The digital currency Bitcoin has seen many ups and downs since it began circulating in 2009 without ever being adopted into mainstream use. Now a plan from Bitcoin developers to alter the currency’s underlying software, the blockchain, will force users to choose between two competing versions of the digital currency. The blockchain secures Bitcoin by distributing continuously updated records of all transactions to all computers in the Bitcoin network. Meanwhile, the same financial and governmental institutions that Bitcoin was designed to circumvent are beginning to exploit blockchain technology to streamline their own operations. Bitcoin’s lasting legacy may not be as a virtual currency independent of any government, but rather the first use of distributed record keeping through the blockchain.
The blockchain’s innovative accounting
The blockchain solves the problem of double spending for digital currencies like Bitcoin. For purchases with physical currencies, banks and credit card issuers verify that the same unit of currency cannot be spent twice. The blockchain accomplishes the same accounting task by checking transactions against every record in the Bitcoin network. This architecture makes Bitcoin transactions very secure: falsifying a majority of records would prove difficult given the size of the network. The blockchain software is freely available and decentralized, which reduces the fees that sellers would otherwise pay to banks and credit card issuers for processing payments with physical currencies.
As the number of Bitcoin transactions grow, so does the amount of information added to the blockchain. Under the current system, a new “block” of records is added to the “chain” every ten minutes, but these blocks are capped at one megabyte of data. For Bitcoin to grow, it will eventually become necessary to increase the size of each block, possibly as early as 2016. There are competing plans for how to increase block size, however. One Bitcoin offshoot, or “fork”, called Bitcoin XT increases block size to eight megabytes and automatically doubles every two years. Other plans call for a more comprehensive solution, but proponents of XT fear there may not be enough time before the one megabyte cap is reached. Only a consensus of users can determine which Bitcoin version becomes dominant.
Institutional adopters of blockchain
As the Bitcoin community decides which path of the fork to pursue, other groups are adopting blockchains for their own record keeping. The NASDAQ stock exchange and some investment banks are looking at ways to create financial products that leverage the blockchain. In Vermont, the state government is investigating uses of the blockchain for record keeping and contracts. The Rethink Music initiative recently published a report that investigates how blockchain could be used to fairly compensate musicians when their songs are played by radio stations or music streaming services. Given the importance of organizing information in today’s economy, many more applications of the blockchain are sure to follow.
The blockchain software can also spread quickly because it is open-source, meaning that anyone can freely access the code and modify it for their own purposes. While a large number of variations limit the value of a digital currency, they can increase the value of its underlying software. Multiple versions of Bitcoin cause headaches for buyers and sellers navigating between them, but multiple iterations of the blockchain allow a growing number of organizations to apply it to their operations. Whatever the result of the recent Bitcoin fork, the blockchain will continue to solve data coordination problems well into the future.