Blockchain and Bitcoin: In the new world order, math is king

Historically, when it comes to transacting money or anything of value, people and businesses have relied heavily on intermediaries like banks and governments to ensure trust and certainty. The need for intermediaries is especially more apparent when making a digital transaction, because digital assets like money, stocks and intellectual property are essentially files and they are incredibly easy to reproduce.

This creates what’s known as the double spending problem (the act of spending the same unit of value more than once) which until now has prevented the peer to peer transfer of digital assets.

But what if there was a way of conducting digital transactions without a third party intermediary? Well, a new technology exists today that makes this possible.

READ MORE: Doubling down on crypto-currency

Blockchain and Bitcoin

Cryptocurrencies first appeared in a 2008 white paper – authored by a person, or persons, using the pseudonym Satoshi Nakamoto – detailing an innovative peer to peer electronic cash system called Bitcoin that enabled online payments to be transferred directly, without an intermediary.

The technology likely to have the greatest impact on the next few decades has arrived. And it’s not social media. It’s not big data. It’s not robotics. It’s not even AI. You’ll be surprised to learn that it’s the underlying technology of digital currencies like Bitcoin. It’s called the blockchain. Don Tapscott, Canadian business executive, author, consultant and speaker, specialising in business strategy and the role of technology in business and society

While the proposed Bitcoin payment system was exciting and innovative, it was the mechanics of how it worked that was truly revolutionary. Shortly after the white paper’s release, it became evident that the main technical innovation was not the digital currency itself but the technology that lay behind it, known today as blockchain.

Although commonly associated with Bitcoin, blockchain technology has many other applications. Bitcoin is merely the first and most well-known. In fact, Bitcoin is only one of about 750 applications that use the blockchain operating system today.

One example of the evolution and broad application of blockchain, beyond digital currency, is the development of the Ethereum public blockchain, which is providing a way to execute peer to peer contracts.

Crypocurrencies 

Cryptocurrencies, sometimes called virtual currencies, digital money/cash, or tokens, are not really anything like the Euro, dollar or British pound. They live online and are not backed by a government. They’re backed by their respective networks. Created with cryptography, the entries are secured with math, not people. Restricted entries are published into a database, but it’s a special type of database that is shared by a peer-to-peer network.

The peer-to-peer network solves the “double-spend” problem in most cases by having every peer have a complete record of the history of all the entries made within the network. The entire history gives the balance of every account including yours. The innovation of cryptocurrency is to achieve agreement on what the history is without a central server or authority.

Cryptocurrencies are generated by the network in most cases to incentivise the peers, also known as nodes and miners, to work to secure the network and check entries. Each network has a unique way of generating them and distributing them to the peers.

Bitcoin, for example, rewards peers (known as miners on the Bitcoin network) for “solving the next block”. A block is a group or entries. The solving is finding a hash that connects the new block with the old one. This is where the term blockchain came from. The block is the group of entries, and the chain is the hash. Hashes are a type of cryptologic puzzle.

Blockchain

Simply put, a blockchain is a type of distributed ledger or decentralised database that keeps continuously updated digital records of who owns what. When a digital transaction is carried out, it is grouped together in a cryptographically protected block with other transactions that have occurred in the last 10 minutes and sent out to the entire network.

The validated block of transactions is then time-stamped and added to a chain in a linear, chronological order. New blocks of validated transactions are linked to older blocks, making a chain of blocks that show every transaction made in the history of that blockchain. The entire chain is continually updated so that every ledger in the network is the same, giving each member the ability to prove who owns what at any given time.

Blockchain’s decentralised, open and cryptographic nature allows people to trust each other and transact peer to peer, making the need for intermediaries obsolete. This also brings unprecedented security benefits. Hacking attacks that commonly impact large centralised intermediaries like banks would be virtually impossible to pull off on the blockchain.

Getting started with Bitcoin

The first thing you need is a Bitcoin wallet, which is basically the Bitcoin equivalent of a bank account. It allows you to receive bitcoins, store them, and then send them to others.

There are two main types of wallets.

A hot wallet is one that you install on your own computer or mobile device. You are in complete control over the security of your coins, but since they are on a device that is connected to the internet they are less secure.

