Bitcoin's Shared Ledger Technology:

Money's New Operating System

Submitted by - Anil Goyal(IPG2012-108)

Pradhan Meena(IPG2012-124)

A block chain or blockchain is a distributed database that maintains

a continuously growing list of data records that are hardened against
tampering and revision, even by operators of the data store's nodes.

The most widely known application of a block chain is the public

ledger of transactions for cryptocurrencies used in Bitcoin. This
record is enforced cryptographically and hosted on machines running
the software.
The technology forms the basis of some cryptocurrencies, including
bitcoin, Ethereum and Dogecoin.
From 2008 to date, no other technology has been the subject of such
fervent debate. Irrespective of your opinion, the rise in popularity of
cryptocurrencies cannot be ignored. Today, there are a number of
billion dollar businesses that accept Bitcoin as a form of payment.
These include Dell, Reddit, Expedia, PayPal, and most recently,
Microsoft.

The technology underlying Bitcoin would bring about a once-in-alifetime seismic shift in the financial industry, shrinking its current
profits and workforce but also creating many new markets and
opportunities. Bitcoin isnt merely the cryptocurrency that has caught

the imagination of the antiestablishment and enriched a few lucky

speculators. In fact, that Bitcoin is merely an app. The underpinnings
known as the blockchain or distributed ledger technologyare
nothing less than a vastly faster, cheaper and more secure way to
manipulate money electronically. The blockchain is poised to become
the dial tone for the 21st-century global economy.
Its estimated that a fifth of U.S. GDParound $3.6 trillionis
generated by industries that will be disrupted, or at least made more
efficient, by this new technology. But it is the financial services
industry, and its hundreds of billions of profits, that faces the most
immediate threat.
Nasdaq is hardly alone. Citigroup , Visa , Barclays , Bank of New
York Mellon and UBS are among those moving to test blockchain
technology. Meanwhile, the New York Stock Exchange, Goldman
Sachs, USAA and BBVA have all invested in Bitcoin startups. Their
dollars have helped make Bitcoin among the fastest-growing areas of
startup investment, with $375.4 million committed in just the first half
of 2015, compared with $339.4 million for all of 2014,..and thats Big
money?

Funding their own disruption? Absolutely.

But also brilliant. The big financial companies need to be involved
early to identify where blockchain will eat their profits.

PERHAPS FITTINGLY, the technology that could one day wrest

power from the big banks was birthed during the throes of the
financial crisis.
In a white paper published in October 2008 Bitcoin creator Satoshi
Nakamoto (possibly the pseudonym of a reclusive Japanese genius
coder or a Finnish sociologist or a mysterious government
agencyno one really knows, although the Internet is littered with
theories) proposed a protocol to fundamentally alter how something is
sent and settled online.
Information has traditionally traveled on the Internet via copiesif
Alice sends Bob an e-mail, document, text or photo, she still retains a
version on her computer. But if Alice sends Bob Bitcoin, the system
first checks to see if she has Bitcoin to spend and isnt counterfeiting,
and then ensures she hasnt secretly also kept a copy of that Bitcoin or
sent or spent it elsewhere. In theory, two people anywhere on earth
could send each other money without using a bank intermediary
although most transactions are still likely to go through some sort of
third party.

This so-called Internet of value (as distinguished from the

Internet of information) works by maintaining a shared ledger on a
network of participating computers around the world and updating
that ledger with a block of Bitcoin transfers roughly every ten

minutes. (The ledger consists of a chain of blocks, hence the term

blockchain.) That ten minutes dramatically shortens the two to three
days typically required to clear and settle a financial transaction
within the U.S., to say nothing of the five days it can take
internationally.

The days of [banks] holding on to peoples money a little bit longer

and benefiting from that, or charging people fees and high margins on
exchange rates, are going to end.
In addition to speed and a smaller middlemans cut, a shared ledger
system offers superior security and transparency. A Bitcoin payment is
a push transaction, meaning that money leaves a Bitcoin wallet only
if the owner sends it. Thats in contrast to a pull transaction like a
credit card payment, in which the consumer hands over the keys to
her account to a merchant, trusting the company, its employees and its
future hackers not to misuse that key. The shortened settlement time
also reduces the risk of fraud. Shared ledger technology could even
curb the current epidemic of identity theft.

