system without any arbitrary borders, fees, restrictions & regulations. A system virtually impossible to counterfeit, a system based on a revolutionary technology: The Blockchain.
In 2008, Nakamoto (2008) described how Bitcoin allows payments from one party to another, without “going through a financial institution”. Until then, people hardly doubted the monetary system. The fact that this was written during the year of the global economic crisis may be a coincidence. However, it is not a coincidence that the rise in interest in this system occurred contemporaneously with the collapse of trust in financial institutions in that same year. People started to question the trustworthiness of the banking sector. Bitcoin showed, for the first time, that financial institutions may become superfluous.
“Rise of Bitcoin”:
Bitcoin was developed as a ‘cryptocurrency’, where encryption algorithms are exploited to secure transactions. No one is in charge, no one is the owner and records are completely decentralized. Bitcoin has already inspired the development of 700 other cryptocurrencies (Extance, 2015).
Bitcoin was the first decentralized digital currency using peer-to-peer technology to function without an intermediary, such as a financial institution (Bitcoin.org, 2015). Peer-to-peer (P2P) refers to the sharing of files directly between users and servers in the network, without the need of a central server/party. This system enabled, for the first time in a transaction system, the network to reach consensus without the need of information on user identities and without trust relationships.
..To the Blockchain
The underlying technology of Bitcoin is the Blockchain. The Blockchain enables an anonymous transaction between two people that are unknown to each other, without the need of a third party — but can be trusted at all times. Neither the buyer or the seller is mentioned, only the exchange is verified and saved. The record of transactions in a functioning Blockchain is growing each day and is shared in real time among all users in the network, hence the name distributed ledger. Each established block of transactions is linked to the block that came before it and therefore the process ensures validity (Peters & Panayi, 2015; Pilkington, 2016). It is the combination of the ledger and the Blockchain technology — in any transaction system — that makes the system a virtual, distributed and decentralized entity (Plansky et al., 2016).
The discussion of Blockchain was until now mostly linked to Bitcoin. In the last years, the attention seems to have shifted to the core elements of Blockchain and how this proves valuable for so many more practices and therefore does not only have to be based on or used for Bitcoin (Cascarilla, 2015). Whereas Bitcoin was developed to provide for an alternative way of doing a transaction by creating an alternative trusting mechanism between the two exchanging parties, the technology is already used for a wider variety of transactions. Many people now acknowledge Blockchain as the template for a lot of other applications, such as securing systems for online voting without an intermediary (Extance, 2015). Blockchain enables removing a third party and by doing so, to also make it safer than with a third party. This can save costs and time, for each sort of transaction or agreement. Likely therefore, Blockchain is sometimes called:
“the most important invention of the twenty-first century”.
Whereas Bitcoin was designed to transfer any value, it mostly became a network of sharing currency, the token BTC. Nowadays, the focus is more and more on these tokens, since this can be any value that someone would like it to have. Asset-backed tokens are claims of an underlying asset that you can claim from an issuer. The transactions as tokens are passed between users and recorded on the Blockchain.
A token system can however only record balances in digital tokens (Dermody, 2015; Rosenfeld, 2012). Therefore, smart contracts are developed. A smart contract system has the capability of implementing any software routine possible, also including mere token systems. Smart contracts are the building blocks for decentralized applications, build on the Blockchain. The idea behind a smart contract is that “a transaction’s contractual governance between two or more parties can be verified programmatically via the Blockchain, instead of via a central arbitrator, rule maker or gatekeeper (Mougayar, 2016).” A code is stored on the Blockchain and the contract automatically executes when the requirements needed are met. In this way, a smart contract can for example be a method of using Bitcoin to form agreements via the Blockchain (Swan, 2015).
Simple introduction to smart contracts on a blockchain
Combining the idea behind Bitcoin, the decentralized structure it can enable and smart contracts: The Blockchain enables the spread of transactions and resources in a flat, peer-to-peer manner, enabling each node in the network to trust each other.
Blockchain beyond currency transfer
Blockchain has the potential to create a competitive marketplace for trusted transaction bookkeeping. At the financial level, the monetary system can benefit from lower costs and improved security. Beyond the financial level, the digital signatures of each transaction together with the collaborative process offers opportunities for each sector, beyond banking and beyond currencies.
