The internet, at this point, has done almost everything it can possibly to improve our lives. Surprisingly, it promises even more, only this time, with the help of artificial intelligence, big data, and cloud computing, it promises to connect all things surrounding us.
All these things, if true, could fundamentally change how we live today.
The future looks great
However, even though the internet has solved many of our problems, it has utterly failed to surpass its major limitations: Privacy, security, and inclusion. For business and economics, these three issues are very important, to say the least.
For security and privacy, the internet’s reliability has been rather sketchy. We seek help from third parties (public/private institutions) which sometimes also fail to provide us with the necessary security. Sometimes, the ones we trust with our sensitive information are the ones mining our data, whether intentionally or not.
Trust is rare in the world of technology, it seems.
Blockchain, the underlying technology behind Bitcoin, is here to solve the puzzle. Using programming, game theory, and cryptography, blockchain promises to provide the much sought-after “trust” without any help from third parties and thus solve the problem of security and privacy.
Blockchain technology (Bitcoin is just one application) can be applied to every facet of the internet and, therefore, our lives.
Transactions are at the heart of any business. When we cannot trust each other in doing transactions, we turn to institutions which act as middlemen -- banks, insurance companies, and other financial intermediaries are but a few examples.
The advent of the internet made way for a new breed of intermediaries such as PayPal.
No matter where the transaction is done, people always turn to these institutions in search of trust. Turning people’s distrust into capital, they have turned themselves into the ultimate “trust authority.” Selling trust is their business.
But not every such intermediary could keep their excessive greed in check, while acting as a trust provider. In effect, the global financial industry crashed in 2008. In that volatile period, we heard rumblings about something called “Bitcoin.”
Crypto-currencies, or digital currencies, are different from traditional fiat currencies in that they are not created or controlled by countries. The process is considered the most important innovation in finance since the invention of the double-entry method.
The current digital economy is based on reliance over a certain trusted authority -- be it the email service provider telling us that our email has been delivered, be it a social network such as Facebook telling us that our posts regarding our life events have been shared only with our friends, or be it a bank telling us that our money has been delivered reliably to its desired destination.
For all our online transactions, we need to rely on trusting someone. But living in this digital world by relying on a third entity for security and privacy is not very reassuring. What if our trusted third party sources get compromised, or, worse, are the ones threatening our assets?
Blockchain tech has the potential to revolutionise the digital world by enabling a distributed consensus where each online transaction can be verified at any time without compromising privacy. The technology is complicated but the main idea is simple: It enables us to send money directly and safely to anyone, without the help of a bank, a credit card company, or even the omniscient PayPal.
Bitcoin can be considered a microcosm of how a new, decentralised, and automated financial system could work. It offers a glimpse of the future of finance where mere codes define the system and regulations
What Is blockchain?
Satoshi Nakamoto’s 2008 white-paper explains blockchain through Bitcoin as a purely peer-to-peer version of electronic cash that would allow online payments to be sent directly from one party to another without going through a financial institution.
The process does not require any third parties to prevent the problem with “double spending” as this is preventable using peer-to-peer network.
Blockchain can be defined as a “distributed database that maintains a continuously growing list of ordered records.”
The concept of trust does not even factor into the technology, since a user does not need to rely on any sort of human element as the process is carried out entirely through strings upon strings of protocols. Currently, almost every major financial institution in the world is performing research onblockchain, and, by the end of 2017, 15% of all banks are expected to be using the tech.
A matter of trust
For any online transaction, we depend on trusted intermediaries. However, for any Bitcoin transaction, we don’t need to rely on third parties at all, as it uses cryptographic proof. What is that you ask? Well, it basically means that each transaction is sent to the “public key” of the receiver, digitally signed by the sender using the “private key.” To spend money, the owner of the crypto-currency needs to prove the ownership of the private key.
The entity receiving the digital currency verifies the digital signature, thus ownership of the corresponding private key on the transaction using the public key of the sender.
Each transaction is broadcast to every node in the Bitcoin network. Every single transaction needs to be verified for validity before it is recorded in the public ledger.
Bitcoin can be considered a microcosm of how a new, decentralised, and automated financial system could work. It is in its early stage of development. But it offers a glimpse of the future of finance where mere codes define the system and regulations.
Unlike in the current financial system where all rules and regulations are monitored and applied by a third party, in Bitcoin, everything is done through lines of code. Even Bitcoin’s “monetary policy” is written into its code: Every 10 minutes, new money is created. This make the supply of money limited to 21 million -- a hard money rule -- similar to the gold standard.
If implemented according to the principles outlined in Satoshi’s paper, the ultimate beneficiary of blockchain would be the mass public. It will facilitate global trade by making it faster and easier.
It reduces transaction cost drastically and promises to bring transparency in the process and billions of unbanked people in the financial system.
Make no mistake, blockchain technology, and along with that Bitcoin, is the future of finance. For Digital Bangladesh to truly be what its made up to be, we cannot miss this train.
SM Musa is doing research on Strategy & Innovation. He writes from the Netherlands.