Blockchain: Blueprint for a New Economy

public-key cryptography to make a new

form of digital money. Coin ownership

is recorded in the public ledger and

confirmed by cryptographic protocols

and the mining community. The

blockchain is trustless in the sense that a

user does not need to trust the other party

in the transaction, or a central

intermediary, but does need to trust the

system: the blockchain protocol

software system. The “blocks” in the

chain are groups of transactions posted

sequentially to the ledger—that is, added

to the “chain.” Blockchain ledgers can

be inspected publicly with block

explorers, Internet sites (e.g.,

www.Blockchain.info for the Bitcoin

blockchain) where you can see a

transaction stream by entering a

blockchain address (a user’s public-key

address, like

1DpZHXi5bEjNn6SriUKjh6wE4HwPFBPvfx

How a Cryptocurrency Works

Bitcoin is money, digital cash, a way of

buying and selling things over the

Internet. The Bitcoin value chain is

composed of several different

constituencies: software developers,

miners, exchanges, merchant processing

services, web wallet companies, and

users/consumers. From an individual

user’s perspective, the important

elements in transacting coin (I’ll use

“coin” in the generic sense here) are an

address, a private key, and wallet

software. The address is where others

can send Bitcoin to you, and the private

key is the cryptographic secret by which

you can send Bitcoin to others. Wallet

software is the software you run on your

own computer to manage your Bitcoin

(see Figure 1-1). There is no centralized

“account” you need to register with

another company; if you have the private

key to an address, you can use that

private key to access the coin associated

with that address from any Internet-

connected computer (including, of

course, smartphones). Wallet software

can also keep a copy of the blockchain

—the record of all the transactions that

have occurred in that currency—as part

of the decentralized scheme by which

coin transactions are verified.

Appendix A covers the practicalities of

maintaining an altcoin wallet in more

detail.

Figure 1-1. Bitcoin ewallet app and

transferring Bitcoin (image credits: Bitcoin

ewallet developers and InterAksyon)

eWallet Services and Personal

Cryptosecurity

As responsible consumers, we are not

used to many of the new aspects of

blockchain technology and personal

cryptosecurity; for example, having to

back up our money. Decentralized

autonomy in the form of private keys

stored securely in your ewallet means

that there is no customer service number

to call for password recovery or private

key backup. If your private key is gone,

your Bitcoin is gone. This could be an

indication that blockchain technology is

not yet mature enough for mainstream

adoption; it’s the kind of problem that

consumer-facing Bitcoin startups such as

Circle Internet Financial and Xapo are

trying to solve. There is opportunity for

some sort of standardized app or service

for ewallet backup (for example, for

lost, stolen, bricked, or upgraded

smartphones or laptop/tablet-based

wallets), with which users can confirm

exactly what is happening with their

private keys in the backup service,

whether they self-administer it or rely on

external vendors. Personal

cryptosecurity is a significant new area

for consumer literacy, because the stakes

are quite high to ensure that personal

financial assets and transactions are

protected in this new online venue of

digital cash. Another element of

personal cryptosecurity that many

experts recommend is coin mixing,

pooling your coins with other

transactions so that they are more

anonymous, using services like Dark

Coin, Dark Wallet, and BitMixer.15 As

the marketplace of alternative currencies

grows, demand for a unified ewallet

will likely rise, because installing a new

and separate wallet is required for most

blockchain-related services, and it is

easy to have 20 different ewallets

crowding your smartphone.

Despite their current clunkiness in

implementation, cryptocurrencies offer

many great benefits in personal

cryptosecurity. One of the great

advantages is that blockchain is a push

technology (the user initiates and pushes

relevant information to the network for

this transaction only), not a pull

technology (like a credit card or bank

for which the user’s personal

information is on file to be pulled any

time it is authorized). Credit card

technology was not developed to be

secure on the Internet the way that

blockchain models are developing now.

Pull technology requires having

datastores of customer personal

information that are essentially

centralized honey pots, increasingly

vulnerable to hacker identity theft attacks

(Target, Chase, and Dairy Queen are just

a few recent examples of large-scale

identity-theft vendor database raids).

Paying with Bitcoin at any of the 30,000

vendors that accept it as of October

2014 (e.g., Overstock, New Egg, and

Dell Computer; see