I’ll admit that I’m a bit of a blockhead when it comes to the term blockchain (I’m also a blockhead for a host of other reasons, but I’ll leave that for another day), a technology being brandied about quite a bit as a savior of industries including financial services. I decided to look into the technology behind the polarizing digital currency Bitcoin.
But for Those Living Under a Digital Rock…
…we’ll start with Bitcoin itself, which for several years now has been all the digital currency rage, without fully breaking into the mainstream. Bitcoin is a cryptocurrency, or digital currency, and is a peer-to-peer and open source payment system. In other words, a customer can make transactions directly and digitally from user to user…without the need for an intermediary like a bank.
Much Ado About Bitcoin
If this all sounds fishy to you, you’re not alone. Remember, I earlier used “polarizing” to describe the technology. Take that one step further, actually, when just this week, one of Bitcoin’s founding developers, Mike Hearn, declared Bitcoin as good as “dead.”
“The fundamentals are broken and whatever happens to the price in the short term, the long term trend should probably be downwards,” wrote Hearn. “I will no longer be taking part in Bitcoin development and have sold all my coins.”
When one of your pioneers of the technology sells all of his product like a stock firesale in a shaky financial market, it’s never a vote of confidence. But really? That’s it for something that was once heralded as the “future” of currency (Sorry, Apple Pay)?
Not necessarily, says Aberdeen Group Senior IT Research Analyst Jim Rapoza, but the key will be improving the currency’s volatile image in a society that’s been through enough with the Recession.
“While I think in the future that some form of cryptocurrency will be in wide use, I’m not sure if that will be Bitcoin, and, in any case, I don’t see wide use among the general populace,” said Rapoza.
“Right now there’s a debate going on among the core Bitcoin developers about the future of the currency, with Hearn writing that Bitcoin is dead. Even if the bullish Bitcoin proponents are right, and it survives this current conflict, those kinds of issues aren’t the kind of things that inspire confidence in everyday people.”
Why Bitcoin’s Technology Platform, Blockchain, Could be the Key
The core behind Bitcoin is blockchain, a network of computers that must approve a transaction (in Bitcoin’s case, of a financial nature) has taken place before it is recorded in a chain of computer code. Cryptography keeps the transaction secure, and anyone on the network can see the details of the transaction in a shared database, without a need for a middleman governing that transaction.
This peer-to-peer free sharing is part of the allure of blockchain, says Aberdeen Group Vice President and Research Fellow, IT, Derek Brink.
“Many of the information-processing systems in place today have roots that go back several decades, if not longer. When our digital information moves through these systems, it may go through certain steps, because those are the steps that became firmly entrenched in the pre-digital era,” said Brink.
“The excitement about blockchain technology is that it has the potential to disrupt these traditional, hierarchical, unnecessarily expensive ‘value chains’ for digital information, and replace them with flatter, faster, and much less expensive peer-to-peer models.”
Not So Fast — There Are Security Concerns
But, as with everything in an age of the Internet of Things being a creepy Big Brother, and data breaches seemingly becoming more the norm than the exception, Blockchain too, as a technology, is not immune from security concerns.
“Much of the cryptography that currently supports these traditional value chains is also based on a hierarchical chain of digital trust, ultimately leading back to one or more trusted ‘roots,’” said Brink. “If I understand it correctly, the blockchain technology also disrupts this hierarchical approach to encryption, such that any party in the value chain for digital information can independently verify its authenticity.”
“What I don’t even begin to understand are how blockchain-based projects will address the practical implications of moving an ever-growing chain of ‘blocks’ around a highly distributed set of participants, with the necessary levels of performance and security. Presumably that’s exactly the kind of learning that these current projects will help to bring about.”
Perhaps learning more about the technology is indeed sound advice before digital currency as a whole — let alone Bitcoin — can progress forward. Especially when your own developer calls you out this week as being as valuable as the paper you’re printed on.