Blockchain and Cryptocurrency

Cryptocurrencies and their promise for enterprise technology professionals

Bob Gourley January 25, 2016

Bitcoin is hot right now. It is known as a crypto-currency, but has the potential to be applied to far more than exchanging value. Bitcoin is a protocol, one that many consider the next great protocol for the Internet and the emerging Internet of Things. As advanced applications are developed that leverage the capabilities that make Bitcoin possible, enterprise technologists will be able to tap into new capabilities for security and functionality.

CTOvision will cover more on Bitcoin, Ethereum and related technologies in our new Cryptocurrency category with our focus on helping enterprise executives understand the power of this new capability. We will begin with the basics and then move into real-world examples designed to help you better leverage the functionality.

In this post we start with a bitcoin introduction and a level setting on the proper user of terms.

Bitcoin is many things. From a user perspective it can be seen as cash on the Internet. You can trade it for other traditional cash, or you can buy products and services or you can just hang onto it. More precisely, bitcoin is a digital asset and a payment system. It was invented by Satoshi Nakamoto, who published the invention in 2008 and released it as open source software in 2009. The system is peer to peer, so users can transact directly without an intermediary. Transactions are verified by a network of nodes and recorded in a public distributed ledger called the blockchain. The bitcoin is the unit of the ledger. The design of this system operates without a central repository, making it a decentralized virtual currency.

There have been other attempts at virtual currencies in the past, but they all faced challenges. One of the biggest challenges of a crypto currency is the issue of double spending. If a virtual coin is just a token or a file it can be duplicated it can be spent twice, or even more. This is of course an untenable situation. Bitcoin’s innovation was to mitigate this issue by use of the Block Chain. The block chain is a public ledger of transactions where each transaction is verified by an extensive, decentralized network of computers.

The user-end of Bitcoin is a digital wallet. This computer program provides the user with an ability to send and receive bitcoins. The simplicity of the wallet is a strongpoint, but behind the scenes the bitcoin network is ensuring the currency works by maintaining the blockchain ledger. This ledger contains every transaction ever processed, allowing a user’s computer to verify the validity of each transaction. The authenticity of each transaction is protected by digital signatures corresponding to the sending addresses, allowing all users to have full control over sending bitcoins from their own bitcoin addresses. In addition, anyone can process transactions using the computing power of specialized hardware and earn a reward in bitcoins for this service. This is called bitcoin “mining.”

More on Bitcoin Mining:

Mining is the process of spending computing power to process transactions, secure the network and keep everyone in the system synchronized together. It can be thought of as the bitcoin datacenter, but there is no datacenter. It is a fully distributed/decentralized system with miners operating in all countries and no individual having control over the network. The process is referred to as mining to make the analogy to gold mining, since it is also a way to issue new bitcoins.

Why would you want to use bitcoin?:

Users of bitcoin are provided with enhanced security and control. There have been many cases of fraud and loss of bitcoin, but in each of those cases we know about it is because users trusted others inappropriately. Bitcoin users are really in full control of their transactions. But if a user accidentally deletes their keys and have not made a hard copy backup they will be lost. And they can be stolen if left unguarded. This is similar to real cash. Protect your cash. Fortunately, with bitcoin, you can learn sound security practices to protect the money. Additionally, it is impossible for merchants or others to force an unwanted transaction like can happen with other payment means. And bitcoin payments can be made without personal information tied to the transaction. This helps protect against identity theft. Bitcoins also offer more payment freedom. Payment can be sent and received anywhere in the world at any time.

But perhaps even more important than why you would use bitcoin is why you should know how it works. The blockchain is quite impressive, and new apps are being established to leverage this mechanism. We will be exploring the blockchain in more detail in coming posts.

Our next post will be on CoinBase, a great way to get started learning about Bitcoin. Coinbase is an online bitcoin wallet and platform that both merchants and consumers can use for transactions. It is absolutely the easiest onramp to the bitcoin economy and creating an account is free, fast and secure. Do it here: CoinBase . We also refer you to this overview on The Clearest Explanation of Cryptocurrencies You Will Ever See.

Recent Reporting on Bitcoin:

What You Need To Know About Bitcoin: Including potential new business models to consider

OODAloop nails it again with reporting on Bitcoin price manipulation

From Crowdsourced Militias to Dread Bitcoin Pirates

Today Every Company Buys Electricity, Tomorrow Every Company Will Buy Ethereum

Smart Cities Cybersecurity Challenge

Blockchain Templates: Amazon Making Technology Mainstream

How Cryptocurrencies will go from The Technologically Savvy, into the Everyday Transactions of Consumers

What Executives Should Know About Ethereum

What Should Executives Know About How Blockchain, Smart Contracts and Cryptocurrencies Are Disrupting Business?

