Financial Innovation

Background Bitcoin, a peer-to-peer electronic currency, is a distributed ledger system (Nakamoto 2009). Every transaction is broadcast and verified by all nodes in the network through a particular consensus mechanism (Bonneau et al. 2015; Yermack 2013). Every node collects transactions in a block and the block is associated with a difficult mathematical problem. Solving that problem is called mining, and nodes that mine coins are called miners. The miner that solves the problem first secures the right to append the block to the current longest block chain. Once confirmed, the new block chain is then copied to every node in the network (Narayanan et al. 2016). The longest block chain is the consensus of all nodes, which records all transactions in the history. Decentralization is the presiding feature of distributed ledger systems like Bitcoin. This feature, which contracts with other modern systems, are overseen by intermediaries. For example, the Society for Worldwide Interbank Financial Telecommunications (SWIFT) is central to the global payment system, such as, commercial banks for credit markets and central banks for monetary markets. All these centers prominent in other systems exert what is reasonably called political power, but Bitcoin functions without them. Bitcoin’s supporters embrace the network’s decentralization and have been proposing more aggressive formats such as a decentralized autonomous organization (Bannon 2016). A decentralized ledger can bemaintained by a proof-of-work (POW) consensusmechanism