CRYPTOCURRENCY, SMART CONTRACTS & THE BLOCKCHAIN REVOLUTION
On 9th January 2009 Satoshi Nakamoto, a mysterious figure known only to the NSA, who has taken great care to hide his real identity from the world, released the Version 0.1 of Bitcoin software on Sourceforge.
Bitcoin as you will no doubt know is a crypto or virtual currency that runs on a revolutionary technology called Blockchain.
A blockchain, originally block chain, is a continuously growing list of records, called blocks, which are linked and secured using cryptography. Each block typically contains a hash pointer as a link to a previous block, a timestamp and transaction data.
By design, blockchains are inherently resistant to modification of the data. Harvard Business Review defines it as “an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way.” For use as a distributed ledger, a blockchain is typically managed by a peer-to-peer network collectively adhering to a protocol for validating new blocks. Once recorded, the data in any given block cannot be altered retroactively without the alteration of all subsequent blocks, which requires collusion of the network majority.
Blockchains are secure by design and are an example of a distributed computing system with high Byzantine fault tolerance. Decentralized consensus has therefore been achieved with a blockchain.
This makes blockchains potentially suitable for the recording of events, medical records, and other records management activities, such as identity management, transaction processing, documenting provenance, or food traceability.
Basic Use Case
In other words Blockchain technology creates a decentralised, distributed and transparent network of transactions which can be seen by all as they update in realtime.
You can look at Bitcoin transactions as they happen here:
As pointed out in the Wikipedia definition above, the transactions do not have to be financial in nature – they can be any records that benefit from being decentralised, transparent and can easily and immediately be seen by all parties.
Bitcoins are created as a reward for processing the transactions on the Blockchain ledger, or mining.
Miners keep the blockchain consistent, complete, and unalterable by repeatedly verifying and collecting newly broadcast transactions into a new group of transactions called a block. Each block contains a cryptographic hash of the previous block, using the SHA-256 hashing algorithm, which links it to the previous block, thus giving the blockchain its name.
The successful miner finding the new block is rewarded with newly created bitcoins and transaction fees. As of 9 July 2016, the reward amounted to 12.5 newly created bitcoins per block added to the blockchain. To claim the reward, a special transaction called a coinbase is included with the processed payments.
All bitcoins in existence have been created in such coinbase transactions. The bitcoin protocol specifies that the reward for adding a block will be halved every 210,000 blocks (approximately every four years). Eventually, the reward will decrease to zero, and the limit of 21 million bitcoins will be reached c. 2140; the record keeping will then be rewarded by transaction fees solely.
In other words, bitcoin’s inventor Nakamoto set a monetary policy based on artificial scarcity at bitcoin’s inception that there would only ever be 21 million bitcoins in total. Their numbers are being released roughly every ten minutes and the rate at which they are generated would drop by half every four years until all were in circulation.
After the popularity of Bitcoin started to take off, other people started to create their own cryptocurrency based on Blockchain / Bitcoin.
Litecoin was the next cryptocurrency released in October 2011 and since then literally thousands of cryptocurrencies or Altcoins as they are known have been released, most with far quicker and cheaper transaction times than Bitcoin that provide similar functions but also often fulfil a new function separate to currency / blockchain.
A few notable examples:
Ether – Ethereum is the technology that fulfils two extra functions on top of being a virtual currency (called Ether) based on blockchain technology – ICOs and Smart Contracts. These will be discussed later in the article.
IOTA – IOTA is focused on providing secure communications and payments between machines on the Internet of Things. Using directed acyclic graph (DAG) technology instead of the traditional blockchain, IOTA’s transactions are free regardless of the size of the transaction, confirmations times are fast, the number of transactions the system can handle simultaneously is unlimited, and the system can easily scale unlike Bitcoin which is experiencing serious teething troubles.
XRP – The technology is called Ripple which is a real-time gross settlement system (RTGS), currency exchange and remittance network by Ripple. Also called the Ripple Transaction Protocol (RTXP) or Ripple protocol, it is built upon a distributed open source Internet protocol, consensus ledger and native cryptocurrency called XRP (ripples). It is designed to allow lighting fast and cheap banking transactions between banks and clearing houses international that would have taken days and been expensive before this implementation of this technology.
Monero (XMR) focuses on privacy, decentralisation that runs on Windows, MacOS, Linux, Android, and FreeBSD. Monero uses a public ledger to record transactions while new units are created through a process called mining. Monero aims to improve on existing cryptocurrency design by obscuring sender, recipient and amount of every transaction made as well as making the mining process more egalitarian.
The Ethereum platform allows companies to create and release an Initial Coin Offering – in a similar way to the Stock Market’s Initial Public Offering, but instead of selling shares the company sells altcoins. This has raised a lot of money for new altcoins and their creators, some with good technology and some with very shady technology leading to a wild west style environment where some investors are unscrupulously exploited and their money taken.
This led to China and South Korea banning ICO’s earlier in the year.
Again from Wikipedia:
Smart contracts are deterministic exchange mechanisms controlled by digital means that can carry out the direct transaction of value between untrusted agents. They can be used to facilitate, verify, and enforce the negotiation or performance of economically-laden procedural instructions and potentially circumvent censorship, collusion, and counter-party risk. In Ethereum, smart contracts are treated as autonomous scripts or stateful decentralised applications that are stored in the Ethereum blockchain for later execution by the EVM. Instructions embedded in Ethereum contracts are paid for in ether (or more technically “gas”) and can be implemented in a variety of Turing complete scripting languages.
In English this means that you can write a piece of code in the form of a contract between two or more parties that when fulfilled will be paid in Ether to the party as per the details of the contract.
The potential impact of this is enormous.
A contract can be written in code that once fulfilled will be paid out automatically – no court cases, no doubt, no lawyers, no room for error – binary – 0 or 1. It can be written for any use case. Which brings me on to:
Blockchain Revolution and Advanced Use Cases
Smart contracts have amazing potential to be used for all sorts of use cases:
Legal contracts removing the need for expensive Lawyers,
HR contracts in the workplace.
Property Sales – imagine having a smart contract that changes the settlement time for 6 weeks to 20 minutes.
Blockchain + Smart contracts – the replacement of Uber and AirBnb services to allow the driver / home owner to connect directly with the customer.
Blockchain use cases further to the ones mentioned above from this article:
The future is Blockchain, the future is decentralised, efficient and transparent.
Smarts Contracts further reading: