The Tech that Everyone’s Talking About, and How it Affects You

Bitcoin, cryptocurrencies and the blockchain technology which supports them have fast become some of the biggest talking points of the past year; bitcoin in particular has seen unheard-of climbs in value, with the price of a single coin increasing from around $1000 at the start of last year up to highs of almost $20,000 in mid-December, only to crash down to less than half this since the new year. Driven by financial speculation among other factors, these gains have clearly come at the cost of wild price fluctuations and the threat of a dangerously volatile bubble. So for anyone not already involved in these technologies, they could be forgiven for asking: ‘What is it? And how does it affect me?’

But part of what makes the technology so interesting is the effect it could have on a whole range of industries, almost anywhere that people can creatively put it to use. Its disruptive potential means that it should be of interest to almost everyone, not just those who follow finance and technology news.

 “Its disruptive potential means that it should be of interest to almost everyone, not just those who follow finance and technology news”

However, the terms used in any such discussion can seem confusing, and understanding precisely what they mean and the differences between them can be difficult when the technical side is undeniably complex. Therefore, we’ve put together this guide to take you through everything you need to know to follow the lively debates in this area, and understand how they might impact you.

 

Maybe it’ll even get you thinking about your own industry practices. Ever thought about becoming a disruptor yourself?

What is Bitcoin? (A Brief Overview)

The truth is that while Bitcoin may be the most familiar term to many, and is certainly the most frequently-mentioned, it is only one example of a range of digital currencies and assets known as ‘cryptocurrencies’. And although many have become aware of Bitcoin in the past year, or even the past few months, due to its rapid climbs in value and sharp drops, it’s been around a lot longer.

 

“The idea is to provide an alternative to traditional currencies backed by governments”

The word ‘cryptocurrency’ describes the sense in which these digital currencies are secured by advances in cryptography, the methods for keeping our information, data and communications safe and only accessible or changeable by the appropriate parties. The idea is to provide an alternative to traditional currencies backed by governments, one which can make unchangeable transactions across its network, securely and directly between users, and record them in a distributed ledger known as a blockchain.

Bitcoin is not the first attempt to make such a currency, but it was the first to be fully-realised in 2009; earlier attempts such as ‘b-money’ and ‘Bit Gold’ were not implemented. In fact, Bitcoin combines ideas and solves issues which go back further still, and takes place at the intersection of fields such as economics, communication, computer science, mathematics and more.

 

The first complete description of Bitcoin as a concept appeared in 2008, in a whitepaper entitled ‘Bitcoin: A Peer-to-Peer Electronic Cash System’. Posted to a cryptography mailing list, it was authored by someone claiming to be a Japanese man named Satoshi Nakamoto. Nakamoto would go on to set up and initiate the Bitcoin network, creating the first bitcoins in a process known as ‘mining’.

Satoshi Who?

A good question, and one which people have been asking for some time, without any conclusive answers. Satoshi Nakamoto is thought to be a pseudonym, and to this day their real identity remains a mystery; in fact, no one is sure if Nakamoto is one person at all, as some think Bitcoin must have been the work of a group of researchers.

 

Various individuals have been proposed as the person behind Bitcoin and blockchain technology, but all have been met with doubts and denials from the people themselves. Whoever it was, the breadth and depth of knowledge required to design and build Bitcoin makes the list of potential candidates a very short one.

The mystery of Nakamoto’s identity is only heightened by the fact that, as its creator, the stash of bitcoin they collected in the early days of the system would now secure them a place on a list of the world’s richest people. Estimated as owning over 1 million bitcoins, recent market highs would have put Nakamoto’s personal valuation at close to $20 Billion.

“The stash of bitcoin they collected in the early days of the system would now secure them a place on a list of the world’s richest people”

Tell Me More About the Blockchain…

It’s already been mentioned that Bitcoin relies on something known as blockchain. This is the central part of what Nakamoto first described in his paper, and the underlying technology which makes the creation and transfer of bitcoins possible. Before we go into this, we need to explain a little about how bitcoin and blockchain operates.

 

Normally currencies are controlled by a central authority such as the Federal Reserve in the US, or the Bank of England in the UK. These set monetary policy and therefore influence the supply of money in the economy. Meanwhile, other financial institutions such as commercial banks act as trusted third parties by conducting transactions between consumers and mediating disputes.

