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Bitcoin and the Blockchain

LiveMint logoLiveMint 15-03-2017 Olga Kharif

When bitcoin broke into public consciousness in 2013, it couldn’t have been sexier: a digital currency being used to buy everything from drugs to cupcakes. Now there’s a new wave of excitement about an aspect of bitcoin that is a bit less sexy: public online ledgers. The blockchain—the technology used for verifying and recording transactions that’s at the heart of bitcoin—is seen as having the potential to reshape the global financial system and possibly other industries.

The situation

After years of volatility, the price of bitcoins reached a new high in early 2017, a surge tied in part to growing global political uncertainty and to increased interest in China, where bitcoins are seen as protection against currency controls. But efforts to make bring investing in the digital currency into the mainstream were set back when the US Securities and Exchange Commission rejected an application to open a bitcoin-based exchange traded fund. Meanwhile, more than 50 banks including Barclays and JPMorgan Chase have joined the R3 consortium, created to find ways to use the blockchain as a decentralized ledger to track money transfers and other transactions. R3 plans to make its software code publicly available, which could speed its broader adoption. Nasdaq Inc. is already using the blockchain—with help from start-up Chain.com—for trading securities in private companies.

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The Australian Stock Exchange is working with blockchain start-up Digital Asset Holdings to speed up its clearing and settlement services in the cash equities market. The blockchain is also being tested by retailers like Wal-Mart for ensuring food safety, as industries ranging from healthcare to natural-resource management are exploring what advantages the technology might hold over traditional databases.

The background

Virtual currencies aren’t new—online fantasy games have long used them—but the development of a secure digital currency without a central issuer rightly turned heads. The person or people who created the bitcoin system under the pseudonym Satoshi Nakamoto solved a problem central to any currency—how to control its issuance, i.e., prevent counterfeiting—and did it without relying on a government’s authority.

The software also solved one specific hurdle for digital money—how to stop users from spending the same unit of currency twice. The breakthrough idea was the blockchain, a publicly visible, anonymous online ledger that records every single bitcoin transaction. It’s maintained by a network of bitcoin “miners” whose computers perform the calculations that validate each transaction, preventing double-spending. The miners earn a reward of newly issued bitcoin. The pace of creation is limited, and no more than 21 million bitcoins will ever be issued.

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The argument

Since bitcoin first boomed, there’s been no shortage of critics to call its rise a bubble and to argue that the currency has no intrinsic value.

But entrepreneurs in the field say that focusing on the price of bitcoin is missing the point—its value is as proof of concept for a new kind of payment system not reliant on third parties like governments, big banks or credit-card companies.

Promising applications of the blockchain system include moving money abroad, signing contracts, clearing complex financial transactions and as a medium for micro-payments in emerging countries.

Others say that blockchain advocates are hyping what amounts to no more than a new kind of database. Bloomberg

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