You would have to have been living under a rock for the past few years not to have heard of Bitcoin. Bitcoin is an electronic “crypto” currency which can be used like cash in many web transactions. At time of writing there are about 14 million bitcoins in circulation, trading at approximately $250 for a total value of about $3.5 billion.
Bitcoins are created by an algorithmic “mining” process – by generating a valid cryptographic hash. As more bitcoins are discovered, the more CPU is required to find the remaining bitcoins. The cost of these CPU cycles against the value of the Bitcoin currently makes Bitcoin mining for profit a capital intensive and somewhat risky endeavour.
Bitcoin combines peer-to-peer technology and public key cryptography. The owner of a bitcoin can use a private key to assert ownership and authorize transactions – others can use the public key to validate a transaction. As in other peer to peer systems such as Bittorrent, there is no central server which maintains Bitcoin transactions – rather there is a distributed public ledger called Blockchain.
Blockchain replaces the trusted third party that must normally mediate any transfer of funds (or other commodity). Rather than a centralized database that records transactions and authenticates each party, Blockchain allows chains of transactions to be validated against the Blockchain community – each transaction is confirmed by public-key based authentication on multiple nodes before being concluded. Unlike a trusted third party the authentication of the participants is not required, providing anonymity within the process.
The long-term success of Bitcoin as a currency depends on many factors including adoption by governments, individuals and corporations, and widespread adoption of cryptocurrency involves significant legal and economic considerations. However regardless of the future of Bitcoin, Blockchain may represent a paradigm that might eventually become fundamental to a wide range of individual, corporate and global interactions. As Melanie Swan puts it in the O’Reilly book Blockchain: “Blockchain technology could become the seamless embedded economic layer the Web has never had.”
Blockchain technology could theoretically be used to coordinate a wide range of activities most of which are currently controlled either by governments or banks. Transfer of property, management of global identity (passports, birth certificates), voting, permits, wills, health data, and a plethora of other transactional data could be regulated in the future by Blockchain. Indeed, Blockchain could enable global system that regulate the allocation of resources or coordination of information across governments and economic systems – creating truly global transactions that are not dependent on any specific government or organization.
Compared with the trusted third-party model, the Blockchain model is arguably more resistant to malicious manipulation and can operate at a truly global scale. Furthermore, while the internet has largely prevented totalitarian governments from controlling information flow, it has also allowed governments of all inclinations to achieve greater surveillance of citizens than even George Orwell anticipated. Blockchain based technology would continue to allow information to flow freely while reducing the opportunities for ubiquitous surveillance. Finally, the elimination of the trusted third party reduces the cost of performing a transaction – moving us one step closer to truly “frictionless capitalism."
Those with a libertarian bent or who are simply concerned by the prospect of a “surveillance society” will obviously welcome Bitcoin and Blockchain technology. However, all but the most anarchistic will admit some concern at the prospect of streamlining the trade of drugs and other illegal products, as well as the potential for tax evasion and money laundering. Certainly governments will generally be motivated to resist cryptocurrency and other Blockchain-like technologies, if for no other reason than the reduced potential for the collection of sales tax. However, history has shown us that technology adoption is very hard to resist – so Blockchain may be a glimpse into the future of global commerce and the internet.