Bitcoins, Blockchain: Beyond the hype

Bitcoins, Blockchain: Beyond the hype

Cryptographic payment systems are nothing new but among them BitCoin has really seen a meteoric rise. Despite its popularity, it has not been really considered as a feasible alternative for the paper currency so far due to the extremely high volatility in its value and security concerns. This is despite the legendary stories of BitCoin investors making millions. Most notable story is that of a Norwegian man, Kristopher Koch, investing $27 in 5,000 BitCoins in 2009, only to discover after 4 years that it has grown into an $886,000 windfall. Amazing, isn’t it? Let’s try to understand the exciting world of Bitcoins.

What is BitCoin and Blockchain?

Bitcoin is a digital currency which is decentralized and heavily relies on cryptography to avoid counterfeiting. BitCoin is based on a concept called Blockchain which is nothing but a public decentralized transaction ledger containing a verified record of every transaction. So BitCoins really exist only as entries on BlockChain as compared to paper currencies. Here are some more interesting facts about BitCoin:

• Bitcoin is run over a peer-to-peer (P2P) network of computers, called nodes which are responsible for processing transactions and maintaining all records of ownership
• Blockchain is the public record of all BitCoin transactions and it is shared and is collaboratively maintained through global consensus by all nodes participating in the Bitcoin network.
• Blockchain is secured by public-key/private key cryptography which nobody has been able to break so far. It’s same cryptography which secures your browser using https.
• Blockchain has a decentralized mathematical and deterministic currency issuance mechanism and a decentralized transaction verification system.
• A BitCoin transaction is a record informing the network of a transfer of bitcoins from one owner to another owner. All Bitcoin transactions are stored in blocks, which are linked (or “chained”) together in sequence to form the Blockchain.
• BitCoin transactions are pretty reliable as transaction ledgers are massively replicated by all network nodes.
• The value of the BitCoin is only driven by the value of the Blockchain network.
• There will only be 21,000,000 BitCoins at most. BitCoins mining creates new BitCoins which is also an incentive for the miners to verify the BitCoin transaction in addition to the transaction fees.
• BitCoin miners are required to solve a Proof of Work (PoW) problem to verify the BitCoin transaction and the new block is only added to the Blockchain after this problem is solved. The mining difficulty is adjusted to make sure that the new blocks must take an average of 10 minutes. Now before you are tempted to start BitCoin mining using your PC, solving the Proof of Work problem requires a lot of computing power and today, ASIC mining is the only economically efficient mining technique. ASICs (Application-Specific Integrated Circuits) are custom built for a particular application and are thus orders of magnitude faster than a normal CPU.

Blockchain: the future

Though Blockchain was created to support BitCoins, it has gained a lot of traction in last few years and there are several alternative applications which are being built based on the concept of decentralized consensus as it has the potential to create robust and secure decentralized systems in a variety of ownership or attestation related usage. Here are some of the interesting use cases worth exploring:-

Identity and Authentication

In the era of increasing hacking and identity theft cases, some FinTech companies are leveraging the blockchain technology for identify and authentication segment by combining the decentralized consensus principle with identity verification. Check this article:

https://letstalkpayments.com/12-companies-leveraging-blockchain-for-identification-and-authentication/

Asset Registration

Asset registration is another alternative use of the blockchain. For example, a number of shares could be matched to their equivalent worth in bitcoins. US stock exchange NASDAQ, has begun experimenting with the using the blockchain to trade assets on it’s pre-IPO arm, NASDAQ Private Markets. Please check a generic asset registration services provided by Coindaddy.

https://coindaddy.io/services/asset-registration

As an extension of this concept, Nick Szabo suggested the idea of “smart property”, as a means of cryptographically enforced property ownership which is digitally transferable and which can be liable to an arbitrary set of contracts between the provider/owner and a customer/lender. Another application coming up are Land titles (as is currently explored with Factom), Criminal records, Voter records, Court records, Wills (as explored by Third Key Solutions), Trusts, Medical records (like the MedVault project) etc.

Smartcity

One of the most notable and recent smartcity use case is probably the Dubai city Blockchain pilot project which Dubai city has launched in partnership with IBM and ConsesSys. The project aims to make Dubai the world’s first “Blockchain Powered Government”. Please check this article:

https://www.coindesk.com/dubai-government-ibm-city-blockchain-pilot/

In another project, Dubai’s government is testing blockchain tech for trade finance in partnership with IBM.

https://www.coindesk.com/dubai-ibm-blockchain-trade-finance/

Attestation

In another interesting application of Blockchain, Namecoin is providing blockchain-based notary, which allows domain name registration and transfer in a completely decentralized manner. Other worthwhile examples are Blockstack the ProofOfExistence and BTProof digital notary projects, which allow users to certify any document by using the Blockchain.

Sidechains

Sidechains (or “pegged sidechains”) are a new concept which capitalizes on the innovations developed by Bitcoin to enable users to not only transfer bitcoins to individuals, addresses, and centralized services, but also to other blockchains. Sidechains will operate in a completely independent and isolated fashion - they are separate systems running in parallel to and taking advantage of the existing Bitcoin blockchain and hence they allow various blockchains to interact with each other, expanding the Blockchain network.

Smart Contracts

A smart contract is a contractual agreement implemented digitally. A smart contract is self-enforced, depending on whether specific conditions that are monitored through software are met. It is enabled using a “layer” built upon the existing Blockchain infrastructure to support smart contracts. For example Visa and DocuSign showcased a proof of concept demonstrating how smart contracts could be used to greatly speed up the processes involved in car rental – rental cars can be driven out of the car park without any need to fill in or sign forms.

Education and employment

Blockchain has the potential to completely transform the education and employment sector as well by using eportfolios, feedback and accredition. We may be looking forward to a future where permanent employment loses its meaning and employers and employees are perfectly matched based on digitally verified education and experience for each assignment. Please check this article where blockchain.open.ac.uk explores some of the interesting use cases.

https://blockchain.open.ac.uk/#what

Hyperledger: Blockchain 2.0

Only an Open Source, collaborative software development approach can ensure the transparency, longevity, interoperability and support required to bring blockchain technologies forward to mainstream commercial adoption. That is what Hyperledger is about – communities of software developers building blockchain frameworks and platforms. It’s a joint initiative by various financial and technology companies to create robust industry specialized applications, platforms, and hardware systems that support business transactions utilizing blockchain technology in joint projects within The Linux Foundation. Please check this link:

https://www.nttdata.com/global/en/news-center/others/2016/021001.html

To conclude, we will see more and more interesting applications for Blockchain as more initiatives and pilot projects are launched. Blockchain has the power to fundamentally change the financial applications as well, which I will explore in my next article.