[Editor’s note: This is a guest post by Santi Subotovsky, partner at Emergence Capital. The post went through PandoDaily’s usual editorial process. Mr. Subotovsky was not paid for this post.]

Most people think of bitcoin as a mere replacement for fiat money, or what we think of as “cash.” While currency is the best-known application of the bitcoin protocol, there are even more compelling disruption opportunities outside the finance world that we’ve barely even begun to tap into. So, when people ask me about bitcoin, I like to explain that there are two things going on here: the bitcoin protocol (the Bit) and a bitcoin currency (the Coin).

The “Bit” Side of Bitcoin

Bitcoin’s biggest disruption is the distributed system in which every transaction is shared and available on a public database, known as the blockchain. It sounds complex, but it is not. In essence, the bitcoin protocol simply enables a decentralized database to track ownership of assets. The beauty in this over-simplification is that assets can be anything from physical to virtual.

It’s the simplicity of the concept that creates the most fascinating applications. The bitcoin protocol has both the potential and the promise to disrupt major industries as we now know them. Every industry where a third party exists to track ownership of assets could potentially be disrupted by an application built on the blockchain. Companies such as Ticketmaster (ticketing), Old Republic National Title Insurance Co. (property titles), and even the venerable New York Stock Exchange (stock exchanges), could be entirely disrupted by next-generation counterparties leveraging the blockchain.

How and why would this happen? The bitcoin protocol can allow buyers and sellers to securely buy, sell, and track assets such as tickets, titles, and shares of stock by leveraging the blockchain’s distributed “consensus protocol” that can keep track of ownership. We are starting to see interesting start-ups such as BitHalo and Namecoin that are building applications that will enable asset owners to directly access the blockchain, further eliminating the need for expensive middlemen. Perhaps one of the most exciting developments is IBM’s proposal that it may use the blockchain to build out a distribution platform for the Internet of Things.

The “Coin” Side of Bitcoin

Today, the most widely used application of the bitcoin protocol is the currency. This makes sense given that money is a pretty logical asset for which people would want to track ownership. If you hear on the news about bitcoin, it almost always has to do with money that is being stored on the blockchain.

Most of the early bitcoin companies are focused on the currency in three categories: (1) building the basic infrastructure that allows people to buy and sell bitcoins on exchanges such as Bitstamp and Bitfinex, (2) securely store bitcoins in wallets such as Coinbase and Xapo (Emergence Capital is an investor in Xapo), and (3) transact through merchant services such as Bitpay and Gocoin. It is interesting to see how some of these early category leaders are evolving and adding more services, making the lines between these core categories less clear. Additionally, while bitcoin is the most popular form of virtual currency, there are other alternative currencies (or “alt-coins”) such as Litecoin, Ripple, Dogecoin and others.

Bitcoin's Untapped Potential

More experienced teams of founders: We’re starting to see extremely talented, high-profile teams focused on bitcoin startups. Wences Casares and his team at Xapo, Jeremy Allaire at Circle, and Ben Davenport over at BitGo are some examples of experienced founding teams making big bets on this nascent ecosystem.

Second-derivative startups: While the first wave was focused on building basic platform services such as exchanges, wallets, and merchant services, we’re now seeing far more diversity in the ecosystem as startups begin to address the challenges arising from increasing bitcoin adoption. Namely, these are in the areas of security, identify, financial tracking, analytics, and so on.

Bitcoin protocol startups: Of these trends, the third and most fascinating one, in my opinion, and the one still in the earliest stage, is the growing number of startups working on problems not even related to bitcoin the currency. Instead, they’re leveraging the value of the protocol itself. Companies that are currently rethinking DNS, ownership of physical assets, ticketing, file storage and, even email systems, are blowing my mind as I think more about a world in which bitcoin the protocol disrupts entire technology ecosystems as we now know them.

Where are we going from here? As a technology entrepreneur and an investor at Emergence Capital , it’s been fascinating to see the rapid evolution of the ecosystem in just the past few months. And even though bitcoin (the protocol and currency) can be confusing, the ecosystem is starting to mature. Here are some signs that we’re headed in the right direction:Bitcoin is still in its infancy and it’s exciting both to think how far the ecosystem has come and how much opportunity remains ahead. Banking and financial services are ripe for disruption and bitcoin has introduced a number of principals that have the potential to do just that. But, counter to popular perception, many of those who create the most value using bitcoin technology may have nothing to do with financial services. We’re only scratching the surface of what “bit” entrepreneurs will soon create.

[Editor’s note: This is a guest post by Santi Subotovsky, partner at Emergence Capital. The post went through PandoDaily’s usual editorial process. Mr.Subotovsky was not paid for this post.]

(Art by Michael Carney for Pando)