Brace yourselves for the next wave of bitcoin startups, and prepare to be surprised: they may not have much to do with bitcoin as a payment mechanism at all.

We usually see bitcoin as disruptive to the payments industry, as its technology greases the wheels of transaction, and eliminates the need for currency conversions and hefty fees.

We think of banks and credit cards. But just as we’re getting used to that idea, the next wave of disruption is coming – with new targets.

This wave takes aim at those who hold money for us as guarantors for contracts or deals we’ve made: escrow companies, betting agencies and bookmakers.

Digital currency technology has the ability to secure and enforce a whole range of digital contracts all by itself, performing functions that have previously required a trusted (human) third party with access to the deal-makers’ money.

Futures contracts, world event prediction exchanges, insurance, even your last will and testament can now be settled in this manner. If the subject of the agreement is something that can be factually proven with a specific time set for the decision, it’s possible.

Future bets

Enter Reality Keys, a new service by Tokyo-based startup Social Minds due for public launch on 20th January. Reality Keys provides real-world data in a form that can be used to complete or disregard bitcoin transactions, based on quantifiable facts.

Users can request information on a range of subjects including: exchange rates, cryptocurrency transactions and data in the Freebase open database, which lists 39 million topics covering everything in the known universe.

Users then specify a date at which they would like to confirm the status or outcome of a particular event, and two cryptographic public keys are provided: one for if the event happens and another for if it doesn’t.

At the specified date, a private key is released corresponding to the outcome that occurred.

Social Minds’ founder Edmund Edgar says he saw the potential for bitcoin to be used in this way after the failure of the original Intrade prediction market, which closed last April with a $700,000 cash shortfall following the death of its CEO John Delaney on Mount Everest.

Intrade, which took bets in US dollars on real-world events and was known to be quite accurate at predicting them correctly, was also the subject of regulatory action by the US Commodity Futures Trading Commission.

Similar companies have since risen, like Predictious, which takes bitcoin bets on anything “from presidential elections to the Oscars, to the sales of the iPad.” The catch is that you need to deposit your money with a third party, Predictious itself.

Use case scenarios

Two examples in which Reality Keys could be used are:

1) Currency hedging. You’re an American importing wine from France. But fluctuating currency values hit your expenses hard as the Euro suddenly shoots up, and you must still pay your staff in US dollars.

2) Event prediction and betting. You’d like to put a wager on Hillary Clinton winning the 2016 presidential election.

In both scenarios you deposit a certain amount (let’s say 1 BTC) into an address that required two of three keys to spend: your key, the other person’s key, and the Reality Key for one of those scenarios becoming true (i.e., the US dollar is worth less than the Euro, or Hillary Clinton wins the election). If the prediction indeed comes true, the 1 BTC is paid to you. If not, and you lose, it’s paid to your betting partner.

Math, not humans

“The rise of bitcoin owes a lot to with the failure of trusted third parties that were supposed to be looking after our money for us,” said Edgar.

“But a lot of bitcoin services have ended up embracing the same model. I think we’ve seen enough people lose their hard-earned bitcoins to prove that this model has to change.”

By limiting its role to providing data and making it usable on the block chain, Reality Keys empowers users to create their own digital contracts and transact directly with each other.

It is all, of course, anonymous. Reality Keys provides only the keys, and has no interest in or knowledge of the nature of the contract or the amounts of bitcoin at stake.

“I wouldn’t even call it a platform – just an information service,” Edgar continued.

Layer upon layer (if you want)

Should one layer of digital signature protection not be enough, they can even structure their transactions to use additional signatures provided by other external parties, providing layers “as deep as you like” of assurance that don’t depend on Reality Keys or any other single company or individual.

Edgar said that, although this capability has existed within the bitcoin protocol for a while, it is limited by a lack of software client support and the logistics of brokering and setting up transactions. Blockchain.info supported multi-signature transactions for a short while but has since withdrawn the feature, citing low usage.

“The community’s been suffering from a chicken-and-egg problem where we don’t have services set up to broker multi-signature transactions because the clients don’t support it, but the clients don’t support it because there aren’t enough services to make use of it.”

“We decided to go ahead and build our little part of the infrastructure we think the community needs, so people working on the other parts can build their parts too,” he added.

Edgar sees most use of the service to come via its “simple, really accessible API,” as developers build it into their own projects. It can also be used directly through its own web interface.

Reality Keys is free for anyone to use, but charges a fee if you somehow require human intervention (e.g., if a data source like Freebase produces incorrect information that needs correction).

Edgar said he is keen to expand the service to provide other kinds of data for a potentially huge ecosystem of peer-to-peer distributed markets.

“Our service doesn’t really care what data it is providing. If you can point us to a data source with a public API and reasonably friendly Terms of Service, we can monitor it and plug it into the block chain,” he concluded.

Keys, Tokyo and Maths Images via Shutterstock