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Bitcoin blockchain's potential for secure transactions gets real

Rob Lemos Writer and analyst

Bitcoin has excited entrepreneurs and venture capitalists and led to the creation of dozens of startups. To date, a total of $676 million has been invested in the digital currency and its technologies. Yet, technologists are increasingly focusing on the blockchain, a critical part of the Bitcoin protocol that keeps a permanent, distributed cryptographic record of digital currency transactions.

The blockchain is a public write-once, read-anytime database that isn't under any centralized control. That functionality gives entrepreneurs the ability to build unique applications that rely on its security.

New value now being unlocked by startups

Digital document verification service BlockSign, for example, stores a 32-byte hash—the digital fingerprint—of a contract or other important legal document within a field in a transaction recorded in the blockchain. With that information, the startup can authenticate and verify copies of the digital document.

"A lot of the security and privacy functionality is created in the way that Bitcoin leverages the blockchain," says Nicholas Thorne, co-creator of BlockSign. Any data stored is publicly accessible, and the customers aren't locked into a single provider, he explains. "Rather than ever having to come back to us to authenticate or verify the authenticity of an agreement, anyone can do it."

Despite Bitcoin's black eye, blockchain is like black gold

While the decentralized Bitcoin digital currency has taken hits in the past year—from the failure of Mt. Gox to legitimate doubts about bitcoin's viability—the blockchain has gained an increasing amount of attention from entrepreneurs and venture capital firms.

It's little wonder then that BlockSign isn't alone. Storj.io aims to use the technology as the basis of distributed cloud storage, allowing customers to pay a market rate for data storage rather than rely on a single vendor. The blockchain allows the system to locate, secure, and verify data, which is broken up into "shards."

Building on security is central to success

Another startup, Blockstream, aims to create the infrastructure, so-called "side chains," to allow more innovation on blockchain technology. Its distributed nature and ability to attest to the security of transactions are fundamentally interesting capabilities, but Bitcoin requires reliability. That can slow innovation, according to Reid Hoffman, chairman and co-founder of LinkedIn, who invested in Blockstream.

"The blockchain creates the possibility of trustless trust," Hoffman said in a blog post on his reasons for the investment. The open-source nature of the code and standard behind Bitcoin reinforces that trustless trust, but it also means that any innovations take time to be adopted, if they're adopted at all.

"This characteristic is foundational to Bitcoin's value and success to date," Hoffman wrote. "But it also means that advances to Bitcoin Core, the software at the heart of the system, happen slowly."

Blockstream aims to allow more innovation, while protecting security and verifiability.

Bitcoin was just blockchain's first killer app

Ted Rogers, chief strategy officer for Bitcoin technology company Xapo, said that with its distributed nature and its ability to be secure and verified, the technology could be the foundation for an entire ecosystem without intermediaries. Late last week, Overstock, which was the first major online retailer to accept Bitcoin, notified the Securities and Exchange Commission (SEC) that it was planning to issue as much as $500 million in stock using blockchain technology as an alternative trading system, sidestepping traditional exchanges such as Nasdaq and NYSE. And the the Nasdaq exchange itself is now reported to be looking to blockchain for its pre-IPO trading arm, Nasdaq Private Markets.

"If we think of the blockchain as TCP/IP, then Bitcoin is just the first killer app," Rogers said, stressing that the revolution is not about the currency but about the peer-to-peer infrastructure. "We are in the middle of being able to do things peer-to-peer that were never thought possible before because intermediaries were required."

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