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Why Bitcoin Could Be Much More Than a Currency

Bitcoin doesn’t have to replace government-backed money to improve the way we do business online.

Today, users of popular products and services must entrust valuable data to the companies that sell those products.

Boosters of Bitcoin commonly call the digital currency the future of money. But even if it doesn’t turn out to be, a growing group of investors and entrepreneurs is convinced that the idea at the center of Bitcoin could revolutionize industries that rely on digital record keeping. It might replace conventional methods of keeping track of valuable information like contracts, intellectual-property rights, and even online voting results.

Bitcoin’s real promise, they say, is not the currency. It’s the underlying technology, in which thousands of computers in a distributed network use cryptographic techniques to create a permanent, public record of every single Bitcoin transaction that has ever occurred (see “What Bitcoin Is and Why It Matters”). Investors are betting that this record-keeping system, called the blockchain, will be valuable for many other things besides tracking payments.

It’s become common for enthusiasts to compare where Bitcoin is now to where the Internet was in the 1980s and early 1990s. Joel Monegro, a venture capitalist at Union Square Ventures, says the open-source technology that creates the blockchain can be fairly compared to the open-source protocol that is the basis for the Internet, called TCP/IP. Technically a pair of protocols, the Transmission Control Protocol and Internet Protocol, TCP/IP dictates the specific ways data is packaged and routed between computers in a network. For years after TCP/IP was invented, the technology was accessible only to people with a certain level of technical knowledge. Similarly, right now Bitcoin is too arcane for most people and challenging to use even for those who are familiar with it.

Eventually, additional protocols were built that worked with TCP/IP and paved the way for e-mail applications, Web browsers, file transfer services, and so on. Something similar could be brewing now with Bitcoin. The process for making payments with the currency can be thought of as just the first application built on the blockchain system, says Brian Forde, the director of digital currency at MIT’s Media Lab. New protocols being built on top of the foundational technology could lead to easy-to-use consumer products and services.

What might those be? Anything that would benefit from having information stored in an unchangeable database that is not owned or controlled by any single entity and yet is accessible from anywhere at any time.

One early example of such a “Blockchain 2.0” service is Counterparty, which promises its users they can “engage in advanced financial contracts without having to trust anyone else to hold your funds or do your accounting.” In addition to providing a platform for exchanging bitcoins, Counterparty stores important accounting or contractual information in the blockchain.

Another early-stage company taking this general approach is Factom, which is aiming to appeal to a wide range of businesses. Factom says it can “maintain a permanent, time-stamped record” of a company’s data in the blockchain, which will “reduce the cost and complexity of audit trails, managing records, and complying with government regulations.” To test the concept, it has teamed with a medical records company to build a tool health-care providers could use to store data that would be valuable during billing disputes or audits.

The reason the blockchain has the potential to be an all-purpose global database is that as every Bitcoin transaction is verified cryptographically by thousands of computers running the software, they can add a small volume of additional information. Right now that is roughly 40 characters, but there are ways around that limit. A service can build a separate network that can store more information and then use cryptography to encode that information as a string of numbers and letters small enough to be written into the blockchain. Counterparty and Factom employ this basic principle.

One twist, though, is that bitcoins themselves are still inherent to the process: they provide the incentive for people to help make all this happen. Verifying transactions and storing their data in the blockchain earns “miners” newly minted bitcoins. In other words, any service that aims to use the blockchain as a general-purpose database will have to pass a bitcoin (or a fraction of one) around in the process. Or it will have to find some other way to motivate miners to put the information into the ledger.

The concept of a blockchain is not limited to Bitcoin, and several other networks have recently emerged as potential alternatives. Indeed, Bitcoin’s blockchain isn’t even necessarily the one that is best equipped to have applications built on top of it. But Bitcoin has gained by far the most traction and has the biggest network, which makes it more resilient than the others, says Monegro.

If it is to become a mainstream technology, Bitcoin’s software will probably need to be adjusted so that it can handle the huge transaction volumes that would be involved (see “The Man Who Really Built Bitcoin”). There are also open questions about how well Bitcoin’s design will hold up over the long term (see “Academics Spy Weaknesses in Bitcoin’s Foundations” and “Price Slump Tests Bitcoin’s Self-Correcting Economics”). Nonetheless, if the future of blockchain technology is not necessarily contingent on the future of Bitcoin, the powerful idea at the currency’s core is likely to be here to stay.

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