The technology behind Bitcoin holds immense potential that we’re just now beginning to fathom.
A safe, tamper-proof digital ledger has triggered a shock wave rippling far beyond the world of finance.
Online payments diverted into the wrong pockets. Election results disputed by a political party. Idea ownership claimed by two authors. What do these systemic malfunctions have in common? They could all be prevented with a revolutionary technology called blockchain.
Common mortals will probably have to wait at least a decade before they feel the full impact of blockchain technology, but it is no longer something out of science fiction. This very real technology forms the backbone of Bitcoin, the mysterious cryptocurrency released in 2009. It’s the mechanism that allows Bitcoin to exist without any central institution issuing bitcoins or clearing transactions. The network is self-administered based on a set of protocols.
The “simple” definition is that a blockchain is a digital ledger in which all user transactions are noted in a time-stamped “chain” of “blocks” of information. At any time, the system can show who has what and prove it. Every computer logged on to the network stores a copy of the ledger. Some users voluntarily take part in the authentication process, called “mining”. It’s like a lottery: users compete to be the first to confirm transactions using their own hardware, which runs continuously. The winning “miner” is rewarded in bitcoins. Once a new block of transactions is validated by the network, it is added to the ledger in what is referred to as a chain, thus forming the blockchain. “The system establishes a global consensus about past transactions,” says Maxime Augier, a PhD student in cryptography at the École Polytechnique Fédérale de Lausanne (EPFL). “It means that all participants agree on the ledger’s content because they’ve created this consensus system in which any attempt to tamper with information by deleting or modifying it once it’s recorded is doomed to fail.” These virtual transactions are irreversible. There is no going back without network approval.
A proven viability
The blockchain is considered incorruptible. Any ill-intentioned individual acting alone is powerless. “To take over the network, an attacker would have to control more than 50 per cent of its total computing power,” Augier explains. “We hope that’s a theoretical scenario, but we can’t be sure. Should it happen, the individual would take every precaution to avoid being noticed.” Not to mention the energy required to power the computers needed for the blockchain system to work.
This limitation in no way detracts from the technology’s advantages, says Augier. “No other mechanism as simple and popular as blockchain is currently available to achieve this global consensus. The system has proved its viability. And the principle of a ledger used exclusively to record data, and not modify it, could have useful applications outside of finance.” That is precisely why areas as diverse as e-voting and intellectual property are taking a closer look at blockchain technology.
“We’re on the brink of a revolution with blockchain,” says Alexis Roussel, co-founder of Bity, a platform for buying and selling bitcoins. “The shock wave will be similar to that caused by the Internet. At first, it only interested scientists, but now we can’t do without it.”
Banks: the cost advantage
Finance was the first industry to explore blockchain technology for applications other than Bitcoin. “It’s used to carry out faster, cheaper and more secure financial transactions,” explains Andreas Lenzhofer, a partner at PwC Strategy&. “Customers don’t notice any significant change. It’s the infrastructure suppliers that are more directly impacted.”
Most payment systems are centralised. Transactions between financial services companies, for example, go through several intermediaries and are cleared by central banks. The firms then have to synchronise their internal ledgers. The whole process is time-consuming, increases risk and requires capital. In a decentralised system, transactions can be settled in a matter of minutes or seconds. This could save firms up to $20 billion a year by 2022, according to Santander bank.
Large banks do not want to miss that opportunity. UBS, Goldman Sachs, JP Morgan and 22 other institutions have invested in R3 CEV, a start-up that is developing a standardised architecture for private ledgers. Nasdaq, the U.S. tech-sector stock exchange, has introduced a system built on blockchain technology to record trading in unlisted companies. The first transactions using the new platform were carried out at the end of 2015.
The mysterious Mr Nakamoto
First released in 2009, Bitcoin still holds a few secrets. The creator of the cryptocurrency – and blockchain technology – who goes by the pseudonym Satoshi Nakamoto has never revealed his, her or their identity. Journalists have sworn they have found the inventor. In December 2015 Wired magazine believed it had its man, Craig Steven Wright, an unknown 44-year old Australian computer scientist with a collection of degrees. But other sources claim that it’s a hoax. The mystery remains to be solved.
“If you talk to any financial institution today, everybody says payment will be on the blockchain in the future.”
Mark Højgaard, CEO of the Danish
cryptocurrency company Coinify
on Business Insider, January 2016
Electronic voting: a matter of security
Security remains the main hurdle to online voting. Decentralised ledgers are safe and cannot be tampered with. And those are key advantages when applying the technology to e-voting systems. “We definitely need to move in that direction,” says Eric Dubuis, a professor at the University of Applied Sciences and Arts in Bern. “But the Bitcoin mechanism can’t simply be replicated. We need to create a new system specifically for online voting.”
That would mean distributing the virtual “display table” of voting results on multiple computers that are connected but independent. All ledgers would have to be synchronised to eliminate any discrepancies in databases. “Given the amount of information, it wouldn’t be efficient to synchronise the ledgers continuously, as is the case with Bitcoin,” says Dubuis. “The databases should be harmonised at regular intervals.”
Who would take part in the confirmation process? “To achieve a decentralised voting ledger using blockchain, we need more oracles, i.e. referees who will use their reputation to confirm what’s really happening in digital transactions,” says Alexis Roussel, co-founder of Bity. “Once they’re required all over the world, the trust mechanism will be so strong that governments will be able to give up certain powers to build the digital world.”
Intellectual property: a system of proof
The artist who writes a piece of music and the scientist who produces a research paper share the same concern: protecting their baby against theft. Blockchain could do it for them effectively by providing proof that they are the authors of their work. “It will still be possible to copy it, but the file’s first reference will forever be engraved in the marble of the blockchain,” says Alexis Roussel, co-founder of Bity. “If you produce something that you record in the decentralised database, and you’re the first one to do it, you’ll always be able to prove that you’re the author.”
Where should you record your asset? The website alexandria.media, for example, is a self-archiving and distribution platform. Actively supported by the electro diva Imogen Heap, this platform offers payment systems (in bitcoins, of course) to remunerate authors. “When you archive a music file on the network,” says Roussel, “you define how it will be shared – pay-per-view, tip, etc. And if you share your music, you don’t pay to listen to it. As with Bitcoin, participation in the network is rewarded.”
This initiative shows how blockchain technology can revolutionise digital rights. “The information required to certify and pay authors is provided in the public ledger. Automating the process will allow authors to circumvent the complex companies that manage rights.”
Article by Guillaume Meyer