Category Archives: Bitcoins

BLOCKCHAINS: THE TRUE INNOVATION BEHIND BITCOINS

Ed. Note: This post by Vishal Rakhecha is a part of the TLF Editorial Board Test 2016.

Bitcoins have disrupted e-commerce not because of the idea of virtual currency but the peer- to-peer system it has developed. The USP of bitcoins was the decentralised structure of data entry. Any participant in the entire network can make an entry into the ledger if they follow certain rules. This reduced the dependence on trusted third-parties (Pay Pal, Master Card, etc.) or a centralised authority (governments). This has been made possible using an open database called Blockchain. This article will give a brief explanation of blockchain and the possible applications it can have across sectors.

Blockchain is a ‘distributed public ledger’ system which has records of every single transaction ever conducted using a bitcoin. The idea behind blockchain is very simple. All information during a given time-period is stored in a block with its hash – a cryptographically shortened version of the data set given. Each block acts like a page of the ledger. The hash of each block has to be related to the previous block turning it into a chain of blocks, hence the name. Any data once entered into a blockchain cannot be erased or modified. This makes the blockchain transparent and authentic, yet anonymous. The blockchain system has been created in such a way that any user or attacker with enough power to be able to tamper with the network will find it more favourable to become a part of the system and benefit from it rather than harm it.

One sector where blockchain can have a large influence is the financial sector. One of the major issues affecting large financial institutions is the lack of synchronisation of the ledgers within their own company and when they deal with other companies. The lack of centrally available data to all participants in the business leads to an increase of the need for trusted third-party intermediaries who offer unbiased dispute-resolution mechanisms. This problem increases as the number of units engaged in the same project increases. The data in a blockchain is chronologically listed and collectively maintained by all parties involved. The amount of computational power required to change any data in the ‘ledger’ is extremely high and will far outweigh the benefits derived from tampering the data. Use of this technology will also lead to a reduction in the need for an intermediary to decide the validity of the information. Embracing this technology will also reduce the friction between companies as they will operate from a single source of ‘truth’.

Digital asset management is another possible application for the blockchain technology. Bitcoins are not software/data actually getting transferred from one individuals account to another; they are simply a record that at some point your account received that bitcoin. This means that we can embed any asset to the blockchain network like securities, stocks, even fiat currency, discount coupons, tickets, etc. This will enable us to use a purely digital asset management system, with the advantages it provides for the end-user as it will make the transaction more secure and transparent. The other benefits of using the blockchain technology are the impossibility of creating counterfeits and auditability. The blockchain algorithm can also be embedded with the rules framed according to the regulatory bodies, which makes it all the more important for them to encourage the use of them.

Protecting intellectual property and preventing the creation of copies of a piece of art or music is also a possible use of blockchains. Startups like Ascribe provide notary services to artists and writers; they can upload their work and receive a digital key for it. The idea behind this is pretty straight forward, the author’s composition is added to the blockchain; this becomes a permanent proof that the author owns the work. Every time someone copies or uploads that work the creator gets to know about it. This would mean that at least at a theoretical level that there can be no duplicates without the creator’s permission, making licensing and transferring easier for the artists.

Last year around May, the government of Honduras has tied-up with a startup called Factom to keep up its land records using blockchains. The benefits for government authorities are as great as they are for corporations, creating a decentralised system for data entry for land records, vehicle registrations, patents and almost everything that requires a certain amount of permanence. Use of blockchains will also make transfer of information within governmental departments to manage their records within and between departments. A more radical idea proposed by some is making voting a purely online activity, by giving each individual a voting token and making the system more transparent and accessible. Use of blockchains in state machinery will lessen the inefficiencies generally associated with bureaucratic operations.

The system is self-regulating in terms of it not requiring any outside entities having to interfere or dictate the way the system has to work so as to ensure that every single participant remains honest and tries not take advantage of the system. It will also significantly lower the cost of spending on expensive intermediaries and will further facilitate the growth of a more connected and transparent mode of governance. This will also pave way for increasing accountability standards for state bodies and corporation towards citizens and shareholders respectively. The possible advantages of using blockchain make it very attractive system for governments and corporations to invest in and they should try the system to test it.

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An Explanation of Bitcoins, Part II (The Technology)

(Image Source: https://flic.kr/p/e9LG7B)

(This post is based in part on a paper earlier published by Rostrum Law Review)

This post first explains the Bitcoin Network itself and some of its vulnerabilities, and then the cyptography used by Bitcoins that gives it the title of Cryptocurrency. Continue reading An Explanation of Bitcoins, Part II (The Technology)

An Explanation of Bitcoins, Part I (The Philosophy)

(Image Source: https://flic.kr/p/e9LG7B)

(This post is based in part on a paper published by Rostrum Law Review)

Most of the currencies in the world right now, and all the reserve currencies, are fiat currencies, declared to be currencies by a legal tender, and unsupported by any physical commodity, only the rules of supply and demand (Incidentally, the term ‘fiat’ is Latin for “let it be done” or “it shall be”). These currencies usually have a central regulatory body which issues them, and are consequently called ‘centralised’.

Satoshi Nakamoto (the name is a pseudonym), the creator of Bitcoins, had a problem with this centralisation of currency, responding to it in the following terms in one of his earlier worksThe root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micropayments impossible.
Continue reading An Explanation of Bitcoins, Part I (The Philosophy)