The next gold rush is here and it’s all about Blockchain. 160 years ago, people flocked to the Fraser River to find gold. Now people are using their computers to mine for ‘gold’. What is happening now has many similarities to British Columbia gold rush era of 1858-1865.
The race is on for a new internet where people can exchange assets directly with each other. Very soon, our money and banking systems could radically change.
Blockchain – how it started
Bitcoin and other types of virtual money called cryptocurrency can be exchanged via the internet without any need for banks. How does it work? Can you trust it? These cryptocurrencies are based on an open source concept called blockchain. What’s blockchain you ask? It started out as an experiment on how to exchange virtual money without the need for banks to verify what’s in your account. Banks provide a ‘trust’ service. You trust banks to keep your money and businesses rely on banks to provide correct information so they can get paid. Banks keep their own ledgers with everyone’s information.
In order to have a peer to peer exchange system, there has to be a way to set up a trust system and a public ledger that can’t be changed. How to do that?
Trust and Consensus – the Byzantine Generals Problem
The founders of blockchain set out to solve a problem called the Byzantine Generals Problem where, in order to successfully coordinate an attack, the generals had to accomplish two things: trust and consenus. How to establish that trust when the generals are stationed far away from each other? In the Byzantine era the only mode of communication was via messengers on horseback. How to keep those messages from falling into enemy hands?
One of the age-old methods of sending messages back then was to jumble the messages in a way that only the sender and receiver would know how to read them. The receiver would have their ‘key’ and if the message could be decoded, then success! A similar idea is already being used today with two factor authentication.
The second thing blockchain solves is consensus. That’s done by keeping an open ledger that can’t be changed. Back in the gold rush days gold seekers used to post their claims on a tree or in some public area. Often times it took weeks for the gold commissioner to travel to the creeks and officially record the claims. In the meantime the miners had to reach consensus on their own.
Pitfalls of Blockchain
Blockchain is a great idea, but there are several drawbacks that haven’t been worked out yet. One of the main problems is that it requires enormous amounts of energy. Take Bitcoin, for example. There are all these computers around the world running 24/7 trying to find the elusive keys to verify a transaction. Each computer is given a block of transactions to figure out and the first computer that solves their entire block first, wins bitcoins and has their block added to the official chain. The other computers might have almost finished, but everything gets tossed back regardless. It’s like those captcha forms on a timer. Tick off all the squares that contain traffic lights. If you miss one blurry corner, you’re presented with an entire new set of buses to look for.
Last year, a couple of Texans came out with Hashgraph which solves the problems of trust and consensus with gossip and voting algorithms. It’s lightning fast and so lightweight it can run on a smartphone. Unfortunately, Hashgraph isn’t open-source. And guess what? One of the first companies to use Hashgraph is a bank.