Bitcoin will change a lot more than finance. It could also change how software is built and upend a bunch of today’s biggest web companies, argues Joel Monegro of Union Square Ventures.
His argument starts with the block chain, the shared ledger where every Bitcoin transaction is recorded. Validating these transactions requires computing power. When each transaction is validated, a new block is added to the chain, which makes future transactions even harder to compute.
Bitcoin was designed this way to make sure that the same Bitcoin, which has no physical form, isn’t spent twice by the same person. This also gives Bitcoin some inherent value — people or organizations have to spend a lot of money to run the computers that validate transactions, and the complexity of those computations is always increasing as the chain gets longer.
But Monegro argues that these technical underpinnings of the Bitcoin system may have more long-term potential than the currency itself.
That’s because the block chain is not controlled by any one person or entity, and information in it is freely available to other software programs. So programmers are starting to build things on top of the block chain that have nothing to do with digital currency.
For instance, some programmers have developed a protocol called La’Zooz for real-time ride sharing. That could eventually disrupt Uber. Others have created OpenBazaar, a protocol for a a peer-to-peer trading network that could disrupt eBay. Both use the block chain for some basic computing tasks.
Here’s a simple way of thinking about it. The block chain itself is immutable, like bedrock. Bitcoin is like a building on top of that bedrock — it’s got a foundation where programmers have defined some of the basics of how it works, then a bunch of stories on top of that where people interact with it.
But it’s now possible for other folks to build their own buildings on top of the same bedrock.
“The block chain is great at two fundamental things,” explains Monegro. “Distributed consensus, which is basically having a large network of computers agree on a value of something….that’s a key component for any decentralized system. The other thing is time-stamping, holding a chronological order of things happening.”
As new businesses crop up that depend on these functions, they’ll benefit from turning to the Bitcoin block chain, rather than having to build a similar system from scratch.
This concept isn’t new. Many tech companies have technology platforms that others can build on, from Microsoft to Google to Facebook.
The Bitcoin block chain is different because everything underlying it is published, and there’s no central controlling entity. The whole system works only because all the participants abide by the same set of rules, and any changes are dictated by hard math rather than a CEO or board of directors.
“Facebook wants to own and store the data that is relevant to their operation,” says Monegro. “So does Google, so does everyone else. The data they store, they control it. The algorithms they run, they control it to serve their own purposes. A system like this, the protocols you build are open, not controlled by anybody. They work like a machine. They don’t discriminate.”
There’s still reason to be skeptical. Bitcoin itself is still in a very early and tumultuous stage, as the collapse of the Mt. Gox exchange earlier this year showed. Speculation has caused some pretty wild price fluctuations — one Bitcoin is worth about $375 today, down from a peak of $1,242 in March 2013. That makes it an unreliable store of value, which could eventually drive people away.
Plus, the organizations building on top of the block chain tend to speak in utopian terms that could be a turn-off for outsiders. For instance, La’Zooz describes itself as “a completely decentralized and autonomous organisation. That means that anyone can contribute towards the establishment of its goals in whatever way he or she believes would be the best. Tasks are carried out within autonomous, self-defined circles or teams.”
But that kind of utopian vision is how a lot of open-source projects started, and many of them have grown into essential technology. Take the Linux operating system, which runs most of the computers in the biggest data centers in the world, like your bank. Or Apache, which runs the majority of web servers. Or the protocols that formed the basis of the Internet itself.
Monegro and USV’s Fred Wilson think that Bitcoin could become the same kind of foundational building block within the next 5 to 10 years.
Monegro’s entire post is worth reading if you’re interested in the technical vision. Here’s a graphic showing the different layers of the platform he believes will built on the block chain, which he’s going to detail in a set of follow-up posts:
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