Image Courtesy: igor.stevanovic / Shutterstock

Image Courtesy: igor.stevanovic / Shutterstock

Bitcoin has been the focus of media and regulators globally, for the simple fact that its decentralised nature and disruptive impact upon the financial infrastructure of the world brings tremendous changes to established conventions. Power is shifted away from financial institutions and distributed across a vast network of peers that acts as a consensus engine.

This democratises the very nature of the financial system, reducing the power of the oligopolies that control the financial system. However, the true potential of Bitcoin lies not in the ability to disrupt the financial ecosystem, but that of the Bitcoin protocol.

Bitcoin is more than just an encrypted digital payment method. Bitcoin is based around a public ledger system — the blockchain — which uses cryptography to validate transactions. Bitcoin users control access to their Bitcoin wallets through a system of public and  private keys. As such, Bitcoin is an open source peer-to-peer (P2P) channel that doesn’t compromise privacy and security.

Also Read: Back to the basics: What is Bitcoin?

Payment applications of Bitcoin have been evaluated in-depth, remittances, micropayments, and donations being among the financial transactions focussed upon. The Bitcoin protocol conceptually disrupts systems reliant on networks of intermediaries and agents for validation and trust. Two sectors subject to this are asset transferrals and contracts. Practically any system requiring validated transactions and using intermediaries to vet them are vulnerable to this.

Asset transferrals
The Bitcoin protocol, or any conceptually similar protocol,  potentially simplify asset transfers. Most asset transfers require significant energy to execute. This is because of due diligence and compliance requirements, as well as vetting and validation by various parties. Purchasing cars, boats or houses from individual sellers often requires intermediaries performing due diligence and maintaining compliance with legal requirements.

A blockchain alters this by qualifying how Bitcoins or equivalent digital tokens represent tangible assets. Bitcoin entrepreneurs at firms like Colored Coin are developing methods using Bitcoin fractions to symbolise physical objects. This digital fraction can then publicly identify and denote asset ownership, optionally including records of past ownership, transactions and other relevant data.

For example, if purchasing real estate, new owners could verify renovation(s), prior ownership and inspections by reference to the blockchain. If buying a user vehicle, owners could refer to the blockchain for insurance details and other relevant data assigned to it. Ownership could be transferred and titles validated on-site. This would have repercussions for industries reliant on networks of intermediaries to facilitate and validate transactions.

Blockchain approaches create efficient and simple mechanism enabling administrative simplicity and elegant functionality — allowing direct asset transfers without using brokers, lawyers, notaries or other intermediaries to vet, validate and verify transactions. The details of the transaction are locked into the blockchain and available to the public for review at their discretion.

Also Read: Challenges and opportunities for Bitcoin startups

Contract implementation
Bitcoin protocols impact the structuring and implementation of contracts, bringing greater economic efficiency and legal transparency to otherwise opaque practices in specific markets. Lawyers draft contracts on a case-by-case basis, with significant energy devoted to the process: negotiation, development and enforcement.

Contract-based markets often lack transparency and maintain a level of opacity, with a power inequality problem between contract holders and signers, reducing market efficiency and potentially creating distribution and justice problems in such markets. Traditional contracts are replaced by software code instead, which executes when triggered by specific conditions.

For example, options could be developed to execute trades over the blockchain at a specified time or in reaction to financial markets reaching specific conditions. One benefit is reducing legal fees, as these contracts could be standardised and distributed as open source templates. Financial markets would become transparent, as regulators and analysts could access the blockchain, without forcing the disclosure of specific positions.

Ventures like Ethereum are developing these capabilities today. Ethereum is in the process of developing a network serving as a registry and escrow. This network will execute contract conditions automatically, if and when they fulfill a rule set.

Rather than forking Bitcoin in an attempt to tailor it towards specific industries or applications, Ethereum is designed as a separate and alternative cryptocurrency network that resolves issues with Bitcoin’s scalability and efficiency. Ethereum contracts are  modelled as autonomous agents simulated by the blockchain. Each contract has an internal script, with scripting code activated when a transaction occurs.

Proof of Existence has created a similar system to certify and validate documents. Using the blockchain, it provides online, distributed proof for documents secured using a cryptographic digest of the file, but not the file or information itself. This is time-stamped and certifies the existence of the document in a public ledger, using a decentralised certification based on the Bitcoin network.

Property and contracts are just some areas that the P2P nature of the Bitcoin protocol will affect. Achieving wider adoption requires Bitcoin and its advocates to address significant questions and concerns regarding trust, ease-of-use and functionality. However, the Bitcoin community is showing remarkable adaptability, with many working to ameliorate problems and educate the public.

There will be significant innovation and development centred around the Bitcoin ecosystem in the years to come. Much of this will initially revolve around payments, investments and financial systems. Its real value, though, lies in the decentralisation and disruption it promises.

Also Read: Bitcoin: Beyond the fear and media hype