Anyone interested in modern technology has heard of the
digital currency called bitcoin, even if few people understand how it works. Don't
worry. Credit cards and cash will remain the common currency for some time to
come. But as bitcoin and other digital currencies evolve, the technology that
underlies them may soon spread into other transactions: trading stock, buying
and selling real estate, purchasing music and much more.
A mini-industry is forming to take advantage of the
technology called blockchain, aiming to make a wide variety of transactions
faster, cheaper and more secure. The idea is to remove, as much as is
practical, people and their bureaucracies from the transference of money,
contracts and other data where tracking ownership is important. The several
days it takes for a $40,000 payment to clear a bank, for example, could be cut
to 10 minutes by relying on blockchain's specialized, ostensibly highly secure
computer networks. Bitcoin does just that.
Bitcoin-related start-ups raised $375 million in the first
half of 2015, or about 11% more than they did in all of 2014, investment
tracking firm CB Insights said last week. The number of investments rose 63%
compared with last year's first six months. Several venture funds are popping
up to focus on alternative uses for blockchain. Big players including the
Nasdaq stock market and Goldman Sachs, both of which engage in an unfathomable
number of transactions each day, are investing in blockchain experiments.
Goldman Sachs funded a start-up using blockchain to track and protect U.S.
dollars, not bitcoins. And Nasdaq is working with Chain to build a
blockchain-based marketplace for shares in privately held companies.
Blockchain start-ups include Ambisafe Inc., engaged in
projects such as a tamper-proof national voting system, and Blockchain
Technology Group, a San Diego company working on a blockchain-based music
streaming service, with rock-solid transaction records that could help artists
recover royalty money that somehow leaks away undetected through the existing
tracking system. Blockchain is a risky bet, but some investors are going all
in. Block26, a newly formed Los Angeles-based venture capital firm, last month
announced a $450,000 investment in Airbitz, which wants to enable
So what is blockchain?
First, consider that a currency like bitcoin, which lives
only on computers and is backed by no government or central bank, could not
exist for long — even as a cult phenomenon — if users couldn't trust it. It is
great to see media outlets attempting to talk in a positive light about
blockchain technology. Even in the article, it is difficult for the writer to
get away from talking negatively about digital currency, albeit he raises
salient points in the process. Many have raised concerns with...
The biggest safety issue confronting digital currencies is
double-spending: a system needs to be in place to prevent a bitcoin from being
spent by the same person more than once.
Blockchain is the system that bitcoin inventors devised. To
understand how blockchain works requires dedicated study, but non-specialists
might think of it as a publicly viewable spreadsheet that records every bitcoin
transaction — who sent how much to whom (it's possible to remain fairly
anonymous). Every few minutes, a "block" of new rows is added. But
old blocks on the chain can't be edited. They're locked tight by theoretically
unbreakable computer code.
At least thousands of specially set up computers store a
copy of the blockchain, so messing with records would require the herculean
feat of infecting them all. Anyone can set up one of these computers, which
work together to find inconsistencies and prevent fraud like double-spending.
The people and businesses around the world who have set up these computers
collect fees in exchange for authorizing transactions.
Finding applications for blockchain is wide-open territory
right now. Factom, an organization in Austin, Texas, proposes using it to
verify and lock down the records on mortgage contracts, with the aim of
preventing some of the abuses of the mortgage meltdown, where signatures were
faked and mortgage contracts went missing. Like those who sold picks and
shovels to miners in the Gold Rush, some blockchain start-ups like Factom are
tweaking the basic technology so entrepreneurs can develop new applications on
top of it.
And like the early days of the Internet, they say the
potential uses for the blockchain being discussed today might amount to chump
change compared to what businesses end up using a few years from now. The
roadblocks to blockchain are more than technical. Retail banks and other
established institutions make money from the friction in the system, on fees
and on the float they get by holding money in the several days it takes for
transactions to transfer.
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