As the rise of cryptocurrency Bitcoin continues to spark investment interest (its value has increased over 1,700 percent this year alone, and has stirred up bulls as well as bears), chief executive officer Mortimer Singer of Marvin Traub Associates said he’s “more fascinated by the technology upon which Bitcoin is built — blockchain technology.”
WWD: What exactly is a ledger?
Marvin Traub Associates: A ledger is essentially a record of transactions. If you’ve ever balanced a checkbook, you’ve worked on a ledger. If you’ve ever entered transactions into a spreadsheet, you’ve prepared a ledger of sorts. Ledgers are most commonly associated with accounting functions; they have historically been used primarily by accountants to record financial transactions. While ledgers originally had a physical medium — clay, stone, paper, etc. — they have since evolved into digital mediums and are now kept on computers, spreadsheets and cloud-based applications.
WWD: So, how is that related to blockchain?
M.T.A.: While it sounds like a technology more suited for Wade Watts in the fiction novel “Ready Player One,” at its core, a blockchain is just a distributed digital ledger. The distributed element of blockchain is critical to understanding its revolutionary nature. The information kept on traditional digital ledgers is centralized somewhere, either locally on a computer or on a cloud-based system. Information on a blockchain, however, is not stored centrally; it is distributed across all participating computers (known as “nodes”) of the blockchain. Since the information is distributed across all of these nodes, and can therefore be audited at any point in time by any network participant, the records are easily verifiable. Additionally, no centralized version of the information exists for a hacker to corrupt. Hosted by all nodes simultaneously, a blockchain’s data is accessible to any participating node with an Internet connection.
One of the core functions that blockchain optimizes is the establishment of trust between counterparties. The current model for completing transactions does this in a fragmented way: requiring that each party keep their own set of records, which they each independently verify prior to executing a transaction, and/or also through the use of a third-party intermediary. One of blockchain’s technological innovations is its ability to establish trust without the need for local information storage or the use of an intermediary.
WWD: How does blockchain establish trust?
M.T.A.: Blockchain is designed to store information in a way that makes it virtually impossible to add, remove or change its data without being detected by other users. Once new information is recorded onto a blockchain, it is nearly impossible to change. This is why information on a blockchain is said to be immutable (unchangeable).
In simplest terms, transaction blocks are strung together in a way that new blocks have traces of the previous blocks encrypted in them, forming a chronological “chain” of blocks of information (transactions). If any one block in the chain is altered, the links in the chain are broken and the fraudulent transaction(s) can be easily identified by network participants. Additionally, changing the information on a blockchain requires the approval of a consensus of the blockchain’s users, making it extremely hard to add fraudulent or invalid information.
Today, counterparties often rely on a central authority such as a government, bank or a credit card clearinghouse to establish trust. Blockchain applications instead replace these centralized systems with decentralized ones, where verification comes from the consensus of multiple users. As it pertains to the Bitcoin Blockchain, the process of adding new blocks is as follows:
- New bitcoin transactions are broadcast to the blockchain network of nodes. Some of these nodes, known as miners, actually process these pending transactions on behalf of the bitcoin blockchain network. Providing this mining service is quite costly, and therefore these miners are compensated with transaction fees. When a miner has prepared a new block and submits it to be recorded on the Bitcoin blockchain, approval by at least 51 percent of nodes is required before the new block can be added to the chain.
- This effectively means that a hacker attacking Bitcoin would have to control a majority of the blockchain’s nodes in order to conduct such an attack. Given the scale of the current Bitcoin network, an attack of this kind is considered almost impossible as it would cost billions of dollars to execute.
- The distributed nature of blockchain’s transaction processing and verification process therefore creates additional security by requiring multiple network participants to execute new transactions.
These two key features of blockchain — security and decentralization — establish trust between counterparties and reduce the need for intermediaries. Reducing the number of intermediaries across supply chains reduces costs.
WWD: How is blockchain related to Bitcoin?
M.T.A.: Bitcoin first appeared in a 2008 white paper authored by a person, or persons using the pseudonym Satoshi Nakamoto. The white paper detailed a peer-to-peer digital cash technology called Bitcoin that allowed for online payments to be transferred directly, without an intermediary.
Bitcoin is a cryptocurrency that is based on blockchain technology. All bitcoin transactions are verified and recorded on the bitcoin blockchain protocol. Being the first and largest blockchain application by market value $270 billion and active users; Bitcoin has become synonymous with blockchain. However, Bitcoin is just one application of blockchain technology. There are actually now over 1,000 cryptocurrencies, all of which are based on blockchain.
WWD: What is Ethereum and how is it different from Bitcoin?
M.T.A.: Ethereum is the second-largest cryptocurrency by market capitalization. Ethereum currently has a market capitalization of approximately $55 billion (~20 percent the size of Bitcoin’s market capitalization). While the two cryptocurrencies are based on blockchain technology, they are quite different in terms of their purpose and capabilities. As defined earlier, Bitcoin’s singular application is that of a peer to peer electronic payment system. Ethereum however allows for developers to build and deploy any number of decentralized applications using its blockchain technology. In that sense, Ethereum is much closer to a blockchain platform than a blockchain with a singular application like Bitcoin is. One of the decentralized applications that can be built using Ethereum’s blockchain software platform are smart contracts.
WWD: And what exactly is a smart contract?
M.T.A.: A smart contract is a set of computer code that can be written to automatically execute once certain conditions have been met. Because smart contracts run on the blockchain, they run exactly as programmed. This is both their greatest strength and weakness. Smart contracts are inherently inflexible, they are automatically programmed to perform an action once certain conditions have been met. This prevents them therefore from containing clauses which include ambiguous language. Ambiguous language is a necessary element when perfect knowledge of future events isn’t possible. Unless smart contracts can evolve to include flexible language, they will be employed in specific environments where absolute rigidity isn’t a problem.
Bitcoin’s incredible price appreciation has captured most of the consumer mindshare and media coverage this year. We believe however that blockchain’s many other applications will ultimately have a more pronounced impact across industries. The technology behind Blockchain is pretty complex; we believe this is part of the reason that many players within the retail industry haven’t fully grasped how it will impact key pieces of the retail operating models that are in use today.