The technology behind cryptocurrencies is called a “blockchain”, a continuously growing public ledger that tracks who owns which virtual coins. Imagine that, instead of a bank, there was simply a shared google spreadsheet with account names and account balances. That’s the blockchain. No single computer stores the blockchain alone, and no single entity owns the blockchain. Instead, the blockchain is distributed over a network of computers, which synchronize copies of the blockchain amongst themselves. Anyone can add their computer to this network.
Despite the public, distributed nature of the blockchain, clever cryptographic technology makes the system more secure than even government systems. It’s computationally impossible to transfer ownership of bitcoins in the blockchain without an account owner’s private key, which works like a password. This means that only the owner of a bitcoin can transfer that bitcoin to another virtual account. The system relies on “miner” computers, which are incentived to keep the system running in exchange for completing the computational grunt work that keeps the blockchain system active. As compensation, miners earn bitcoins.
Ethereum, an emerging cryptocurrency alternative to Bitcoin, allows users to transfer cryptocurrency with self-enforcing terms defined in “Smart Contracts”. A smart contract transfers currency automatically when certain conditions are met. This allows currency exchanges to take place without an intermediary. No centralized bank, government, or company is needed to mediate between parties.
Using the smart contract system, Initial Coin Offerings (ICOs) on Ethereum have emerged as a new way to fund Blockchain-based startups. ICOs are swelling in size. An Israeli cryptocurrency startup called Bancor recently raised a record breaking $153 million in an Ethereum ICO.
Self-enforcing smart contracts have the potential to make many middle-men and their overhead costs obsolete. Instead of Uber standing between drivers and riders, collecting fees, a smart contract could transfer payments automatically when a GPS chip in the driver’s car reached the rider’s destination. Imagine a decentralized Uber, eBay, or Facebook owned by the masses, with a fraction of the overhead cost.=
Blockchains’ security and decentralization promises to revolutionize how business networks operate. With over 90 central banks engaged in blockchain discussions worldwide, the internet is on the brink of change.