In November 2008 a trailblazing specialist article on IT history was published under the pseudonym “Satoshi Nakamoto“ : “Bitcoin: A Peer-to-Peer Electronic Cash System“.
Nakamoto (we still don’t know who was actually hiding behind the pseudonym) presented the conceptual basis for Bitcoin currency in nine easily readable pages.
The revolutionary promise: transparent, non-falsifiable transactions in virtual money units, known as Bitcoins, in a completely decentralized Peer-to-Peer-Network without being funneled through a central entity such as a state or bank.
Since its inception, Bitcoin currency and the Blockchain Technology that underpins it have attracted millions of dollars of venture capital mostly in the USA, but increasingly also in Germany. At Australia’s initiative, the International Organization for Standardization (ISO), together with ISO/TC 307, has created a committee to work on definitions and standards in the area of Blockchain technology. Since April 1, 2017, Bitcoins have been an official means of payment in Japan.
So, it’s no surprise that Bitcoin and Blockchain-Know-How are increasingly sought after in the marketplace.
Until now, application possibilities have been in the areas of finance, insurance, and business start-ups and projects based around Bitcoin currency and Blockchain technology. On the other hand, applications in online marketing have been neglected and barely discussed.
There are two reasons for this:
1. Bitcoin currency and Blockchain-Technology are hard to understand.
2. Bitcoin currency and Blockchain technology are all too often confined to their obvious spheres of application in the areas of finance and insurance.
Even if the first statement is somewhat understandable, the second statement does not do justice to the revolutionary potential of Blockchain technology, which is completely independent from the Bitcoin currency itself.
I’d like to show you three things with this blog article:
Bitcoins are, like all currencies today, fiat money (Latin: “fiat lux“; “Let there be light“). That means: they have no intrinsic value or promise of payment attached. Price developments rest entirely on users’ collective expectations that advertised coins will find a buyer, i.e. be able to be liquidated.
A Bitcoin is a coin. Not in the sense of a minted coin, but rather a digital coin produced through complex mathematical processes. The mathematical number of bitcoins produced is limited – through the application of mathematical procedures – to 21 million units. This artificial restriction, which also exists with other currencies, should improve value stability. And finally, it will become increasingly difficult to produce new digital coins. Currently, 75 Bitcoins are being produced per hour. The last of the 21 million Bitcoins will be created by 2140 at the earliest.
As with any currency system, in the Bitcoin system, there are three conditions that must be strictly met in order for transactions to be carried out:
1. Transaction capability: Bitcoins must be able to be exchanged smoothly and problem-free between senders and recipients.
2. Transaction legitimacy: Each Bitcoins recipient must be sure that any coins received genuinely originate from the specified sender.
3. Transaction concensus: contradictory transfers must be strictly avoided. The Problem: a Bitcoin as digital coin can be copied and reproduced. But it should not be possible to use the same coin twice, e.g. in the area of double purchases. This means: It must be crystal clear at any given time in which Bitcoin transfers are valid and exactly to whom each individual Bitcoin actually belongs.
The technological components to satisfy all three conditions form the “Bitcoin-System”. Figure 1 shows the structure of this system.
Figure 1: The Bitcoin system
The basis of the Bitcoin system is the decentralized peer-to-peer “Bitcoin-Network”. Peer-to-Peer means all participants have equal entitlement. There is no centralized, coordinating entity. In order for communication between equally entitled participants within the network not to end in complete chaos, “Bitcoin-Protocol” defines the binding rules on how the network is to be used.
Network and protocol together allow Bitcoins to be transferred. With every transaction, as in online banking, there is a sender and a recipient. These in turn use digital “wallets” to manage transfers. Every network participant possesses (at least) one digital wallet.
In order for a Bitcoin transaction to be lawful, it must be initiated by the actual owner of the digital coin. In order to ensure transaction legitimacy, procedures are subject to asymmetrical cryptpgraphy.
The digital wallets are the starting points. Every digital wallet in the Bitcoin network (and automatically with it every participant in the Bitcoin network) has two codes:
Private and public codes are produced simultaneously in pairs and only work together as a pair (see Figure 2).
Figure 2: Be: Example of a key pairing
As long as the private code is kept secret, the code pairing can neither be falsified nor guessed. It is not possible to deduce the private code from the public one. That means that the combination of private and public codes absolutely authenticates digital wallets in the Bitcoin network and is therefore comparable to a verifiable signature or signature mark. And that precisely helps to establish the legitimacy of Bitcoin transactions.
Figure 3: Coding and decoding of Bitcoin transfers.
Procedure (see Figure 3): every transfer is digitally signed by the sender, i.e. encrypted by their digital wallet’s private code. The transaction recipient then checks the digital signature. To do this, the recipient decodes the received transaction with the public code of the sender’s digital wallet. If it works, the transaction is legitimate.
