With the recent demonetisation drive of the Indian Government, and the recent high volatility in its value, the bitcoin has again come into prominence. Bitcoin is so much more than an online wallet. It is an entirely new currency. But it is also so much more than a new currency- the underlying blockchain technology has the potential to disrupt many industries. At the very least, this new technology is a pointer to the direction in which humanity has been evolving over the millennia.
Paying someone
First, the basics. When a person (A) needs to pay a stranger (B), something to which a certain value is ascribed is transferred from A to B. This item of value can be a physical good (like wheat, fruits, rice etc.-Barter system), gold, rupee notes etc. However, the above means of payment become very inefficient and slow because it involves actually moving a physical and tangible entity from A to B.
The internet brought a much faster way- A transfers part of the credit he holds in his account to B’s account. The only way A and B know that the transfer has happened, is if it reflects in the account statements/ledgers of both A and B. In this transfer however, if A and B are the only parties involved, there would be a lot of fudging. A would claim in his ledger that he sent only Rs 10, but B would claim in his ledger that he received Rs 10,000. Hence, we need a neutral intermediary (like the bank or Government) to ensure fair recording and to guarantee the payment.
Bitcoin, and Blockchain: the basics
Bitcoin, is the more popular of the many virtual currencies available. One bitcoin today, which is just a number on the computer, is worth about $1,000. It is worth so much, because many people think it is worth so much. You may wonder that if it is just a figure on a computer, what is preventing someone from creating zillions of such numbers? They cannot, because the number of bitcoins which will ever be released, and the time of its release, is hardcoded in its software- it will never exceed 21 million.
The most exciting part of Bitcoin is not the currency itself, but the underlying technology. The underlying blockchain technology is basically a way to get two strangers to agree without any central intermediary. In the previous payment-to-stranger example, one needs to ensure that if A enters a debit of Rs 10, then B will only enter a credit of Rs 10 without involving any intermediary whatsoever. Blockchain’s solution is a very simple and elegant one- instead of having one central supervisor, A announces and shows his ledger entry to the whole world that he is giving Rs 10 to B. Now B shows his ledger entry (of the credit of Rs 10) to the whole world too, and if they match, everyone will “vote” to allow the transaction to take place. Once sufficient people have vetted the transaction, the software records it permanently.
Myriad applications
The blockchain technology powering the bitcoin is much more than just a payments solution- it is a way to make two strangers sign a common agreement in the absence of a powerful central intermediary to match records. The applications range from signing contracts, to storing records of clinical trials to even voting for our political parties.
An indicator of things to come?
Our society has always transferred power to a central figure (like a Government, a leader) to ensure that our selfish needs as individuals did not compromise the survival of our species. Many social science and economic theories indicate this. For example, if we have a central power which ordered us not to consume more than a certain amount of food so that everyone could survive, we avoid the classic tragedy of commons.
However, over the centuries, the capabilities of the general public seem to have increased. As a consequence, we seem to increasingly (albeit, slowly) take more and more power into our hands. Come to think of it, our earliest rulers were unquestionable, and in some cases even divine. This transitioned into having kings, queens and monarchs as rulers who were feared, but occasionally questioned because they were looked at as humans. Slowly the idea of self-rule and democracy took shape to give us the kind of Governments most have today.
The blockchain is basically a way to further transfer power away from these central figures to the society, because certain transactions no longer need these central intermediaries.
Criticisms of bitcoin/blockchain
The blockchain, and the current implementation of the bitcoin have their fair share of criticisms.
1. They have been used in the infamous Silk route for drugs.
2. Bitcoin mining (the computational process powering this currency) is intentionally designed to be computationally intensive- their data centres cause a lot of unnecessary emission of greenhouse gases. For context, as on 2015, the bitcoin network had 100 times more computational power than Google.
3. Moreover, till date they are very cumbersome to use.
4. Also, the bitcoin lacks some features available in normal credit cards like payment reversal.
5. Another important limitation is the time it takes for any transaction to get confirmed- about 10 minutes currently.
Conclusion
The bitcoin may or may not survive. Even the blockchain technology may be replaced by a more disruptive technology. But the paradigm of decentralisation will only continue.
-by Akhil Sai Valluri