From Crowdsourced Militias to Dread Bitcoin Pirates

AdamElkus October 22, 2013

There are two basic truths of social science that technologists scanning the news in recent weeks may appreciate. First, despite arguments about the rise and fall of the state, most countries are considerably less orderly and cohesive on the inside than they look at first glance. In other words, the “monopoly of force” and the “Westphalian state” are convenient fictions. Second, illicit markets are low-trust environments where nasty punishments for breach of contract are commonplace. The terrifying ripple effects that the closure of illicit markets can generate is a testament to the ugly nature of the social relations that produce them.

Amidst the chaos of the government shutdown and a possible debt default, an well-off Oakland neighborhood is reacting to harsh law enforcement budget cuts by crowdfunding their own security services:

In Rockridge, the answer has been to crowdfund private security services, with the aim of compensating for an understaffed police department in the city with the highest robbery rate in America. In the last few weeks three separate campaigns have been started on Crowdtilt in order to fund four months of private security patrols in three different section of Rockridge. Near $35,000 have been raised so far, and two of the three projects have raised enough funds to ensure they will move forward.

Ethan Zuckerman notes that crowdfunded security is only the latest and greatest episode in a wave of crowdfunded responses to the erosion of efficient government services and decaying infrastructure. In many municipalities across the country, government services (or their equivalent) are only available if you directly pay for them. From “Kickstarter urbanism” or crowdfunded armed guards on the patrol, crowdfunded services are increasingly springing up across America. This is fairly predictable. In the absence of strong governing institutions, self-help becomes the order of the day. And absent institutional incentives, efforts to provide for the common good often falter.

Zuckerman worries that crowdfunding perpetuates inequality, as it potentially reduces the incentive to pay for government services and also leaves out those unable to afford it. But, as Rockridge resident Steve Kirsh noted in response to a fellow crowdfunder lamenting that these services should be provided by the government they pay taxes to: “welcome to America!” If trends in economic inequality and government dysfunction continue linearly, crowdfunded civic services will likely become a pervasive aspect of American life.

On the more seedy side, the FBI’s recent bust of Silk Road founder and illicit market impresario Ross William Ulbricht has unwittingly stimulated an interesting natural experiment in “dark network” economics. Why? A recent Buzzfeed post explains:

In order to buy something on Silk Road, you first have to transfer funds to your account. Since these funds are Bitcoins, and since Bitcoin transfers are final and permanent, any money held in a Silk Road account is no longer available to the users who deposited it. …..Silk Road has processed hundreds of millions of dollars in orders in a virtual currency, so expect the ripple effects of this shutdown will be massive.

The Buzzfeed post links to a Reddit forum concerning all matters Silk Road that documents enough small-time dealers panicking to fill an entire season of The Wire. Users suddenly found themselves without access to their accounts, and fretted about running afoul of Paulie Cicero’s famous rule concerning uncontrollable circumstances that prevent his business partners from coming up with the money. Given the opacity of the illicit network Ulbricht facilitated, we are probably unable to truly map ripple effects of his arrest. But it is safe to assume that some bones will be broken and Jimmy Hoffawill get some unexpected (permanent) neighbors.

Like the fictional Bartertown depicted in Mad Max: Beyond Thunderdome, Ulbricht’s Silk Road was an illicit bazaar that held together many private arrangements. Here was a rough and tumble place where money and services could change hands in an environment without cumbersome state regulation. However, in low-trust environments without institutions capable of arbitrating disputes, the only rule set that enables commerce is costly punishment that both deters breach of contract and obtains satisfaction for business losses. As Tina Turner famously stated to Mel Gibson’s itinerant road warrior, “bust a deal, face the wheel.”

Technologists looking to understand the latest trends should understand that economic demand for online services preferred by affluent neighborhoods crowdfunding to ward off Glock-toting lumpenproletariat or enterprising small businessmen using bitcoins to emulate a certain New Mexico high school chemistry professor are both functions of fairly old social rule sets. And those seeking to understand the computational future will miss the impact of these social rule sets if they, as data scientist Drew Conway observed, continuously turn to only those with backgrounds in purely technical subjects.