Bitcoin and blockchain: Everything you ever wanted to know but were afraid to ask

Don't know your distributed ledgers from your ICOs? Read on.

by Arun Kakar
Last Updated: 18 Dec 2017

Have you jumped on board the bitcoin bandwagon yet? It’s certainly been hard to miss the gold rush, as more and more people flock to fill their virtual wallets. News headlines such as ‘Dutch father sells everything his family owns for bitcoin’  don't exactly lessen the hype. 

Those involved (or claim that they are involved) will tell you that the bitcoin revolution is going to have a profound impact on the way we do business. Are they right? Here’s MT’s simple guide to the crypto-craze.

First things first, what is it?

Don’t know your bitcoin from your blockchain? Start here.

Blockchain is the fundamental technology behind bitcoin and various other innovations, of which more below. Essentially, it’s a shared online ledger. Imagine that you had a spreadsheet and duplicated it across a network of computers that is designed to continually update said spreadsheet.

This is the essence of blockchain, a shared database that is always updating. The key detail is that it is decentralised: it isn’t limited to a single location, which makes it incorruptible (unlike a centralised company database for instance that is liable to hackers) and accessible.

Venture advisor William Mougayar compares blockchain to using Google Docs against sending over a Word document for someone to edit. ‘Both parties have access to the same document at the same time, and the single version of that document is always visible to both of them,’ says Mougayar. ‘The distributed part comes into play when sharing involves a number of people.’

A blockchain is made up of nodes: computers that connect into the blockchain through a client software to attain a copy of the blockchain. By doing this, it becomes one of many administrators on the blockchain. The incentive for doing this? For your everyday user, at least, the answer is cold, hard (virtual) cash.

Bitcoin, the original of the cryptos (there are  now believed to be over 700 cryptocurrencies including MT favourite, ahem, "shitcoin") was devised by the mysterious Satoshi Nakamoto as a way of exchanging value tokens using a blockchain, without having to rely on a centralised intermediary such as a bank. Indeed, it’s not surprising that Nakamoto’s idea really took off only after the 2008 financial crisis and the backlash against central bank bailouts.

Without an intermediary to process and validate transactions, there needed to be a way that the system wasn’t gamed to prevent people from doing naughty things such as spending the same bitcoin twice.

The solution was elegant, in a blackboard covered in barely legible equations kind of way. Whenever a bitcoin transaction takes place, the bitcoin software on the relevant machine creates a mathematical puzzle, which it distributes across the network. The first ‘miner’ (decentralised administrator) to solve the puzzle sends out a signal to the other miners who check that the sender of the funds has the right to spend the bitcoins and that the solution is correct. If enough miners approve, then the block is added to the ledger and the transaction becomes official. After enough blocks are added to the ledger, the miner receives bitcoins as a reward.

As a result, the incentive to the decentralised network to maintain the system is also what increases the supply of the currency. It's worth noting that there are a sum total of 21 million bitcoins in existence. The latest data as of December 15 shows that almost 17 million have been mined.

Why is this important? Well, when the last bitcoin is mined, a lot of professional miners will be worried (unless it expands). If you think the demand is high now, wait and see what happens when it reaches the maximum. Investors, as we all know, love scarcity.

Separating the block from the bit

Bitcoin’s extreme volatility threatens its viability, and it remains to be seen whether it will be more widely adopted, especially with the regulator waiting on the proverbial doorstep to step in.

Nonetheless, Bitcoin’s soaring valuation reflects wide-ranging interest. The Swedish central bank for instance is rumoured to be weighing up the decision to be the first in the world to issue a cryptocurrency as it moves towards becoming a cashless economy, while on the other hand many are using it as a way of escaping capital control. Meanwhile, the argument as to whether it is a currency or an asset class rages on, with prominent figures on either side.

‘Although many commentators argue that Bitcoin is a pure bubble, the reality is more likely that people investing in Bitcoin are primarily investing in the blockchain as a technology at the forefront of innovation in financial markets,’ says Daniele Bianchi, of Warwick Business School.

