Blockchain, the brainchild of an elusive programmer and computer expert who goes by the pseudonym Satoshi Nakamoto, appears poised to enable the Internet to make a quantum leap.
Blockchain technology makes it possible for information to be transmitted without being directly copied. This is the innovation that is at the root of the cryptocurrency revolution. If information could be copied, it would be possible for anyone to simply counterfeit any given bitcoin or other cryptocurrency.
Because all forms of currency rely on the faith of the seller that the bitcoin he or she receives in exchange for goods and services will be readily exchangeable for goods, services or other currency, the ability to easily counterfeit bitcoin or any other cryptocurrency would quickly destroy its value as a medium of exchange.
How Does it Work?
Without going to deeply into the nuts and bolts, blockchain is a way for a distributed network of many computers to verify an electronic transaction, and create a permanent and unalterable electronic diary of transactions involving any given counterparty and any given unit of exchange. A record of that transaction is stored distributed across all the computers on the network.
There are a number of advantages to this approach:
- Documents are stored and continually updated on thousands – maybe millions – of different computers, not just one.
- Any one computer can fail — or many can fail – and the information will not be lost.
- Information stored in a blockchain remains public and is easily verifiable be the rest of the network.
- There is no single copy of a document that a hacker could conceivably corrupt.
- No organized crime syndicate, nor any single government, can control the information stored in the distributed network.
The technology holds a tremendous level of promise. The financial industry – particularly in 2nd world markets with lots of economic activity but little in the way of trustworthy institutions – is beginning to embrace blockchain-enabled cryptocurrencies for international remittances. People in places like Venezuela, where government officials have been trying to clamp down on cash and prevent people from moving assets out of the country, have embraced blockchain as a way of preserving their economic liberty, while protecting their assets against government confiscation.
“Wallet” applications enable ordinary consumers to ‘spend’ bitcoin and other cryptocurrencies with vendors who are participating with those apps. Popular cryptocurrency wallet applications include
- Mycelium Bitcoin Wallet
- Bitcoin Wallet
But blockchain has promise for many different kinds of applications. For example, blockchain makes it much easier for many different people, spread all over the world, to collaborate simultaneously on a given file. The distributed network quickly irons out conflicts so everyone working on the document sees a file that is constantly updating with the changes from everyone else.
Blockchain also makes it easier for companies to create “self-executing” contracts. Etherium, an emerging cryptocurrency, was developed specifically to facilitate and enable smart contracts. For example, a programmer could set up a contract that releases funds only when a specific number of people authorize the transaction. A smart contract can also automatically send a remote signal to another electronic device to execute a task at a given time and date, based on the receipt of a given amount of money. For example:
You could pay to rent a car with a car rental service. The car rental service programs its central computer to unlock the car and enable you to start the ignition at a certain time based on your reservation. Or unlock the door to a weekend getaway rental based on your estimated arrival time.
The Future of Blockchain
Blockchain may eliminate a series of middlemen in a wide variety of financial transactions, thanks to the peer-to-peer nature of the architecture. Fees may come down, making small purchases using cryptocurrencies more efficient and practical – and cutting some agents and clearinghouses out of the picture.
The music industry is already encountering this phenomenon – Recording artist Imogene Heap has founded a company called MyCelia, which converts recorded music into self-executing smart contracts that effectively eliminate the need for record label distribution, and allows the artist to get paid directly, bypassing music publishers and labels.
Going forward, blockchain is likely to fundamentally transform the way we do business across a wide swath of industries. The technology is already making possible entirely new business models.
Examples of emerging and future applications include:
- Insurance claims processing
- “Smart property” that ‘knows’ who is authorized to use it at any given time, and won’t work for anybody else.
- Lending on smart property – that automatically ‘forecloses’ if the loan isn’t paid, saving a fortune in legal fees and reducing borrower risk
- Health records that are instantly accessible from the Web but that can only be accessed by those authorized to read them. Blockchain makes it possible for health care institutions and providers to share data without compromising privacy and security. If a patient enters a hospital, all records in existence could be in the cloud and tied to his or her identity.
- Encrypting and verifying personal records like birth and death certificates.
- Election tracking and voting.
Cryptocurrencies and directly related transactions, such as clearing and settling, are just the beginning. Blockchain’s impact on nearly every industry is likely to be huge.