“The set of rules, the algorithm, which bitcoin operations follow, involves something known as a blockchain”

Bitcoin decentralizes these processes, which instead take place in the operations of the network itself. This is possible because the set of rules, the algorithm, which bitcoin operations follow, involves something known as a blockchain. This is the distributed ledger that lists all the transactions made up to that point, and the order in which they were made. The ‘blocks’ of which it consists could be compared to the individual pages of a ledger, following each other sequentially in a chain to form the ledger, or ‘blockchain’, in its entirety.

Each bitcoin itself is actually just a chain of digital signatures confirming the previous owner and the next, relying on cryptography to prove this and making it infeasible to alter. Each transaction is broadcast to the network along with proof of the time it was made. And because these proofs rely on the proofs of the previous transactions and are included in the blockchain when collected in each new ‘block’, they quickly become irreversible, even if someone tries to attack the network.

“Each bitcoin itself is actually just a chain of digital signatures confirming the previous owner and the next”

This is important because, without each payment moving through a central authority, it proves that each coin is only being spent once by each owner, solving the problem of ‘double-spending’ and making fraud and counterfeiting impossible. It also ensures that there is non-repudiation, a user cannot challenge that they made a transaction, as the proof that it was made using their private cryptographic key is included in the publicly-viewable chain as a digital signature which can’t be replicated.

And Mining?...

The process of validating and confirming the transactions in a block is what you may have heard referred to as ‘mining’. Essentially, this validation is the ‘reconciliation’ an accountant would normally undertake in a ledger. The first miner to successfully complete the validation of a block is rewarded with a set amount of bitcoins and all the miners move on to working on the next block. Because only the most recent, and longest, version of the blockchain is considered authoritative, the network can maintain a consensus about what transactions have occurred.

“An attacker seeking to subvert the network cannot change a previous block without redoing all the work that came after it”

This is thanks to something known as a ‘proof-of-work’ system, built into the mining process, which sets an arbitrary task requiring the processing power of the computer to satisfy a particular problem. This means an attacker seeking to subvert the network cannot change a previous block without redoing all the work that came after it. As the most recent version of the blockchain will have the most work invested in it, this gets very difficult very quickly; especially since the attacker would have to catch up and overtake the miners working honestly on the true blockchain.

Since working honestly on the blockchain comes with the reward of more bitcoins, the network incentivizes miners to do so, leaving little reason to invest so much computing power in trying to attack it. All this adds up to a clever consensus mechanism that maintains the integrity of the network.

So Everything is Decentralized?

Exactly, we’ve already mentioned that Bitcoin is decentralized, removing the need for central authorities such as national banks, reserves, or financial institutions. By adding new bitcoins into the network as the mining process verifies transactions, there is the controlled creation of more Bitcoin currency added to its virtual economy. This means there is a steady, pre-determined rate of inflation. In fact, because the generation of bitcoin is programmed to become harder over time, this inflation rate follows a consistent downward trend. Eventually it will hit zero, meaning no new coins will be created after the theoretical maximum of 21 Million bitcoins (excluding those which have been lost accidently or deliberately destroyed). From then on, mining work will be funded by transaction fees rather than the reward of new coins, all without the intervention of a singular governing body.

Being decentralized, Bitcoin is not tied to a specific state or national economy, meaning its use is completely voluntary, and without a ‘single point of failure’ the Bitcoin network is incredibly resilient. Once again, this was all the intention of its mysterious creator. In the wake of the 2008 Financial Crisis, Nakamoto saw the devastating effect that the collapse of financial institutions could have, often on people who were not its cause, motivating Nakamoto to figure out a viable alternative to more traditional currencies. Nakamoto even went so far as to code a message into the first block he mined in 2009, quoting a news piece from The Times warning of a second bailout for banks in the UK.

Bitcoin is not tied to a specific state or national economy, meaning its use is completely voluntary, and without a ‘single point of failure’ the Bitcoin network is incredibly resilient

“Criminal activities being facilitated via cryptocurrencies is certainly an issue, and one which regulators, banks and currency exchanges will have to work hard to contend with”

Unfortunately, there’s a flipside to all of this. Because Bitcoin, blockchain and its cryptographic underpinning provides verification between untrusted individuals, allowing for quick and anonymous transactions, the network has also become an enormous draw for criminal activities. Blackrock CEO Larry Fink went so far as to describe it as “an index of money laundering”. Criminal activities being facilitated via cryptocurrencies is certainly an issue, and one which regulators, banks and currency exchanges will have to work hard to contend with. Especially since bitcoin’s popularity means it’s effectively become a reserve currency among the many cryptocurrencies in circulation.

But What About the Bubble?

