Whether you love, hate, or are indifferent aboutBitcoin, there is no denying its stunning popularity. Bitcoin and other crypto currencies of its ilk, such as Dogecoin and Litecoin, have seen rises in comparative exchange rates and legitimacy. Indeed, the IRS deciding to tax Bitcoin earnings as capital gains is a good indicator that Bitcoin has crossed some, however nebulous, threshold of legitimacy.
Regardless of the long-term viability of these crypto-currencies, the new monetary platforms have developed a fundamental innovation that will have far greater implications than just electronic payments. This innovation is the block chain.
Understanding the Block Chain
Traditionally data and information are shared through a 'hub and spoke' model. A single institution, such as a bank, acts as the hub and disseminates information to us individually. But with Bitcoin there is no 'bank' or central institution. Rather the account value is stored across the distributed network of thousands, or more, computers. For Bitcoin, the solution to this problem is the block chain, a public ledger and database where transaction records are stored concurrently across the network. (Check out this block chain FAQ for a crash course in plain English.)
The block chain is important because it solves the longstanding problem of decentralized consensus. In other words, the block chain helps us answer questions such as how do we get multiple computers to agree on certain pieces of data or how do we handle inevitable faults in the system if a computer goes down or gets hacked? For these currencies to work, the network they exist on must propose a value, communicate with each other, and come to a consensus. This is a necessity if you are trying to have records stored publicly across a network rather than stored in one centralized hub.
The Value of Decentralized Consensus
The key is that the block chain provides us with a mechanism to apply decentralized consensus to a variety of applications. Applying this decentralized concept to other technologies presents the prospect for profound future impact. Any application that requires a system of record, whether banking, property ownership records, or election voting, could potentially benefit from a system of decentralized consensus by breaking away from the classic 'keys to the kingdom' problem and eliminating any single point of failure.
For failure to occur in a decentralized network, an entity must compromise a large portion of a distributed, potentially global, network rather than a single institution. Decentralized consensus has other benefits as well, as it potentially creates another barrier for misrepresenting the truth. When information is publicly known, an inaccuracy must be vetted by the system. Consider the real world example of resumes before and after the advent of LinkedIn.
Sign up for CIO Asia eNewsletters.