How Will Bitcoin 2.0 Change The World?

Since its launch in 2009, Bitcoin has grown in size and scope. Developed as a decentralized, peer-to-peer digital currency and payment system without a central authority to regulate it, it has garnered worldwide interest. Groups as diverse as computer geeks and cryptographers, to anarchists and hippies, to venture capitalists and the suits on Wall Street have all shown a keen interest in the so-called cryptocurrency.

Today, one Bitcoin exchanges for approximately US $250$260, and has a market capitalization of nearly $4 billion, with approximately $50 million a day in notional transaction value. Companies and merchants large and small are now accepting Bitcoin for goods or services rendered, including Microsoft (MSFT), Dell Computer, Overstock.com (OSTK), NewEgg, Virgin Airways, and many more.

While the value of Bitcoin as a virtual currency and payment system is certainly valuable, novel applications using its underlying technology known as the blockchain are promising to be much more valuable than Bitcoin in and of itself. (See Also: Basics for Buying and Investing in Bitcoin.)

The notion of a digital money has been around for decades, however Bitcoin was the first to solve the major problem that faced its predecessors: the double-spending problem. Specifically, how does one prevent a money form that exists in purely digital form just ones and zeroes from being copied and spent more than once at the same time?

Take the example of a digital photograph. This can be attached to an email and sent to hundreds of recipients, with identical copies of the original photograph along with it. These multiple copies of the same photograph undermine its value. If it were a unit of money, it could be counterfeited at will. Bitcoin prevents double-spending by utilizing a public ledger whereby each and every transaction is recorded and remains a permanent fixture. Not only that, but each and every node in the distributed Bitcoin network has a copy of the public ledger that can be compared against the other copies for fidelity. While the ledger itself is public, the individuals transacting in Bitcoin remain anonymous, represented by an alphanumeric string and no other identifying information. (See also: Ways to Earn Bitcoins.)

For example, say person A sends 5 BTC (the abbreviation for Bitcoin units) to Person B. Person A's account, known as a 'wallet', is debited -5 BTC while person B's account in the ledger is credited with +5 BTC. This transaction is recorded in the blockchain, but only the string of letters and numbers that serve as unique identifiers for the wallets of A and B are revealed. (See also: Bitcoin May Be the Currency of the Future.)

But that still does not preclude double-spending. The public ledger is the first step; verification and validation of the ledger's contents is the second. New Bitcoins are produced, or 'mined', without a central monetary authority by solving a difficult cryptographic algorithm based on encryption built by the NSA. Computers trying to solve this puzzle compete to do so and the 'winner' the first to do so is rewarded with a block of newly minted Bitcoins. Hard-wired into the Bitcoin source code, which is open source and in the public domain, is a rule stating that a new block of Bitcoins will be 'mined' on average once every ten minutes. If a lot of computational effort is directed towards solving this puzzle, it is likely that new blocks will be discovered sooner than the targeted ten minute interval. In response, the system will adjust the mining difficulty upwards making that difficult puzzle even harder to solve until the ten minute target is restored. (For more, see: What is Bitcoin Mining?)

Mining has a dual purpose. It spurs the creation of Bitcoins and increases the supply, but it also keeps the blockchain secure and solves the double-spending problem. By solving this encryption problem, Bitcoin miners worldwide serve to ensure the validity and fidelity of the public ledger, making it impossible to alter. Any attempt to change, copy, or counterfeit a past transaction will immediately ripple through the blockchain, causing the attempt to immediately be recognized and disregarded. The more aggregate mining effort the network has, the more difficult it is to undermine. Today, the aggregate computing power in the distributed Bitcoin mining network is more powerful than all the world's supercomputers put together. (See also: Can Bitcoin Be Hacked?)

So, why could Bitcoin stand to change the world and disrupt finance as we know it? While the mining work done to secure and validate internal Bitcoin-to-Bitcoin transactions is valuable, recent enhancements to the core Bitcoin source code now allow for the mining network to secure and validate external non-Bitcoin transactions. These so-called Bitcoin 2.0 applications could perhaps be even more valuable than Bitcoin in and of itself. Anywhere that validation of trust, proof of ownership, or a record of an event are required, the blockchain can provide an ultra-secure, cost-effective, decentralized solution that can persist even if one or more nodes go down due to outage or hacking attempts.

Already, Bitcoin-related start-ups have received venture capital funding exceeding the pace of that invested in the dot-com days of the late 1990s. Although much of that investment has been deployed to augment the 'traditional' Bitcoin ecosystem, a growing amount is being directed at Bitcoin 2.0 companies.

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How Will Bitcoin 2.0 Change The World?