Blockchain

Description

by Jacob Aron:

" the true innovation of Bitcoin's mysterious designer, Satoshi Nakamoto, is its underlying technology, the "block chain". That fundamental concept is being used to transform Bitcoin – and could even replace it altogether.

So what is the block chain? It is a ledger of transactions that keeps Bitcoin secure and allows all users to agree on exactly who owns how many bitcoins. Each new block requires a record of recent transactions along with a string of letters and numbers, known as a hash, which is based on the previous block and produced using a cryptographic algorithm.

Miners, people who run the peer-to-peer Bitcoin software, randomly generate hashes, competing to produce one with a value below a certain target difficulty and thus complete a new block and receive a reward, currently 25 bitcoins. This difficulty means faking a transaction is impossible unless you have more computing power than everyone else on the Bitcoin network combined. Confused? Don't worry, ordinary Bitcoin users needn't know the details of how the block chain works, just as people with a credit card don't bother learning banking network jargon. But those who do understand the power of the block chain are realising how Nakamoto's technology for mass agreement can be adapted. "You can replace that agreement with all sorts of different things and now you have a really powerful building block for any kind of distributed system," says Jeremy Clark of Concordia University in Montreal, Canada." (http://www.newscientist.com/article/mg22129553.700-bitcoin-how-its-core-technology-will-change-the-world.html)

Examples

Ethereum

"One of those tapping into its power is Vitalik Buterin, a 19-year-old developer from Toronto, Canada. Last week he launched Ethereum, a new platform that will not just allow for multiple cryptocurrencies, as they are known, but also promises to host a range of decentralised applications on a single block chain. Making systems decentralised is appealing because the authorities will find them hard to shut down.

Initially, Ethereum users will be able to exchange bitcoins for a new currency – ether. Then, ether will be mined just like Bitcoin. But acquiring another form of digital money is not the point. Ethereum is meant to work like an operating system for cryptocurrencies. Developers can create apps, such as social networks or file storage, that sit on Ethereum's network as part of an app store.

Ethereum allows for the creation of complex, yet decentralised, economic tools like financial derivatives, in which two parties can bet on the rise and fall of an asset, or crop insurance that pays out to a farmer according to a weather data feed. Creating decentralised versions of Dropbox or eBay should be possible too, claims Buterin.

Other developers are attempting to achieve the same results by overlaying new code on the existing Bitcoin block chain. One example is the concept of "coloured" coins: with bitcoins labelled to represent other assets such as gold, cars or even houses, you transfer ownership when you trade the labelled coin.

Buterin says Ethereum is much more flexible. "Bitcoin is great as a form of digital money, but its scripting language is too weak for any kind of serious advanced applications to be built on top." (http://www.newscientist.com/article/mg22129553.700-bitcoin-how-its-core-technology-will-change-the-world.html)

Decentralized Autonomous Corporations

"One of the more advanced concepts being touted for a next-generation Bitcoin is the idea of decentralised autonomous corporations (DAC) – companies with no directors. These would follow a pre-programmed business model and are managed entirely by the block chain. In this case the block chain acts as a way for the DAC to store financial accounts and record shareholder votes.

In a way, Bitcoin is actually the first DAC, says Daniel Larimer, a developer in Blacksburg, Virginia. People who own bitcoins are shareholders in the company, which offers financial services, earns revenue through transaction fees and pays a salary to its employees, the miners. But no one is in charge.

Larimer has started his own DAC, called BitSharesX, which he says can perform the actions of a bank, lending other currencies to customers, who can provide BitShares as collateral. Other potential business models for a DAC include election services and lotteries, all run automatically. "The key to a DAC is that it should not depend on any one person." (http://www.newscientist.com/article/mg22129553.700-bitcoin-how-its-core-technology-will-change-the-world.html)