A history of Bitcoin

The concept of bitcoin started with the idea that a ownerless, open-source transparent decentralized currency, backed by cryptography, could dramatically improve upon government-backed fiat currencies. It was pioneered by the Cypherpunk electronic mailing list, a group of mathematically-minded libertarians and anarchists concerned about the loss of privacy and institutional overreach by banks and governments. Members of this community experimented with several cryptographic-based currencies, such as Crash, digicash, hash cash, and bit gold. But, all these experimental currencies still required a centralized authority which was subject to being a single point of vulnerability and its own overreach.

There was also the so-called “double spend” problem – in an environment of distributed money, there is no single source of truth regarding the ledger for the currency and it’s very difficult to ensure that the owner hasn’t spent it in more than one place.

Satoshi Yakamoto, a shadowy anonymous figure who has never been identified, published the Bitcoin white paper in 2008, which solved the double-spend problem and ingeniously devised a distributed ledger that prevents the high-jacking of the network by those with the most computing power. One of the guiding principles of bitcoin is that, much like the historical gold standard, the currency is not subject to being debased, or having its value manipulated by central banks.

This radical response to the fundamental lack of trust in central authorities is a decentralized system, ownerless, open source, fully transparent, and supported by advanced cryptography. With this scheme, money becomes more efficient, there are fewer fees and less overhead. It is possible to transform to a world of straight-through processing, with no single point of vulnerability or failure.

Bitcoins can be thought of as entries in a ledger, analogous to “rai stones” on the Island of Yap. Rai stones were huge limestone discs, up to 12 feet across and weighing up to four tons, that were used as money on the Pacific Island island of Yap, as early as 1000 AD and as recently as the late nineteenth century. The stones were so large it was impractical to move them, so people kept track through oral history of who owned each one. The complete ownership history of each stone was recorded through this oral ledger, even though the stones themselves never moved.

Yap stone, British Museum, London (Wikipedia)

In this same way, the Bitcoin protocol is a public ledger that records the ownership of each bitcoin. This ledger is shared among all the computers on the bitcoin network, and each transaction is checked using cryptographic puzzles. The puzzle is a computationally-intensive hash algorithm that solves for a “nonce,” a random number with the correct number of leading zeros. The first computer that solves the puzzle, verifying and approving the transaction, is paid with newly created bitcoins. Then, if 51% of the other computers agree with the solution, the transaction is entered on the ledger, also known as blockchain. That is why it is known as a “consensus network” enabling a new payment system and a new form of digital money, also known as “crypto-currency.”

Bitcoin’s network has far, far more computing power versus the 500 fastest supercomputers in the world. It comprises of a crowd-owned, public, transparent, safe and transaction system impervious to attack. It is the first decentralized, user-driven peer-to-peer payment network functioning without a central authority. Each bitcoin is a unique number. Once spent, they are entered into the ledger and cannot be used again. There are a fixed number of new bitcoins generated daily, decreasing slightly, maxing out in 2140 at 21 million.

Experts believe that blockchain may be as transformational as the Internet itself. Blockchain enables numerous use cases and could replace centralized banking platforms and systems of authority. We haved evolved from information to value exchange from the World Wide Web to the Internet of value.

Read more about the homogenization of payments is unlocking new potentials for better add-on services in the payments industry Read the latest trends in the payments industry in the World Payments Report 2015

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The Evolution of Crypto-currency

“Think about the blockchain as another class of thing, like the Internet − a comprehensive information technology with tiered technical levels and multiple classes of applications for any form of asset registry, inventory, and exchange, including every area of finance, economics, and money. In fact it is even more, the blockchain concept is a new organizing paradigm.”

Melanie Swan, Institute for Blockchain Studies

Welcome to the wondrous world of the complex, yet highly imaginative crypto-economy. The world of blockchain and bitcoin, of miners, sandboxes and hashes. If you are not familiar with this subject yet you may easily fall under the spell of fascinating and fast-growing crypto-environments. And even if you have already made a study of the subject, some elements of the crypto- economy may remain mysterious, and intangible.

Imagine that with every transaction you execute on the internet, a notary looks over your shoulder to make sure that nothing is wrong. That would be a very costly affair indeed. But it is an entirely different matter if it could be computerized. What you have then is the possibility of frictionless business as the control is already embedded in the transaction. This may well be the key to lots of new possibilities. Such a system exists. It is called blockchain, a strong chain without weak links offering a solution to numerous actual problems within the digital economy.

