The Inside Scoop on Bitcoin and Blockchain

Dan Wellers

01Perception:
Bitcoin is doomed, and so is the technology behind it.

Reality:

2016_Q1_perc-real_01In January, when an influential developer declared Bitcoin a failure, tech enthusiasts and thought leaders worldwide predicted its imminent demise. While Bitcoin’s fate remains to be seen, the underlying technology, called blockchain, still holds the potential to transform the way we make commerce secure and trustworthy. Digital currency is just one example of how blockchain technology provides a method for recording any digital interaction in a way that’s secure, transparent, auditable, and efficient. In the case of financial transactions, blockchain could replace banks as guarantors, or it could enable near-instant settlement of securities trades.

 

02Perception:
Digital transactions can’t ever be secure.

Reality:

2016_Q1_perc-real_02Blockchain transactions strongly resist tampering. Its system of distributed digital consensus requires the entire network to agree that the transaction information is accurate. Transactions also can be made irrevocable—a critical quality for trusted commerce.

Here’s how it works: The blockchain is essentially a ledger, copies of which are maintained across a network of computers. Before transactions can be recorded in this ledger, a computer in the blockchain network has to solve a computational puzzle that contains those transactions. Once one computer solves the puzzle, the other computers in the network automatically verify it, thus validating the transactions and approving their entry into the blockchain.

Efforts to cheat by, for example, changing the value of a transaction already in the blockchain, are rejected because they lack the approval of the entire network. Because the approval of a new record is permanently linked to the approval of previous ones, manipulating past transactions becomes increasingly difficult.

 

03Perception:
Blockchain was invented for shady purposes. It doesn’t solve any real problems.

Reality:

2016_Q1_perc-real_03Today we need an agent, such as a bank, to guarantee that parties to a transaction are who they say they are, possess the assets they claim to have, and follow through on their commitments. This approach has worked for centuries, but it adds cost and time to transactions. The blockchain eliminates the agent, reducing cost and increasing efficiency. And because it’s digital, it can process any asset that can be represented as a ledger entry.

The potential uses of blockchain technology go far beyond digital currency and financial services. For example, according to Deloitte Consulting, “smart” contracts recorded in the blockchain could be set to execute without human oversight, potentially eliminating the need for expensive lawyers. In addition, the ownership and provenance of creative works, such as music, could be stored and programmed to manage usage rights, thus reducing piracy. What’s more, in emerging economies or during periods of political or economic instability, landowners could have a secure, tamper-proof way to store property titles. Additional applications might include managing software and hardware licenses, storing and securing health records, enabling tamper-proof voting, and many others.

Related article: Beyond Bitcoin: How The Blockchain Could Disrupt Our Financial System


About Dan Wellers

Dan Wellers is the Global Lead of Digital Futures at SAP.