From the beginning, bitcoin has assumed a shadowy, almost outlaw mystique. The technology’s origin and founder remain shrouded in mystery, even to this day. Add to that the Silk Road scandal, in which anonymous users traded bitcoins to buy drugs, landing its pioneer in prison for life, and it’s easy to see why many initially viewed bitcoin as a funding mechanism for the underworld. Even the mathematics of the technology are inscrutable enough to believe the worst.
The irony is that the mathematical foundations of bitcoin create a solid record of legitimate ownership that may be more ironclad against fraud than many of the systems employed by businesses today. Plus, the open, collaborative way in which bitcoin processes transactions ensures the kind of network of trust that is essential to any business agreement.
In other words, look a little more deeply into the technology behind bitcoin, and you can readily see several intriguing possibilities for business use beyond crypto currency.
What follows is a deeper look at bitcoin’s foundation and mechanisms, and how companies could cash in on the integrity of bitcoin’s backbone, the blockchain.
Bitcoin’s true value: The blockchain
A currency’s viability depends in large part on its ability to guard against counterfeiting and to eliminate potential ownership disputes. Bitcoin tackles these problems by establishing a clear chain of ownership for each coin in circulation through a shared public ledger known as the blockchain. The blockchain -- and the process by which it is updated and maintained -- has been so successful that it is fast capturing the interest of researchers and entrepreneurs looking to create systems that nurture trust between competitors in realms beyond cryptocurrency.
The blockchain’s function is simple: To log every bitcoin transaction ever conducted. When one person transfers ownership of a specific denomination of bitcoins to another person, that transaction is confirmed by the bitcoin network (via a process known as mining) as an entry in a block of transactions that is then added to the long chain that goes back to the beginning of the project. This chain of blocks is more powerful than a table of owners because it allows everyone in the network to follow any given coin’s trail of ownership all the way back to when it was first created.
Another important wrinkle in the blockchain is that it employs public key encryption for identifying owners in the ledger, recording one half of the public key pair rather than names or Social Security numbers. Only the person who holds the corresponding private key can decide what happens next to their coin.
This layer of cryptography offers a certain amount of privacy because no names are recorded. But the cryptography offers a greater value in that it ensures transactions are endorsed only by the person who controls the private half of the key pair. Enterprises thrive on trust and assurance, and the cryptography built into the blockchain offers a great foundation for fostering trust among vested parties.
Another key component of the blockchain is the distributed way in which new entries are added to the ledger. There is no central record keeper like there may be with other ledger-based schemes such as travelers’ checks or PayPal. Instead, anyone can organize the next block of bitcoin transactions and update the blockchain through a process known as mining. This open, collaborative structure makes the blockchain attractive for more than supporting an alternative currency. Any organization or group of organizations can place trust in the blockchain because everyone in the network can play a part in the way it is extended.
Adding a bunch of new transactions to the blockchain may not sound exciting enough to generate wide interest in the task, but bitcoin sweetens the pot by offering rewards to those who do. To add the next block of transactions to the chain, you must solve an obtuse mathematical puzzle built from complex cryptographic primitives. The first to solve the puzzle gets to add the block to the chain and receives 25 coins, worth several thousand dollars. The prize is so lucrative that some groups use custom hardware that runs much faster, increasing their chances of finding the answer to the puzzle first, thereby mining more coins. Because the mathematical puzzles are hard and very fair, everyone gets a chance to compete, and that means everyone has a role and investment in the blockchain.
Pushing the blockchain beyond cryptocurrency
The digital signatures that certify each transaction and the collaborative process by which the blockchain is created offer an enticing amount of certainty and assurance for those interested in using the blockchain for tasks beyond banking and currency.
While bitcoin’s blockchain is generally filled with bitcoin transactions, many companies are exploring ways of using the blockchain to track other swaps, trades, or exchanges. Some are looking to bundle their transactions in bitcoin’s blockchain, while others plan to create an entirely separate blockchain using most of the same principles.
The more interesting work being done is in adding new features to the blockchain itself, features that do more than simply create another competing currency with another competing name.
More than 100 companies are exploring ways to extend the blockchain. Some want to build a trading platform; others want to create a more reliable secure identification card; some want to build "self-executing contracts"; some want to handle bitcoin accounting so that businesses can adopt the currency with a minimum of fuss. The applications are exploding.
Because the blockchain provides an unimpeachable record of transactions between two or more parties and evolves collaboratively among vested (and often competing) entities, there is significant potential for organizations to leverage blockchains to seal sophisticated business relationships in a way that reduces fraud and abuse.
Most transactions in the blockchain are prosaic, transferring a certain number of bitcoins from one person to another. But the technology also includes a novel limited language for describing the transaction. This description can include more complex logic that can be used for much more than paying off a debt. It can check for agreement between multiple people and provide some kind of escrow.