The potential impact of this new application can be seen in three waves.

Crypto-economy 1.0

This first concerns different currencies and financial transactions, not just bitcoin. There are more than 700 currencies recorded at the “Map of Coins” website. These currencies promise to change the speed and mechanics of moving money.

Crypto-economy 2.0

The second wave will explore other possibilities of the blockchain, also called “bitcoin without bitcoin.” This concerns two kinds of uses in particular: smart contracts and smart products, and how the economy can be made to run more smoothly. In other words, how waste can be stamped out.

Crypto-economy 3.0

Now let your imagination run wild in the crypto-economy 3.0. Imagine DACs (Decentralized Autonomous Corporations), also called Robocorps. Imagine an Internet of Things scenario, where objects are increasingly getting a freehand to make decisions and stimulate the economy: a potential forerunner of a zero-marginal cost society. In such a case, blockchain will be part of a collaborative commons, an advanced form of blockchain technology in society.

Menno van Doorn
Director of the Sogeti Research Institute for the Analysis of New Technology (VINT)

Download our new report Blockchain, Cryptoplatform for a frictionless economy

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Bitcoin basics: How it works

“The first five times you think you understand it, you don’t,” Dan Kaminsky, American Security Researcher

Here’s a simple example of how a bitcoin transaction takes place.

 

The Internet of Money

“It’s a significant innovation that could transform the financial system more generally.” The Bank of England

“Innovations in network technology and cryptography could change the speed and mechanics of moving money.” Goldman Sachs

As currency, crypto-currency can be compared with “Uber for the financial sector” a bank without branches and offices, like a taxi-control center without the control center.

Although anyone with a PC can participate in bitcoin mining, modern bitcoin mining operations use specialized equipment known as Application Specific Integrated Circuits – ASICs – that are optimized to bitcoin mining. One example of a modern bitcoin mine, ASICMiner, is located in a secret location in Hong Kong’s Kwai Chung district.

A simple transaction comparison demonstrates the contention that bitcoin is more efficient. Comparing a credit card transaction to a bitcoin transaction, the credit card-accepting merchant receives the transaction minus the merchant discount rate, which can be as high as 3%, and the cardholder is subject to fees and interest. A typical bitcoin transaction has no bank intermediary and the fee is as low as 0.3%. Bitcoin enthusiasts point out that cryptocurrencies remove the middleman and result in straight-through transactions that are up to ten times more efficient.

Although Bitcoin itself has suffered from speculation, association with criminal activity, and hacking, the evolution of the technology has just begun. Bitcoin has already surpassed Western Union in volume, but it has a long way to catch up with Visa, which is still sixty time bigger.

How Bitcoin Stacks up Against Other Payment Networks (average daily transaction volume in $mm USD) (Statistica, Coinometrics)

Bitcoin offers advantages of ubiquity and low fees, but suffers from a lack of maturity. As shown in the table, bitcoin is nearly free and allows one to payment anyone in a transparent and neutral way, but is not widely accepted. Bitcoin has been subject to volatility and association with dubious and illegal practices. Bitcoins can be – and certainly have been – lost or stolen. There is no recourse once you’ve misplaced your private keys. Regulators are working through how to manage oversight of potential illegal activity and consumer protection.

“The first phase of Bitcoin was about installing an infrastructure – gateways, wallets, development platforms, etc… The next phase involves building native bitcoin applications which will ensure bitcoin becomes mainstream,” Fred Wilson, Union Square Ventures

Crypto-Technology Landscape (©William Mougayar, 2014 )

Blockchain started with coins, and recently there has been an explosion of innovation around asset registry and application stacks. Insights into the future of blockchain technology are illustrated by analyst, William Mougayar, categorizing them into applications, middleware and ancillary services, infrastructure and platforms. He says the bulk of the innovation to date has been with exchanges, wallets and trading. Blockchain is the missing jigsaw price for the Internet of Value - allowing real money, commodities, assets to change hands at minimum friction.

Large commercial and investment banks around the world have announced experiments and tests around blockchain, bitcoin and permissioned ledgers. We believe that banks ignore at the technology at their peril. This is the “Innovator’s Dilemma” - disruptive technologies are typically dismissed by entrenched market leaders because they initially underperform existing technologies and undershoot customer needs. Then, just as with cell phones, digital photography, streaming music and Wikipedia, technologies improve rapidly and have a greater impact than anticipated because of complementary network effects.

