The Blockchain Revolution

Bitcoin may sound complicated at first, but when we sum it up, it is based on some very simple ideas:

• digital signatures that facilitate identity
• the distributed ledger (the blockchain) that is stored on every client’s device
• the crowd collectively clearing each transaction
• the need to make clearing transactions challenging to avoid a potential takeover of the blockchain
• the need for an incentive (some equivalent of money, typically called the “coin” that is generated from within the system) to get the crowd interested in performing the challenging work that accompanies verifying transactions.

Now, if you think about it, peer-to-peer payment is actually a fairly simple commercial application. Once you establish identity, build a system to clear transactions, and convince people that they won’t lose their money, you’ve got enough trust to make things work. What’s being transferred is uniform (money). There’s no product variety to contend with. There are no physical assets involved. There’s no need to discover what’s available or compare prices.

Not surprisingly, therefore, much of the initial focus of blockchain marketplace development has been on creating new systems for trading assets that are non-physical: digital and financial assets.

The Blockchain

Blockchain can be considerred as a “new database technology, purpose-built for trading assets”. There is immense potential in new blockchain based marketplaces for loyalty points, mobile minutes, gift cards, and of course, a range of financial assets. Many current systems for trading such assets could benefit significantly from a new decentralized marketplace. It's not that there’s anything wrong with a centralized institution, but it increases costs, freezes innovation potential, and needs layers of reconciliation.

Let's take a look into those new inventions that based on the technology behind Bitcoin.

OpenBazaar and Contracts

The OpenBazaar platform takes a first step toward creating a decentralized peer-to-peer marketplace. If you have an item for sale, you list it on the OpenBazaar client (a program or app you download to your device), along with a product description, and a price (in bitcoin). Once you confirm listing the item, this listing is broadcast to all the other clients on OpenBazaar.

If you find a product that you like you can pay for it with bitcoin. Much like PayPal, which was a critical part of making eBay work early in the evolution of peer-to-peer markets, Bitcoin provides the necessary payment infrastructure for OpenBazaar. And analogous to eBay’s auction system, if the OpenBazaar price is too high for you, you can propose a new, lower price to the seller.

Once you (as the buyer) agree with the seller on a price, you arrive at another challenge. How do you ensure that you’ll actually get the product you bought? This is where a critical infrastructure element of distributed peer-to-peer markets comes in: contracts. On OpenBazaar, the contracts are relatively simple, using a notary as the trusted third party (can be another client). Once the contract is set up, you send your bitcoin payment, and these are held “in escrow.” You, as the buyer, notify the seller, saying, “I’ve sent the funds.” The seller then ships the product (and handles all the logistics). When the product arrives, you acknowledge receipt. The funds are then released to the seller. If there’s a dispute, the notary acts as the mediator.

A decision by any two of the three parties—buyer, seller, or notary—releases the funds. So, for example, the buyer and seller could resolve their dispute themselves. There’s a rating system to help choose sellers, buyers, and notaries. It’s a little different from what’s used in a centralized marketplace, and is not completely immune to manipulation (similar to Ebay).

Smart Contracts - new sophisticated class of contracts

While a traditional contract is an agreement between two or more parties to do something, in the case of a smart contract, the same terms exist, but with one exception—trust that comes from having a third-party is less important.

This is because the smart contract protocol can specify, as computer code, terms under which certain obligations are fulfilled (which is why people call it code is law), and can execute actions like sending a payment or deactivating a file once there is evidence of the contract’s terms being fulfilled.

By being autonomous, self-sufficient, and decentralized, smart contracts can decrease the risk associated with peer-to-peer contracting.


That's all for now, next time we will take a look at Ethereum, an alternative digital currency to Bitcoin and the Smart Contracts technology it is creating.