Bitcoin’s Shared Ledger Technology: Money’s New Operating System


Laura Shin SEP 9, 2015 @ 10:00 AM

This story appears in the September 28, 2015 issue of Forbes.
On July 31, 2014 Adam Ludwin, Devon Gundry and Ryan Smith–no-names in the world of finance–walked into a windowless conference room in a Los Angeles office building near LAX and sat down on black leather executive chairs at a mahogany table that could seat 12. A dual-screen teleconferencing unit came to life, and five New York-based executives of Nasdaq materialized.

Just a few months before, the three Millennials (ages 33, 34 and 29) and their company,, had begun selling software tools to help developers create Bitcoin apps. It was a seemingly inauspicious time to be staking your future on the digital currency. Within the previous year the FBI had shut down the biggest Bitcoin enterprise, underground drug bazaar Silk Road; the dominant Bitcoin exchange, Mt. Gox, had gone belly-up with more than $450 million missing; and Bitcoin, the currency, had started to plummet in value from a $1,240 speculative peak in December 2013 to its current $230.

Yet during the teleconference the jeans-clad entrepreneurs told the Nasdaq suits that they believed the technology underlying Bitcoin would bring about a once-in-a-lifetime seismic shift in the financial industry, shrinking its current profits and workforce but also creating many new markets and opportunities. Bitcoin isn’t merely the cryptocurrency that has caught the imagination of the antiestablishment and enriched a few lucky speculators. In fact, that Bitcoin is merely an app. The underpinnings–known as “the blockchain” or “distributed ledger” technology–are nothing less than a vastly faster, cheaper and more secure way to manipulate money electronically. The blockchain is poised to become the dial tone for the 21st-century global economy.

Gil Luria, a financial tech analyst at L.A.-based Wedbush Securities, estimates that a fifth of U.S. GDP–around $3.6 trillion–is generated by industries that will be disrupted, or at least made more efficient, by this new technology. But it is the financial services industry, and its hundreds of billions of profits, that faces the most immediate threat.
The Nasdaq execs had been studying Bitcoin for a year, and they knew all this. But picking the right partners was crucial. So they peppered’s founders with questions about their vision and, more important, whether they could execute. The answer: The wild-haired Gundry and Smith had the product and software chops, while CEO Ludwin, with his neatly trimmed beard and tortoiseshell glasses, was a Harvard M.B.A. and former venture capitalist with a keen strategic view.

“We were very excited about their abilities,” says Jean-Jacques Louis, Nasdaq senior vice president of strategic initiatives, who had shed his tie before the teleconference to put the Millennials at ease.

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After the session Ludwin, Gundry and Smith went straight to a nearby In-N-Out Burger and, with planes screaming overhead, debated the future of their venture. They had pitched their first product to startups–a simple application programming interface (API) which helps coders write blockchain apps more quickly–and already 50 were using it. But in June Ludwin read in the New York Post that Nasdaq was interested in Bitcoin and, with the help of one of’s angel investors, set up a meeting with the exchange. The question the young entrepreneurs now mulled: Would Bitcoin technology remake financial services first through Silicon Valley upstarts or through powerful incumbents like Nasdaq? CEO Adam Ludwin (Christian Peacock for Forbes)

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“People want to believe that there’s going to be this mythical coin that comes out of Silicon Valley that the world starts using and that all of Wall Street just falls into the ocean,” Ludwin muses. But that is simply not going to happen. Layers of infrastructure need to be built first, and consumers and regulators need to be persuaded to trust blockchain–two prerequisites that give financial heavyweights an enormous early edge. So the founders decided to bet the company’s future on working with the big boys.

Smart move. In May Nasdaq became the first established financial services company to announce a real-life test using Bitcoin technology. With as its partner, Nasdaq plans to go live in November with blockchain trading of shares of pre-IPO private companies like Uber and Airbnb. But that’s only the beginning. Says Nasdaq Chief Executive Bob Greifeld, “[Blockchain] is the biggest opportunity set we can think of over the next decade or so.”

Nasdaq is hardly alone. Citigroup C -2.00%, Visa V -1.45%, Barclays , Bank of New York Mellon and UBS are among those moving to test blockchain technology. Meanwhile, the New York Stock Exchange, Goldman Sachs, USAA and BBVA have all invested in Bitcoin startups. Their dollars have helped make Bitcoin among the fastest-growing areas of startup investment, with $375.4 million committed in just the first half of 2015, compared with $339.4 million for all of 2014, CB Insights reports.

Funding their own disruption? Absolutely. But also brilliant. The big financial companies need to be involved early to identify where blockchain will eat their profits, says Eric Piscini, a principal in banking technology at Deloitte. And then, he adds, they must decide, “Should I cannibalize myself instead of waiting for someone else to cannibalize me?”

As for, shortly after that first Nasdaq meeting, it raised $9.5 million in a series A funding round led by Khosla Ventures’ Keith Rabois (a member of the so-called PayPal mafia, along with Elon Musk, Peter Thiel and Reid Hoffman), valuing it at an estimated $36 million. Were it to go out for funding now, the fledgling company, with just 15 employees, including the 3 founders, would easily be valued at more than $100 million. That might sound like small change in a unicorn-crowded world where CB Insights counts 132 private VC-backed companies valued at $1 billion-plus. But the technology is still in its infancy, and blockchain companies, as a group, might end up being the most valuable.

PERHAPS FITTINGLY, the technology that could one day wrest power from the big banks was birthed during the throes of the financial crisis. In a white paper published in October 2008 Bitcoin creator Satoshi Nakamoto (possibly the pseudonym of a reclusive Japanese genius coder … or a Finnish sociologist … or a mysterious government agency–no one really knows, although the Internet is littered with theories) proposed a protocol to fundamentally alter how something is sent and settled online.

Information has traditionally traveled on the Internet via copies–if Alice sends Bob an e-mail, document, text or photo, she still retains a version on her computer. But if Alice sends Bob Bitcoin, the system first checks to see if she has Bitcoin to spend and isn’t counterfeiting, and then ensures she hasn’t secretly also kept a copy of that Bitcoin or sent or spent it elsewhere. In theory, two people anywhere on earth could send each other money without using a bank intermediary–although most transactions are still likely to go through some sort of third party.

This so-called “Internet of value” (as distinguished from the “Internet of information”) works by maintaining a shared ledger on a network of participating computers around the world and updating that ledger with a block of Bitcoin transfers roughly every ten minutes. (The ledger consists of a chain of blocks, hence the term “blockchain.”) That ten minutes dramatically shortens the two to three days typically required to clear and settle a financial transaction within the U.S., to say nothing of the five days it can take internationally.

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