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Blockchain

Consumers’ Research recognizes the extensive potential of Bitcoin and the blockchain. At the core of Bitcoin is the ability to send money faster around the globe, improve property rights, and enable people who have never met to fully trust one another. There are myriad applications for this exciting new technology, and also challenges that the industry faces. Some of these are discussed below.

Consumers’ Research is involved in all sectors of consumer affairs, such as health care, energy, technology, and finance. We see this broad involvement as an asset to the “blockchain industry,” as it allows us to approach Bitcoin and the blockchain from a unique consumer perspective, which stakeholders such as government entities value.

Consumers’ Research became involved in this space since almost the beginning and has been a consistent presence. The organization’s officers began speaking at digital currency events in 2014 (including the 2015 Blockchain Summit on Necker Island, organized by BitFury), as well as events hosted by the Federal Trade Commission and Congressional caucuses. Our leadership is often asked to speak about the importance of consumer protection in the space and to discuss the perils of overburdensome or ill-fitting regulation.

Consumers’ Research has organized and hosted two blockchain-related events in Bretton Woods, NH and co-hosted two blockchain conferences, one in Washington, D.C. and one in New York. The organization published a paper on bitcoin taxation, as well as a white paper (produced the help of our Bretton Woods 2015 participants) outlining the opportunities of blockchain tech and the challenges faced by those opportunities. And with the help of our Bretton Woods 2016 participants, Consumers’ Research also developed, in collaboration with our Bretton Woods 2016 participants, consumer protection guiding principles for digital currency custodians. The organization’s website includes regular reporting on blockchain tech, and our group’s officers occasionally publish op-eds in the national media.

Technological Background of Bitcoin

Bitcoin is a digital asset and payment system that enables peer-to-peer transactions; it is based on a distributed public ledger called the blockchain, which maintains a continuously growing record of transactions that can be verified on a decentralized and trustless basis. The protocol is “trustless”, because there is no need to rely on a third party to conduct the transaction and verify that parties to the transaction will not engage in “double spend.” The network is public, so transactions recorded to the distributed ledger are visible to all who participate in the protocol. Furthermore, the data recorded on the blockchain is immutable, because each “block,” or record of recent transactions, contains a reference (or hash) to the block that preceded it as well as the solution to a mathematical problem, signifying the block’s uniqueness and validity. Because these blocks are layered one-after-the-other, each hash reference to the previous block must match the records on all the nodes (or computing devices) participating in the network. If data in a block is altered, it will not result in the matching hash and will be rejected by the network, thereby precluding “double spend” or fraud.

Bitcoin is often referred to as a digital currency or a cryptocurrency. A digital currency is a virtual (i.e. non-physical) asset, currency, or other store of value that is held and transferred through digital mediums, such as computing hardware and the Internet. Digital currencies have characteristics in common with physical currencies; however, they can be transferred instantaneously due to their non-physical nature and independence from third-party intermediaries.

A cryptocurrency, meanwhile, is a decentralized medium of exchange that uses cryptography to secure the currency and regulate the creation of new units.

Another key appeal of Bitcoin as a currency is that is has a controlled, finite supply; the release of new bitcoin tokens is slated to terminate in 2140 at 21 million tokens. This differentiates it even further from “centralized” currencies, wherein issuers can merely print more money, which eventually leads to inflation.

When speaking about blockchain applications, there are three general “levels” that are discussed: Blockchain 1.0, 2.0 and 3.0.

Blockchain 1.0 deals primarily with currency and payments. It is the first round of blockchain technology applications. It refers to the underlying technology platform, the overlying protocol, and the digital currency (Bitcoin or other digital currency alternatives), which represents a store of value (as well as provides value to the protocol itself). That underlying technology platform includes the blockchain (the immutable, transparent public ledger which forms the basis for the technology) as well as mining of bitcoins and hashing. The overlying protocol is the software that enables transactions. Blockchain 1.0 applications are primarily concerned with using the blockchain to conduct payment activities through software built “on top” of the blockchain using digital tokens, coins, or currencies.

Blockchain 2.0 refers to the broad spectrum of economic and financial applications that exist beyond simple payments, transfers, and transactions. Such applications include traditional banking instruments such as loans and mortgages, complex financial market instruments such as stocks, bonds, futures, derivatives, as well as legal instruments such as titles, contracts, and other assets and property that can be monetized. While some of these applications are still in the nascent stages of development, many are well on their way to becoming a reality.

Blockchain 3.0 refers to vast array of applications that do not involve money, currency, commerce, financial markets, or other economic activity. Such applications include art, health, science, identity, governance, education, public goods, and various aspects of culture and communication. The majority of these applications are in nascent stages of development or still even in the “idea phase.”

For all its promise, Bitcoin has not been without controversy. Silk Road, a “dark web” site trading in drugs, pirated material, and other items, infamously utilized Bitcoin. The currency has seen high-profile hacks of exchanges that deal in it, including a recent hack of BitFinex that resulted in the theft of around $65 million. These thefts, however, are not due to innate failures of the security of the technology or the protocol, but are instead due to bad business practices and bad actors.

Bookmark and revisit this page to stay up to date on Bitcoin-related issues and research. For more information, Consumers’ Research has published a white paper that includes insights from our Bretton Woods 2015 conference.

Blockchain Experts

Kyle Burgess, Executive Director