Plenty has been written about bitcoin since its creation in 2009 – particularly its volatility and criminal uses – but interest is now shifting to other uses for its underlying ‘blockchain’ technology. The technology could change how the financial services sector works, how contracts operate, and even how we send emails.
A blockchain is a peer-to-peer public ‘distributed ledger’ - a decentralised record of information that is open to multiple operators. The bitcoin blockchain is the public ledger that records every bitcoin transaction. But the technology has other possible uses.
- Financial services: The blockchain could revolutionise traditional banking structures and speed up financial transactions. Most financial assets (like shares or bonds) are already in digital form, recorded on centralised ledgers. Decentralisation would mean reduced costs and no central point of attack - this might mean fewer institutions being considered ‘too big to fail’. The blockchain could even bring financial services to the millions of people with internet access but no bank account, by providing another way of transferring money directly between individuals.
- Asset ownership: The blockchain offers a way of creating a public, tamper-proof database to track ownership and transfer of assets – including houses and financial securities. ‘Coloured coins’, representing the assets, can be traded through the blockchain, all for a fraction of current transaction costs. The technology can create a digital history of assets, preventing fraud and theft. One company, Everledger, is using the blockchain for diamond certification and transaction history.
- Smart contracts: Agreements - written in code and enforced by software - can be hosted on the blockchain. These ‘smart contracts’ can self-execute when certain conditions are met (much like a computer program) - when a pre-programmed condition is triggered, the smart contract executes the corresponding contractual clause. Smart contracts could cover anything from online shopping to a smart multi-signature escrow although – for now – they are only likely to lend themselves to simple agreements. This approach could affect the legal and financial industries, particularly as the previous limit on smart contracts was that computer programs couldn’t trigger payments.
- Other uses: these include: (i) peer-to-peer email that both encrypts the message and masks the sender and receiver; (ii) a decentralised domain name system that is resistant to internet censorship; (iii) fully anonymous online voting that is fast, flexible and secure; and (iv) fully autonomous and private transactions conducted by connected devices as part of the ‘internet of things’.
It remains to be seen which of these uses will be taken up, particularly where there are well-functioning centralised ledgers already. And the blockchain certainly introduces new risks, like the ‘51 per cent attack’ - where a malicious user tries to gain control of a majority of the processing power of a blockchain network to use it to validate fraudulent transactions.