Within ten minutes John’s wallet would reflect that his balance had gone up by $100,000. The ledger would have been updated everywhere to reflect -$100,000 from Mary and +$100,000 to John.
Every user of this system can, using their wallet application, download and view the transaction history and every user’s history will match creating a system of trust.
For privacy the history would not identify John or Mary publically but store their public digital signature you can think of as their public identifier, sort of like a Facebook account or twitter handle that does not identify you.
When John wants to see his balance his wallet application scans the blocks in the ledger adding up inflows and outflows that match his public signature.
As an example, here is an address I created for this article: 1NNYSQw1xVQA69gzbp8vFbwWTiGtL5txGt. Feel free to send me some bitcoins any time ;).
An easy way to visualise the concept of a bitcoin wallet and address is to think of it like a glass safe.
Anyone with your address can look inside of the safe and see your coins. This address is your public key. No one however can access the coins without the combination to the safe. This is your private key. If you lose this private key there is nothing you can do to get your money out of the safe ever!
It’s impenetrable even with the best of modern hardware. For example, to break a 256 bit key like bitcoin, would take fifty supercomputers that could check a billion, billion (10^18) 256 bit AES keys per second about 3×10^51 years to exhaust the combinations a 256-bit key allows.
The universe has existed for 14 billion (1.4e10) years. It would take ~6.7e40 times longer than the age of the universe to exhaust half of the key combinations of an AES-256 bit key.
You may have heard in the news the FBI was trying to take Apple to court because they would not help unlock an iPhone involved in the San Bernardino shootings. Apple iPhones use 256 bit encryption to protect the data on their phones.
The FBI was unable to brute force attack the encryption so wanted Apple to help circumvent the 4-digit pin that unlocks the phone. They eventually did this with the help of a private security firm exploiting a weakness in the pin entry not the 256 bit encryption - once again proving any system is hackable if you find the weakest link.
The moral of the story is if you own bitcoins, don’t lose your private key. Ever!
It’s important to bear in mind the pseudonymity this system provides is dependent on the owner keeping their public key anonymous. The key I posted earlier for example is now no longer anonymous and linked to me. Five minutes on Google will give you the public keys to Microsoft’s Bitcoin account.
What is great about this transaction is there were no intermediary banks, no clearinghouses, no SWIFT and it was all done within minutes not days. If banks started using a tailored version of blockchain it could remove the need for single, trusted intermediaries.
It would distribute the responsibility of reconciling, validating and securing transactions to a broader community of intermediaries. The cost of this reconciliation across multiple parties once eliminated can drive efficiencies and potential cost savings to the industry.
It would also allow faster settlements and possibly reduce overall costs in correspondent banking.
A number of banks are investing in blockchain technology right now and several organisations like Ripple, R3CEV, Bankchain, TRUST and Sidechains are setting up exchanges based on the technology. ANZ is working with hyperledger and SWIFT GPII. Keep an eye out for more information there.
NINE REASONS WHY BANKS AREN’T USING BLOCKCHAIN
Still, it is early days for this technology. It’s doubtful you will see significant adoption in mainstream banking within next five years. Some of the reasons include:
• The banking industry is highly regulated and banks are naturally very cautious. Most of the big banks are piloting the technology and cautiously dipping their toes into the water.
• Scalability. Visa today handles about 2000 transactions every second. Blockchain for bitcoin is currently limited to four to seven transactions per second because the protocols in bitcoin limit the size of transactions blocks to 1mb. Obviously a major limitation, although some of those organisations mentioned above are working on solutions to scale blockchain. Bitshare, for example, claims to be able to process 100,000 TPS.
• Security. While extremely secure, the technology implementation of something like blockchain is unregulated. A group of individuals with gigantic computing power could theoretically establish their own chains as a definitive version and hijack the bitcoin block chain.
• Bitcoin implementation is decentralised and unregulated. This creates mistrust and if things go wrong, who do you sue? How do you implement compliance, anti-money laundering and know-your-customer regulations?
• The implementation and use of blockchain solutions are very new. There are also very few people who really understand it and what its capabilities and limitations really are.
