5 Ways Bitcoin And The Blockchain Will Innovate Digital Exchange

Posted By Sebastian on Dec 13, 2015 in Blog, Featured, Startups | 0 comments

What 7 years ago started with a paper that introduced a new peer-to-peer electronic cash system called Bitcoin and its underlying blockchain has shown the potential to not only fundamentally change monetary transactions but more generally digital exchange in open and distributed networks without reliance on intermediaries. Below, I will describe 5 different ways how Bitcoin and the blockchain will impact digital exchange of products and services.

Bitcoin and the blockchain

As of April 2015, Bitcoin is one of 530 trading and 740 total cryptocurrencies. These electronic currencies are at their core decentralised, removing the need and influence of central authorities, and establishing trust between unrelated parties. Transactions are stored in an open ledger, fully transparent, incur lower transaction fees, are near instantaneous in a peer-to-peer network without intermediaries, and eventually immutable.

At the foundation of Bitcoin and its siblings lies the blockchain, a distributed database maintaining transaction records that, once acknowledged through consensus within the network, are irrevocable and tamper proof. These transactions are stored as hashes and combined into blocks through a cryptographic puzzle.

Since any document or asset can be expressed as a hash code, the blockchain can store any references well beyond financial transactions. In addition, digital currencies can be split into extremely small units, for instance, Bitcoin’s smallest unit called Satoshi is worth one hundred millionth of a Bitcoin. Hence, many new and innovative applications have been emerging.

Micropayments – small financial transactions that allow new business models and ways of monetisation

Micropayments are tiny payments made every time a user or device accesses content or uses a service. Apple’s recent decision to allow ad blocking in iOS9 will have an impact on the traditional revenue source for online media and content providers. Micropayments, either voluntary or through paywalls, could help to reshape the way we consume and are charged for digital and online content, away from financing through advertisement. BitWall and CoinTent provide micropayment tools whereas Blendle developed a digital kiosk platform where users can buy articles from different publishers.

Other ideas have been explored for music by the IDEO Futures network, a venture fund and incubator. A music blockchain innovates the recording and distribution of music as well as the engagement of fans. Songs and albums can be crowdfunded, ownership & distribution terms registered and helpers & investors paid through smart contracts (which will be later introduced). Ujo Music is currently working on a prototype for such an infrastructure that allows artists to register ownership and policies for their artwork on the blockchain.

Faradam is a Bitcoin-based metered payment service for freelancers that uses a simple timer and a Bitcoin wallet allowing users to charge their contractors by the minute. Streamium follows a similar approach for live video sessions where online educators and consultants get paid instantly by their viewers.

Other ideas include corporate currencies where virtual tokens circulate value within organisations, or more general applications for transferring value, as described in Ebay’s patent application, for virtual gift tokens.

Bitcoin microtransaction platforms like BitMonet, a San Francisco-based startup, allow micropayments leveraging the cryptocurrency protocol. BitMonet provides a mobile Android SDK for in-app purchases.

Successful entrepreneur, technologist and venture capitalist Marc Andreessen imagines a future where micropayments eliminate email spam by charging a small fee for every electronic message that makes sending bulk loads uneconomical.

Permanent record management – proof of existence & ownership through distributed consensus

The blockchain allows for digital fingerprinting of any kind of document whereas the document itself can be stored privately, but the fingerprint and therefore the state of the document is stored permanently on the blockchain.

Proof of Existence provides the most general online service that allows to demonstrate data ownership, document timestamping and checking of the document integrity by storing the document’s cryptographic digest (hash) on the Bitcoin blockchain.

Factom has built a data layer on top of the bitcoin network that enables audit trailing and accountability tools to proof existence of documents as well as link and verify different document versions. One of the early adopters is the Honduran Property Institute which uses Factom for a prototype of a blockchain-based land registry. Having transparent public records reduces fraud, corruption and forgery, and increases accountability of institutions.

Ubitquity is another company building a secure storage platform for legal documents with focus on real estate transactions, preventing title fraud, and enabling to track record of ownership and title transfers.

Oliver Wyman, Santander, InnoVentures and Anthemis Group describe in their Fintech 2.0 paper how a fully electronic home purchasing process can streamline the mortgage process. Traditionally, there have been information asymmetries between buyer and seller of a property which were resolved through intermediaries. An innovative and simpler approach could be achieved through an electronic land register that holds details of the property, such as valuation, ownership, financing and survey details. An interested buyer then provides this information plus his electronically stored financial details to a mortgage bank so it can assess affordability and approve a mortgage directly. The sale is subsequently sealed in a digital purchase agreement, and funds and ownership automatically transferred.

Bitcoin transactions can also be combined with snippets of additional information when embedded in the ledger. CoinSpark allows to link private messages to Bitcoin transactions as well as notarise important documents on the blockchain. Only the hash of the message is encoded in the transaction metadata and visible to the public, the message itself is stored and retrieved separately, and can only be accessed by the sender or the recipient.

