Bitcoin or Blockchain

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Today, there are flurries of innovations happening across all industries of business as companies redefine their services and advances in technology are made. Two notable technological innovations that have fueled further innovations to occur are Bitcoin and its underlying technology, which is blockchain. To better understand Bitcoin and blockchain, both will be described in detail in regard to their functions, how they meet their functionality, and which is the more significant of the two.

Bitcoin

The emergence of Bitcoin happened amongst the time of the 2008 financial crisis in Satoshi Nakamoto’s white paper as trust was deteriorating towards financial institutions.[1] This paper, wherein the cryptocurrency was born, outlines a “trustless” peer-to-peer system in which there is no centralized authority that oversees the verifications of transactions. The term trustless may be off the mark since users will now need to rely on the system, rather than a financial intermediary. This decentralized form of trust is a result of the underlying blockchain technology which will be discussed in later sections.

Furthermore, Bitcoin is a proposal for a completely electronic version of cash. As a form of cash, it is debatable that it is a valid representation of what the true form of cash is meant to be. That is, there are three main criteria that cash, or money, must meet as described by the IMF.[2] These three criteria include store of value, unit of account, and medium of exchange.

Store of value. Like any money, the value that is attributed to the particular form, whether it be Euros, renminbi, or the United States Dollar, tends to fluctuate according to various economic factors and government regulation. However, these fluctuations are not nearly as significant as what has been seen with the value of Bitcoin (tossing some extremes aside, e.g. Venezuelan Bolivar). When Bitcoin emerged, it was virtually worthless, reached a high point of nearly $20,000, and today rests just below the $4,000 mark.[3] See Appendix A for reference. This extreme volatility calls into question whether Bitcoin is a true store of value since it tends to vary greatly even from one day to the next.

Unit of Account. Given the extreme volatility and speculative movements that exist with Bitcoin, it is hard to imagine what shopping in units of Bitcoin would look like. It would be wholly unreliable from the both the consumer point of view and from a business perspective. That is, if a consumer wanted to purchase an item that he found online the night before and walked into a shop the following day, the price may have changed. The shop keeper would have to continually update prices as the price of Bitcoin fluctuated which would translate into extreme pricing pressures and administrative costs. Bitcoin could be relied upon for unit of account, but there would be pains for both the consumer and business.

Medium of Exchange. Although there are many companies accepting Bitcoin as a medium of exchange, many major retailers have not accepted Bitcoin as a form of payment.[4] Paying for goods or services with Bitcoin can be tricky for the consumer, such as having to go through a third party to redeem the cryptocurrency into gift cards which can then be used for purchases. Much like the famous example of the purchase of pizza for 10,000 Bitcoin[5], one side of the transaction would likely not get a fair bargain for the purchase. Until Bitcoin is accepted without having to convert to a recognized form of currency and both parties of a transaction need not speculate on price appreciations or depreciations, Bitcoin fails the test of medium of exchange.

To reiterate, Bitcoin does not act as a reliable form of cash or money. However, some investors have made millions on their investments on the cryptocurrency, and its popularity has spawned various other iterations of the electronic cash, such as the notable Ethereum. The idea of a wholly electronic monetary system has even sparked the interest of some countries’ governments which have either issued their own cryptocurrency, researched it, or experimented with it.[6] Regardless, the true value of Bitcoin may rest with its underlying technology, blockchain.

Blockchain

The technology beholden to Bitcoin, again, is the blockchain. Essentially the blockchain is a digital distributed ledger of transactions over a peer-to-peer network.[7] With this technology, transactions are confirmed without the need for a central authority to verify them. There are various improvements from this technology that can be made alongside its implementation. That is, the end goal of blockchain use within a company will be to gain efficiencies within current operations. Applications of the blockchain are far and wide across business functions and industries.

Technology. To go deeper into the inner workings of the technology before describing its potential and current uses in detail, the components which make the benefits of blockchain possible will be described. That is, the technological makeup of a blockchain is coherent with its naming. Data is formed into blocks across a chain. The block is organized by strict cryptographic rules which links one block to the next. Hashing is what makes this linking possible, which creates unique identifiers from variable inputs (the transaction data in the ledger) and gives a fixed set of characters as an output (the hash). Each hash from previous blocks of transaction data is used to create the next block, linking them in a chain.[8] The chain is maintained by nodes or individual computers which validate the transactions in the ledger belonging to the particular blockchain ecosystem.

