In order to grasp just how powerful this technology is for the financial services landscape, financial services professionals must understand just why this technology exists. An origin story of blockchain and bitcoin would not be complete if the first chapter began in 2016, 2015, or even 2010, but rather it should begin in the 1980s. Beginning and growing out of the cypherpunk movement of 1980s, the movement that blended together both a libertarian political perspective and computer science expertise, the trend toward a digital and decentralized currency began to grow. Many attempts were launched during the 1980s and 1990s, seizing on the growing proliferation and integration of the internet into business practices. Ironically enough, especially given the fact that bitcoin itself may seek to disrupt the current financial system, some of the earliest developers and proponents of cryptocurrencies were financial institutions.
2 Function of Internet
There early attempts, rather obviously in the current context, were unsuccessful in their attempts to develop a digital and decentralized method of transmitting financial information across geographic and political boundaries. Said failures were not the result of a lack of technical expertise, vision, or ability, but rather were linked to a fundamental flaw in how the internet interacts with the financial system. Put simply, and boiling down all extraneous data and information, the internet is extremely efficient and effective at the following two functions.
Creating Copies of Information
First, creating copies of information for distribution lies at the core of the true value that the internet providers to both individuals and institutions. The ability to distribute information across the world in, literally, the blink of eye completely transformed how commerce is conducted. On top of the rather obvious implications for data transmission, the way in which this data was communicated between different individuals and institutions was already permanently transformed by the proliferation of the internet. Even with these possibilities, however, the internet by itself only obtained paradigm shifting levels of adoption when personal computers become more widespread.
Ability to Access, edit, change information
Second, the ability of individuals to access, edit, and change the information that had been copied, and resend it or post it back to other users as new versions was a game changer. Think of a simple email attachment, be it a slide deck, word document, or excel worksheet that is able to transmitted back and forth between different actors, with everyone (for the most part) having the ability to make changes, relabel, and reattach this document. While this might come in handy for making changes to files in a workplace setting, or for editing media files, this exposes a core problem with the idea of a decentralized monetary unit or unit of exchange. The following point cannot be over emphasized, or stated as something that is of minor importance.
In order for bitcoin or any other aspect of the cryptocurrency to exist, much less achieve the level of excitement and investor interest that currently dominates the marketplace, the underlying blockchain technology must have been operational first.
One of the most important analogies and connections to draw between blockchain and cryptocurrency technology is that without blockchain, the entire cryptocurrency economy and landscape would not exist (Limón 2018).
The Foundational Technology of Blockchain
The “crypto” in cryptocurrency would not exist, or at least not exist in its current form, if the blockchain technology had not been fully developed. Remember, and that in face of the buzz and excitement that currently dominates most conversations surrounding blockchain this can be difficult to remember, none of the core technologies embedded and that drive blockchain are necessarily new or innovative. The movement and shift toward a digital and decentralized currency has been underway for decades, and the technology used to anchor bitcoin and other cryptocurrencies is a result of that. Let’s take a look at some of these foundational technologies and how they are related to blockchain technology:
Public Keys and Private Keys
The public key and private key conversation and protocol has been a part of computer programming and analysis since the first computer era first began in the business environment (Lopez 2006). Without diving too much into the technical weeds, public keys are the addresses to where data (of any kind) can be sent, and private keys can be thought of – quite literally – the key necessary to unlock and access the information that has been delivered to your public key address.
The idea of hashing may seem like an overtly technical concept, and it is important to realize that the actual computer processing underpinning the hashing process is complicated, but at a conceptual level the idea is not difficult to understand.
In the context of blockchain technology the key points to remember about
hashing are that it is
- (1) a one way conversion that, as of right now cannot be undone, and
- (2) serves as an identifying metric that can be tracked, examined, and analyzed throughout the entirety of the blockchain itself.
Encryption – clearly the concept of encryption is not something new, innovative, or an idea particularly associated with blockchain technology itself, but it is the specific encryption utilized in blockchain that make it particularly useful/interesting.
Drilling down, the SHA-256 encryption methodology utilized on the bitcoin
blockchain, initially developed by the National Security Agency, has proven to be unhackable with current technology and resources. This additional layer of security has proven invaluable as blockchain and bitcoin attempt to establish themselves as viable marketplace options.
The idea of a decentralized method of storing and communicating information has been an ideal of numerous individuals and institutions for decades, especially in terms of distributing wealth and data between different market actors, is not a new idea. That said, it was the implementation and refinement of blockchain technology that achieved this idea at scale, as well as allowing the secure and virtually instantaneous communication of information for it to actualize.
That said, the true value of blockchain technology is not merely in the decentralized nature of the program, but the distributed nature of record keeping and information.
contrary to existing information systems or databases, many of which rely on cutting edge technology and information communication, the distributed nature of blockchain records and information is distinctive versus other systems.
While in a decentralized system and information there may be certain aspects of data and information that are not handled at the core, the distributed nature of blockchain is distinctive