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Bitcoin and Blockchain – Tulips of the 21st Century?

There has scarcely been a term other than “bitcoin” in circles of investors and speculators whenever discussing about trade. While a bitcoin could be bought for € 500 in September 2016, the price for a unit of cryptocurrency has been around € 4.000 (status in September 2017), recently. Within the last five years, the rate for a bitcoin increased incredibly to 30.000%. Apart from that, its market capitalization is around US $62 Billion. However, reliable predictions for exchange rates cannot be made because bitcoins do not generate cash flow nor earn interest. That is why its exchange rate stays always speculative. In other words: a bitcoin is always worth the amount of money that someone is willing to pay for. 

Critics consider this aspect in the bitcoin-mania as linked to enormous risks and call this trend already as the biggest speculative bubble since the “tulipmania” in seventeenth century. Regardless of speculations, market capitalization and whether the bubble is going to burst or not: above all, the run on bitcoins, however, has consequences in global technological processes. Especially, considering transparent and secure applications, the technology behind bitcoin opened new paths. 

What is bitcoin? 

Bitcoin is a digital currency, also called cryptocurrency. It is the first public traded cryptomoney which has been initially introduced under the pseudonym “Satoshi Nakamoto” in 2009. Currently, there are more than 1.000 different digital currencies. The most popular ones, apart from bitcoin, are Ethereum, Litecoin, and Ripple. In contrast to regular currencies, there are no authorities to request new money or to follow transactions. These tasks are managed from the network of miners in common (“peer-to-peer” or “P2P”). Beyond that, high computing power enables the production of new bitcoins. The production of bitcoins is called “mining”. One of the biggest bitcoin mines is on Iceland. It is maintained by Genesis Mining, the company of Marco Streng who is one of the first bitcoin investors. Read here how mining works, in detail. 

Blockchain – the technology behind bitcoin

Cryptocurrencies such as bitcoin are based on blockchains. Thereby, a blockchain depicts a decentralized database of which integrity (protection against subsequent manipulation) is secured by storing the hash value of the preceding data record in the subsequent data record, i. e. by using cryptographic linking. The crucial features of this technology are its transparency, invariability, and decentralized procedure. In contrast to that, in the traditional banking industry, the administration of money by institutions is centralized. Hypothetically, it is possible that these institutions make changes to the general ledgers. In addition, there is always the matter of data safety in case of a cyberattack, for example, or in case of unauthorized third-party access, in general. 

To avoid these risks, the blockchain technology is transparent. All transactions are saved anonymously whereas the general ledger is saved on different computers (“nodes”). Moreover, the saved data cannot be changed or deleted later on. A blockchain is a chain of blocks where transaction data is linked with each other. The executed transactions are aggregated into blocks followed by the verification of its validity. As a next step, new blocks are added to the already existing chains. This step is called “proof-of-work”. The procedure behind that: the system solves mathematical exercises by testing (“mining”). The continuous solution of such mathematical exercises guarantees the security of the network of miners, because the energy consumption of this process is huge. 

The network protects itself, more or less, independently from external attacks by using a lot of electricity to be able to execute and control all transactions. The high energy consumption of the computers is problematic, especially if one considers that one transaction of bitcoins would be enough to supply 1,6 households in the US with energy for one day (read more about energy efficiency). 
In fact, the huge energy consumption of the mining process may avoid unauthorized production of bitcoins; however, it does not avoid cyberattacks concerning the exchange of bitcoins. Recently, cyberattackers hacked the accounts of thousands of customers of the South Korean bitcoin provider “Bithump”. The blockchain was not harmed, though. 

Where or when is used the blockchain technology?

Nevertheless, economic experts and technicians are fascinated by the technology behind bitcoin. It should be noted that there is not one blockchain. The most popular one is bitcoin blockchain which is used in many applications. Especially, the above mentioned features (transparency, invariability, decentralized procedure as well as security and efficiency) appeal to many institutions, companies, and researchers to deal with blockchain. Imagine a blockchain that is used in the administration of local authorities: it must be designed differently to fulfill different requirements. In the finance sector, SAP uses already blockchain. Also other sectors have started to test this technology. 

Blockchain payments with SAP technology 

It is self-explanatory that a technology as it is of bitcoin shows its influence also in the finance sector. One reason for its popularity could be the demand for real-time transactions on the part of consumers and companies. In addition, traditional business processes and models are threatened by fintechs and start-ups in the financial technology branch. 
To make aware of these changes, SAP cooperated with ATB Financial (Canada), Ripple, and ReiseBank AG (Germany). The aim was to transfer the first proper international blockchain payment from Canada to Germany. Therefore, ATB Financial transferred CAD $1.000 to ReiseBank. The corresponding network for the transfer based on the SAP technology and on the blockchain company solutions of Ripple. The result was remarkable: it took only twenty seconds to transfer the money whereas via regular banking payment, it would have taken two to six workdays (read more here). Apart from the development in the financial sector, SAP works on establishing blockchain in e-commerce and in the context of personal data, too.

Blockchain in health-care systems and in agriculture

The blockchain technology could also serve as basis for applications in medical contexts, e. g. to facilitate the exchange of information between patients, doctors, and pharmaceutical industries. This way, it is imaginable to share electronic medical records of patients, for example. 
A further research area of SAP is to find a system which could be used by farmers in bad weather conditions. Then, sensors installed on a field would collect weather data and send it to the insurance company of the farmer. Apart from the mentioned examples of approaches, SAP does research on effects and potentials of blockchain, too. Because companies are always looking for opportunities to cut costs, increase productivity, and reduce complex processes in their work flows, the blockchain technology could serve appropriate solutions (read more here).

Bitcoin and blockchain in everyday life

Certainly, SAP and Ripple are only two companies dealing intensively with blockchain and bitcoin. These companies see a need for research in the practicality of cryptocurrencies in everyday life, e. g. make them suitable for commerce because many do not accept them as a method of payment. If one still wanted to pay his/her bills with bitcoins one had to change it into an acceptable currency, sometimes in unfavorable exchange rates. At this point, the Finnish provider Lamium can resolve the matter. It makes sure that payments are fulfilled decentralized and encoded according to the blockchain technology, also anonymously beyond national borders. 
Imagine the following example as an everyday situation: you receive a bill from a provider that you must pay. However, this provider is not able to accept your bitcoins yet. If you would still like to pay with bitcoins, you can register on the website of Lamium and upload your bill. After that, the Finnish provider pays the bill for you and debits the amount of money from your bitcoin wallet. This way you are able to pay every bill, regardless if the provider accepts bitcoins or not.


Text by Daniel Schnaithmann, translation by Gohar Zatrjan



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