Blockchain

In January 2009 we witnessed the birth of the first viable digital currency. Called bitcoin, this new form of money was born on the Internet. What an incredible and provocative idea, a currency without the need for traditional banks and not beholden to any central authority. In fact, bitcoin is absent of any governance and oversight, seamlessly traversing the Internetwith little delay and only managed through the consensus of all users of the currency.

Now, powering the seemingly magical new form of money, the mechanism that makes it work is also an innovative new idea. It's a novel way to store, validate, authorize and move digital transactions across the Internet. It's called a blockchain and it has the potential to be a highly disruptive technology, not just in the world of digital currency but in a vast number of organizational contexts. The potential of the blockchain is so significant that anyone who wants to understand the future of the Internet needs to understand it, what it is enabling and may enable and the industries it may disrupt both positively and negatively.

The Birth of Blockchain in Bitcoin:

Bitcoin is called cryptocurrency because the existence in history of a transactioncan be seen by everyone, but the contents are only known to the people making and receiving each individual transaction. What cannot be seen by others is called encrypted and what can be seen is unencrypted. Thus, the crypto or cryptography part of the word cryptocurrency. As a currency, it does not exist in a physical form.There are no coins or notes.

It lives natively on the internet. When a transaction takes place, participants who use Bitcoin, their computers specifically, validate the transaction, and it is recorded in a distributed ledger. What's that ledger's name? Yes, it's the blockchain. How can a digital currency possibly have value? To have value, typically, something must be relatively scarce and it must be accepted by others for payment. Gold, silver, diamonds, and oil, for example, all derive their value from being both scarceand expensive to mine.

How might that translate to a digital currency? The first characteristic is that there is only a limited amount of bitcoins available. The original creator stipulated that there would only be 21 million bitcoins. It's not known why this volume was chosen. The second characteristic is how a person or organization can acquire a bitcoin. Like gold, acquiring a new bitcoin, in contrast to an existing tradable bitcoin, requires a unique type of mining.

New bitcoins are provided as rewards to blockchain participants that solve increasingly complex math puzzles every time a blockchain transaction takes place. People who choose to solve these math problems are called miners. They require considerable computing power. In other words, the cost of mining new bitcoins is high. You need a lot of processors and electrical power. When a puzzle is solved, the miner is rewarded with a bitcoin.

He can now trade that bitcoin openly on the global bitcoin exchange. The value thereafter is calculated similar to any currency, by supply and demand. If demand for bitcoin is high, its value increases. Less demand, price drops. You might think that we'd run out of bitcoins to mine pretty quickly. However, the math problems are getting harder and the speed of awarding them is slowing over time. It is predicted, with a little uncertainty, that the last bitcoin will be mined in 2140.

To spend and receive bitcoins, users must have an electronic wallet on their computer. This can be as simple as an app on a smartphone. A user can purchase bitcoins from a seller and then use the wallet to send and receive payments to other users or organizations. You don't need to be a bitcoin miner to acquire a bitcoin, you just need to buy some on a bitcoin currency exchange. That is, you provide dollars, or your local currency, and get bitcoin in return.

The currency market also enables you to get dollars for your bitcoin. A transaction that is initiated from the wallet is added to a queue, validated by all the other bitcoin users, and, if approved, added as a block to the distributed ledger, the blockchain. As an additional important detail, adding a block requires the activity of miners. This creates a form of validation to the transactions. That is, requiring miners in the transaction means we almost eliminate fraudulent activity.

A hacker would need to fake all the processing and electrical power of the minersto fraudulently add a block to the blockchain. Having miners solve math problems to validate adding blocks is called proof of work. Watching all this unfold, all financial institutions can do is be bystanders as digital money moves around the internet without any central authority, without friction, and largely without cost.Better yet, nobody owns the Bitcoin universe or public blockchain database.

It's remarkably secure, transactions are anonymous, and it's fast. The other quality of a currency we discussed is that it must be accepted as a form of payment. Can bitcoin be used to buy anything? Certainly. Wide acceptance is foundational to its success. After all, if it was not accepted, it would be worthless. Of course, as you can imagine, given its decentralized, private, and untraceable characteristics,Bitcoin has found a role in all manner of illegal activities.

However, with legitimate currency conversion taking place all the time, Bitcoin enjoys plenty of aboveboard use too. Major brands such as Dell, Microsoft,Expedia, Subway, Overstock.com, Whole Foods, and many more accept Bitcoin as payment. Bitcoin is certainly not perfect and is largely considered a work in progress. The sulfur is still being developed and maturing. We'll look at some limitations and risks later.

It has also inspired other digital currencies such as Ether, that we'll discuss too.Bitcoin is a revolutionary new currency. It breaks the financial status quo and raises a whole host of challenges around governance, regulation, legalities, and so much more. Most importantly, for the purposes of this course, it has given birth to the blockchain, a technology which now has the opportunity to be as transformative as the emergence of the internet itself.

Example of BLockchain:

 to help track stolen diamonds, in addition to knowing whether a diamond is associated with a conflict zone. A startup called Everledger has begun to use blockchain to store information on almost one million diamonds.