The second type of wallet is a hardware wallet. They mostly look like pen-drives, and maintain high levels of security to protect your coins by storing your coins offline. Offline storage keeps your coins out of reach from hackers. The two most popular hardware wallets are the Ledger Nano S and TREZOR.

Coinbase is a web wallet with a simple design and a number of very useful features that make it excellent for beginners. You can send and receive bitcoins via email and buy and sell bitcoins directly from Coinbase. It is a good place to buy bitcoins and learn how it works, but not a good solution for long-term storage.

Electrum is a software wallet that enables you to set up a strong level of security very quickly. During the simple installation process, you are given a twelve-word phrase that will allow you to recover all of your bitcoins in the event that your computer fails. Your wallet is also encrypted by default which helps protect your coins against hackers. Electrum is available for Windows, OSX, and Linux.

Once you set up a wallet, you will be given a wallet address, which is like your bank account number, and which you will use to make transactions.

Today it is relatively easy to buy Bitcoin directly by using a credit or debit card, like VISA and MasterCard. You will need to use a Bitcoin exchange or broker like Coinbase itself, Bit Panda and CoinMama. These make buying – and selling – Bitcoin a simple matter of following a number of basic steps, much like when using online banking to transfer money.

Malta setting the stage

Earlier this week, Malta’s Financial Services Authority (MFSA) published the feedback it received on its proposed rules for collective investment schemes involving cryptocurrencies.

The MFSA first sought feedback on its proposed rulebook last October as part of a bid to regulate professional investor funds (PIFs) that focus on cryptocurrencies. The proposal notably changed the structure from a stand-alone rulebook to a supplementary document for existing investor rules based on industry comments, according to the document.

The change came as a result of the “ample feedback” MFSA received requesting this change, according to the agency.

While the final set of rules has not yet been released, the MFSA did state that, based on industry feedback, it has updated its existing rules proposal to allow for investments in both cryptocurrencies and tokens released as part of an initial coin offering (ICO).

Despite feedback to the contrary, the MFSA has decided to only allow qualifying investors to invest in cryptocurrency-based funds, meaning only investors who meet specific minimum requirements, such as a net value of at least 750,000 euros, among other factors.

The full set of rules is still being written and will be released pending further review, according to the Maltese government.

Parliamentary Secretary for Financial Services, Digital Economy and Innovation, Silvio Schembri welcomed the publication of the rules, saying this was another step towards sustaining Malta’s digital economy.

“This is the first step towards having a Virtual Currency Act,” he said, adding that work was being carried out for regulating virtual currencies, ICO’s, exchanges and the use of blockchain technology.

Changing the world

Blockchain is a highly disruptive technology that promises to change the world as we know it. The technology is not only shifting the way we use the Internet, but it is also revolutionising the global economy. By enabling the digitisation of assets, blockchain is driving a fundamental shift from the Internet of information, where we can instantly view, exchange and communicate information, to the Internet of value, where we can instantly exchange assets.

A new global economy of immediate value transfer is on its way, where big intermediaries no longer play a major role. An economy where trust is established not by central intermediaries but through consensus and complex computer code.

Blockchain has applications that go way beyond obvious things like digital currencies and money transfers. From electronic voting, smart contracts & digitally recorded property assets to patient health records management and proof of ownership for digital content.

Blockchain will profoundly disrupt hundreds of industries that rely on intermediaries, including banking, finance, academia, real estate, insurance, legal, health care and the public sector  –  amongst many others. This will result in the complete transformation of entire industries.

But overall, the elimination of intermediaries brings mostly positive benefits.

Banks and governments for example, often impede the free flow of business because of the time it takes to process transactions and regulatory requirements. The blockchain will enable an increased amount of people and businesses to trade much more frequently and efficiently, significantly boosting local and international trade. Blockchain technology would also eliminate expensive intermediary fees that have become a burden on individuals and businesses, especially in the remittances space.

Perhaps most profoundly, blockchain promises to democratise and expand the global financial system by giving people, who have limited exposure to the global economy, better access to financial and payment systems and stronger protection against corruption and exploitation.

The potential impacts of blockchain technology on society and the global economy are hugely significant. With an ever-growing list of real-world uses, blockchain technology promises to have a massive impact. This is just the beginning.