• For blockchain technology to be effective it relies on cooperation and co-ordination. How likely is it banks all over the world competing for the same customers with similar products will choose to truly co-operate? One could argue they already have with SWIFT but this requires a standard for them to agree on and its early days for this to occur.
• Human nature has a big part to play in the adoption of anything new. The saying from the 1980’s, “No one ever got fired for buying IBM”, still applies, especially in highly risk averse regulated industries like banking.
Adopting blockchain-based payment processing will require leaps of faith and risk sadly very few will undertake at large scale until it’s necessary.
Let’s say you are a CIO’s who decides to take this leap of faith, who do you pick to take it with? Ripple, R3CEV, Bankchain, TRUST, Sidechains, Bitshare, HyperLedger, SWIFT GPII ? It’s early days and too soon to pick a winner. Beta or VHS ? USB3 vs Firewire vs Thunderbolt ? It may well be too soon to decide.
• Regulation could conceivably be part of the solution. The creation of a central governing body to regulate the financial services blockchain and its membership could help, but if history holds true, by the time this happens some new disruptive technology will probably be in place.
• While complex and costly, the current banking infrastructure that securely and safely transfers our money works very well. Unwinding this is unlikely to make it to the top of too many banks CEOs to-do lists in the short- to medium-term.
The world’s top 1000 banks earned over $US940 billion last year in profits. There are estimates floating about from Santander that banks can save $US20 billion if they used blockchain technology.
Given cost complexity and the time required to roll it out, something like blockchain globally on the scale of these figures puts the likelihood into perspective.
I’m sounding very pessimistic with that list but I’m just injecting a dose of reality into all the hype. Blockchain is and will be a revolutionary technology. Any financial institution (or anyone for that matter) in the trust business ignores blockchain at their own peril. It’s why most of the big banks are experimenting with it right now and why picking a standard at this point in time is not necessary.
What is important is solving the limitations the bitcoin implementation of blockchain has in order to allow mainstream adoption in Banking. ANZ are working on proof of concepts and with organisation like Hyperledger to design simpler, more effective and lower risk solutions.
NOT JUST FOR BANKS
The great thing is it’s not just banks that benefit from blockchain technology. If we look at the claimed capabilities the blockchain enables (transparency, security, availability and immutability) there are lots of industries which could and are benefiting from this already. A few examples are:
• Storing medical records. Imagine a national medical register that would allow any doctor anywhere in world could access to your details with your private key.
• Shipping companies are looking into it to create global shipping manifestos. Things would not go missing and this transparency could benefit customs and border controls.
• They could be used to create a global valuable items registry. Who owns that Rembrandt or Caravaggio painting? It could halt the sale of counterfeit art by allowing buyers to check a global registry they trust.
• There is a registry called Ever Ledger that has created a global registry of diamonds to help stop sale of conflict diamonds by storing lists of diamonds that have been certified.
• Guardtime, a company in Estonia, is using a version of blockchain to manage Estonian citizen data on behalf of the government.
• Artists, photographers and musicians could use it for copyright management. They could store hashed licences of their works in the blockchain. Any time they needed to prove work is theirs, they could run it through an encryption-hashing algorithm and until it matches one stored in the blockchain.
• Document vaults could store hashed data of original documents. These could then be reproduced anywhere in the world and be verified by signing them with the key stored in the blockchain. The legal industry is certainly watching this space.
• Share trading. Copies of trades could be kept on a public distributed ledger using block chain technology.
Obviously there are many potential uses of this technology. The key is finding problems that really need it.
If you have gotten this far, it’s likely you have more than enough information to appear like a blockchain expert to all but a very small portion of the population. You know what blockchain is, what is does and what it could do but not necessarily how it does it.
If you want to get a deeper understanding of how block chain enables secure, transparent and decentralised reconciliation of transactions and what the block and chain part of blockchain really mean, keep watching BlueNotes for our next blockchain story, where we will go deeper into the workings of bitcoin’s blockchain, including hashing, encryption keys, digital signing, proof-of-work and even merkle trees.
Christian Venter is, GM Consumer Digital Technology at ANZ