We believe it’s critical for banks to get in the game by creating a portfolio of initiatives ranging from table stakes to specialized bets. To do so, forecasting is insufficient – we need to understand the range of possibilities so as not to place a bet that cuts off a future path, such as assuming that bitcoin is merely a fad, and then be willing to fail quickly.

Read the latest trends in retail banking in the World Retail Banking Report 2015
Read more about bitcoin for bankers

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The Future of Storage - Blockchain Gives You the Keys

Blockchain of Events

This powerful decentralization technology has the opportunity to disrupt well beyond the financial services world that it is often synonymous with. From healthcare, law & legal, insurance, telecommunication to the access economy, the internet of things, and cloud computing, just to name a few.

What are the use cases in the data world? We live in a period of exponential data growth with ever increasing storage needs, all the while maintaining data confidentiality, integrity and, availability to secure business value (and of course in the interest of individual privacy). So what does the future of cloud storage look like? How can the storage benefit from Blockchain technology?

The possibility of having to chase goods that have been rerouted back to the depot is a barrier to shopping online. Market analysts believe that until the industry can remove the final friction from last-mile services (including much convenient handling of returns) online retail will fail to reach its full potential.

Is My Data Mine?

In any sector where the research & development (R&D) of future products is critical to the future of a business there is an every foreboding risk of your central storage repositories being compromized. When you become the victim of a targeted attack and lose your assets you risk losing years of vital data that is your intellectual property, your future business value.

Let’s take the pharmaceutical sector as an example, the average time to develop a new drug is more than 10 years with the average cost at approximately $2.6Bn. These numbers are staggering, how much does this sector risk losing once they become the victim of an attack on their lifeblood - their R&D repository. There has to be another way…

Blockchain Your Storage

A use case that Blockchain presents is the concept of distributing your data across a vast network. For example, what if your files were encrypted on the client-side, split into chunks and then distributed across a vast Blockchain powered storage network where the storage space itself is unlimited - provided by many public cloud providers, or even individual users renting their spare capacity. No central server, no central control and the power is with the user (or the enterprise) - they have the keys to unlock the encryption.

This vision for a distributed R&D store might look a lot like the combination of Factom and Storj - a startup that establishes a decentralized and secure cloud storage platform that doesn’t have downtime, eliminates third party oversight, and removes central control. It achieves this by using the Blockchain as a transaction ledger applying encryption for security needs.

What Does Blockchain Hold

There is little doubt that data is the future, it is truly the new oil for business value. As a result of Blockchain we are likely to see a rise in Data-as-a-Service (DaaS) offerings from service providers, though this will begin in the start-up scene. The concept of a Blockchain powered DaaS has three core advantages:
  • 1. Storage Cost - An autonomous decentralized storage system would reduce the cost of storage significantly by eliminating the expense of centralized services: facilities, people, operations, hardware, regulatory and legal, etc.
  • 2. Security - Client-side encryption will always reign supreme to server-side, why give someone else the keys?
  • 3. Speed - The scale of a true decentralized peer-to-peer network for storage would be vastly superior to a centralized server.

The Mindshift Challenge

This way of thinking about storage will require a complete mindshift in today’s traditional approach, it may sound ridiculous spreading your data across many cloud storage providers - but how is this any more ridiculous than storing it in a single place?

How can enterprises start making steps towards this vision? Look to the Invisible Infostructure coupled with Blockchain technology to envision secure and reliable access to data mixing old and new deployment models. Storage technology solutions should follow this mantra and remain invisible and support you focusing on your business outcomes. How can the future power of Cloud and Blockchain enable such a transformation? What can you do today? Consider where your data is stored and the level of trust you place in your cloud providers and start to investigate Bring Your Own Encryption options that can increase your confidence in public cloud storage solutions.

Leo Kennedy
Technology Consultant, Infrastructure Services CTO Office

Read more about the design principle Invisible Infostructure in TechnoVision 2015

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Security Collapse in the HTTPS Market

“All things of value are helpless” is a famous line from a poem by the multitalented Dutch artist Lucebert. It’s even more true if you know where to look. Back in the old days, you just picked a suitable bank if you wanted to rob money. Nowadays, you would hack IDs: passwords, credit card numbers and other personal data conveniently, via email providers. To do this on a large scale, you would for instance attack a CA, a Certificate Authority.