But it’s not just in finance where the blockchain technology is rewriting the rules of the game. Smart, savvy entrepreneurs in other sectors are finding novel uses for blockchain in business. For example, blockchain’s transparency can essentially be used to verify supply chains, opening up whole sectors to a new level of accountability.

Take Ship Chain, a blockchain based startup that is taking on the $8.1 trillion shipping and logistics market. It uses smart contracts, computational protocols used to verify the performance of a contract, to track and verify each logistical stage of a shipping process. This would not be possible without the blockchain technology.

Ship Chain ‘unifies shipment tracking on the Ethereum [a bitcoin alternative] blockchain, using a sidechain to track individual encrypted geographic waypoints across each smart contract,’ according to its website. ‘With this system, the meaning of each cryptographic waypoint is only accessible for interpretation by the parties involved in the shipment itself. This gives shippers more visibility across their supply chain, and allows carriers to communicate with ease.’

Big business has also been experimenting. This summer, EY applied blockchain technology to shared ownership of vehicles, using the tech to log vehicle ownership and usage and apportion insurance costs. ‘The time has come for blockchain to reshape the automotive industry,’ said Paul Brody, EY Global Innovation Leader, Blockchain.

Chomping from the bit

Despite the present level of interest, blockchain isn’t new. Blockchain VCs, incubators and accelerators have had their finger on the pulse since the days when bitcoin was at parity with the dollar (it’s currently over $18,000).

One of the most groundbreaking potential impacts of blockchain is in driving a fundamental shift from a conventional supplier economy towards a peer to peer (P2P) economy, in which everyone essentially becomes a supplier to everyone else.

This has been a key fixture of the sharing economy, with companies such as Uber and Airbnb built on assets owned by other people. Many argue that blockchain will takes this shift in business model to a new level because it provides an essential infrastructure for a P2P economy, thus giving it a potentially monumental impact. Just type any sector into Google and put the word ‘blockchain’ after it to be flooded with articles and companies that are claiming that it will change things forever.

‘This is the natural evolution of social nets to economy nets,’ argues Anton Kravchenko, CEO of Xena Exchange, a second-generation cryptocurrency exchange. ‘One can transfer money with a trusted network without having to go to a bank or take out insurance on their car without the involvement of an insurance company, and still be sure that it will pay out when time comes. Secure, frictionless, and instant transactions are like the future of economical interactions.’

There’s that zeal again. Will it really go that far? When talking about any emerging technology it’s easy for things to become… inflated. While not even its defenders will argue that blockchain integration has been quick, there are more fundamental questions as to what decentralised applications can do which differ from services already offered.

‘Blockchain attempts to solve a problem that you didn't know you had: the problem of the trusted intermediary,’ says Zac Korman, co-founder of Awesome Power Inc, a smart meter startup. ‘As a programmer, I've never said, "I need to design a system that works like a database, but guarantees no one can control it, including myself." I've never seen that question asked.’

Businesses are still getting to grips with blockchain, Bitcoin and the other cryptocurrencies. The hype resembles the dotcom bubble from 1997-2001, where endless internet-based companies were formed in an attempt to capitalise on the nascent web. Most failed, but a handful of them changed the world, says Alex Dunsdon, co-founder of open innovation accelerator the Bakery. Dundson believes that the same pattern is occuring with blockchain technology: just as Google and Amazon came out as mega-firms from the dotcom boom where so many failed, the blockchain revolution will yield companies that will significantly alter the business landscape. Those who brush it off immediately as a fad fail to grasp its wider implications.

‘Dissenting voices don’t understand it,’ Dundson tells MT .‘To really understand Bitcoin you have to understand the power of decentralisation so you have to fundamentally understand the open [internet], which is absolutely frightening.’ Just as the internet was unleashed and never went away, blockchain is here to stay. With a narrative as difficult to predict as the price of Bitcoin itself, we'll just have to wait and see what the implications will be. Did someone say Web 3.0?

Image credit: Michael Wuensch/Pixabay


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