The Economist: Blockchain, a machine of trust

Bitcoin has a bad reputation. The decentralized digital currency, backed by a vast network of computers, has gained a notorious reputation for wild swings in its value, the enthusiasm of its backers and its erratic uses, including extortion, buying drugs on dark web bazaars and hiring thugs.

This is unfair. The value of a bitcoin has been fairly stable, at $250 for much of this year. The skepticism of regulators and financial institutions has given way to enthusiasm (the European Union recently recognized it as a currency). But what is most unfair is that bitcoin’s shady image has led people to overlook the huge potential of “blockchain,” the technology that underpins bitcoin. The implications of this innovation extend far beyond cryptocurrency. Blockchain allows people to collaborate without trusting each other and without a neutral central authority. Simply put, it is a machine for creating trust .

The blockchain food chain

To understand the capabilities of blockchain systems and what they can do, it is important to distinguish three things that are often confused among the public: Bitcoin as a currency, the specific blockchain that supports Bitcoin, and the concept of blockchain in general. A useful analogy is Napster, a company that was launched in 1999 and pioneered peer-to-peer file sharing services, but it was illegal and provided millions of free music tracks. Napster itself was quickly shut down, but it inspired many other peer-to-peer services. Of course, there are also many peer-to-peer services currently used to pirate music and movies. Despite its murky origins, peer-to-peer technology also found legal uses, paving the way for Internet startups such as Skype and Spotify. The same thing happened with Bitcoin.

Blockchain is a more efficient technology. It is essentially a shared, trusted public ledger that can be checked by anyone, but no single user can control it. Participants in the blockchain system will jointly maintain the update of the ledger: it can only be modified according to strict rules and consensus. Bitcoin's blockchain ledger prevents double spending and keeps track of transactions. This also makes it possible to have a currency without a central bank.

The blockchain is also the latest example of an unexpected achievement in cryptography. Mathematical encryption is used to condense raw pieces of information into a code, called a hash. Any attempt to tamper with any part of a blockchain would be immediately exposed because the new hash would not match the old one. The same science that allows information to remain confidential (important for encrypted messaging, online shopping and banking) is also, paradoxically, a tool for open transactions.

Bitcoin itself will probably always remain a curiosity. However, blockchain has many other uses because it satisfies the need for a trustworthy record, which is important for every type of transaction. Now, there are dozens of startups looking to exploit blockchain technology, either building on the bitcoin blockchain or creating new blockchains of their own (see article).

Ideas exist for things like防篡改公共数据库for the manufacturing economy (land registries), for example (Honduras and Greece are interested in this); or奢侈品和艺术品的所有权登记. Documents could be put on a public blockchain by embedding information about them, and you wouldn’t need a notary to vouch for it. Financial services firms are considering using blockchain as a way to record who owns what, rather than keeping a series of internal ledgers. A trusted private ledger would eliminate the need to check with the counterparty on every transaction, it’s fast, and it minimizes errors. Santander estimates that it could save banks up to $20 billion a year by 2022. Twenty-five banks have already joined a blockchain consortium created by a blockchain startup called Blockchain.   R3 CEV is working together to develop common standards. In addition, Nasdaq is about to begin using this technology to record securities transactions of private companies.

These new blockchains don’t have to work the same way as Bitcoin. Many of them could tweak their models, for example by finding alternative ways to maintain the process of “mining” (paying participants with newly generated bitcoins in return for the computing power they provide to maintain the ledger). Some censored participants in some industries might choose to join a private chain because they don’t need as much security. Blockchains could also implement business rules, such as transactions that only occur when two or more parties agree, or when another transaction has been completed first. As with Napster and p2p technology, a clever idea is being modified and improved. In the process, it’s quickly shedding Bitcoin’s shady reputation.

New chains on the block

The spread of blockchain is not good for anyone in “honest business” (central institutions and bureaucracies like banks, clearing houses, and government authorities), and even if some banks and governments are exploring leveraging this new technology, others will oppose it. However, given that governments and banks have decentralized trust in recent years, it may not be a bad thing as a way to create more oversight and transparency.

It would be a mistake to draft blockchain regulations at this early stage: the history of p2p technology tells us that it will take several years for the full potential of this technology to become clear. In the meantime, regulators should keep their hands free or find ways to develop new approaches within existing frameworks rather than being too rigid and risk stifling this rapidly evolving idea.

The idea of ​​a shared public ledger may not sound revolutionary or sexy. But so do double-entry bookkeeping and joint-stock companies. And blockchain, like them, is a distinctly mundane process, but it has the potential to change how people and businesses work together. Bitcoin enthusiasts have been mesmerized by the ideal of pure free will, the ability of digital money to transcend any central bank. The real innovation is not the digital money itself, but the trust machine that mints it, and it promises much more than that.

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Original article: http://www.economist.com/news/leaders/21677198-technology-behind-bitcoin-could-transform-how-economy-works-trust-machine
Author: economist
Compiled by: Satuoxi
Editor: Satuoxi
Source (translation): Babbitt Information