This is where things get uncertain, and it goes without saying that nothing stated here should be taken as financial advice. Following Bitcoin, there are now over 1,000 cryptocurrencies in circulation, some of which meet a specific need, and others whose purpose is less clear.

 

Confusingly, whether they have an obvious differentiator or not hasn’t always been an indicator of how successful they become (just look at ‘Dogecoin’, which started as a joke but recently broke $2 billion for its market cap). A lot of this is thanks to a rush from investors keen to grab a piece of a potentially lucrative market: few who would turn down the chance to invest in something that appreciates value at the rate bitcoin and other popular cryptocurrencies have over the last few years!

 

Aside from trading, cryptocurrency investment has primarily taken place via something known as Initial Coin Offerings (ICOs). These are similar to the Initial Public Offerings (IPOs) popular among startups, but venture capitalists buy the cryptocurrency linked to the project rather than conventional stocks, often in exchange for other more established cryptocurrencies like bitcoin rather than recognized legal tender.

Currently, ICOs are largely unregulated, which is part of their appeal over conventional IPOs, but one prediction we can make is that this is likely to change drastically over the next year as financial regulators catch up to the emerging technology. Aside from state regulation such as the potential ‘crackdowns’ in China and Korea, even Facebook has recently announced a ban on cryptocurrency advertising in an attempt to limit deceptive or fraudulent investment schemes operating through their platform. A precedent which other advertising platforms may soon follow. Faced with this prospect of increased regulation, investors are already starting to become more wary, something which has been reflected recently in some dramatic shifts in the market.

 

“Faced with this prospect of increased regulation, investors are already starting to become more wary, something which has been reflected recently in some dramatic shifts in the market”

It is because of issues such as this that some have been hesitant about the technology and cryptocurrencies in general. Larry Fink’s comments have been raised already, and J.P. Morgan CEO Jamie Dimon went as far as to call it “a fraud”, comparing it unfavourably to the infamous 17th century Dutch mania for tulip bulbs.

 

Interestingly though, Dimon has since backtracked on these comments, saying he “regret[s] making them”. While he is still hesitant about bitcoin itself, he is optimistic about the blockchain technology behind it, and suggests that Initial Coin Offerings be reviewed “individually”. So clearly he now thinks there’s something there in the technology worth pursuing.

“When even its critics are changing their mind, it’s clear that blockchain technology is being put to some interesting uses”

When even its critics are changing their mind, it’s clear that blockchain technology is being put to some interesting uses, and there are cryptocurrencies and startups with a clear purpose, working towards solutions for the bottlenecks which are likely to hinder bitcoin in the future.

One of the most popular is Ethereum, which provides a platform to run applications and ‘smart’ contracts with the assurance of a decentralized, always-on blockchain, secure from censorship, fraud, and other interferences. It’s easy to see how the democratic ideals of this project have got many people excited, but whether it’ll deliver a scalable and desirable alternative to current client-server models remains to be seen.

 

Another blockchain application which is making waves (sorry), particularly in finance circles, is Ripple. Billed as an alternative digital payment network, it’s fast, anonymized, and, crucially, interacts with traditional fiat currencies, as well as a selection of cryptocurrencies. In fact, it also has its own cryptocurrency, known as XRP. Treated as an asset, XRP can be converted to cash quickly and easily across the world, making it particularly useful for doing business in emerging markets. And similar to Bitcoin, the Ripple Network provides trust between users, avoiding the ‘double-spend’ problem.

What makes Ripple special, however, is its ability to settle transactions in under 5 seconds. Combined with their communications platform, Ripple hopes to replace systems such as SWIFT codes, becoming the standard for consumers, businesses and financial institutions to communicate and make payments around the world. Again, whether all this pays off is yet to be seen, and getting sufficient buy-in for their platform from clients and users will decide if Ripple maintains its success in real-world terms.

“Combined with their communications platform, Ripple hopes to replace systems such as SWIFT codes”

What we can take from all this, and from examples such as Ripple and Ethereum in particular, is that regardless of whether Bitcoin survives the storm of an over-eager market (and it certainly has been stormy of late!), blockchain technology is here to stay, and the innovations it makes possible are only just beginning to be realised.

How Does This Affect My Industry?

Hopefully you’ve found all this information useful so far, and feel confident you have a better understanding of where this emerging technology is at now and how we got here. With this in mind, we can turn to how blockchain is set to affect you and your industry directly.

