Bitcoin, introduced with much hoopla in 2009 was supposed to change money forever. Instead of metal coins and paper bills, bitcoin is stored on computers, independent of any country or bank. However, despite the hype, bitcoin has so far proved unsuccessful — the value of a bitcoin has dropped to just $524 (as of May 2016). Only a handful of companies accept bitcoins. Surprisingly, the most valuable part of this once revolutionary new currency may be its data infrastructure — the blockchain.
The blockchain has the potential to reinvent any transaction that now requires going through a middleman, including finance, banking, contacts, and retail.
Brock Pierce, founder and managing partner at Blockchain Capital, sees enormous potential for blockchain, telling WIRED Retail, “This innovation is more substantial than the internet. The blockchain is going to have an even larger impact.”
Blockchain: No More Intermediaries
Before blockchain, buying and selling required an intermediary, a bank or broker who housed your financial data at their computers. When you transfer funds or make a purchase, a banker connects to the bank’s system to record the change.
No more. Blockchain replaces this central system with a decentralized ledger of chained records. Each record is connected to the one before and the one after it, yielding a traceable history of every transaction. No record can be deleted and no existing records can be altered.
For instance, when a purchase is made with bitcoin, the seller’s computer consults the blockchain ledger stored on thousands of other computers to see if the buyer owns the proper amount. If there is distributed consensus among the computers, a new data entry is added to the chain, showing the transfer.
Blockchain: Transforming the Financial World
Although programmers developed blockchain to run bitcoin, this infrastructure will soon manage many other types of information transfers, providing more services faster for consumers.
Blockchains have enormous implications for financial institutions. For instance, the Securities and Exchange Commission approved a plan by another firm, Overstock, to issue stock through blockchain. Wired quoted Michael Bodson, CEO of theDepository Trust & Clearing Corporation saying that through blockchain, “The industry has a once-in-a-generation opportunity to reimagine and modernize its infrastructure to resolve long-standing operational challenges.”
Blockchain can soon reinvent banking, replacing “Too Big To Fail” institutions with computerized systems that are more efficient and more honest. Since every blockchain transaction preserves its own record, bank losses (and tax write-offs) could be much less. Banks would need fewer offices, freeing real-estate and lowering costs.
IBM and the Linux foundation are working on a Hyperledger project that would create private blockchains to manage supply chains, oversee contracts, and run other business applications requiring confidential data. Already Intel, Cisco, JP Morgan, Hitachi, Fujitsu, Wells Fargo, and others have announced support.
Smart Contracts Through Blockchain
Banking is only the beginning. In the future, blockchain’s ability to remove the middleman means it could support “smart contracts” with conditional clauses programmed into the blockchain. This makes the contract self-enforcing, by transferring funds only when the conditions are met. Ethereum has developed a decentralized platform to run such smart contracts for crowdsourcing, voting, and even new forms of currency.
Smart contracts could change entire fields of law. Blockchain wills could automatically take effect when a person dies, transferring inheritances without needing an executor. Replacing legal jargon with blockchain logic would require a different type of corporate lawyer with skills akin to a computer programmer. Imagine the implications for law schools!
The blockchain could soon revolutionize music and the other arts. Currently, most musicians and authors make little money from their work as most of the sales price is consumed by the publisher and retail store. This could change through blockchain agreements.
For instance, Mycelia, started by English singer-songwriter Imogen Heap, is developing a way to encode a blockchain contract into songs, so fans would pay the artist directly, without going through a record company. A blockchain e-reader could download ebooks directly from the authors, bypassing both publisher and bookstore, or even Amazon. And when more people have 3D printers, blockchain-locked templates could enable artists to earn greater profits from their designs for toys, figurines, and other art objects.
Future of Blockchains
Of course blockchain is not perfect. Because nothing can be removed from the chain, the blockchain ledger quickly swells to humongous size. And because each new entry must be verified by a consensus of linked computers, transactions take longer to be approved than in a traditional centralized system. Moreover, Michael Terpin, co-founder of BitAngels, warned that some startups are just replacing the word bitcoin with blockchain in their business proposals.
Despite these flaws, blockchain has enormous potential as a way to link, store, and track data. In the next few years, blockchains will offer consumers an alternative way to make purchases without bank and credit card fees. Soon after that blockchains will revolutionize all forms of data transfer–including music and video streaming and data backups.
Now that blockchain is being separated from bitcoin, its uses are unlimited. Traditional banks and retailers will need to adapt to blockchains or be themselves blocked out.