By now, you have probably heard of blockchain technology and Bitcoin. But you may not understand how it works, how blockchain is already impacting the global economy, and the prospect of what it can do for us as businesses and consumers in the immediate future.
The history of Bitcoin and the ABCs of blockchain technology.
Shortly after the 2008 global financial industry crash, a person (or persons) working under the pseudonym Satoshi Nakamoto published a white paper in a cryptocurrency forum outlining Bitcoin, a new cryptocurrency that would support a peer-to-peer digital cash system. Simply put, a cryptocurrency is a digital currency that uses encryption to regulate the currency and verify the transfer of funds. While the path from white paper to actualization of an idea is usually a long one, Bitcoin was launched just a few months later.
Bitcoin has been able to catch on because it is supported by a powerful underlying technology called blockchain.
According to Dr. Michael Yuan, Chief Scientist of CyberMiles, a foundational blockchain designed and optimized for commercial apps, "Blockchain is the underlying technology to support a decentralized ledger system, where there is no central authority [like a bank or clearing house] yet still allows for non-cooperative individuals to come to consensus on what transactions should be recorded on the ledger."
In short, every line item on the blockchain ledger is linked (in a chain) to previous transactions on the ledger, which are not recorded in one central storage system, but spread across a decentralized network. This makes hacking or altering transactions virtually impossible, making blockchain one of the most trustworthy and unhackable technologies available in the world today.
Blockchain is essentially open source, owned by no one and supported and edited by its users. To build the decentralized network, users provide storage for the blockchain. This is how Bitcoin evolved. Yuan explains, "Bitcoin is a byproduct of a specific implementation of the blockchain. Its original purpose was to award network nodes [users that provide network storage for the blockchain ledger] that safeguard the integrity of the blockchain network. Those nodes are also known as miners, as they mine bitcoins by contributing their computing power to the network."
The current value of one bitcoin (as of September 2017) is a little over $4,000. Each bitcoin is divided into 1,000,000 subunits called bits, allowing users to make small transactions in units much smaller than one penny. Anyone can download a Bitcoin Wallet on their phone, earn bitcoins as a miner by providing network storage of the blockchain, and buy and sell goods and services using Bitcoin. While there was early resistance to bitcoin because of its novelty and perceived complexity, there has been a breakthrough, with major retailers like Overstock.com, Expedia, and Microsoft already accepting bitcoins as payment, and more e-commerce brands coming on board every day.
One of those e-tailers is 5miles, a leading consumer-to-consumer marketplace dedicated to buying and selling secondhand items locally. Dr. Lucas Lu, founder and CEO of 5miles, said, "Not simply in the form of cryptocurrencies like bitcoin, we believe blockchain technologies could provide natural solutions to common problems in a C2C e-commerce network. For example, the blockchain network's mechanism for reaching consensus amongst non-cooperative strangers is a key feature that could allow C2C sellers and buyers to reach agreements, and hence greatly reduce the cost associated with customer support and dispute resolutions."
Benefits of using bitcoins include faster peer-to-peer transactions, worldwide payments, and low processing fees (as no middleman, like PayPal or a credit card processor, is needed.) Additionally, because of the verification and security of blockchain technology, buyers and sellers can trust their transactions are secure in the case of a non-cooperative party. For instance, the distributed blockchain network can enforce the rules that enforce contracts, prevent double spending or eliminate fraud, all without third-party enforcement.
Bitcoin is just the beginning.
New applications of blockchain technology are being developed every day. Describing alternative uses of blockchain, Yuan says, "It can be used to build an accounting system, money transfer service, marketplace, crowdfunding or crowdsourcing system, or any system that requires collaboration among non-cooperative participants."
Blockchain's ledger reconciliation provides trust and security that is supported not by a central authority, but by its open-source, decentralized network. Yuan highlights future applications of this technology as e-commerce marketplaces and applications, peer-to-peer finance and insurance transactions, content distribution, healthcare data exchanges, B2B accounting applications, supply chain, and customer service applications.
The distributed trust of blockchain technology has the potential to profoundly impact all of us in myriad ways. Just as at the advent of the internet we could not have predicted all of its current uses, Bitcoin is a blockchain technology in its infancy with huge implications--for businesses and consumers alike. Blockchain, with its open source, allowing creative minds across the globe to develop new uses and applications, has the potential to truly change the world in ways we can't yet but soon will see.