I’ve seen a lot of articles, listened to “the kids” talk about it – and I’ve been trying my best to ignore Bitcoin. But after reading that RE/Max was partnering with GoCoin for rent payments, NASDAQ was testing out the platform and Overstock.com’s blockchain bond issue (and acceptance of Bitcoins), I figured it was about time I got up to speed.
Maybe you’re already familiar with blockchain technology but if you’re not, the short version is that it’s a method of verifying and recording transactions that uses nearly tamper-proof cryptography. The “nearly” is based on the assumption that at any time, at least 51% percent of the players in the system are good actors. And by good actors, I mean those using their computer power to break the cryptography in order to verify that a transaction is from who it “says” it’s from and is going to the right place.
If you’re wondering how a bunch of people unencrypting transactions makes them secure, it’s not the actual transaction that’s being unencrypted. Rather, they’re calculating that the encryption, based on constantly changing algorithms within the system, is correct.
The people who find these blocks and verify them are called miners, essentially a bunch of strangers (the “crowd”) doing the work of their own volition. And it’s totally decentralized in that no one owns or regulates the platform and all its data is stored (distributed) across its network of users.
Why would anyone want to spend their time and computing power on finding and processing transactions? It’s because miners are rewarded for their work. In the Bitcoin system, the first to determine the validity of an encrypted block gets paid in Bitcoins. But before they can be paid, they need to broadcast their solution across the network so that others can proof the work.
Once consensus that the solution is correct is reached, the transaction block is chained to other transaction blocks in such a way that tampering with one block requires all other blocks in the chain must be altered. It’s just about impossible to change a transaction and gets even more impossible as the chains grow larger over time.
These chains of transaction blocks are publicly available in a virtual ledger, though that doesn’t mean everyone can see what’s in each individual transaction. Only those with the proper electronic keys can access and view a transaction – typically only the parties involved in the transaction.
If you’ve noticed, I’ve barely mentioned the currency aspect of Bitcoin. No matter what its value or whether it remains a viable digital currency has become secondary to the block chain technology used to autonomously trade the currency. So for NASDAQ, it’s not about investing in Bitcoins or even taking them as payment. It’s about securely doing business.
The way it works is that trade information “piggybacks” on a small denomination Bitcoins (tag coins) as colored coins or side chains. These side chains and the tag coin to which they’re attached end up in a block of transactions and then go through the normal mining process to verify them before being stored in Bitcoin’s public ledger.
Compared to how information is currently exchanged and stored – multiple people and often insecure systems – the Bitcoin platform automates the entire process without all the possible points of failure.
Whether Bitcoin’s platform is the best for these types of informational transactions is another story. While there are other digital currency platforms, some of which have been developed just for this purpose, there needs to be enough miners for these systems to work. But miners need to be incentivized (paid). So if the currency doesn’t catch on, there’s little reason to mine.
I expect we’ll see “accredited” mining companies that offer their services for these purposes eventually. They could be paid based on the number of transactions they process or flat fees for their participation. In fact, adoption of block chain technology is expected to create all sorts of new businesses and jobs.
But just as many jobs will become extinct. Imagine, for example, a platform with built in rules that for a transaction to proceed, it has to comply with all local/state/federal/international laws and meet a set of conditions that the parties have checked from a list of options. That’s a smart contract. Lawyers are concerned.
And so are the federal agencies that have been trying to tamp down on the illegal activity that occurs on these networks. Money laundering, drug trafficking, child pornography, terrorism all going on right alongside that payment you’re making to Overstock.com. One “solution” is that the government has a key to everything – but who wants that?
Add to those concerns the regular DDoS (Distributed Denial of Service) attacks generating millions of mutant transactions, serious software bugs (like transaction malleability) and the potential for the supposedly impossible 51% attack (luckily, the 51% threshold was reached by the good side this time) are all downsides of an automated system that no one – and everyone – controls.
No. Bitcoin is not just funny money or a PayPal alternative. Its block chain technology has potential for really good and really bad outcomes, which is why everyone needs to pay attention…though I’m sort of sorry I did.