Cryptocurrencies and the Impact of Blockchain Technology

March 13, 2018 | Posted in: Business, Economics, Finance, Global Business, Money, Technology

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Cryptocurrencies have soared in their fame, value, and variety since their patron currency, Bitcoin, was conceived in 2009.  Consider that, since its 2009 conception, one Bitcoin is now worth $9,000, Bitcoins have a market capitalization of $155 billion and, as of January 2018, 219,000 Bitcoin transactions occur per day! Bitcoin derivatives are now being traded on the Chicago Mercantile Exchange (CME) and Chicago Options Futures Exchange (CBOE) and now have the backing of major financial institutions and hedge funds.  Even JP Morgan Chase & Co. CEO Jamie Dimon, who previously called bitcoin a “fraud”, has since backtracked and acknowledged the reality of the blockchain phenomenon.

So what are people talking about when they mention “mining?”  As investor and bitcoin advocate Andreas Antonopolous put in his 2016 lecture, “mining is like a giant competitive game of Sudoku that resets every time someone finds a solution. … Imagine a giant Sudoku puzzle, several thousand rows, and columns in size. If I show you a completed puzzle you can verify it quite quickly. However, if the puzzle has a few squares filled and the rest is empty, it takes a lot of work to solve! The difficulty of the Sudoku can be adjusted by changing its size (more or fewer rows and columns)…”

The Sudoku analogy is an apt one.  Bitcoin mining, more simply, is just a way to crowdsource the encryption process.  But mining gets increasingly difficult the larger the digital ledger becomes.  For example, the difficulty of “mining” the first bitcoin transaction was roughly equivalent to solving a 9×9 Sudoku puzzle.  But mining the second transaction roughly involves solving a 9×18 Sudoku puzzle and the difficulty of solving the first and second puzzle combine to increase the overall complexity by increasing orders of magnitude.  As you can imagine, as the bitcoin blockchain is now 510,432 transactions long and “mining” or solving the analogous Sudoku puzzles is infinitely more difficult now than it was five years ago.

Perhaps more important than Bitcoin’s utility as a currency is its powerful underlying technology, blockchain, which records transactions in a public ledger that is continuously updated and distributed across a network of computers.  At its core, blockchain is a solution to what is commonly referred to as the “double spending problem.” Double spending is impossible when paying in cash, as a physical bill is handed to the cashier at the point of purchase.  However, in digital transactions, conventional wisdom posits that unless a trusted third party (TTP) intermediates a transaction, a unit of virtually-held currency can be spent twice, as the history of that specific unit of currency must be verified before being transacted.

Below I will more formally describe the blockchain and its underlying technology, but first, what does this all mean for Real Estate.  Blockchain has the potential to disrupt many processes within Real Estate.  From accounting to Title business and contracts, the blockchain will be omnipresent.   Take for example the chain of custody and ownership of real property.  Today we use a title company to research the records and give us assurances that the documentation available indicates ownership.  With the introduction of a public open ledger system, the blockchain, custody of property, and the need for a secondary central repository be it a Title Company or city and state public records would not be needed.  This would reduce transaction costs, state and city costs for hosting this information, and legal work associated with the research needed to transact on property.  Transaction could simply be recorded to a public blockchain.  This same concept will also hold true for leases as they too can be recorded within the blockchain.

Blockchain eliminates the proverbial middle-man — in the case of bitcoin usually banks or certification authorities — by utilizing a network of personal computers that encrypt and maintain the integrity of the ledger’s contents, making all recorded transactions non-reversible.  This procedural efficiency has been estimated to reduce the cost of financial reporting and settlement/clearing transactions, procedures most common in the banking industry, by up to $12 billion according to a recent study by Accenture. In order for an attacker to succeed in double spending, he/she would need to amass a majority of the computing power in the system in order to distribute a fraudulent ledger.