Each diamond is scanned to glean 40 unique points that are then condensed into a digital footprint. This is then entered into the blockchain. Each time a diamond moves say from a seller to a buyer, a new block is created and over time a full, secure digital trail of ownership is established. The adoption of this solution is growing and Everledger is attracting attention from investors. Beyond diamonds, the same tool may soon be expanded to manage and track art, expensive watches, luxury cars, and other unique items of value.

This blockchain solution potentially solves a longstanding intractable challenge. For the next example, how about a venture capital firm without essential owner, where funding decisions are made by shareholders not VC's. The DAO which stands for decentralized autonomous organization, raised $168 million from cryptocurrency and is entirely run by those that are invested in it.

Its governance is completely transparent unlike traditional VC's where functions and rules are private and opaque. The DAO has not been without serious challenges including several security breaches. Not necessarily dispelling the security promise of blockchain, but more a reflection on its particular implementation. It's fair to say the bonus of innovation exhibited by the DAO is subject to the same teething problems that introducing any new high risk productand service experiences.

And then to these such as the DAO raises the stunning possibility of autonomous organizations; businesses without leaders, without a primary geographic location, and not beholden to any government laws. Now whether this can be sustained, only time will tell. For the final example we'll look at voting on the blockchain. In 2016, Colombians voted on a peace treaty between the government and FARC, the Revolutionary Armed Forces of Colombia.

There were a variety of limitations on enabling the six million Colombians living abroad to participate in the vote. So an organization called Democracy Earth experimented with the blockchain to capture their voices online. As we discussed earlier, the inherent challenges of online voting in any context is proving an identity to be true. Using this new technology enabled authenticating votes. In addition, to push voting innovation, Democracy Earth gave citizens more than a no and yes choice to the peace treaty.

They were given sub-themes to indicate by vote the relative importance of each one. While the votes could not be added to the official ballot, this voting experience did give a voice to a larger group of Colombians and has triggered a rigorous debate in Colombia about the use of online voting in the future. The experiences and results are being studied by many around the world. If you're like me, it's hard not to be impressed by these first attempts to innovate using the blockchain.

Future of Blockchain:

The most exciting areas of the blockchain and we call it Smart contracts. While a Smart contract actually is software code executed on the blockchain, the terminology use of the word contract indicates that the code enforces some form of governance or rule. We should think of this as the general concept since many argue that the use of the term Smart contract is also misleading. What might be a simple example of a Smart contract in action on the blockchain? Let's return to a previous example of managing digital products online.

Specifically, as the authentic owner as of say a photograph you took, you may want to use the blockchain to sell that photo to buyers. Since the blockchain already confirms you as the rightful owner, let's look at a Smart contract to sell a copy. We'll use the blockchain as the platform for the entire transaction. First, you're established as owning the copyright. Then a buyer submits payment for a copy of the photo. Once you receive payment and it is confirmed, a Smart contract executes and then delivers a copy of the photo to the buyer.

The transaction is recorded in the blockchain and each step is stored forever as proof of what has happened. In this example, the Smart contract was code that ensured that all the conditions were met for this purchase and even delivered the photo through some form of online transfer. While this is a simple example, you can imagine really complex transactions taking place in the blockchain that are enforced by Smart contracts. Think about all matter of financial transactions or real estate or legal agreements, and even agreements between machines like self-driving cars negotiating around each other in traffic.

It's easy to see that a smart contract takes the capabilities of the blockchain up a few notches and makes it a platform for complex action. One of the most exciting innovations in this blockchain space is called Ethereum. This software platform uses the blockchain and Smart contracts to enable the building of complex decentralized software applications. It's an ambitious project that is still in its infancy. However, the promise of Ethereum is to enable the development of software tools that can build solutions that don't require the traditional commanding control hierarchies that exist today.

In other words, these are applications that don't have an all powerful single owner to make and enforce the rules. Some of the initial solutions on Ethereum have included an alternate digital currency called Ether, an online identity management system called uPort, land title transfers and online system for managing digital signatures. And an entire suite of banking services developed by consulting firm DeLoitte and the blockchain firm ConsenSys.

In the final example, I'd like to discuss how one innovative organization is connecting the blockchain to the physical world. The solution is from a German team called Slock.it, and its first goal was to enable apps to unlock things but have now since grown to have much greater application. It works by using Ethereum and Smart contracts. Slock.it gives connected objects an identity, the ability to receive payments and the capability to enter complex agreements.

It effectively eliminates the need for a middle man when executing software on one device to trigger a physical action in another. This makes interaction almost immediate and significantly reduces the cost. For example, let's say we use a smartphone to unlock the lock on a bicycle.The authority to allow the opening of the lock no longer resides with a central authority but rather only between the smartphone and the lock itself.

It makes a lot of sense for example when you want to rent a bike and want to receive payment. A person who purchases the rental executes a transaction that includes identity, payment, and the unlock process directly with the bicycle. Slock.it enforces the transaction,it's remarkably efficient and secure. The innovations described in this video gives a tease of what may be to come. We know we're in the early stages of blockchain because already many innovations have failed.