Wonder what all the fuss is about Bitcoin? A growing number of technology watchers are becoming increasingly excited about the peer-to-peer system on which the digital currency is built. They see applications far beyond the anonymous exchange of money — applications that could make the future look far different from our present.

That foundation is called the blockchain. This is the distributed, encrypted record that Bitcoin uses to record every transaction. An article in the Telegraph last week by Matthew Sparkes explained how the blockchain works:

The idea is that each and every transaction is broadcast by the person initiating it. Rather than telling the bank we want to spend [$5], we tell the world. That transaction is bundled up with thousands of others and cryptographically bound into a 'block' by 'miners' ... To quote the wiki dictionary maintained by 'the Bitcoin community' — perhaps the nearest you can get to an official explanation — 'mining is intentionally designed to be resource-intensive and difficult so that the number of blocks found each day by miners remains steady ... The primary purpose of mining is to allow Bitcoin nodes to reach a secure, tamper-resistant consensus.'

This matters because, as Sparkes sets out under his provocative headline of The coming digital anarchy, this is a system that can be applied not just to money but to any kind of transaction, from domain name registration to legal arbitration or public elections. In between those two extremes, it could completely overturn the way enterprises organize themselves and tout for business.

The fifth protocol

To better understand the impact on business, it's worth going back to a longform blog post from April by Angellist CEO and co-founder Naval Ravikant, in which he states that cryptocurrencies will create a fifth protocol layer powering the next generation of the Internet:

The Four Layers of the Internet Protocol Suite are constantly communicating. The Link Layer puts packets on a wire. The Internet Layer routes them across networks. The Transport Layer persists communication across a given conversation. And the Application Layer delivers entire documents and applications. This chatty, anonymous network treats resources as 'too cheap to meter.' It's a giant grid that transfers data but doesn't transfer value. DDoS attacks, email spam, and flooded VPNs result. Names and identities are controlled by overlords — ICANN, DNS Servers, Facebook, Twitter, and Certificate 'Authorities'. Where's the protocol layer for exchanging value, not just data? Where's the distributed, anonymous, permission-less system for chatty machines to allocate their scarce resources? Where is the 'virtual money' to create this 'virtual economy?' ... Cryptocurrencies are an emergent property of the Internet — almost a fifth protocol in the Internet suite. If [Bitcoin creator] Satoshi Nakomoto did not exist, it would still be necessary to invent them. Someday, they will be used by the machines in our network, on our desk, in our garage, and in our pocket to exchange value and achieve consensus at blinding speeds, anonymously, and at minimal cost.

What Ravikant is really describing here is not Bitcoin per se but the work of the blockchain, providing a trusted, shared transaction record that allows machines to own and exchange value without human intervention. Although in strict engineering terms it's not really a protocol, its impact is potentially as huge as any of these other building blocks of the Internet.

Effectively, Ravikant is arguing the blockchain is how the Internet of Things will exchange value — not just monetary value, but also many of those other components of business transactions that we currently find much harder to quantify, such as trust and reputation.

Autonomous things

Now back to Sparkes, who recounts a scenario imagined by Mike Hearn, an ex-Googler who now works on Bitcoin:

Jen wants a taxi. She tells her smartphone where she's heading and it immediately starts gathering bids from nearby taxis and ranking them based on price and user reviews. This system on which requests and offers bounce around is called TradeNet, and it would be based on blockchain technology. The strange thing about these vehicles is not that nobody drives them, as self-driving cars will have become commonplace decades before, but that nobody even owns them. They are what Hearn calls 'autonomous agents', independent machines which earn their own money through fares, pays for their own fuel and repair and operates utterly without outside control.

Far-fetched it may be, but this is the kind of scenario that is getting venture investors excited about blockchain right now — and you can understand why. The potential earnings from those who get this right could be astronomical.

Inevitable gaming

Of course, like any new innovation, blockchain is going to take longer to get established than those visionaries expect. Over the weekend, for example, news has arrived that the Bitcoin blockchain is not always proof from dominance by a single participant.

There's also the tendency to overestimate the potential of a new system to solve age-old problems. Think back to the dot-com boom and the rise of B2B electronic trading communities that were set to transform the way people bought and sold products. The concept quickly ran into unanticipated problems relating mainly to these primitive networks' inability to convey trust and reputation.

While it's true that blockchain promises to solve precisely these problems, it will take a while to work out exactly how. Then it will take even more time to work out how to counteract the inevitable gaming of the system that ensues.

So this technology is definitely a long-term play. But as electronic trading and the Internet of Things begins to take shape in the corporate plans of enterprises everywhere, blockchain is a concept that will loom large in everyone's future.

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