The money is in the Bitcoin protocol

Mention Bitcoins and people think ‘anonymous currency’. However, that’s only one instance of how the underlying public-key cryptographic protocol can be used. For example, at a conference last week, in my presentation, I said it was an approach that I’m increasingly thinking about as a way to re-frame the discussion between centralised and decentralised systems.

I’ll look at some of the basics in this post as well as how people are thinking about using the Bitcoin protocol to do some very innovative things.

Bitcoin protocol

Let’s start with the protocol itself. It was designed in 2008 and released in 2009 by pseudonymous developer(s) Satoshi Nakamoto.

Some of the key features of the Bitcoin protocol are:

  • It is a cryptographic protocol
  • Operates on peer-to-peer networks
  • It uses a shared transaction database called the “block chain” to achieve distributed consensus about coin ownership
  • Once accepted, transactions can’t be undone or denied
  • Open source

In essence, the Bitcoin protocol allows building peer-to-peer systems that securely builds distributed consensus. Another generic way to look at Bitcoin systems is ‘smart property‘- a way to securely exchange ownership of a good (physical or digital) or service once a condition is met.

Bitcoin protocol based systems are cheap and globally scalable. They require minimal structure, allowing for nodes to leave and rejoin the network at will. At the same time, the design allows for incentives or rewards for self-perpetuating the system. The security of the system comes from the combined computing power of honest participants.

Non-currency uses

Hopefully it is clear from the features of the Bitcoin protocol and system that crypto-currency is just one use case. Just as the BitTorrent protocol can be used in multiple ways for peer-to-peer data transfer, so can the Bitcoin protocol open up new and different possibilities.

It’s easier to divide the non-currency uses of the Bitcoin protocol into two categories. The first is called alternative chain which uses the block chain algorithm for non-currency uses. The other is by building new protocols on top of the Bitcoin protocol.

This 2012 YouTube video from Mike Hearn is a must-watch for people interested in more details. There are some good examples including conditional transactions which can be used in diverse ways.

Alternative chain examples

1. Peer-to-peer, social trading of “normal” (government-backed) currencies without the need of a centralised clearing house. Called a ripple exchange, it is based on a design loosely inspired by the Ripple monetary system.

2. A decentralised, open DNS (Domain Name System) using the .bit Top Level Domain. This is an alternative DNS root based on Namecoin and outside the official DNS root administered by ICANN. Early work in this area included discussion on BitDNS.

3. A service called Proof of Existence which is a sort of notary public service on the Internet. It easily and cheaply (0.005 BTC) allows people to verify ownership, integrity, and that a document existed at a certain point in time.

Building on the Bitcoin protocol examples

1. Bitmessage for encrypted peer-to-peer communications, including hiding metadata like the identity of the sender and receiver, from eavesdroppers. The message transfer mechanism is similar to Bitcoin’s transaction and block transfer system, requiring a ‘proof of work’ for each message.

2. Zerocoin that augments the Bitcoin protocol to allow for fully anonymous currency transactions by placing anonymity technology into the Bitcoin network itself. Zerocoin uses Bitcoin as a “distributed, online, append-only transaction store.”

3. Gliph adds secure mobile communications to the Bitcoin landscape. It edges into controlling digital identity “that shares as many (or as few) facets of yourself as you want to.”

Ripe for innovation

The Internet inherently enables and supports peer-to-peer interactions. Some peer-to-peer protocols like BitTorrent have been around for a while and are well established. Comparatively, while Bitcoins as a crypto-currency is now getting well known (but not really well understood), the Bitcoin protocol and systems are fertile ground for innovation.

I haven’t seen much discussion in New Zealand about the possibilities. If anyone has an interest, please get in touch with me. I’m keen to explore this area more.


5 thoughts on “The money is in the Bitcoin protocol

  1. Pingback: Four short links: 29 August 2013 - O'Reilly Radar

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