Blockchain Revolution: How the Technology Behind Bitcoin Is Changing Money, Business, and the World

by Don Tapscott

talking to another without revision: “On the Internet, nobody knows you’re a dog.” Online, we still can’t reliably establish one another’s identities or trust one another to transact and exchange money without validation from a third party like a bank or a government.

Technology doesn’t create prosperity any more than it destroys privacy.

protocol, one that designated God the trusted third party in the middle of all transactions: “All the parties would send their inputs to God. God would reliably determine the results and return the outputs. God being the ultimate in confessional discretion, no party would learn anything more about the other parties’ inputs than they could learn from their own inputs and the output.”4 His point was powerful: Doing business on the Internet requires a leap of faith.

pseudonymous person or persons named Satoshi Nakamoto outlined a new protocol for a peer-to-peer electronic cash system using a cryptocurrency called bitcoin.

ensured the integrity of the data exchanged among these billions of devices without going through a trusted third party. This seemingly subtle act set off a spark that has excited, terrified, or otherwise captured the imagination of the computing world and has spread like wildfire to businesses, governments, privacy advocates, social development activists, media theorists, and journalists, to name a few, everywhere.

implications of a protocol that enables mere mortals to manufacture trust through clever code. This has never happened before—trusted transactions directly between two or more parties, authenticated by mass collaboration and powered by collective self-interests, rather than by large corporations motivated by profit.

Blockchains enable us to send money directly and safely from me to you, without going through a bank, a credit card company, or PayPal.

Bitcoin or other digital currency isn’t saved in a file somewhere; it’s represented by transactions recorded in a blockchain—kind of like a global spreadsheet or ledger, which leverages the resources of a large peer-to-peer bitcoin network to verify and approve each bitcoin transaction.

Every ten minutes, like the heartbeat of the bitcoin network, all the transactions conducted are verified, cleared, and stored in a block which is linked to the preceding block, thereby creating a chain. Each block must refer to the preceding block to be valid.

This structure permanently time-stamps and stores exchanges of value, preventing anyone from altering the ledger. If you wanted to steal a bitcoin, you’d have to rewrite the coin’s entire history on the blockchain in broad daylight.

This new digital ledger of economic transactions can be programmed to record virtually everything of value and importance to humankind: birth and death certificates, marriage licenses, deeds and titles of ownership, educational degrees, financial accounts, medical procedures, insurance claims, votes, provenance of food, and anything else that can be expressed in code.

This Internet of Everything needs a Ledger of Everything. Business, commerce, and the economy need a Digital Reckoning.

“the technology behind bitcoin could change how the economy works.”

Investing in blockchain start-ups is taking off, as did investing in dot-coms in the 1990s. Venture capitalists are showing enthusiasm at a level that would make a 1990s dot-com investor blush. In 2014 and 2015 alone, more than $1 billion of venture capital flooded into the emerging blockchain ecosystem, and the rate of investment is almost doubling annually.8 “We’re quite confident,” said Marc Andreessen in an interview with The Washington Post, “that when we’re sitting here in 20 years, we’ll be talking about [blockchain technology] the way we talk about the Internet today.”9

Trust in business is the expectation that the other party will behave according to the four principles of integrity: honesty, consideration, accountability, and transparency.

Honesty is not just an ethical issue; it has become an economic one.

Consideration in business often means a fair exchange of benefits or detriments that parties will operate in good faith.

Accountability means making clear commitments to stakeholders and abiding by them.

Transparency means operating out in the open, in the light of day. “What are they hiding?”

In the emerging blockchain world, trust derives from the network and even from objects on the network.

increased transparency, investors will be able to see whether a CEO really deserved that fat bonus.

“People have a very simplistic view of identity,”23 said blockchain theorist Andreas Antonopoulos. We use the word identity to describe the self, the projection of that self to the world, and all these attributes that we associate with that self or one of its

projections.

In the physical world, your reputation is local—your local shopkeeper, your employer, your friends at a dinner party all have a certain opinion about you. In the digital economy, the reputations of various personas in your avatar will be portable. Portability will help bring people everywhere into the digital economy.

Instead of putting the taxi driver out of a job, blockchain puts Uber out of a job and lets the taxi drivers work with the customer directly.”27

The blockchain can improve the delivery of foreign aid by eliminating the middlemen who take the aid before it reaches its destination. Second, as an immutable ledger of the flow of funds, blockchain holds institutions more accountable for their actions. Imagine if you could track each dollar you gave to the Red Cross from its starting point on your smart phone to the person it benefited. You could park your funds in escrow, releasing amounts after the Red Cross reached each milestone.

