The Evolution of Bitcoin Technology

From the moment Satoshi Nakamoto released his white paper on decentralized Internet currency and first reference implementation, Bitcoin has attracted a lot of interest not just from the financial domain perspective but also as P2P distributed platform. From a business domain perspective, Bitcoin has provided a currency that is not controlled by any government or institution but by fully transparent mathematical principles –cryptography.

Of course this is very fascinating, but what is even more fascinating for me though is what the underlying technology has to offer as a new paradigm and potential to change how we build applications in the future -Or maybe the future is already here?

The backbone of Bitcoin is blockchain technology -peer-to-peer distributed crypto ledger-and the potential for this innovative technology and applicability is actually huge. It is expected that this technology will disrupt existing the financial business models.

What does blockchain technology offer?

Blockchain technology is built on a series of innovations in distributive data organization and sharing. Blockchain’s goal is to create a single version of truth.

There are 7 key innovations that make up blockchain today:

1.     Encryption – encryptions enable security and data anonymity in shared environment

2.     Mutual consensus verifications protocol – this protocol allows the network to get consensus on the updates of the data. There is no need for centralized governance.

3.     Smart Contracts – a really powerful concept. Smart contracts are programs or code uploaded to a distributed ledger. They are programmed to generate instructions for downstream process if certain conditions are met; for example, payment instructions or moving collaterals. Hence, the leger entry is not just a passive data anymore.

4.     Universal data source – these new technologies enable multiple parties to work together with the same data source.

5.     Transparent real time data – the whole history of the entry is tracked. Authorized parties can review the full history of any coin from the moment it is created. With encryption and selective control, participants can reveal a part or the complete trusted data to a third party.

6.     Decentralized Consensus – This paradigm break the existing financial system centralized consensus. In order for transactions to be added to the block as a chain, all participants in the network need to agree on that. The only significant drawback is that this method is not environmentally friendly as it consumes a lot of processing power, but reaching consensus is at the heart of blockchain technology.

7.     Rich datasets – originally, blockchain kept only transactional data, but the new generation is able to keep more complex data objects and smart contracts.

Eventually more efficient settlements of transactions and processing will occur as everyone is able to see the same data and any updates are quickly propagated across the network. This will bring us to a point when we will not need any more third party clearing houses, escrows, government controlled or bank records. Since all parties could use the same underlying dataset for trade-related processes, blockchain will reduce the scope for data errors, disputes and reconciliation time, speeding up the end-to-end process.

This is an introduction to this innovative technology; in my next blog entry I’m going to explore few use cases where the use of this technology is a game changer.