If you haven’t already heard, the coolest and most important thing about Bitcoin probably isn’t Bitcoins at all, but rather the verification and tracking system that underpins the crypto-currency.
The Bitcoin Blockchain system was inaugurated on Jan. 3, 2009, by the shadowy (and potentially fictitious) Satoshi Nakamoto. Six years later, the application of Blockchain and derivative blockchains has exploded across the financial services industry and beyond. (In this post, I refer to the original Bitcoin Blockchain in uppercase and derivative blockchains in lowercase.)
Many believe that blockchain technology could be the next leap forward in global computing. Just as the internet and mobile computing have connected people all over the world in real time, blockchain has the potential to stitch together real-world and smart digital assets in an automated, self-regulating environment governed by business logic. This emerging technology very well could end up providing the framework for a new, fully-automated application services layer, which would top the existing protocol stack that makes up the Internet. Blockchain could provide globally connected, encrypted, “trustless” payments, transactions, tracking, verification and execution of contract terms for IP protection, digital and real-world asset management, and much more.
Blockchain 1.0: Currency
The first incarnation of Blockchain is all about currency. It is a distributed cryptographic ledger technology that processes, verifies and permanently records all transactions on the Bitcoin network. The purpose is to remove the need for a “trusted” third-party institution (like a bank or a government) to validate the currency and transactions, and replace that trusted entity with an algorithmic, self-policing, automated consensus engine. Literally every “node” – or point of connection – on a blockchain “votes” on the details of a given transaction and the majority consensus becomes an “unalterable truth”, the permanent record of the event. As the foundation of Bitcoin, Blockchain was built to have a somewhat narrow focus – proof of work for bitcoin mining, and the validation, tracking and recording of various types of bitcoin transactions – and therefore has limited flexibility.
Blockchain 2.0: Smart Contracts
While the creator of Blockchain designed the system to accommodate a variety of transaction types, enabling it to execute more than simple Bitcoin transactions, there are a number of entities now creating new, more flexible distributed ledgers for purposes that go beyond the capabilities of the original system.
The next iteration of blockchain goes beyond the execution of simple buy/sell transactions to include much more extensive business logic and if/then instructions. Take for example Etheriem, a crowd-funded nonprofit organization created by technologist Vitalik Buterin. Etheriem seeks to build what amounts to a global smart contract utility – a cloud-based distributed ledger available to all comers for the design, build and execution of any and all types of smart contracts.
If blockchain 1.0 is about the decentralized, trustless automation of a digital currency, blockchain 2.0 is about the decentralized, trustless automation of entire business and legal agreements, governing the movement and transaction of any type of asset. The bottom line of blockchain 2.0 is that we use the distributed ledger and an associated digital currency to both define the terms of the contract and execute payments for assets or services rendered. No human intervention is required or allowed once the contract is executed by all parties. Through blockchain, these types of contracts can be brought to bear on a much wider range of real-world problems, such as complex commercial real-estate transactions, real-time compliance and audit, governance and public records, elections and intellectual property, just to name a few.
Blockchain continues to pick up steam as game-changing technology. As financial services solution and technology solution providers, it is critical that we understand the capabilities and risks of blockchain in order to leverage it appropriately for our clients and consumers, as well as to ensure that we remain relevant in the market. Check back on Nov. 12, when we’ll dive into the exciting potential future of blockchain 3.0 and the concept of the distributed autonomous corporation. We’ll also discuss risk, compliance and regulatory considerations we face as we forge ahead with this new technology.