Does Bitcoin's underlying technology have other uses? Investors think so

August 23, 2015 by Paresh Dave, Los Angeles Times

Anyone interested in modern technology has heard of the digital currency called Bitcoin, even if few people understand how it works.

Don't worry. Credit cards and cash will remain the common currency for some time to come.

But as Bitcoin and other digital currencies evolve, the technology that underlies them may soon spread into other transactions: trading stock, buying and selling real estate, purchasing music and much more.

A mini-industry is forming to take advantage of the technology called blockchain, aiming to make a wide variety of transactions faster, cheaper and more secure.

The idea is to remove, as much as is practical, people and their bureaucracies from the transference of money, contracts and other data where tracking ownership is important.

The several days it takes for a $40,000 payment to clear a bank, for example, could be cut to 10 minutes by relying on blockchain's specialized, ostensibly highly secure computer networks. Bitcoin does just that.

"We want to use the Internet to move things around because it's fast, low-cost and transparent," said Adam Ludwin, chief executive of Bitcoin startup Chain Inc.

Bitcoin-related startups raised $375 million in the first half of 2015, or about 11 percent more than they did in all of 2014, investment tracking firm CB Insights said this month. The number of investments rose 63 percent compared with last year's first six months.

Several venture funds are popping up to focus on alternative uses for blockchain. Big players including the Nasdaq stock market and Goldman Sachs, both of which engage in an unfathomable number of transactions each day, are investing in blockchain experiments. Goldman Sachs funded a startup using blockchain to track and protect U.S. dollars, not Bitcoins. And Nasdaq is working with Chain to build a blockchain-based marketplace for shares in privately held companies.

Blockchain startups include Ambisafe Inc., engaged in projects such as a tamper-proof national voting system, and Blockchain Technology Group, a San Diego company working on a blockchain-based music streaming service, with rock-solid transaction records that could help artists recover royalty money that somehow leaks away undetected through the existing tracking system.

Blockchain is a risky bet, but some investors are going all in. Block26, a newly formed Los Angeles-based venture capital firm, last month announced a $450,000 investment in Airbitz, which wants to enable devices to communicate with each other with help from the blockchain.

"The idea is to not miss out in making history," said Ni'coel Stark, managing principal at Block26.

So what is blockchain?

First, consider that a currency like Bitcoin, which lives only on computers and is backed by no government or central bank, could not exist for long - even as a cult phenomenon - if users couldn't trust it.

The biggest safety issue confronting digital currencies is double-spending: a system needs to be in place to prevent a Bitcoin from being spent by the same person more than once.

Blockchain is the system that Bitcoin inventors devised. To understand how blockchain works requires dedicated study, but non-specialists might think of it as a publicly viewable spreadsheet that records every Bitcoin transaction - who sent how much to whom (it's possible to remain fairly anonymous). Every few minutes, a "block" of new rows is added. But old blocks on the chain can't be edited. They're locked tight by theoretically unbreakable computer code.

At least thousands of specially set up computers store a copy of the blockchain, so messing with records would require the herculean feat of infecting them all. Anyone can set up one of these computers, which work together to find inconsistencies and prevent fraud like double-spending. The people and businesses around the world who have set up these computers collect fees in exchange for authorizing transactions.

Finding applications for blockchain is wide-open territory right now. Factom, an organization in Austin, Texas, proposes using it to verify and lock down the records on mortgage contracts, with the aim of preventing some of the abuses of the mortgage meltdown, where signatures were faked and mortgage contracts went missing.

Like those who sold picks and shovels to miners in the Gold Rush, some blockchain startups like Factom are tweaking the basic technology so entrepreneurs can develop new applications on top of it.

And like the early days of the Internet, they say the potential uses for the blockchain being discussed today might amount to chump change compared to what businesses end up using a few years from now.

The roadblocks to blockchain are more than technical. Retail banks and other established institutions make money from the friction in the system, on fees and on the float they get by holding money in the several days it takes for to transfer.

Still, it's clear that entrepreneurs in the industry think blockchain applications could be "much bigger than the Bitcoin currency itself," said Andrey Zamovskiy, chief executive at Ambisafe.

"We are being approached by a big wave of disruption."

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5 / 5 (1) Aug 23, 2015
As I understand, the blockchain algorithm gets more and more difficult to "mine" over time, which means it takes an ever-increasing amount of computing power to keep the economy going.

Bitcoin is also vulnerable to hostile takeover, because the public ledger is based on a principle of trust and popular opinion to verify which transaction history is the real one. Once a single party owns more than 50% of the computing power in the network, they are in power to change the history. They don't need to infect or hack any computers - they can just buy them.

not rated yet Aug 23, 2015
Hi. Eikka,

Just to let you know, the difficulty of mining, or securing the system, goes up or down based on the amount of power used to mine in the last couple of weeks. Right now Bitcoin is vastly over secure for the size of its economy and this is going to correct in the next few years.

Also, you're right that Bitcoin is vulnerable to a 51% attack, but the damage such an attacker can do is really limited. Unless they get to around 75% they can't do anything more than invalidate some transactions. By doing this, they would attract attention and be attacked by the rest of the network (most large miners are pools of smaller miners) and would quickly find themselves isolated. Further, the incentives of large players to to maintain trust in the system, so this attack is not really the danger some make it out to be.

You can find out more at
not rated yet Aug 23, 2015 looks like it might be interesting. Hope they can get their web site working to help find out.
not rated yet Aug 24, 2015
the difficulty of mining, or securing the system, goes up or down based on the amount of power used to mine in the last couple of weeks

But the number of "coins" is capped, so there is a permanent increase in difficulty over time.

The whole point of the system is that there's a monetary incentive for people to keep computing, yet a cap on the amount of "money" so you couldn't mine unlimited amounts of and cause spiralling inflation, but since the act of mining also works as the transaction mechanism of calculating the public ledger, over time the real cost of calculating the ledger becomes more than the real value of the transactions and the whole system becomes useless.

Some would argue it is already pointless anyways, because it forces people to waste energy needlessly, like requiring your stockbrokers to perform an increasingly complex morris dance every time they sell or buy.

not rated yet Aug 24, 2015
but the damage such an attacker can do is really limited. Unless they get to around 75% they can't do anything more than invalidate some transactions.

That's enough to undermine public trust and cause a stock market crash.

Also, due to the way bitcoin is constructed, it is inevitable that some very rich and resourceful company will end up with nearly all of the computing power on the network. The reason is simply that as the difficulty of mining increases, making profit on mining becomes a matter of economies of scale and the small miners drop out and sell their equipment.

Eventually, you need a very large scale operation to turn a profit on mining bitcoin, and that means there's only going to be a handful of companies big enough to do it, and they will collectively own 99.9% of the computing power on the network. At that point, you don't need to hack into systems - you can "merge" and control the whole thing.

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