An important explanation of what crypto-currency (and the more well-known bitcoin) is all about:
I’m not an expert, by any stretch of the imagination, but I am quickly discovering the utility of such a technology for even the most fundamental parts of our digital lives.
What if there is a technological advancement so powerful that it transforms the very basic pillars of our society?
A technology which fundamentally influences the way that our economy, governance systems and businesses function, and change our conceptual understanding of trade, ownership and trust?
This technology already exists, and it’s called crypto currency.
People often think of Bitcoin as only virtual money or a transaction system. But if you look closer, you’ll see that the monetary aspect is just the tip of the iceberg.
That’s because Bitcoin is a ground-breaking internet technology for which money is merely one of the possible applications.
Money exists to facilitate trade. Throughout the centuries, trade has become incredibly complex. Everyone trades with everyone, worldwide. Trade is recorded in bookkeeping.
This information is often isolated and closed to the public. For this reason, we use third parties and middlemen we trust to facilitate and approve our transactions.
Think of governments, banks, accountants, notaries, and the paper money in your wallet. We call these “Trusted Third Parties”.
Trusted Third Parties
This brings us to the essence of Bitcoin. Bitcoin’s software enables a network of computers to maintain a collective bookkeeping via the internet. This bookkeeping is neither closed nor in control of one party.
Rather, it is public and available in one digital ledger which is fully distributed across the network. We call this the Blockchain.
In the Blockchain, all transactions are logged including information on the date, time, participants and amount of every single transaction. Each node in the network owns a full copy of the Blockchain.
On the basis of complicated state-of-the-art mathematical principles, the transactions are verified by the so-called Bitcoin Miners, who maintain the ledger. The mathematical principles also ensure that these nodes automatically and continuously agree about the current state of the ledger and every transaction in it.
If anyone attempts to corrupt a transaction, the nodes will not arrive to a consensus and hence will refuse to incorporate the transaction in the Blockchain.
So every transaction is public and thousands of nodes unanimously agree that a transaction has occurred on date X at time Y. It’s like there’s a notary sitting at each transaction.
This way, everyone has access to a shared single source of truth. This is why we can always trust the Blockchain.
Single Source of Truth
The ledger doesn’t care whether a bitcoin represents a certain amount of euros or dollars, or anything else of value or property for that matter. Users can decide for themselves what a unit of bitcoin represents.
A bitcoin is divisable in 100 million units! And each unit is both individually identifiable and programmable. This means that users can assign properties to each unit. Users can program a unit to represent a eurocent, or a share in a company, a kilowatt-hour of energy or a digital certificate of ownership.
Because of this, Bitcoin is much more than simply money and payments: a Bitcoin can represent many kinds of property.
A thousand barrels of oil, award credits, or a vote during elections, for example. Moreover, Bitcoin allows us to make our currency smarter and to automatize our cash and money flows.
Imagine a healthcare allowance in dollars or euros that can only be used to pay for healthcare at certified parties. In this case, whether someone actually follows the rules is no longer verified in the bureaucratic process afterwards.
You simply program these rules into the money. Ergo: compliancy up front.
The unit can even be programmed in such a way that it will automatically return to the spender if the receiver doesn’t use it aftter a certain amount of time. This way, the provider can ensure that allowances are not hoarded.
A company can control its spending the same way by programming budgets for salaries, machinery, materials, and maintenance so that the respective money is specified and cannot be spent on other things.
Automatizing such matters leads to a considerable decrease in bureaucracy, which saves accountants, controllers, and the organization in general an incredible amount of time.
The programmable, open character of Bitcoin allows us to completely rebuild and innovate our financial sector and our administrative processes, make them more efficient and more transparent, and significantly decrease bureaucracy.
But there’s more.
Internet of Things
In an “internet of things”, our economy will be dealing with machines that actively participate in the economic traffic. In fact, they are already here. Think of a vending machine. Or drones delivering packages.
These machines are unfamiliar with the concept of trust, but Bitcoin is not. Because of Bitcoin, the drone can be a hundred percent certain that it will deliver the package to the right recipient and know for sure that it has been paid for.
And we can program the vending machine in such a way that it will automatically keep track of its supplies, order new supplies from the supplier and pay for them automatically.
Of course, you will understand that this is only the beginning. Internet technology is disruptive and breaks the status quo. It opens markets and breaks the positions of middlemen all the time.
Bitcoin and crypto currencies have caused a paradigm shift. So, It’s about time to explore this new technology constructively and critically, and have an open discussion about the potential applications.