The technology behind bitcoin could transform how the economy works
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The October 31 issue of The Economist featured the blockchain in its cover: How the technology behind Bitcoin could change the world. Right up frontthe Economist distinguishes between three different notions that are often muddled up when discussing blockchains: Bitcoin has had a mixed reputationdue to its wild fluctuations in value and past links to illicit activities. And, bitcoin-specific blockchain concepts like mining might well be perceived as economist blockchain trust machine wasteful of computing power and energy by all but the most libertarian of bitcoin supporters.
But the advanced technologies and architectures underlying blockchains are being increasingly accepted as having important implications far beyond bitcoin and other cryptocurrencies. The blockchain holds the promise to revolutionize the finance industry by bringing one of its most important and oldest concepts, the ledgerto the Internet age.
It is a way of making and preserving truths. The earliest ledgers likely hark back to ancient Mesopotamiawhere writing first evolved thousands of years ago enabling people to keep track of financial records.
The modern ledger, based on double-entry book-keepingwas first developed among the merchants of renaissance Italy as commerce and banking flourished. Starting over 50 years ago, institutions have been transforming their paper-based ledgers into highly sophisticated IT applications and data bases.
But while most ledgers are economist blockchain trust machine digital, their underlying organization has not changed. Each institution continues to own and manage its own ledger, synchronizing its records economist blockchain trust machine those of other institutions as appropriate, - a cumbersome process that often takes days.
This is not surprising. There is often a fairly long time lag between the emergence of a disruptive technology and the development of the processes and institutional organizations that are required to properly leverage the technology. For example, when electric motors were first developed in the late 19th century, they were deployed to replace big steam engines as a source of power.
It took several decades for factories to realize that instead of having one central source of power, they could now fit small electric motors in each machine in the plant floor, thus leading to far more productive and flexible manufacturing processes.
But, going across companies and vendors was quite cumbersome. The Internet changed all that. Once the Internet was widely embraced in the s, it became no harder to send an e-mail between companies as within a company. Everyone was using the same standards, including open source implementations of key protocols. Rather than developing their own proprietary networks and struggling to interconnect with those of others, institutions now collaborated on developing the common Internet architecture, - and Internet-based applications like e-mail and the Economist blockchain trust machine, - that they all now used.
A similar story played out with UNIX. In the s, UNIX became a popular operating system for technical workstations, supercomputers and a number of other applications. Finally, Linux emerged in the s as a UNIX-like operating system that over time was embraced by just about everyone.
And, as was economist blockchain trust machine case with the Internet, it was the outside-incollaborative governance of Linux that helped it succeed economist blockchain trust machine essentially unifying UNIX where previous efforts failed. A report by the Bank of England argues that the time might well have now come for the ledger to now follow the collaborative, distributed, standards-based approach of those earlier innovations.
Those holding the ledgers have the ability to prevent any transaction they deem to be invalid. In order to use the system, people must trust that these centralised ledgers will be maintained in a reliable, timely and honest manner. Since anybody can check any proposed transaction against the ledger, this approach removes the need for a central authority and thus for participants to have confidence in the integrity of any single entity.
Why should the finance industry embrace such a shared, distributed public ledger that everyone can inspect, but which no single entity controls? Why not continue to rely on centralized institutions like banks, clearing houses and government authorities to certify the trustworthiness of the proprietary ledgers economist blockchain trust machine each manage? In a distributed financial system, economist blockchain trust machine are made directly between payer and payee, thus removing the credit and liquidity risks.
The main responsibility of the institutions involved is to oversee the trustworthiness, security and efficiency of the distributed ledger system, ensuring that the cryptographic technologies and protocols have been properly implemented. And, like the Internet, such a distributed system should be significantly more resilient than our current banking systems, given the large numbers of redundant blockchains and pathways in the network.
Ledgers have been widely used to keep track of valuable economic assets besides money. Similarly, blockchain-based distributed ledgers will likely have much broader applications beyond payment systems. Financial institutions can use them to keep track of stocks, bonds, loans and similar such assets.
The rapid growth of the Internet of Things requires the kinds of capabilities offered by blockchain technologies, - distributed peer-to-peer architectures, near unlimited scalability, privacy, security and the ability to efficiently handle myriads of trustless transactions.
And like the Economist blockchain trust machine, it might well lead to many innovative applications that we can barely imagine today. Posted on November 17, at Irving Wladawsky-Berger A collection of observations, news and resources on the changing nature of innovation, technology, leadership, and other subjects. Bitcointhe best known and most widely held digital currencywhose users can transact directly with each other with no need for a central authority, - be it a bank or government agency, - to certify the validity of the transactions.
The blockchain architecture underpinning bitcoin, whose protocols were specifically designed to control the creation and transfer of bitcoins. The general concept economist blockchain trust machine blockchaina distributed database architecture with the ability to handle trust-less transactions where no parties need to know nor trust each other for transactions to complete.
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