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August 25, 2017

Why Bitcoin and Cryptocurrencies Are Only the Beginning

Whenever we deposit money into a bank account, we assume that the bank is protecting our investment from hackers and cyber thieves using the most advanced technology available. They do a pretty good job keeping our money safe, but blockchain technology would perform even better in this regard.

The blockchain is the underlying technology behind cryptocurrencies such as Bitcoin. It can be described as a massive decentralized ledger that automatically records every transaction into a global network. The blockchain eliminates the middle man from every transaction, eliminating an access point for hackers while simultaneously speeding up processes relying on manual inputs significantly. The best way to illustrate how this works is with an example.

If Person A wants to send Bitcoins to Person B, the blockchain records the transaction in three components: an input, amount, and output. The input is the Bitcoin address that gave Bitcoins to Person A in the first place, Person C in our hypothetical example. The amount is the number of Bitcoins A is sending to B. Finally, the output is Person B's Bitcoin address.

All of this information is publicly accessible, meaning that it is possible to trace a Bitcoin through every account it has ever been in. In the example above, we already know that C paid A who later paid B. If we examine Person C's Bitcoin address, we could discover who paid them. This process can be used to trace the Bitcoin all the way back to its origin point, rendering it impossible to fraudulently alter a Bitcoin account because every Bitcoin's chain of custody can be clearly established. Modern banks cannot do the same with every individual dollar bill.

Some consumers may be alarmed by the fact that their Bitcoin account is public knowledge, but the use of a private key ensures that only you can access your Bitcoins. The private key is a random assortment of characters that is used to virtually sign every transaction involving Bitcoins, ensuring that an account's owner is the only one who can use it.

Signing a transaction transfers Bitcoins from your wallet to the Bitcoin network, where Bitcoin miners verify your signature. This verification process adds an extra layer of security against fraud. The standard wait time to complete a transaction is around 10 minutes, though merchants have the option of waiting longer to ensure that you have the requisite funds in your account before giving you whatever you purchased. Thus, both the buyer and the seller have more protection than they would using a traditional currency.

The world's largest banks understand the potential of blockchain technology, devoting a significant amount of resources to how it can be used to enhance their own operations. Goldman Sachs believes that blockchain technology has the potential to "change everything," noting the security benefits of removing the middle man in particular. Brock Pierce of Blockchain Capital was recently on CNBC discussing how banks are already embracing and evaluating the threats as well as opportunities in Cryptocurrency. Barclays calls attention to the technology's ability to "reduce the capital requirements of banks" by reducing the associated counterparty risks. The institution believes that this could make some services, such as bank transfers, significantly cheaper than they are today.

Blockchain technology may not be public knowledge yet, but there is every reason to believe that it will make banking safer and more transparent in the near future. Cryptocurrencies such as Bitcoin are only the beginning. We are onto something VERY BIG.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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Item Reviewed: Why Bitcoin and Cryptocurrencies Are Only the Beginning Rating: 5 Reviewed By: EconMatters