Transparency? All those duplicate ledgers (which so far have

defied hacking) could be used to track who transacted with whom
when and which assets were involved. That would have prevented a
problem that emerged during the housing bust, when it was difficult to
track which institution owned which underwater mortgage, creating

difficulties for regulators, homeowners and, worst of all, panic among

investors.
And the blockchain will be much cheaper to use than older financial
instruments like credit cards. The banks, Visa, MasterCard and
American Express now collect 1% to 3% of domestic credit and debit
transactions, generating more than $70 billion a year in fees in the
U.S. market alone.Thats a tax on all payments. With Bitcoin that
goes practically to zero.
The World Bank estimates that individuals in the developed world
sent $436 billion back home to their families in poorer countries last
year. The fat fees for such remittances make a prime target for
Bitcoin.

Beyond banking, the shared ledger approach could streamline

record keeping and property transfers of all sortsfrom land titles to
patent and trademark holdingsdisplacing armies of white-collar
workers and incumbent software providers. Deloitte, the worlds
largest accounting firm, is exploring using blockchain systems for
reconciliation, auditing and other functions, which could sideline

legions of CPAs.This is very much the sort of creative destruction .

While destroying some jobs, the blockchain will also enable new
marketplaces (say, for trading energy credits or mobile telephone
minutes) and an explosion of microtransactions on the Web. The
Internet of value, linked up with the Internet of things, could
transform the supply chain and global trade.

We dont have the imagination to recognize what is

possible once set up is complete, of this blockchain
technology,

Bitcoin, the cryptocurrency, is merely the first application, much the

way e-mail was the first application of TCP/IP, the protocol that
underlies the Internet.
New systems will ultimately be built on top of the
blockchain protocol the way SMTP was created for e-mail, http
enabled Web browsing and VoIP made Skype and FaceTime possible.

All are built atop TCP/IP. Its a low-level, new protocol. Were not
talking about apps yet. Were talking about infrastructure.
It is just going to disrupt a bank, an exchange or card network because
we have a protocol and were going to put an app on itthats pretty
unlikely. Its unlikely not because it isnt going to happen. It will
happen. But there are several things that need to happen first.
By the time you have an app like Uber or Instagram, you are at the
tenth layer of a technology stack. You dont have Uber without
Google Maps, and you dont have Google Maps without GPS and
satellite imaging and the Internet and the iPhone and LTE and
miniaturization and all these things.
Heres how primitive the infrastructure is now: The Bitcoin
blockchain can currently handle 7 transactions a second, while credit
card giant Visa can process 56,000. No wonder Bitcoin players liken
the current state of the technology to the Internet of 1994 and 1995, a
time when going online meant dialing up AOL and connecting at 14.4
kilobytes per second.
When threatened by technological innovations, established industry
players have typically resisted (think of the recording industrys
lawsuits against Napster) or been slow to respond (as many traditional
media companies have been to the rise of the Internet). The big
financial institutions seem to be breaking that pattern by embracing
blockchain technology. Still, Athey notes, they face the classic

dilemma that theyre earning fees and profiting from existing

systems, which makes it institutionally hard for them to deploy new
technologies.
The global institutions are looking at blockchain, for ways to reduce
their current costs, for opportunities to generate new revenues and
also from a very defensive positionwhich is, in 20 years what does
a bank look like?
if we can find a good way to deliver value to the customers in the
industry, the numbers will follow. Its really about, Lets find the
proper use for itwhere we can change the worldand then the
investment returns will follow.
Bitcoin, Altcoin, Dodgecoin Who Cares? Only the Block Chain
Matters
Since Satoshis White paper came online, other cryptocurrenies have
proliferated the market. But irrespective of the currency and the
frequently debated deflation issues, the underlying Block Chain
protocol and the distributed computing architecture used to achieve its
value remain the same.
Just as the open communications protocol created profitable business
services by catapulting innovation, the Block-chain protocol offers a
similar foundation on which businesses can create value-added
chains. Using the integrity lattice of the transactions, a whole suite of
value trading innovations are beginning to enter the market.