All that’s left to address is the prevention of contradictory transactions. As already mentioned, a Bitcoin is, like any other digital item, ultimately capable of being copied and reproduced. Therefore, a consensus must exist as to who actually owns each digital code. To do this, every transaction of each individual Bitcoin is recorded and documented, without a gap, from the moment of production through to current ownership.
The instrument used to establish this transaction consensus is the so-called “Bitcoin-Blockchain”. This is a data bank where all Bitcoin transactions are stored, in an unbroken history, and that therefore reflects the currently valid state of all digital Bitcoin ownership.
The Bitcoin Blockchain is, however, no conventional databank looked after by a single individual or business, such as a bank, but is rather looked after by a decentralized databank. That means (again, simply stated): the complete Bitcoin Blockchain, or more or less the large parts of it, is stored redundantly on the computers of many different participants in the Bitcoin network. The big advantage: dependency on a central entity is removed. Everyone owns the databank.
But this introduces a new problem: the safeguarding of databank correctness in arriving at a transaction consensus. It’s hard to answer the question “Which transactions are valid?” in a decentralized databank. Ultimately, all the different copies of the Bitcoin Blockchain (or parts of it) must be kept accurate and up to date.
The solution here are so-called “Blocks”, which are produced by individual participants in the Bitcoin network. A Block is an umbrella for a host of Bitcoin transactions. Once a block contains a certain number of transfers, it will be added as a new partial piece of the Bitcoin Blockchain to an arbitrary copy. Through synchronization reports, all other copies are then automatically and immediately updated to add the new block. Should it be confirmed by a sufficient number of other copies that the new block has been integrated, then all these transactions are immediately validated.
Because every new component part of the Bitcoin Blockchain is automatically also a reference to the immediately previously added piece (see. Figure 4), a virtual chain of blocks is created that contains ALL valid Bitcoin transactions, without any gaps. This gives the Blockchain technology its name.
Figure 4: The functioning principle of Blockchain.
Every individual reference is calculated on the basis of a transaction contained within a Block. As a result, the Bitcoin Blockchain is extremely difficult to counterfeit or manipulate. Forgeries or manipulations would not only require matching an individual piece and its reference, but also the simultaneous matching to all other Blocks and references, in other words, to the ENTIRE Blockchain. While this may be theoretically possible, in practice it is virtually impossible.
SIDE NOTE: On the parallel production of Blocks
Several Blocks are almost always produced in parallel by members of Bitcoin networks. If two or more parts are ready at the same time, they cannot be added to the Bitcoin Blockchain at the same time. Only one piece can be added at any given time so that only that Bitcoin transaction will be entered in the Bitcoin Blockchain and be officially valid.
How is the competition between blocks decided?
The winner and resulting new part of the Bitcoin Blockchain is always that Block whose creator delivers the fastest solution to a complex mathematical puzzle. This evens up the competition. As soon as a new piece is added to the Blockchain, a new mathematical puzzle is created. Any transactions not contained in the incoming Blocks remain invalid and will have to try their luck again next time around; in other words, try to achieve validity over another partial piece. In ensure that the Block creators regularly engage in this intensive competition, the successful addition of part pieces to the Blockchain is rewarded – with free Bitcoins.
Berentsen and Schär write: “In centralized systems, one entity is exclusively equipped with record keeping rights. These rights confer the capacity to manipulate and randomly alter the record to that entity.” Whenever a central databank that documents ownership exists, the operator of such databank attains a position of power. This position of power is problematic. Because it reduces the basic trust in the propriety of the databank. Who trusts “the top dog”?
Berentsen and Schär go on to say: “If the possibility exists for a centralized body to be corruptible in some way, or vulnerable to outside attack from third parties, this could lead to considerable problems and undermine the credibility of the system.” In other words: potential manipulations of the centralized data bank by the operators themselves are only one part of the problem. The other part is the fundamental vulnerability of a centralized databank to attack from without. How often are there reports nowadays of hacker attacks on banks and attempted frauds?
In order to counteract inevitable crises of confidence, operators of centralized databanks don’t skimp on any costs or effort to increase confidence levels in centralized databanks. There are a wide spectrum of measures available: Seriousness, care in data management, the implementation of new security technology, and fair rules on what constitutes deception. Nevertheless, in many cases it’s a matter of “kill, or be killed”, which plays into the hands of operators of centralized databanks. Think about banks: We all have to be bank customers to take part in financial dealings.
On top of that: costs and efforts by central databanks are often reimbursed directly by users of central databanks, for example, in the form of transaction fees.
Summarized: Strong positions of power with a latent risk of fraud, low levels of basic trust, vulnerability to third-party attacks, and transaction fees are the hallmarks of basic use of centralized databanks.
Blockchain technology solves these problems. Pronounced positions of power don’t exist in decentralized databanks. Absolute transparency and communally-recognized transaction propriety address trust issues. Attacks by third parties are theoretically possible but practically impossible. Transaction fees are low. Lost independence is reclaimed.
In online marketing, there is also virtual capital that is administered by central entities, e.g. advertising networks or search engines: visits, clicks, impressions, page views, and links. Blockchain technology could also be interesting for online marketing.