 

Of course, writing about the future is difficult, and as we’ve seen, cryptocurrencies and blockchain are fast-moving technologies with a tendency to outpace anyone trying to make predictions. As quickly as something’s written, the market has shifted in unpredictable and unexpected ways.

 

Nevertheless, talking about what the future might look like for blockchain isn’t impossible, and aside from more regulation for cryptocurrency markets and Initial Coin Offerings, there are some things we can say about use of the technology itself.

“If you can think of how a distributed ledger could be useful to your industry, you’ve already thought of a use for blockchain technology”

Firstly, perhaps the key idea to take away from everything so far is: if you can think of how a distributed ledger could be useful to your industry, you’ve already thought of a use for blockchain technology.

Many industries rely on auditable trails, secure supply chains and trusted interactions. The immutable data recording of a blockchain provides a resilient solution to all these issues. It can’t be taken offline or retrospectively changed; yet it is accessible to multiple users and creates trust between them. All while validating their identity (anonymized or not) and the precise time and nature of any interactions they are involved in.

How About An Example?

You can begin to see how this becomes applicable to countless industries at almost every level, but let’s take a real world example: UK-based startup Qadre. They work on a number of blockchain development, implementation and consultancy projects, but for now we’ll stick to their work on supply chains in the pharmaceutical industry.

Healthcare is a global business, and making sure that medicines get to where they’re needed without being diverted, tampered with or stolen is vital. But this can be difficult when supply chains stretch across continents, and counterfeiting and theft along global supply routes is rife, creating a problem which is both costly and dangerous. The solution Qadre proposes combines their proprietary blockchain system with physical tagging to securely link the digital identity to the real-world pharmaceutical product. The blockchain records all the movements and exchanges that the shipment goes through in its journey from the factory to the legitimate customer.

Controlled access to this distributed ledger keeps the process transparent and means that errors or potential illicit activities are picked up quickly, pinpointing precisely where and when they’ve occurred, and who’s responsible. This increases confidence and accountability in the integrity of the supply chain while lowering costs, to the benefit of manufacturers, consumers and intermediaries alike.

“Errors or potential illicit activities are picked up quickly, pinpointing precisely where and when they’ve occurred, and who’s responsible”

Of course, this is only one example from a whole host of applications set to affect end-users and processes around the world. For instance, creating trust in supply chains is equally applicable to the luxury goods market, and Qadre utilises their blockchain solution here also (among other areas).

“The benefits of blockchain and distributed ledgers can be leveraged in diverse existing industries, not just the financial sector”

Pharmaceuticals and luxury goods are only two examples, and we’ve only shown one way in which blockchain technology can be used; but the important thing to take from this is how the benefits of blockchain and distributed ledgers can be leveraged in diverse existing industries, not just the financial sector.

Final Thoughts (Global Payroll, Mobility, Expense Management & Beyond)

First off, thanks for getting this far, and we hope you’ve enjoyed learning about a technology which is sure to change the way you work in the future. Here at EMS we provide innovative solutions across Global Payroll, Mobility, and Expense Management, so the benefits of blockchain are clear. Who in our industry wouldn’t want access to a shared ledger with secure, high-trust, immutable data recording?

 

But the way that technologies shake up industries isn’t always how we expect, and the financial uses that, at first, seem most obvious for blockchain or associated cryptocurrencies such as bitcoin may not be where they have the most impact. Projects like Ethereum and Ripple have promise, but hopefully the use case of Qadre and pharmaceutical supply chains has displayed how diverse the possibilities are; and of course, that goes for all the industries we work with or are involved in here at EMS too.

As we’ve said already: if you can think of a use for a distributed ledger, you’ve already thought of a use for blockchain. But don’t worry if not, blockchain is in its early days still, and it’ll take a lot of work to figure out how to best put it to use. People are only just beginning to think about where it can be leveraged to improve existing processes or invent new ones, and most of the work and innovation is ahead of us, not behind us, whatever the cryptocurrency markets might suggest.

“Most of the work and innovation is ahead of us, not behind us, whatever the cryptocurrency markets might suggest”

So what can we take from all this? Hopefully you too can now see why blockchain is an area to watch, and has so much more to offer than just bitcoin and an ever-changing market. This guide should have given you the knowledge you need to follow these debates and developments with keen interest. It may have even set you thinking about how these technologies could shake up the processes in your workplace, and we hope it has! At EMS, we firmly believe that the future lies in innovation, finding new and better solutions for the tasks we deal with every day. Blockchain offers the chance to do just this, it gives us new ways to think about the processes we use, and we hope you find this just as inspiring as we do.


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