Micropayments
The payments systems used today were designed in the 1950s and
theres a fixed minimum cost for every transaction. As a result
sending small payments of say, $5, is not feasible using this system.
(Although companies like DWOLLA have begun offering such
services). The reason this hasnt changed is quite simple; Remittances
in 2013 were made at an average rate of 8.9% resulting in $48 billion
in revenue. Thats a tidy revenue stream.
Just as TCP/IP allowed information to be transmitted instantly, today,
the Block Chain Protocol allows the instant transfer of value
irrespective of size. One company that is making use of this concept is
ChangeCoin.
ChangeCoin offers a micropayment Infrastructure for the Web. Say
you read an article on a popular website, but the freemium version
only lets you read quarter of the article and requires a minimum
subscription to access the entire article. With micropayments, the user
can now pay just a few cents to read the entire article without
engaging in an la carte form of subscription. A good way forward
based on this concept would be to cable TV subscriptions, where
consumers can pay for the 4 or 5 channels that they regularly watch
rather than paying for a suite of 200. Another application is for WiFi
hotspots where users pay exactly their data consumption. A user could
pre-allocate a connectivity budget and micropayment software could
take care of paying for the data connection with no user intervention.

ChangeCoin has also created a boon for content creators and bloggers
in the form of ChangeTip. Consumers can now use Bitcoin to tip a
content creator with a small sum (even 5 cents) instead of just liking
an article. Not only is this an innovative way to show appreciation but
it will change the business model of content creation and curation.
Block Chain APIs
Companies such as CHAIN, now allow developers to build APIs on
the Block Chain Protocol such as:
APIs to allocate digital resources such as energy, bandwidth,
storage, and computation to the connected devices / services that
need them.Eg; FileCoin
APIs for Oculus Rift- With access to the virtual world now
becoming TROM-esque, developers are looking at creating
APIs that can be used in the virtual space to make transactions,
blurring the lines between virtual and real economies.
Micropayment APIs tailored to the type of transaction being
undertaken. i.e: Tipping a blog versus Tipping a car share driver.
Very useful in a shared economy where consumers increasingly
become prosumers.
Smart Contracts and Programmable Money

This relatively new concept involves the development of programs

that can be entrusted with money. Smart contracts are programs that
encode certain conditions and outcomes. When a transaction between
2 parties occurs, the program can verify if the product/service has
been sent by the supplier. Only after verification is the sum
transmitted to the suppliers account. By developing ready to use
programs that function on predetermined conditions between the
supplier and the client, smart programs ensure a secure escrow service
in real time at near zero marginal cost. One company that is making
dramatic foray here is Codius which offers an ecosystem for Smart
Contracts.
Apart from Financial transactions, smart contracts are now entering
the Legal System. Companies like Empowered Law use the public
distributed ledger of transactions that makes up the Block Chain to
provide Multi-Signature account services for asset protection, estate
planning, dispute resolution, leasing and corporate governance. A
prime example of this transition is seen ins a procedure referred to as
Coloring a Coin, in which a house can be sold in the form of a
Bitcoin payment with the same ease and speed.
Digital Assets and Smart Property
Building up on coloured coins, digital assets are assets whose
ownership is recorded digitally. Bitcoins are of digital assets, but since
the Block Chain is a decentralized asset registry, it can also be used to
register ownership and transfer of any digital asset besides bitcoins. In

this way, a digital bond could pay coupons and redeem the principal
to the address holding the digital bond, without the need of
custodians.
Taking this concept one step further is in the form of Smart
Properties. A Smart Property is a property that has access to the Block
Chain, and can take actions based on the information published there.
Another way to look at it is that smart property can be controlled via
the Block Chain. Eg: A car whose ownership is represented by a
digital asset in the Block Chain. The physical car is connected to the
internet and can read the Block Chain. Therefore it can keep track of
the status of the digital asset representing it. As the digital asset is
transferred from one address to another, the physical car can see this
status update in the Block Chain and take necessary actions, i.e.
change its owner Its a way of Automating the Internet of
Everything.