Security Collapse in the HTTPS Market

In 2011, Comodo was hacked and so was DigiNotar, a Dutch commercial CA. This heist led to massive email hacks and other security violations. Trustwave was targeted in 2012. These are just a few examples of a widespread practice in many guises that keep stirring up emotion and analysis. The whole system of Trusted Third Parties, CAs, Public Key Infrastructures and protocols like HTTPS seems compromized, and this is no news as there is ample evidence since 2000 and before.

In October 2014, Communications of the ACM featured the article ‘Security Collapse in the HTTPS Market’ by experts from the Dutch University TU Delft that concluded: “Widely reported security incidents — such as DigiNotar’s breach, Apple’s #gotofail, and OpenSSL’s Heartbleed — have exposed systemic security vulnerabilities of HTTPS to a global audience. Then came Edward Snowden. HTTPS is both a major target of government hacking and eavesdropping, as well as an effective measure against dragnet content surveillance when Internet traffic traverses global networks. HTTPS, in short, is an absolutely critical but fundamentally flawed cybersecurity technology.”

System Error

The rigorous answer to this ‘System Error’ is a mix of append-only decentralization and replication. Luckily, we have a new kid on the block that listens to the name ‘Blockchain.’ This basic mechanism can provide a solid chain, so to speak, without an obvious weak link that begs to be broken. Just visit the website blockchain.info to see the system in its full glory, displaying the mining of the so-called ‘Bitcoins’ from the public transaction database. Everything is open, honest, and traceable.

Now, if we for a moment forget about the money, since the Bitcoin application is only a simple proof of concept demonstrating that the Blockchain mechanism is very much able to do its trick, then it would be quite conceivable for the Blockchain to be the foundation of economic transactions in general, based on well secured identity management. This is how Fromknecht, Velicanu, and Yakoubov, all from the Massachussetts Institute of Technology, described the potential in November 2014, related to the dire state of the TTP/CA/PKI/HTTPS system:

“Public Key Infrastructures (PKIs) enable users to look up and verify one another’s public keys based on identities. Current approaches to PKIs are vulnerable because they do not offer suffciently strong guarantees of identity retention; that is, they do not effectively prevent one user from registering a public key under another’s already-registered identity. In this paper, we leverage the consistency guarantees provided by cryptocurrencies such as Bitcoin and Namecoin to build a PKI that ensures identity retention. Our system, called Certcoin, has no central authority and thus requires the use of secure distributed dictionary data structures to provide efficient support for key lookup.”

The Internet of Things

We keep connecting so many different digital devices — from toothbrushes to turbines, smart homes, production plants, phones and connected cars (aka “smartphones on wheels”) — that there are terms for it: the Internet of things (IoT) and the Industrial IoT (IIoT or Industrial Internet). Therefore IBM and Samsung created their new Adept platform that for example allows a machine or system to detect a failing part and order a replacement. Adept is built on the distributed blockchain database as a fast and (more) secure way to connect physical objects. So apart from things of value being less helpless and overcoming the fundamental flaws of TTP/CA/PKI/HTTPS based systems, blockchain also may well be the missing link to multi-billion (more) secure IoT/IIoT connections.

Jaap Bloem
Principal Analyst at VINT

Read more on how Blockchain is changing the world as we know it

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Yo CIO! Do you understand the blockchain?

Last week I had a dinner with a CIO and I asked him what he knew about the blockchain, and he replied “nothing”. It gave me the opportunity to do an 8-minute pitch. During these eight minutes he said nothing, which is quite remarkable if you knew this person. Afterwards he looked at me and said, “So you’re basically saying that this is a new way of getting rid of all the waste in the system?”

And he was quite right of course, although we didn’t frame it this way yet. I asked him, “How would you start this in your company?”. He gave it some thought and then replied, “We will do nothing unless we understand more on what it is”. And although that sounded reasonable, it made me think what he could do to get a better understanding.

This CIO is very much into CMM levels. So here’s four ideas to get a better understanding of the blockchain in a CMM kind of way:

1. Easy: Open a bitcoin account

2. Watch: “Life on Bitcoin”

An easy way to get into the reality of the crypto-economy is watching “lifeonbitcoin.com” Can a newly married couple survive by only using “cryptocurrency”?