Although the idea of blockchain sounds simple in principle, the idiosyncrasies in its implementation can be extremely confusing.  Blockchains are secured via a competition of computing power that ultimately serves to encrypt its contents.  Miners compete to obtain a “nonce,” or string of 32 hexadecimal digits, that when appended to the existing encrypted ledger of Bitcoin transactions (or “block”) generates a number that is less than or equal to an arbitrarily determined “target hash.” (Mathematically, this is written H(x) < target).

Bitcoin uses the SHA-256 “hash function” to convert the text of its ledger into random hexadecimal numbers and letters.  The first miner(s) to guess a satisfactory nonce is awarded 12.5 bitcoins (in 2020, this reward will decrease to 6.25 bitcoins to cap the supply of coins into the market) or $145,412.50 by current Bitcoin prices.  As there is no computational shortcut to finding a nonce that satisfies the condition, miners usually pool computing power to increase their speed of guessing, or “hash rate,” and their chance of mining a cryptocurrency coin; the top “mining collectives” by hash rate distribution are BTC.com, AntPool, BTC.TOP, ViaBTC, and SlushPool according to blockchain.info.

In the event that an attacker amassed more computing power than BTC.com, AntPool, BTC.TOP, ViaBTC, and SlushPool combined, it would be in the attacker’s incentive to use his/her computing power to out-mine everyone else and earn the reward rather than commit a crime to obtain the same monetary reward.  Hence, the blockchain system of record-keeping is self-maintained and theoretically fool-proof.  It should be noted that, although individual coin exchanges have been hacked, the integrity of the underlying value system of the coin remains intact because the ledger of coin ownership is maintained by all disparate owners of the currency and is readily accessible.

Although ridiculously complicated, the self-contained blockchain solution to the double-spending problem can actually be generalized to be a platform for other services.  Tech companies have made a fortune monopolizing the kind of protocols that blockchain technology just democratized — Google from web search, Amazon from e-commerce, Facebook for online identities, and Uber for internet-coordinated car service.  Cryptocurrencies  — Bitcoin, Litecoin, Iota, Ethereum, and Ripple — obviated the need for fiat currencies and their requisite central banks to verify transactions and perform monetary policy.

Blockchain can serve as the platform upon which open protocols for the same functions that Google, Amazon, Facebook, and Uber satisfy now can be built only, in this case, for currency transactions.  The idea of compensating those who maintain the network and integrity of the information — a.k.a. miners — can be extended to web-search and online identity (ad-free web pages), Amazon (free products), and Uber (free rides) as well.  Ethereum is currently experimenting with these kinds of open-source solutions.  Filecoin, an application that runs on the Ethereal blockchain and compensates users who lend out spare hard-drive space with Filecoin cryptocurrency, is just one example of the versatility of the blockchain architecture.

While Bitcoin and other crypto-currencies dominate the headlines, the real revolution is the emergence of blockchain and its theoretical impacts.  The beauty in blockchain is its ability to democratize protocols that were previously claimed and monopolized by privately-held companies.  With blockchain, users will no longer have to rely on Facebook to maintain their online identity in private data centers, rather profile data can be stored in the blockchain and distributed to all participating computers.  The same analogy follows for just about every valuable digital service you can think of.  Indeed, we are on the brink of a new-internet (and perhaps world) order.  Blockchain is perhaps the most significant advancement toward a true sharing economy in the past fifty years, and we are now beginning to discover the extent of its uses.

2 Comments

1. 

   zvodretiluret
   April 6, 2018

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   you have a great blog here! would you like to make some invite posts on my blog?
2. 

   Beholder
   May 3, 2018

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   Blockchain is best known as the technology behind the cryptocurrency bitcoin — a digital currency whose value soared above $19,000 over the last year before slumping to half that when the frenzy subsided. But blockchain is so much more, potentially easing the doubts and uncertainties that dog so much of life — whether buying a used car from a stranger, having faith that a piece of fruit really is organic or knowing that a prescription drug isn’t counterfeit. Blockchain, in effect, hard-wires trust into transactions or data that we might otherwise be more cautious about.

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