You’ll probably recognize this situation: A website invites you to pay for advertising. And to encourage you to book advertising, the website operator tells you how much traffic they get, i.e. the potentially high number of people who will see your ad.
This situation is not really satisfying. Because you can’t be sure how many visitors a website is actually getting. And even if such a tool were available, it would still be unclear whether the traffic was from genuine human users or from website operators using Bots, for example.
This situation has led central, “trustworthy” entities like Google or Facebook to build their own advertising networks, which are then distributed to advertising space on websites. Some of the services offered are:
Naturally, the operators of these advertising networks receive payment for these services.
Along with these surely existing advantages (there’s a distinct lack of alternatives), this construct also brings all the previously discussed disadvantages of a centralized databank in its wake (see above). But, with Blockchain technology, things can be different.
You already know that Blockchain technology allows transactions and ownership of virtual money units, Bitcoins, be documented without gaps or the possibility of fraud. It should now be clear to you: All of the services offered by centralized advertising networks (recording of website traffic, delivery and direction of advertising pop-ups, reporting on clicks on advertising) are ultimately transactions that, along with the resulting ownership, can also be depicted without gaps and free from fraudulent display in the Blockchain advertising network:
Visits (~ Visits) by internet users to a website.
Pop ups (~ Impressions) of advertisements.
Clicks (~ Clicks) on advertisements.
So it’s no longer a matter of transactions and ownership of digital coins, but rather transactions and ownership of visits, impressions, and clicks, which can be depicted unbroken and fraud-free in a Blockchain. Centralized advertising networks like those of Google or Facebook would then become superfluous. An example of a Blockchain-based advertising network is the 2015 start-up BitTeaser.
Furthermore: Blockchain technology can be helpful elsewhere. Blockchain technology can enable internet users to prove that they are human users without, and this is important, revealing their identities. Microsoft, for example, is already working intensively on solutions like these. The significant advantage: Ad Fraud can be wiped out. And that would be a real win, since advertising fraud is a big problem. According to Media Quality Report, the most recent percentage of Ad Fraud measured against the overall market was 7.9%. Damages accrued worldwide from Ad Fraud are running at 7.2 billion US dollars.
Not only online advertising could be revolutionized through Blockchain technology! Search engines, search applications, and Discovery-Services can be formulated completely differently through Blockchain.
Links, after all, are nothing other than virtual capital that can be easily dropped in a Link-Blockchain. Think of links as a virtual currency unit for attention.
In order to understand the potential of this, we first have to understand how this multi-million dollar link business functions today:
As with any currency, links have varying worths. The problem today: Only the world’s most powerful “Central Link Bank”, Google (and yes, there are others, even if they’re less powerful), decides the value of individual links. Many are very valuable, while others are worthless, maybe even of negative worth. Because third parties don’t have access to the “Central Link Bank”, or to the fundamental link ranking system, the links’ worths remain unknown. In this way, Google again is uniquely able to offer innumerable free, but of course also fee-based, applications and services that are based on the capital of their own Central Link Bank. Again, all of the previously discussed disadvantages of a central data bank fully apply.
Blockchain technology truly offers the chance to revolutionize business with and around links. Thus it could be possible, completely independently of a central entity like Google, to compile a decentralized, transparent, universally accessible Link Graph administered by Blockchain (see. Figure 5), which could then serve as the basis for transparent search engine applications and discovery services.
Figure 5: An illustration of Links in a Blockchain.
Of course, Blockchain technology also always offers the chance to simplify web payments, in particular, payment for virtual, digital goods. Tip: Bitcoin currency offers an already globally-accepted solution. But many other crypto-currencies (so-called “altcoins”: alternative crypto-currencies) are currently struggling to win users’ attention and affection.
In November 2008, Satoshi Nakamoto published the conceptual basis of the Bitcoin currency in his groundbreaking specialist article “Bitcoin: A Peer-to-Peer Electronic Cash System”. The revolutionary promise: transparent, non-falsifiable transactions in digital money units, known as Bitcoins, in a completely decentralized Peer-to-Peer-Network without any kind of navigation through a central entity such as a state or a bank. Or as Tyler Winklevoss, a well-known internet investor, puts it: “We have decided to invest our money and our trust in a mathematical system that is exempt from politics and human denial.” Since then, Blockchain technology has found and is finding its way into more and more spheres of application. Online-Marketing won’t be left out.
For those of you who are interested in more information, watch the TED video listed below.
Video: TED Talk – How the Blockchain will radically transform the Economy (YouTube).
 S. Nakamoto: “Bitcoin: A Peer-to-Peer Electronic Cash System”, 2008.
Published on 05/03/2017 by Bela Mutschler.
Bela Mutschler lectures and researches at the University Ravensburg-Weingarten. Since October 2016 he has been head of the Bachelor program “Internet and Online Marketing” which he developed himself. As a consultant, he advises firms on the design of modern online strategies and challenges of the digital transformation.Become a guest author »
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