Another one : Morgan Spurlock, who did a documentary on living on hamburgers (super size me), also did a documentary on living on bitcoins for CNN, but quite hard to find it on the web.

3. Advanced: Read “Consensus as a service”

This reportassumes that the reader is already familiar with Bitcoin (the blockchain) and bitcoin (the commodity, currency or asset). If you are unfamiliar with these concepts, then some of the vocabulary, concepts and analogies may not make sense. The purpose of this short report is to describe the divergence between ‘permissionless’ cryptocurrency systems (such as Bitcoin, Ethereum, Peercoin) and ‘permissioned’ distributed ledger systems (such as Ripple, Hyperledger).

4. Serious: Open a Research Lab like UBS

Swiss banking giant UBS is opening a technology lab in London to explore how blockchain technology can be used in financial services. The lab will bring together technology experts from the bank and the wider fintech community, UBS said. Lab members and invited guests will experiment with how blockchain — the underlying technology behind bitcoin — can be adapted to process a wide range of financial transactions in a more efficient and cost-effective way, the bank said.

These are just four way to get started, but I’m interested in your ideas. What would your advice be for this “blockchain for CIOs” list?

Menno Van Doorn
Director of the Sogeti Research Institute for the Analysis of New Technology (VINT)

Read about the state of Bitcoin in Q1 2015

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Introducing Capgemini’s Own Digital Crypto-currency

On Sept 4th 2015, we launched SRTCoin (Satoshi Roundtable Coin) with the aim to experiment, test and learn about crypto-currencies and we invite you to take part.

SRTCoin can be accessed using the Web-based Counterwallet. The instructions are very simple. In a matter of two minutes you can setup a wallet and send or receive crypto-currencies.

How can I earn SRT coins?

Take part in “Proof of listening”: attend our the Satoshi Roundtable calls (every Thursday 8-9 AM ET) and listen out for the “Magic Word”. This is a secret word code that will be mentioned during every call.

To receive the coins in your CounterWallet, you need to send the “Magic Word” to one of our volunteers and voila, you have earned your first SRT coins. It is that simple.

Every week we distribute 10,000 SRT. However, the more people who listen, the less coins each person may get, but .. it is about creating an experience after all and sharing the wealth. Spoiler alert: you will not get rich.

Another way to earn coins is “Proof of Participation”: Participate in our Bitcoin & Blockchain related events, accelerators and publishing of materials to support our team of blockchain volunteers. Earn SRT based on bounties available for volunteers who help out such as these examples with more to come in the future:

  • Research and development of a “Blockchain API reference guide”: 100,000 SRT Bounty
  • Developing a Proof of Concept for Identity Management on the blockchain : 50,000 SRT Bounty
  • Speaking role at Satoshi Roundtable : 10,000 SRT Bounty

And what if I want to create a Crypto-currency coin ?

Like SRTCoin, any kind of crypto-currency or asset can be easily built with the “Counterparty Platform”. Counterparty allows users to issue assets. Every user has the ability to create a new currency project inside the bitcoin and Counterparty ecosystem.

You can create two different types of assets:

Named Asset: (like SRTCoin) require a one‐time issuance fee of 0.5 XCPt o discourage spam and squatting.

Numeric (Free): An integer between 26^12 + 1 and 256^8(inclusive), prefixed with A. Numeric assets only require one bitcoin transaction fee to be created. Beyond creating the most basic asset

In this case crypto-currencies are built inside the bitcoin blockchain and are separate from the Bitcoin currency itself. Tokens can be received, stored, and sent from any bitcoin address to any other. SRTCoin is not tied to the BTC balance of any given address. This means that sending/receiving bitcoins has no effect on the balance of SRTCoin. While Counterparty has its own internal currency (XCP), trading and creating assets does not require anything apart from regular bitcoin transaction fees.

If you are interested to earn SRTCoins: would like to participate in our events; want help to create your own cryptocurrency, or simply want to learn more about bitcoin, blockchain, cryptocurrencies, or permissioned ledgers in general, get in touch with us.

Bart Cant
Financial services, Principal, Capgemini

Read more on how cryptocurrencies are challenging the historic norms of currency

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Meet the authors

 

Jaap Bloem Principal Analyst at VINT

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Bart Cant Financial services, Principal, Capgemini

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Leo Kennedy Technology Consultant, Infrastructure Services CTO Office

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Menno van Doorn Director of the Sogeti Research Institute for the Analysis of New Technology (VINT)

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