Another interesting application of the blockchain is in supply chains that describe the sequence of steps and processes required to produce and distribute a good or provide a service. Every step in this chain across different companies and locations can be logged in a blockchain for later verification and detection of irregularities or fraud. Skuchain provides a platform called Thingchain that uses cryptographic QR codes and registers every processing step of a product and therefore creates a chain of provenance. A consumer can scan the QR code to see the entire history of the product.

Smart contracts – autonomous contractual execution of agreements and payments

Smart contracts are computer programs or protocols that automatically verify and enforce their terms by executing contractual clauses if certain predefined conditions are met, e.g. triggering a payment for a lost or won bet, or for an ordered good after successful delivery, without involvement of an intermediary.

Smart contracts can be, for instance, applied to asset registration and asset-related payments, such as the above described electronic property register and title-related mortgage payments, or to financial instruments like shares.

Ethereum, an open-source and crowdfunded project, has built a decentralised application platform based on a public blockchain, its proprietary currency ether and a scripting language that allows to define and execute smart contracts. The EtherScripter is a visual smart contract builder for the Ethereum platform.

Otonomos is a Singapore-based fintech startup that provides blockchain incorporation services where a company can issue programmable shares in a bitcoin-like fashion. This allows for peer-to-peer equity transfer, for instance during a crowdsourced equity funding event.

A NY-based startup in the smart securities space is Symbiont. The company digitises private equity transactions in the blockchain, and by doing so intends to create faster and more efficient markets, lowering transaction costs and increasing liquidity and transparency, e.g. through real-time capitalisation tables.

San Francisco-based Mirror is building an off-exchange or over-the-counter (OTC) trading and hedging platform for financial contracts that enables peer-to-peer trading of economic and business risks at lower cost leveraging blockchain technology.

Another early stage project is Farmshare that is building a community supported agriculture model where consumers can acquire tokens from farmers as shares of a harvested crop and receive weekly deliveries in exchange for tokens.

Internet of Things – trustless, secure and scalable peer-to-peer transaction between devices

The Internet of Things (IoT) is seen as the next technology revolution, billions of everyday devices connected to the internet that are part of complex, integrated systems, with embedded computing capabilities and minimum necessity of external device control.

IBM, as one of the first large companies, has been looking at decentralised approaches using the blockchain for IoT in the 2014 business value paper and in the 2015 white paper that describes the ADEPT platform for autonomous decentralised peer-to-peer telemetry, a joint venture with Samsung. ADEPT uses the Ethereum platform for device communication and smart contracts.

Sensing-as-a-service, described by Noyen et al. (2014) in a research paper, leverages the blockchain as a basis for device identification and micropayments so that connectivity and sensing capabilities of edge nodes can be made available as part of new and innovative business models. Two possible applications are measuring the traffic flow and road condition by smart cars or providing weather forecasting data from privately owned weather stations.

Filament is a wireless infrastructure and mesh network provider that connects equipment with small IoT devices for remote monitoring and wireless data collection. Each device has a unique digital identity that is registered on the blockchain and allows micropayments through smart contracts between devices.

Other projects that build on top of blockchains are the TransactiveGrid, an open energy platform for real-time metering, or the KenCode smart plug and light switch that contains a circuit board offering functionality for mesh networks, distributed computing and sensors.

Identity – authentication & verification with the blockchain as truth machine

Today, an individual’s credentials are owned by either governments in form of physical identity cards or passports, or by corporations in form of social media or online identities, for instance, through Facebook, Twitter, Google or LinkedIn. The blockchain technology allows a decentralised protocol for identity where the individual is in control of their data.

KeyBase is building an open and secure identity and PGP key distribution platform that will allow public-key cryptography apps to build on top, e.g. for secure messaging. A valid identity is established by linking a KeyBase account to social accounts like Twitter, Github, Reddit and other websites, and then verify users through a tweet, post or message. Keybase then becomes an open directory for public keys and provides password-less user authentication for third party websites and services. Another company in the space that builds a decentralised identity and authentication system is OneName. It allows users to register a unique name that links a blockchain ID to their social media profiles.

ShoCard is also based on public/private key encryption and includes two-factor authentication to manage and process decentralised identities that allow verification to any third party. The digital ID contains name, address, signature, DOB and physical details whereas each field is cryptographically protected on its own, allows lookup of the certifying institution, and can be independently shared with third party if needed. This returns the control of personal data to its owner.

The non-profit organisation Democracy.earth, backed by Y Combinator, is building a platform for civic technologies that help to update democracy for the 21st century starting with identity validation for electoral processes.

Bitcoin and the underlying blockchain technology are a part of a fast moving field that will impact and transform digital exchange of products and services. If you have any comments or suggestions, or just want to have a chat about the technology or new applications, get in touch with me via LinkedIn.

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