Bitcoin is the start of disruption

Here’s another way of looking at things. Bitcoins aren’t really money, they are a way of keeping score.

Steve Mott and I ran a somewhat experimental session on Bitcoin at the excellent BAI Payments Connect event in Las Vegas earlier in the year. Modesty forbids me from relaying just how well this worked, so I shall restrict myself to just one twestimonial:

#payconnect Steve Mott and @dgwbirch team up for best payments presentation of all time! Good work @BAI and planning crew.

— Jim Bruene (@netbanker) March 11, 2014

My part in this session was to explain to a general banking audience that however sceptical they might be about the Bitcoin currency (XBT), and I share that scepticism, the blockchain technology is a genuine technological breakthrough and the start of a new era in transaction technology.

The Bitcoin protocol (crucially distinct from bitcoin, the currency it underlies) was built from the ground up to support far more complex transactions and relationships than simple value transfers.

[From Bitcoin is not just digital currency. It’s Napster for finance. – Term Sheet]

One of the most interesting pieces that I’ve read about the more complex transactions was from Eli Dourado, who pointed out that more generalised transactions can solve a variety of real-world problems in an innovative and efficient way. Here is one example:

The simplest variant is a 2-of-3 transaction. Let’s say that I want to buy goods online from an anonymous counterparty. I transfer money to an address jointly controlled by me, the counterparty, and a third-party arbitrator (maybe even Amex). If I get the goods, they are acceptable, and I am honest, I sign the money away to the seller. The seller also signs, and since 2 out of 3 of us have signed, he receives his money. If there is a problem with the goods or if I am dishonest, I sign the bitcoins back to myself and appeal to the arbitrator. The arbitrator, like a credit card company, will do an investigation, make a ruling, and either agree to transfer the funds back to me or to the merchant; again, 2 of 3 parties must agree to transfer the funds.

[From Stop Saying Bitcoin Transactions Aren’t Reversible | Eli Dourado]

Now this example, like a great many other examples, is about payments. But take this way of thinking and look at the classes of problems that it solves. It seems to me that there is a widespread (and general) set of problems around the creation, management and transfer of digital assets that could be solved in this way. I got involved in a fascinating discussion around this at an entertaining discussion session during Auckland’s Nethui meet up and it left me thinking that idea of smart contracts around digital assets is more of a window into the coming economy that using Bitcoin to buy laptops from Dell, because trading without clearing and settlement is massively less expensive than trading with them. But how would this work?

Long-term sustainability can only be achieved by providing an incentive for users to contribute to the network — for altruistic to selfish reasons — so that there are always a sufficient amount of resources available at any given time.

[From Tomorrow’s Apps Will Come From Brilliant (And Risky) Bitcoin Code | Opinion | WIRED]

Correct. So in other words, who will pay to do the distributed proof of work that is necessary to maintain a blockchain? In the Bitcoin world, the reward for doing the proof of work is the Bitcoins themselves and these are used as a currency (although technically they aren’t really). So what if we forgot about the whole idea of Bitcoins as money and instead think of them just as a way of keep score with respect to maintaining the blockchain? Then a rather obvious alternative to incentivise people is just to pay them and treat the Bitcoins as a mechanism for recording who has done the work. If the people doing the work are the same as the network of people who are using the results of the work, then it would be possible to simply net off the resources and settle up periodically.

This is what I mean. Let’s imagine that there is a network of financial services organisations that want to create a blockchain to provide a more cost-effective platform for the trading of some assets. You can imagine some form of bonds being handled in this way. So each of the financial services organisations sets up the equivalent of a mining rig to do the work. Each of the financial services organisations pays a small amount per transaction. At the end of the month the participants net up and if one of the organisations has contributed more to the network in terms of mining than they drew in terms of transactions, then they get payment from the rest of the network and vice versa.

This is why feel justified in saying that Bitcoin is indeed the start of disruption in business processes irrespective of whether Bitcoin the currency ever obtains mainstream traction. It is because the bit calling technology, the open public ledger with distributed proof of work, is a genuinely new way of solving a problem in the digital world and solving it in a way that has no physical analogue at scale.