Here's Why Blockchains Will Change your Life

By Don Tapscott and Alex Tapscott, co-authors, Blockchain Revolution.

The Bitcoin technology creates the World Wide Ledger of value.

As early as 1981, inventors were attempting to solve the Internet’s problems of privacy, security, and inclusion with cryptography. No matter how they reengineered the process, there were always leaks because third parties were involved. Paying with credit cards over the Internet was insecure because users had to divulge too much personal data, and the transaction fees were too high for small payments. In 1998, Nick Szabo wrote a short paper entitled “The God Protocol.” Szabo mused about the creation of a be-all end-all technology protocol, one that designated God the trusted third party in the middle of all transactions. His point was powerful: Doing business on the Internet requires a leap of faith.

A decade later in 2008, the global financial industry crashed. Perhaps propitiously, the pseudonymous Satoshi Nakamoto-who may or may not be an Australian entrepreneur named Craig Wright-outlined a new protocol for a peer-to-peer electronic cash system using a cryptocurrency, or digital currency, called Bitcoin. Cryptocurrencies are different from traditional fiat currencies because they are not created or controlled by countries. This protocol established a set of rules—in the form of distributed computations—that ensured the integrity of the data exchanged among these billions of devices without going through a trusted third party. This seemingly subtle act set off a spark that has excited, terrified, or otherwise captured the imagination of the computing world and has spread like wildfire everywhere.

“They’re like, ‘Oh my god, this is it. This is the big breakthrough,’” said Marc Andreessen, the co-creator of the first commercial Web browser, Netscape, and a big investor in technology ventures. “This is the distributed trust network that the Internet always needed and never had.”

Today thoughtful people everywhere are trying to understand the implications of a protocol that enables mere mortals to manufacture trust through clever code. This has never happened before—trusted transactions directly between two or more parties, authenticated by mass collaboration and powered by collective self-interests, rather than by large corporations motivated by profit.

It may not be the Almighty, but a trustworthy global platform for our transactions is something very big. We’re calling it the Trust Protocol.

This protocol is the foundation of a growing number of global distributed ledgers called blockchains—of which the Bitcoin blockchain is the largest. While the technology is complicated, the main idea is simple. Blockchains enable us to send money directly and safely from me to you, without going through a bank, a credit card company, or PayPal.

Rather than the Internet of Information, it’s the Internet of Value or of Money. It’s also a platform for everyone to know what is true—at least with regard to structured recorded information. At its most basic, it is an open source code: anyone can download it for free, run it, and use it to develop new tools for managing transactions online. As such, it holds the potential for unleashing countless new applications and as yet unrealized capabilities that have the potential to transform many things.

Big banks and some governments are implementing blockchains as distributed ledgers to revolutionize the way information is stored and transactions occur. Their goals are laudable—speed, lower cost, security, fewer errors, and the elimination of central points of attack and failure. These models don’t necessarily involve a cryptocurrency for payments.

However, the most important and far-reaching blockchains are based on the bitcoin model. Here’s how they work.

Bitcoin or other digital currency isn’t saved in a file somewhere; it’s represented by transactions recorded in a blockchain—kind of like a global spreadsheet or ledger, which leverages the resources of a large peer-to-peer bitcoin network to verify and approve each Bitcoin transaction. Each blockchain, like the one that uses Bitcoin, is distributed: it runs on computers by volunteers around the world; there is no central database to hack. The blockchain is public: anyone can view it at any time because it resides on the network, not within a single institution charged with auditing transactions and keeping records. And the blockchain is encrypted: it uses heavy-duty encryption involving public and private keys-like the two-key system to access a safety deposit box-to maintain virtual security. You needn’t worry about the weak firewalls of Target or Home Depot, or a thieving staffer of Morgan Stanley or the U.S. federal government.

Every 10 minutes, all the transactions conducted are verified, cleared, and stored in a block that is linked to the preceding block, creating a chain. Each block must refer to the preceding block to be valid. This structure permanently time-stamps and stores exchanges of value, preventing anyone from altering the ledger. If you wanted to steal a Bitcoin, you’d have to rewrite the coin’s entire history on the blockchain in broad daylight. That’s practically impossible. So the blockchain is a distributed ledger representing a network consensus of every transaction that has ever occurred. Like the World Wide Web of information, it’s the World Wide Ledger of value—a distributed ledger that everyone can download and run on their personal computer.

Some scholars have argued that the invention of double-entry bookkeeping enabled the rise of capitalism and the nation-state. This new digital ledger of economic transactions can be programmed to record virtually everything of value and importance to humankind: birth and death certificates, deeds and titles of ownership, financial accounts, votes, provenance of food, and anything else that can be expressed in code.

The new platform enables a reconciliation of digital records regarding just about everything in real time. In fact, soon billions of smart things in the physical world will be sensing, responding, communicating, sharing important data, doing everything from protecting our environment to managing our health. This Internet of Everything needs a Ledger of Everything. Business, commerce, and the economy need a Digital Reckoning.

So why should you care? We believe the truth can set us free and distributed trust will profoundly affect people in all walks of life. Maybe you’re a consumer who wants to know where that hamburger meat really came from. Perhaps you’re an immigrant who’s sick of paying big fees to send money home to loved ones. Maybe you’re an aid worker who needs to identify land titles of landowners so you can rebuild their homes after an earthquake. Or a citizen fed up with the lack of transparency and accountability of political leaders. Or a user of social media who values your privacy and thinks all the data you generate might be worth something—to you. Even as we write, innovators are building blockchain-based applications that serve these ends. And they are just the beginning.

Alex Tapscott is the founder and CEO of Northwest Passage Ventures. Don Tapscott is CEO of The Tapscott Group and an Inaugural Fellow at the Martin Prosperity Institute at the University of Toronto.

This post is adapted from Don & Alex Tapscott’s new book, BLOCKCHAIN REVOLUTION: How the Technology Behind Bitcoin is Changing Money, Business, and the World and originally appeared on Fortune

Follow Don Tapscott on Twitter @dontapscott

Follow Alex Tapscott on Twitter @alextapscott