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Bitcoins and Blockchains for Directors


Expert analysis from Tom Murphy, Founder/ Director of Boards.ie.

Let’s imagine a very odd town. People in this town have two special abilities. They can broadcast to each other telepathically and they have perfect memories. Imagine for a moment that I live in this town and you visit me. You're new in town so I want to give you €10. I simply tell everyone (telepathically) that you have €10 in your account (and I have 10 less in mine, no quantitative easing here!).  Everyone notes that down in their mental ledger and life moves on. The town’s folk will now credit you with €10.

This town doesn’t have a bank, it doesn’t even have hard currency because everyone just keeps a full record of everyone else’s money in a ledger in their head. There is no need for a bank, no need for a "trusted third party" because every transaction is effectively being done in public and recorded by everyone. When Mary buys bread from Joe the baker, she tells everyone he has €2 more and she has 2 less. When Joey loses a bet to Mark, same thing.  Over time everyone has a long ledger of money movements, and a current position for every person in the town. If there is a disagreement, the majority consensus will determine the state of play. Since every single transaction is recorded by every person, it’s very difficult to say a transaction didn’t happen.

What I've described above is what is called a "blockchain" system. It’s the basis on which Bitcoin, along with other digital currencies, work. Telepathy is the internet. Hard drives are the perfect memory. Money (in the form of Bitcoin) is moved by announcing to the blockchain (the ledger) that I want 10 bitcoins to move from my assets to yours. You get 10 bitcoins, I lose 10 bitcoins and everyone updates their ledgers.

And it works very well... so long there is assurance that only *I* can give away my money. I mean, it wouldn’t be a great system if *you* can come along and announce to everyone that *I* am going to give you all my money!

This element of trust can be achieved with cryptography. There is a way that I can send a message that can *only* be encrypted with my encryption key. Simply put, if I keep that key safe, my money is safe.

This system has been proven to work very reliably. Existing banking systems have used this type of encryption for decades.

Bitcoin is the application of this cryptographic technology to money. It’s probably the currency you have heard about the most but there are a number of benefits to using Bitcoin.

1. It is much harder to hack. A hacker these days only has to access just one central store of information (a bank) and then change a few records there to steal money. With Bitcoin, they would have to change the current ledger AND every record of that money's history AND do that on every persons ledger worldwide... simultaneously.

2. It’s impossible for a government or company to control it. It can’t be inflated or adjusted.

3. Its nearly instantaneous for transfers.

4. Its nearly cost-free for transfers. 

There are other uses for blockchain, the cryptographic technology behind Bitcoin, including secured code execution (Ethereum) or interoperability of devices (IOTA) but these are outside the scope of this piece. Suffice it to say, blockchain technology is here to stay. It’s a hugely disruptive force, the impact of which has yet to be considered, let alone felt. 

Tom Murphy, Founder/ Director of Boards.ie Ltd; Independent Consultant and Mentor, can be contacted directly at tom@thomasmurphy.ie

The views expressed in the posts and comments of this blog do not necessarily reflect the views of the Institute of Directors in Ireland. They should be understood as the personal opinions of the author. The content of this blog is for information purposes only and the Institute of Directors in Ireland is not responsible for the accuracy of any of the information supplied.