Dominic Frisby explains why financial institutions are waking up to blockchain, the technology behind Bitcoin
YOU PROBABLY studied the Agricultural and Industrial Revolutions at school. You are now living through the Financial Revolution.
This is all happening thanks to a breakthrough bit of tech called ‘blockchain’.
“There is so much pull and interest on this right now,” says Derek White, the chief digital officer at Barclays, who has has a team of employees exploring how the technology underlying Bitcoin might change finance.
“That comes from a recognition that, ‘Wow, we can use this to change the fundamental model of how we operate to create our future.’”
It works something like this:
Every ten minutes a block is formed. Each block contains information, which has been ratified by multiple independent computers across the network. Thus we know that information is true. Once a block is formed, it is permanent. It cannot be changed. The network then begins the process of ratifying the information for the next block.
So we have a chain of blocks: a system of permanent record that keeps growing. A spreadsheet in the sky.
This, broadly speaking, is the principle of the blockchain – the breakthrough tech behind the digital cash system, bitcoin.
Don’t worry if you don’t understand it. It is normal to feel baffled when tech gets explained. And it doesn’t matter if you don’t understand it. Most people don’t understand how the combustion engine works, yet they use cars. Most people haven’t even heard of the Hypertext Transfer Protocol (HTTP), they still use the internet. Indeed most people (and that includes senior banking officials) don’t understand how money works – how it is created and so on – and yet we all use use that.
Now that bitcoin is up, running and functional, computer programmers are investigating all sorts of applications beyond an alternative money system. Investment in the billions is pouring in. This is where the Financial revolution is taking place.
When cash meets communication
If I owe you a pound. I can put my hand in my pocket, take out a pound coin and hand it to you. There is no middleman. That is a simple cash transaction.
For decades computer scientists had been trying to replicate that simple cash transaction digitally, but nobody could find a way of doing it – not without involving a middle man of some kind to process the transaction. By the early 00s, they had all but given up. A digital cash system was thought impossible.
The breakthrough of bitcoin was that it solved that problem.
Now imagine the same thing for communication. I can message you directly without a middleman – no gmail, no yahoo, no Facebook, no What’s App – having access to what’s being said. That has enormous implications for privacy. It’s happening now.
A digital Domesday Book for the 21st century
So the blockchain is this enormously comprehensive system of ‘distributed’ (to use the buzz word) record. Nobody is in charge of it. It is ‘decentralised’.
It is a quick, efficient way of proving (and thus exchanging) ownership.
Financial assets such as stocks and shares can be traded over a blockchain. The Nasdaq is already developing systems here. Land ownership can be registered on a blockchain. (Did you know 50% of UK land is still unregistered? 50%!) The Isle of Man is already recording its land registry on a blockchain, as is Honduras. The ownership of vehicles, tickets, anything can be recorded and traded using this tech.
Consider the impact a much older system of record had on history, the Domesday Book, which was still being used to settle land ownership disputes as late as the 1960s, and you can get an idea of the impact on economic growth a record as enormous as the blockchain could have.
The revolution will not be televised, it will be recorded on the blockchain
To prove who we are, we rely on passports, driving licences, usernames and passwords. This is all on its way out. The blockchain will be a means to prove not just your identity but also your reputation, much more efficiently than current systems.
It’s a small step from here to the new voting applications, which are being developed. Elections are currently an expensive and arduous. Thanks to blockchain tech they will soon be instantaneous. We would have known the result of the General Election by 10.01 pm at a fraction of the cost.
What’s more, you can audit your vote and make sure it is counted even with your identity secure and your anonymity protected. In this era of enormous political discontent, our system of representative democracy will be shown up for the archaism that it is. Direct democracy will be demanded. Voters will not just have a say once every five years, but each time new issues arise. Politicians will become what they should be: administrators of the people’s will.
The blockchain is going to change the way we do things. The implications are enormous.
Dominic Frisby is the author of Bitcoin: the Future of Money?