How the Technology Behind Bitcoin Is Changing Money, Business, and the World

Don Tapscott and Alex Tapscott

Blockchain Revolution (2016) by Don Tapscott and Alex Tapscott describes the potential for blockchain systems to change the way that governments, banks, corporations, and private citizens manage everything from money to personal health data.

Blockchain systems are based on writings attributed to Satoshi Nakamoto, which is the pseudonym of an anonymous technologist…

Blockchain Overview

Blockchain Revolution (2016) by Don Tapscott and Alex Tapscott describes the potential for blockchain systems to change the way that governments, banks, corporations, and private citizens manage everything from money to personal health data.

Blockchain systems are based on writings attributed to Satoshi Nakamoto, which is the pseudonym of an anonymous technologist. A blockchain system is one in which individuals who engage in a transaction broadcast data about it to a network. Users participate by undertaking a process called mining, which involves collecting transactions in progress and attempting to compile them into a block of data in a way specified by the network. Each block contains data about the previous block, so that all blocks of data are “chained” together. The creator of the block that is added to the chain is rewarded with reputation or currency. Copies of the blockchain are held on computers all around the world.

The most famous use of blockchain technology is the digital currency Bitcoin. It demonstrates characteristics of blockchain systems at their best. Transactions have integrity because they cannot be manipulated to spend the same coin twice. The widespread involvement and lack of an individual authority means that the system cannot be obstructed or shut down by one actor.

Transactions are reliably completed because people have an incentive to resolve them. Users can secure the data they send and protect it from tampering by using asymmetric key encryption, in which a sender can encrypt with a recipient’s public key something that can only be decrypted with the recipient’s private key. The identities of parties in a transaction are hidden behind their anonymous addresses. Anyone can prove that a transaction did or did not occur because the blockchain can be viewed by anyone. Blockchain systems are accessible and reliable for people who lack access to traditional banking or investment opportunities.

Financial institutions are increasingly interested in blockchain systems because they do not need to verify individual identities and the value of what they are exchanging. Moreover, the blockchain can complete a transaction more quickly than banks generally do. It stores the value each person holds because of its permanent records, and it allows individuals to lend money to each other.

Blockchain technology can be used for a variety of financial tasks, such as investing and insurance. It is a strong tool for accounting and auditing. Existing financial institutions have not fully embraced blockchain cryptocurrency; they are more likely to create a version of a blockchain currency that restricts access or privacy to more closely control or profit from it. Ideally, blockchain systems are freely distributed and accessible. They could eventually be used for improved credit tracking through reputation scoring, raising money for new enterprises, and stock markets that crowdsource predictions.

The developers of ConsenSys and Ethereum are working to integrate blockchain systems into every aspect of business. The platform of Ethereum allows programmers to script management policies and rewards that activate automatically in response to employees’ work. It provides a foundation for supplier and customer contracts and ensures that a company can do business even if it does not yet have a well-known brand. Companies could automatically search through a blockchain of customer requests to find business. They could even make use of smart contracts, which are computer programs that execute automatically to transmit funds or cancel a service when certain criteria are met. The transparency and integrity of the blockchain can foster trust within the company and outside of it.

Blockchain systems can improve on new industry trends. A blockchain could be implemented to remove the middleman from home rentals by directly connecting travelers with property owners and enabling secure monetary transactions and ratings that increase or decrease a participant’s reputation for actions as a guest or host. Some industries could be completely automated, for example, by allowing a self-driving car to choose passengers to transport, pay its own taxes and license fees, and generate reports for accountability, each through communication with a blockchain containing smart contracts. New weather prediction applications automatically gather data from sensors and reward the people who operate the sensors with automated payments based on sensor accuracy. These automated systems could even replace corporate structure, determine compensation based on network-calculated reputation, and enforce intellectual property rights.

Internet-connected devices could utilize blockchain systems to give the general public the ability to evaluate the condition of government- and utility-owned smart devices like power poles and other aspects of the “smart grid.” Likewise, blockchain technology could augment accountability measures for food producers and link health care devices to patient records, all while enhancing speed, cost savings, and reliability.

The blockchain represents an opportunity to make finance simpler for people who remit money to their families in other countries, who live beyond the reach of established payment-system infrastructure, or who lack credit history or extensive personal documents. People who have access to a smartphone and an internet connection can use a blockchain to establish an identity with a reputation and store value in a blockchain currency. From there, it becomes easier to start a business or earn an income from participating in a crowdsourcing service. A blockchain system could circumvent the many fees and inconveniences that people usually encounter when remitting funds. Aid organizations can use blockchain records to show how they spend their money and to better identify the people who need help through accurately recorded land titles.

Blockchains have potential government applications in creating transparent and accountable voting systems and personal data records that can be disclosed selectively. These advantages apply not only to democratic societies but also to hypothetical models of participatory systems that use sampling or prediction markets.

Musician Imogen Heap is participating in a project to better manage her intellectual rights to her music and payments from the use of her songs through blockchains. Artists of all kinds can utilize similar tools to create smart contracts that enforce license restrictions for the use of their work. Patronage on the blockchain could be done anonymously, allowing recipients like journalists to remain independent.

Many obstacles still prevent the full realization of the potential for blockchains. For example, blockchains do not fit into any existing legal framework. The energy and infrastructure needs of many blockchain networks are not sustainable and scalable. Existing industry leaders and governments could alter large blockchain networks to exert control. As with any digital technology, the risk of security exploitation, criminal use, and government surveillance is high.

Nonetheless, many former skeptics have joined the blockchain wave from banking, government, and academia. The participation of many different types of actors will be fundamental to blockchain technologies’ success or failure.

Key Blockchain Insights

  1. Blockchain systems create public digital ledgers that a network helps distribute and expand. The blockchain system that most people have heard of is Bitcoin, which uses the ledger to trace the ownership of units of digital currency.
  2. A blockchain is transparent and recursive, which prevents users from tampering with the record. Transactions are anonymized, but the history of any transaction can be traced through the entire length of the chain.
  3. Blockchains are decentralized systems. No one person controls the history of the chain, and participants are rewarded by the network for contributing to the system infrastructure.
  4. A blockchain system can facilitate faster and more thoroughly documented monetary transactions, so financial institutions have shown interest in customizing the technology to best suit them.
  5. A contract that utilizes a blockchain can be programmed to enforce itself. Smart contracts are especially useful in protecting intellectual property.
  6. Internet-connected devices, appliances, and systems can use blockchains to automatically record data where it is most useful and provide access to the interested parties.
  7. A blockchain system can lead to more transparent and accountable voting processes. It can also give citizens full access and control over their public records.
  8. Sending money overseas becomes faster and cheaper with a blockchain system. Similar technology can give people who live beyond the reach of traditional banks the ability to store and invest money.
  9. Existing blockchain-based companies use the technology to develop business applications that improve accounting and contracting, record utility maintenance, and purchase works of art.
  10. A blockchain system with smart contracts can support distributed applications and automation allowing shared resources to generate revenue based on a set of rules.
  11. Challenges to the widespread use of blockchain technology involve ensuring legal compatibility and the comfort of existing stakeholders while retaining the system’s independence and guarantees of privacy.
  12. The continued development of blockchains as open systems requires the participation of stakeholders in academia, business, finance, government, and beyond.