In the simplest form, this technology can bind a digital signature of a text document into the blockchain. This freezes an indisputable record of what people agree to do and when they made the agreement. If there's an argument in the future, the blockchain can be used to settle disputes. The solution isn't perfect because it won't settle debates about the way to interpret the language in the contracts, but it will eliminate questions about what bytes are in the contract document.
Working with an arbitrary text document is only the beginning. Some developers have created escrow contracts with thresholds that lock up money until everyone agrees the terms have been met. These can be used in more complex group deals like the crowdsourcing projects from Indiegogo or Kickstarter. When people commit the money, it can only be unlocked if the project raises more than a preset threshold.
The next generation of blockchains can use even more elaborate and complex logic. Some might imagine contracts with checkpoints and audits than check completion. Others may want boilerplate contracts that can be deployed quickly and understood by everyone. These will unlock even more opportunities to work together while using the blockchain to ensure that everyone is protected.
Money gains much of its value because there's a limited amount of it in circulation. No one can simply mint another dollar. One of bitcoin's greatest features is the algorithm it uses to keep the supply of bitcoins tightly controlled.
This doesn't need to be limited to protecting the world of currency. A number of popular objects like baseball cards or art prints are also issued in limited quantities. Scarcity, no matter how artificial, is often a desirable feature for collectors who are interested in investing.
There are other more prosaic needs. Some marketing teams want to limit how many times a coupon can be redeemed. While some want their coupons to be used by any and all customers, others want to offer special deals that must limit how many coupons circulate. Perhaps the inventory is limited; perhaps they want to build demand by making the coupons exclusive. In any case, ensuring that there is a fixed number of some digital good is right in the blockchain’s wheelhouse.
It’s easy to envision a future version of a blockchain that makes the process of limiting digital circulation simpler by tracking and validating the existence of digital goods, such as collectibles or coupons. Instead of limiting the blockchain to currency, it could allow users to add arbitrary objects and fields that could be anything but digital cash.
A typical cash transaction takes place between two people, one paying and the other receiving. But the bitcoin exchange logic can include a requirement that multiple users all provide valid signatures.
Many corporate boards and organizations do a poor job with voting. Many votes are taken by voice, a process that doesn't record who cast votes. If a true tally is collected, it often isn't recorded, and if it is recorded, it often isn't perfect. Many organizations simply don't do a good job with minutes or records.
The blockchain's solution for binding multiple owners of cash can also be used to track whether people agree to do other things. By tracking votes and ensuring that the results are available to guide everyone long into the future, the blockchain can be the foundation of governance.
Bills of lading
Shipping goods is a complex process that usually involves people from many companies. If the packages get to the final destination, everyone is happy. If they don't, someone must pay.
One of the traditional solutions is a "bill of lading," a paper document that travels alongside the goods and tracks responsibility. A blockchain transaction mechanism is a better solution because it can use cryptographic signatures to eliminate distrust. If all of the shippers are part of the process of computing the blockchain, they will be more willing to trust the transactions.
Future versions of the blockchain could extend the process to abstract goods. A person signing off at the end of a work shift could transfer responsibility to the next manager. A security team could swap roles and responsibilities every so often and track these changes via a blockchain.
Everyone has a guess on who will win the Super Bowl, but only the ones who predict the game correctly like to brag about it afterward. The blockchain is a perfect way for people to lock in their predictions in a way that can't be denied later.
This is becoming more and more useful as companies experiment with prediction markets where employees bet on the future. Getting people to wager real money (or points) on events usually generates better guesses and results than simple polls or relying on one so-called expert. The markets aggregate the wisdom of the crowds and produce better results.
While prediction markets are best known for guessing the outcome of elections, they can be quite useful inside the enterprise for aggregating the predictions of the employees. Some plan investments in new product lines by asking employees to bet on the first year's sales. There are dozens of business decisions that can be allocated to employees in a crowdsourced manner, like guessing on attendance at proposed future conferences or predicting which colors will prove most popular for upcoming products. All of these predictions can be certified by a blockchain.
In the past, many businesses embraced subscription services that charged one amount for access to an unlimited number of transactions. Charging one amount is simpler for everyone to understand and simpler to track because it removes the need to count all transactions.
While these solutions are popular and simple, they have problems of their own. It becomes harder to track which offers are truly valued by the customers and which are consumed because they're part of the bundle. Overconsumption and waste are common because the users don't need to pay for each item. Complex offerings are often driven out by cheap ones.
The blockchain can open up more complex transactions by tracking everything. While this is possible to do with a regular database or file, it doesn't have the same certainty or broad trust. Customers can be included in the computation of the blockchain, giving them the chance to validate transactions. If customers build the blockchain, they'll trust it and the enterprise.