Swan (2015) referred to this development as Blockchain 1.0, 2.0 and 3.0:
Blockchain 1.0 relates to (crypto)currencies in relation to cash. Blockchain 1.0 was about using the Blockchain for currency transfer and digital payment systems.
Blockchain 2.0 relates to (smart) contracts and property. It is about the economic and financial applications of using the Blockchain, more extensive than only cash transfer.
Blockchain 3.0 relates to applications of the Blockchain beyond currencies, finance and markets mostly towards sectors as government, culture and health.
Swan (2015) mentions, in relation to the development of the Blockchain 3.0, that the applications can take any form of exchanging, beyond money through the transfer of for example hard assets (physical property) and intangible assets (votes, ideas).
How can Blockchain enable exchanges beyond money?
In essence, Blockchain is only the peer-to-peer network enabling decentralized trust at scale and thereby enabling value transfer without the need of an intermediary. The value transfer can be anything holding value and therefore can go beyond currency transfers. Blockchain 2.0 was the first example, using smart contracts. As mentioned, a smart contract is a transaction’s contractual governance between two or more parties can be verified programmatically via the Blockchain (Mougayar, 2016). The contract is enforced automatically when the in advanced agreed conditions are met. In Blockchain 2.0 this referred to contracts within the financial or economic sector that reduced overheads, solved complex contracts and brought back processes that tended to last a week to only a few minutes (Donnell, 2016). Many banks are currently researching how they can use the Blockchain for own purposes. (Wild, Arnold, & Stafford, 2015).
Blockchain 3.0 is a variation on smart contracts, while making it possible to transfer physical property using the Blockchain. This is referred to as smart property (Swan, 2015). Information about physical property, let’s say a car, is registered on the Blockchain. This includes information regarding the property as well as the ownership relationships towards the object. Smart keys can be used to facilitate ownership rights. This results in access to use a car for whoever owns the smart key. Pre-established smart contracts could automatically transfer property from owner to another owner when for example all loan payments are paid. In essence, the Blockchain 3.0 became a system for recording and managing property rights.
References
- Bitcoin.org. (2015) from https://bitcoin.org/en/
- Cascarilla, C. G. (2015). Bitcoin, Blockchain, and the Future of Financial Transactions. Paper presented at the CFA Institute Conference Proceedings Quarterly, from: http://www.cfapubs.org/doi/pdf/10.2469/cp.v32.n3.5
- Dermody, R. (2015). Smart contract vs “token”-based systems. 2016–05–29, from http://symbiont.io/uncategorized/smart-contract-vs-token-based-systems/
- Donnell, O. T. (2016). Blockchain: Looking beyond the hype of Bitcoin. Retrieved from https://www.gtnews.com/blogs/blockchain-looking-beyond-the-hype-of-bitcoin/
- Extance, A. (2015). The future of cryptocurrencies: Bitcoin and beyond. Nature, 526(7571), 21–23. http://www.nature.com/news/the-future-of-cryptocurrencies-bitcoin-and-beyond-1.18447
- Mougayar, W. (2016). Understanding the Blockchain. O’Reilly. https://www.oreilly.com/ideas/understanding-the-blockchain
- Nakamoto, S. (2008). Bitcoin: A peer-to-peer electronic cash system. https://bitcoin.org/bitcoin.pdf
- Peters, G. W., & Panayi, E. (2015). Understanding Modern Banking Ledgers through Blockchain Technologies: Future of Transaction Processing and Smart Contracts on the Internet of Money. Available at SSRN 2692487, from: http://arxiv.org/pdf/1511.05740.pdf
- Plansky, J., O. Donnell, T., & Richards, K. (2016). A Strategist’s Guide to Blockchain. Strategy & Business, Spring 2016(82). http://www.strategy-business.com/article/A-Strategists-Guide-to-Blockchain?gko=0d586
- Swan, M. (2015). Blockchain: Blueprint for a New Economy: “ O’Reilly Media, Inc.”: http://w2.blockchain-tec.net/blockchain/blockchain-by-melanie-swan.pdf
- Wild, J., Arnold, M., & Stafford, P. (2015). Technology: Banks seek the key to blockchain. Financial Times, November, 1: http://www.ft.com/cms/s/2/eb1f8256-7b4b-11e5-a1fe-567b37f80b64.html#axzz4Fn23dBa9