With the rise of a global peer-to-peer platform for identity, trust, reputation, and transactions, we will finally be able to re-architect the deep structures of the firm for innovation, shared-value creation, and perhaps even prosperity for the many, rather than just wealth for the few.

Technologists and science fiction writers have long envisioned a world where a seamless global network of Internet-connected sensors could capture every event, action, and change on earth. Blockchain technology will enable things to collaborate, exchange units of value—energy, time, and money—and reconfigure supply chains and production processes according to shared information on demand and capacity.

rather than predicting a blockchain future, we’re advocating for it. We’re arguing that it should succeed, because it could help us usher in a new era of prosperity. We believe that the economy works best when it works for everyone, and this new platform is an engine of inclusion.

1. Networked Integrity Principle: Trust is intrinsic, not extrinsic. Integrity is encoded in every step of the process and distributed, not vested in any single member.

Problem to Be Solved: On the Internet, people haven’t been able to transact or do business directly for the simple reason that money isn’t like other information goods and intellectual property per se.

double-spend problem.

Breakthrough: Satoshi leveraged an existing distributed peer-to-peer network and a bit of clever cryptography to create a consensus mechanism that could solve the double-spend problem as well as, if not better than, a trusted third party. On the bitcoin blockchain, the network time-stamps the first transaction where the owner spends a particular coin and rejects subsequent spends of the coin, thus eliminating a double spend.

The mechanism for reaching consensus is critical. “Consensus is a social process,” blogged Vitalik Buterin, pioneer of the Ethereum blockchain. “Human beings are fairly good at engaging in consensus . . . without any help from algorithms.”

To achieve consensus, the bitcoin network uses what’s called a proof of work (PoW) mechanism. This may sound complicated but the idea is a simple one. Because we can’t rely on the identity of the miners to select who creates the next block, we instead create a puzzle that is hard to solve (i.e., it takes a lot of work), but easy to verify (i.e., everyone else can check the answer very quickly). Participants agree that whoever solves the problem first gets to create the next block. Miners

have to expend resources (computing hardware and electricity) to solve the puzzle by finding the right hash, a kind of unique fingerprint for a text or a data file.

Proof of activity is another mechanism; it combines proof of work and proof of stake, where a random number of miners must sign off on the block using a cryptokey before the block becomes official.9 Proof of capacity requires miners to allot a sizable volume of their hard drive to mining. A similar concept, proof of storage, requires miners to allocate and share disk space in a distributed cloud.

Paul Brody of Ernst & Young thinks that all our appliances should donate their processing power to the upkeep of a blockchain: “Your lawnmower or dishwasher is going to come with a CPU that is probably a thousand times more powerful than it actually needs, and so why not have it mine? Not for the purpose of making you money, but to maintain your share of the blockchain,”10

For the first time ever, we have a platform that ensures trust in transactions and much recorded information no matter how the other party acts.

2. Distributed Power Principle: The system distributes power across a peer-to-peer network with no single point of control.

Problem to Be Solved: In the first era of the Internet, any large institution with a large established base of users, be they employees, citizens, customers, or other organizations, thought little of their social contract.

Breakthrough: The energy costs of overpowering the bitcoin blockchain would outweigh the financial benefits. Satoshi deployed a proof-of-work method that requires users to expend a lot of computing power (which requires a lot of electricity) to defend the network and mint new coins.

functioning of the blockchain is mass collaboration at its best.

Implications for the Blockchain Economy: Perhaps such a platform could enable new distributed models of wealth creation. Perhaps new kinds of peer-to-peer collaborations could target humanity’s most vexing social problems.

3. Value as Incentive Principle: The system aligns the incentives of all stakeholders. Bitcoin or some token of value is integral to this alignment and correlative of reputation.

Problem to Be Solved: In the first era of the Internet, the concentration of power in corporations, combined with their sheer size, complexity, and opacity, enabled them to extract disproportionate value from the very networks that endowed them with rights.

Joseph Stiglitz. That included “preying on the poorest Americans.” He summed up the problem: “If you give people bad incentives, they behave badly, and they behaved just as one would have expected.”

Breakthrough: Satoshi expected participants to act in their own self-interests. He understood game theory.

Satoshi chose as the economic set the owners of computing power. This requires these miners to consume a resource external to the network, namely electricity, if they want to participate in the reward system.

Ethereum chose owners of coin as its economic set. Ripple and Stellar chose the social network.