Bitcoin – An Abbreviated History
Shortly after the financial collapse of 2008, round one of “Quantitative Easing” by the Federal Reserve, and unprecedented fiascos such as the Bernie Madoff Ponzi, Bitcoin was released in early 2009 by an anonymous programmer (or a group of programmers) who called himself or themselves Satoshi Nakamoto. Bitcoin is commonly recognized as the world’s first decentralized digital currency. It comprises of Bitcoin the payment network and bitcoins the currency – both of which reside completely on the web, without need for physical representation. Its monetary policy, vis-a-vie how much bitcoins are created at any given moment, is determined in a democratic manner. Any changes to the fundamental changes to rules of Bitcoin must be supported by a super-majority of those who actively verify transactions on the network. Bitcoin is transparent as it is an open source project; those with sufficient programming knowledge can see exactly how the software works, right down to how transactions are verified. Bitcoin allows you to send money directly from person to person, anywhere in the world where Internet is available. Similar to email, provided that the sender and receiver are not identified by their Bitcoin addresses, transactions can remain anonymous. The transactions themselves are near instantaneous and cost little to no fees. In fact, you can send a million dollars’ worth of bitcoins with a fee of only two dimes. Because bitcoins are totally electronic, each bitcoin can be divided into ten million subunits. This allows users to conduct micropayments that were not possible before. Almost half of all people on this planet do not have access to banks and other financial instruments we enjoy in the developed world. Bitcoin, on the other hand, simply works for anyone and everyone no matter where they are. This is why some expect Bitcoin will bring about new era of economic prosperity unlike anything we’ve seen before.
The Bitcoin ecosystem is thriving; there are now dozens online exchanges that allow you to buy and trade bitcoins with most major national currency pairings. There are automated vending machines that dispense bitcoins in exchange for cash. Bitcoins are accepted by many major retailers; NewEgg, Microsoft, Overstock, Expedia, TigerDirect are just some of the big names embracing the currency. These businesses work with payment processors who immediately convert the customer’s bitcoins into dollars for a fee lower than what credit card companies charge. This helps mitigate the risk of holding bitcoins.
In recent years, Bitcoin has risen from being worth less than a penny to a high of over $1,000 USD per coin. Since then the bubble has popped, and today Bitcoin is sitting at around $250. It is expected that the price could grow exponentially as the production of bitcoins will decrease by 50% by summer 2016. Whatever the case may be, Bitcoin represents an important innovation that rivals the impact of the Internet. It has the potential to one day be the world’s global currency. Some regard Bitcoin as the cash of the Internet, while others think it is Gold 2.0.
The Blockchain – Bitcoin’s Engine
The underlying technology behind Bitcoin is what is called the Blockchain. To simplify, Blockchain gets its name by how it organizes transactions into a ledger.
When a transaction occurs in the Bitcoin network, it is processed by the global network of Bitcoin miners. Miners use specific combinations of hardware and software to authenticate the legitimacy of the transaction. It does this by tracing the origin of the bitcoins being sent by checking the Bitcoin ledger, to see how the coins came into existence. In other words, miners are accountants that verify if the sender does in fact have legitimate possession of those coins that are being sent. Consensus is key: a transaction is only valid when enough miners give the transaction the green light. Miners are rewarded an amount of bitcoins in proportion to how much computing power they put into verifying the transactions. The process of verifying and approving a transaction is automated, quick, frictionless, and makes fraudulent Bitcoin transactions impossible.
The transactions and associated metadata are then put into a container called a block. After a specific period of time has elapsed, the block is sealed and linked to the existing chain of blocks. You can visualize this as a new protein being added to an existing strand of DNA. In Bitcoin’s case, this sealing and linking of a fresh block into the existing chain occurs every 10 minutes. Every miner has the same version of the blockchain ledger sitting on their computers, and each miner must continually keep their ledger up-to-date in order to participate in the network. The network is quasi-democratic; any person or entity can become a miner, provided that they have the resources and know-how. No other participants aside miners are needed to facilitate Bitcoin transactions.
Blockchains are immutable and irreversible; while it is possible to change the outcome of future transactions (through changing policies, i.e. what transactions are legitimate), it is impossible to make changes to an existing ledger. Overtime, as investors pour more and more resources into Bitcoin mining, it becomes harder (if not impossible) for a malicious attacker to corrupt the system. Today, the Bitcoin network is already several hundred times stronger in computational power than all of Google’s servers combined. This makes Bitcoin a trustless system where we can send money directly to one another without the need or approval of middlemen.
