Whether you love, hate, or are indifferent about Bitcoin, there is no denying its stunning popularity. Bitcoin and other crypto currencies of its ilk, such as Dogecoin and Litecoin, have seen rises in comparative exchange rates and legitimacy. Indeed, the IRS deciding to tax Bitcoin earnings as capital gains is a good indicator that Bitcoin has crossed some, however nebulous, threshold of legitimacy.
Regardless of the long-term viability of these crypto-currencies, the new monetary platforms have developed a fundamental innovation that will have far greater implications than just electronic payments. This innovation is the block chain.
Understanding the Block Chain
Traditionally data and information are shared through a ‘hub and spoke’ model. A single institution, such as a bank, acts as the hub and disseminates information to us individually. But with Bitcoin there is no ‘bank’ or central institution. Rather the account value is stored across the distributed network of thousands, or more, computers. For Bitcoin, the solution to this problem is the block chain, a public ledger and database where transaction records are stored concurrently across the network. (Check out this block chain FAQ for a crash course in plain English.)
The block chain is important because it solves the longstanding problem of decentralized consensus. In other words, the block chain helps us answer questions such as how do we get multiple computers to agree on certain pieces of data or how do we handle inevitable faults in the system if a computer goes down or gets hacked? For these currencies to work, the network they exist on must propose a value, communicate with each other, and come to a consensus. This is a necessity if you are trying to have records stored publicly across a network rather than stored in one centralized hub.
The Value of Decentralized Consensus
The key is that the block chain provides us with a mechanism to apply decentralized consensus to a variety of applications. Applying this decentralized concept to other technologies presents the prospect for profound future impact. Any application that requires a system of record, whether banking, property ownership records, or election voting, could potentially benefit from a system of decentralized consensus by breaking away from the classic ‘keys to the kingdom’ problem and eliminating any single point of failure.
For failure to occur in a decentralized network, an entity must compromise a large portion of a distributed, potentially global, network rather than a single institution. Decentralized consensus has other benefits as well, as it potentially creates another barrier for misrepresenting the truth. When information is publicly known, an inaccuracy must be vetted by the system. Consider the real world example of resumes before and after the advent of LinkedIn.
A prospective employee may be tempted to lie on their resume to get the job they want. For the most part, employers are forced to take resumes at face value or conduct their own due diligence. In fact, a survey from CareerBuilder.com found that 58% of hiring managers have caught a lie on a resume. However, that same prospective employee is less likely to lie on their more public LinkedIn resume. A study from the Cornell Social Media Lab found that people are less likely to lie on resumes posted in public places because of the presence of past employers, coworkers, and friends who can potentially call their bluff. This example can serve as microcosm (albeit one without complex algorithms) for the potential benefits of systems invoking a public ledger.
Decentralized Applications: The Next Big Thing
A number of organizations are pushing forward the idea of applying the innovation of the block chain to more mainstream applications. I had the opportunity to interview Stephan Tual of Ethereum, an organization broadly seen as leading the charge. Ethereum represents what could well be the next iteration of block chain inspired technology.
Ethereum is building a platform that enables developers to create their own decentralized applications. In a sense, Ethereum provides an ‘operating system’layer that allows individuals to program any feature that they may want on top of it. The existence of such platforms presents an important launching point for future use cases.
Proponents of Ethereum and decentralized applications envision a broad spectrum of areas that this can be implemented. There is an opportunity to introduce an automated element to nearly any mechanism that operates based on a set of predefined rules. Smart contracts based on Ethereum or similar platforms could be extended to areas such as banking, financial derivatives, gambling, crowd funding, or even employment contracts. Money, or any other digital asset, can be automatically redistributed between the parties involved (say on either side of a sports bet) based on the outcomes of a specified set of rules or conditional logic. For example, if team A wins, then money is redistributed from party X to party Y. In such scenarios, this technology mitigates both the middleman and the opportunity for fraud.
But of course, as with everything that has stemmed from Bitcoin, this new decentralized distribution of data is new, relatively unexplored, and not well understood by the community at-large. The question is not whether decentralized networks become more pervasive in our future, but to what extent they will redefine existing systems. By supporting new forms of trusted data sharing and transactional interactions, the long-term effect of Bitcoin may not be its actual impact as a global currency, but as the precursor to a new fundamental trusted application environment that changes the way that we work and play together.
This article is published as part of the IDG Contributor Network. Want to Join?