Takeaways. With the underlying technology of blockchain explained, deductions can be made as to what makes it so attractive to be adopted for use in optimizing business functions. The Blockchain Council outlines some major categorizations of blockchain pertaining to its usefulness, which include decentralization, immutability, and cost reductions.[9]

By way of decentralization, blockchain achieves a heightened level of security that would otherwise not be met with a centralized point of authority. For this reason, it is not vulnerable to centralized cyber-attacks. With the peer-to-peer system enacted by blockchain, all participating parties would have visibility into any changes that would have occurred along the chain. This also speaks to the transparency that blockchain offers to the participants that may otherwise be lost in an email-based notification system.

Immutability also speaks to the security offered in a blockchain system. Due to the hashing mechanism which links all the blocks together in a chain, with each block depending upon the one before and immediately after, changes to transactions are near impossible. This eliminates fraudulent transactions of double spending.

The cost reductions that can be realized are in effect of the administrative expenses that can be eliminated which involve heavily people-based processes. These can be reduced or completely replaced via the blockchain. Without an intermediary, the only costs that would be incurred would be related to the implementation of the blockchain based software or its development. People based processes also tend to be slow which contribute to costs of efficiencies that could be eliminated.

Applications of Blockchain

Healthcare. As previously mentioned, the application of blockchain technology has potential to benefit business across a broad spectrum. To mention healthcare, there is extreme confidentiality that must be maintained in reference to patient data. Patient data must often be shared among different healthcare facilities to allow for proper treatment in a timely and effective manner. MedRec is one prototype software using blockchain which will allow these confidential medical records to be shared while eliminating waste in duplication of procedures and confusion in the distribution of data.[10]

Shipping. Maersk and IBM collaborated on a project which led to the creation of TradeLens, a separate business entity created to develop a blockchain technology that would address many of the problems inherent in global trade.[11] The specific problems that global trade faces is related to complex shipping routes with many touchpoints starting from departure to the end destination. These problems arise from lack of simplicity and transparency, which blockchain stands poised to solve as it will be used to create a secure, interconnected platform.

Rentals. In the startup world, Darenta has ambitions to revolutionize the car rental industry with use of blockchain based technology, geolocating, and smart contracts.[12] With the use of blockchain, the model could allow for ease of accounting for who last used a vehicle, where it was last left, and allow responsibility to shift to the next consumer with low cost overhead. The impact this will have for giants in the industry, such as Hertz or Enterprise, is explosive. Additionally, this would further develop the sharing economy and could have implications on other companies relying on trust-based models, such as Airbnb.

Conclusion

Bitcoin introduced to the world a form of electronic “cash” that has peaked the interest of even federal governments and opened the door for countless more cryptocurrencies to be developed. However, it has fallen short of becoming an acceptable form of money by standards outlined by the IMF. For this reason, its true value lies with its underlying technology, which is the blockchain. This blockchain technology not only allowed for the boom of Bitcoin but is extremely versatile. It has implications for adaptation in use across a wide range of industries as a result of its critical components of security, transparency, and cost reductions. Blockchain technology has already been adapted across various industries such was explained earlier in the fields of healthcare, shipping, and rentals. It continues to be adapted and used for innovations for some of business’s and the world’s most troubling inefficiencies. For these reasons explained herein, the most significant innovation is blockchain.

Appendix A

https://coinmarketcap.com/currencies/bitcoin/

References

[1] https://bitcoin.org/bitcoin.pdf

[2] https://www.imf.org/external/pubs/ft/fandd/2012/09/basics.htm

[3] https://coinmarketcap.com/currencies/bitcoin/

[4] https://www.cnbc.com/2017/12/07/heres-how-you-can-and-cant-spend-bitcoin.html

[5] https://www.businessinsider.com/bitcoin-pizza-10000-100-million-2017-11

[6] https://cointelegraph.com/news/state-issued-digital-currencies-the-countries-which-adopted-rejected-or-researched-the-concept

[7] https://www.pwc.com/us/en/industries/financial-services/fintech/bitcoin-blockchain-cryptocurrency.html

[8] https://lisk.io/academy/blockchain-basics/how-does-blockchain-work/what-is-hashing

[9] https://www.blockchain-council.org/blockchain/5-critical-components-of-blockchain-technology/

[10] https://www.forbes.com/sites/bernardmarr/2017/11/29/this-is-why-blockchains-will-transform-healthcare/#4729c5891ebe

[11] https://www.ibm.com/think/fintech/maersk-and-ibm-form-joint-venture-applying-blockchain-to-improve-global-trade-and-digitize-supply-chains/

[12] https://cointelegraph.com/news/decentralized-car-sharing-platform-aims-to-lead-the-blockchain-based-rental-market

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Lee Richardson

Lee Richardson

Ambitious business writer with a lens for diversity. Building my portfolio. Feedback welcome!

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