Blockchain is a protocol, much like IMAP/POP3/SMTP (email) and HTML (websites). It is highly adaptive: with some ingenious engineering, we can use it to send secure messages; transfer land titles; as a democratic voting platform; and to store data in a decentralized manner. Essentially, any asset that can be transferred digitally should, and one day will, be on a Blockchain-based ledger. The major difference between today and the future is that Blockchain gives us the ability to do everything we do now on the Internet in a more efficient, transparent, and secure manner. In fact, Nasdaq has publicly stated that it has made sizeable R&D investments for its own Blockchain – one that could help it cut down on costs, increase security, and provide better access to their stock exchange. Industries that will experience transformative levels of change by the Blockchain are numerous and that number is only limited by our imagination. Allow me provide two examples.
MLS Listing on the Blockchain
In Canada, the most prolific real estate search engine is the Multiple Listing Service (MLS), of which many readers surely have dabbled with. This is closed, private system (at least for Canadians) that only realtors and real estate agents post listings on. Many have the perception that unless their property listed on MLS, the property simply will not sell. However, for those who do not want to enlist the services of real estate agents but still want to have their property listed in the MLS, a handsome fee must be paid to gain access to the system for a short period of time. While some see this as reasonable, there is nothing special to justify that cost. Younger, tech-savvy people may see this sort of tactic as an attempt to barricade fences around water. To them, it is unethical to coerce home owners to pay fees to just be listed, especially in a time when the Internet is already so well developed and access to the web is so ubiquitous and cheap.
This is an area ripe for disruption using the Blockchain. Imagine a 21st Century (no pun intended) MLS that utilizes the already-existing Bitcoin Blockchain. One would only need to specify certain coins or parts of a coin as valid entries into the new MLS. These entries can then be given to all property owners within a municipality as authentication to ensure that only home owners can make postings. Alternatively, an entire new blockchain could be built, maintained, and semi-controlled by a decentralized group of stakeholders. The cost of hosting would be nearly non-existent; access would be much less restrictive than the current model; and home owners can further customize how they want to showcase their homes rather than place trust in middlemen. This new version of MLS would be a welcome change in opening up the real estate industry, giving more opportunities for home owners to trade their properties.
Timeshares in the New Economy
As an outsider that who never owned any timeshares, the industry seems archaic and inaccessible to the younger generations. It may be because of changing tastes in investments, or a lack of capital among young people, or timeshares being perceived as poor investment. Whatever the case may be, the concept of co-ownership should be highly appealing in a time when traditional home ownership is difficult and globetrotting for work, vacation, and other reasons is becoming more common. However, despite the growth of AirBnB and other travel websites, it is surprisingly no one has played around with the idea of making timeshares easy and profitable to trade on the Internet.
Developers of resorts and vacation properties should come together and allot select developments as available for co-ownership and tradeable on an online exchange. Ownership would be represented as timeshares recorded on a blockchain-based ledger. The public would be able to see timeshares being traded on that blockchain, generating buzz and displaying a new level of transparency. But at the same time, the public would not know exactly who is trading with whom.
Timeshare owners would trade their shares directly on the exchange any time of day, similar to forex. The developers who run this system stand to make a profit every time a trade is made. With the younger generations, their primary concern would be the ability to trade in and out of properties whenever they please. To increase the attraction of timeshares, timeshare holders should be allowed to rent out the units, perhaps on a profit split arrangement with the developers. When timeshare owners feel that their needs are not being served, they can trade in their shares to a buyer with a different outlook. Giving the consumers unparalleled flexibility in what they can do with their timeshare investment will be what brings this new generation in.
To the Future
Bitcoin represents an important innovation. Its underlying technology will slowly but surely trickle into every aspect of our lives. Resort and vacation home developers can already accept the digital currency with little in setup cost. For those who want to innovate, Bitcoin and Blockchain technology provide limitless potential for whatever they want to build.
Michael Yeung is the Cofounder and Principal Consultant of Saftonhouse Consulting Group, a Vancouver-based firm that helps individuals and organizations leverage Bitcoin and related innovations. As Canada’s go-to expert on the subject of digital currencies, Michael has explained Bitcoin on television, radio, newspapers, and other mainstream publications. He has also given talks in conferences, workshops, and other events. Michael has advised institutions on how to take advantage of Bitcoin, integrated Bitcoin payment services for multiple businesses, and installed Bitcoin ATMs for his clients. He has helped investors move into Bitcoin and managed their investments. Michael believes Bitcoin’s impact will be greater than that of even the Internet. Michael can be contacted via firstname.lastname@example.org. Please visit www.saftonhouse.com and ca.linkedin.com/in/mikeyeungvancouver for more information.