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The transaction that lasts forever

Whether or not you think Bitcoin has a future, it has a couple of very interesting technological elements that will probably have a life of their own. The aspect that everyone talks about is that Bitcoins derive their value by dint of being “mined.” It takes time, computational power, and a pretty hefty electrical bill to mine Bitcoins in any significant amount and it’s the difficulty of getting new ones (just like it’s the difficulty of getting “new” gold out of the ground) that gives the coins value. But a second, equally interesting aspect of Bitcoins is that there is a distributed transaction ledger system where the transactional history of each Bitcoin is vouchsafed for as long as Bitcoin is around and being used.

The distributed ledger part of the Bitcoin world is implemented by way of a “blockchain.” Actually, the money itself is all but indistinguishable from the blockchain. That a Bitcoin exists at all is because a root for the coin (the “coinbase”) is created when the Bitcoin is created and all subsequent transactions with that coin are recorded in the blockchain. Each transaction is signed by the appropriate party’s private encryption key and then written into the current ten-megabyte block of the overall blockchain.

Without trying to explain the mechanics of the whole thing, the point is that the blockchain that fuels Bitcoin is there forever – it will be there until such time as the system completely fails. And even then, the distributed nature of blockchains means that copies will be around. Again, without digging into the details, there are other blockchains out there and it would be at least theoretically possible to store and vouchsafe a master copy of a failed blockchain if it ever came to that.

So the Bitcoin blockchain is immutable and distributed. That’s great for Bitcoins, but it’s also great for some innovative startups. I spoke with Peter Kirby, the president of Austin-based Factom, who explained why it was also great for general ledger storage beyond just keeping track of coins.

Kirby told me that “the simplest analogy of how the blockchain works is I send you something–I send you a bit of information. Everybody in the room agrees and we write that on a brick. We put that brick in a wall and then we stack ten thousand bricks on top of it. Then we move on to the next transaction and we put that brick in the wall and stack another ten thousand on top of that. The blocks are transaction blocks and there’s a whole lot of effort, we call it proof of work, stacked on top of it to make it really, really, really hard to change that block.

“What we said at Factom is, well, there’s a whole lot of stuff in the world that doesn’t look like money transactions. What if we could do a blockchain for data. And it turns out that having permanent, immutable, tamper-proof data is a really big deal for anybody who does record keeping, anybody who cares about their data being written once and never changed and never tampered with.”

The ledger entries that a bank or an insurance company might write to the Factom system could, in theory, be written directly to Bitcoin blocks, but there’s only so much data that can be stored in a bitcoin block and writing large volumes would be expensive and impractical. Instead, Factom commits a very small transaction (it’s the top hash of a Merkle tree of all the transactions from the past ten minutes, if you want to be really geeky about it) to the Bitcoin blockchain every ten minutes and then uses cryptographic hashes to tie all the Factom writes transacted within that ten minute period to the Bitcoin blockchain.

When a blockchain of entries (these are what get hashed in the Merkle tree) within the Factom system is initiated, Kirby says, “I get to set up what the rules are about what goes in that chain, what belongs in that chain and who’s allowed to do it. Now I’ve got a way to program what the auditors allow in that chain. And I can say, hey, it’s got to have a date formatted a certain way, it’s got to have an ID, and so on.”

Writing to the Factom store (inherently a write-once operation) requires an “entry credit,” which is essentially a software license allowing the access for writing one record. Credit entries, in turn, are converted from a unit called a Factoid, bought with Bitcoins. When sales of Factoids opened last week, buyers got 2000 Factoids to the Bitcoin. In the first days of the sale, more than a million-and-a-half Factoids were sold.

Kirby says that “one of the things that the development team did that ended up being really useful in the business world is they separated factoids and Bitcoin and all the cryptocurrencies, all the digital aspects of it, from the entry credit. So a big bank that’s not allowed to touch Bitcoins, that’s not allowed to hold Ripple, that’s not allowed to hold Ethereum, none of that stuff—their lawyers won’t let them, can still buy entry credits because they’re non-transferrable, they don’t have monetary value, it’s purely a software license at that point.”

It’s still early days. The initial sale of factoids just creates the endowment for a Factom Foundation–a full, working beta of Factom remains some months away. The Factom Foundation is a nonprofit that develops and maintains the open-source software—it separates the blockchain and its mechanics from the process of creating applications on top of those basic infrastructure elements. While the appeal of an immutable data ledger is clear for many essential business verticles, how Factom makes money as a commercial operation is still to be sorted out.