Bitcoin, A Modern Money Method - Innovator Week

ADDITIONAL CONTRIBUTORS BTR Editorial

The map above shows the worldwide usage of bitcoins, a new decentralized, online currency. Photo from Wikimedia Commons.

Written by: Margaret Jacobi

Since the dawn of the Internet, developers wary of government-regulated currency have tried to create a new idea of assets unbridled by institution. Numerous attempts, relying on traditionally-built frameworks, floundered and folded until 2009 when an elusive cryptographer, Satoshi Nakamoto, introduced the “Genesis block” of a new, digital currency. He deemed this open source project “Bitcoin.”

“It isn’t just a digital currency but an entirely new technology that has never existed before. For that reason, it is hard to conceptualize,” says Donald Norman, co-founder of bitcoinconsultancy.com and co-owner of intersango.com, one of the largest Bitcoin exchange sites.

The official Bitcoin logo, courtesy of Wikimedia Commons.

“Simply put, though, it is the first decentralized currency. The economy is not owned or operated by any central authority, government, company, or person. It is the first modern currency that operates only on mathematical laws. This means that your account cannot be frozen, you cannot be denied access, and you do not have to trust a third party to manage your funds.”

Bitcoin functions essentially as an entity of its own. The incredibly sophisticated algorithms Nakamoto presented create a network that insures the reliability of the currency and eliminates the potential for hierarchical abuse.

Ordinarily, to prevent fraud and overspending, a third party, such as a bank, is necessary to oversee and validate transactions. To replace the human element within the bank model, Nakamoto designed the “block chain,” a single master registry on which the peer-to-peer Bitcoin network is based. Users, called “miners,” willing to sacrifice CPU power to run irreversible and competitive cryptographic puzzles, maintain the record collectively. The first to discover the solution to the puzzle is rewarded with 50 new bitcoins and the affiliated block of transactions they’ve processed through the puzzles is added to the entire chain.

Through the “block chain” method, no one can alter the block chain or transaction record without doing more computational work than the cumulative work of all miners across the whole network. Thus, altering the chain is next to impossible, as every added block strengthens the chain and reinforces the logically automated and rigorously coded system that regulates all transactions.

To avoid inflation, the reward for miners is cut in half every 210,000 blocks and the difficulty of the puzzle increases as the number of miners increases. The currency has a pre-ordained limit of 21 million bitcoins, after which, miner incentive will be based on transaction fees.

Three years after its conception, Bitcoin is used by more than 100,000 people and is the focus of numerous supplementary websites and message boards. It has its own Wiki page with a specific list of places to use Bitcoin. You can buy everything from flowers, video games, snacks from one very special vending machine, guns, or make donations to Freenet or Wikileaks. It was even the focus of a recent episode of The Good Wife. The current exchange rate for a bitcoin is $6.30.

The bitcoins are kept in a virtual wallet, a container of all the user’s addresses and corresponding private encryption keys. The public key cryptography system requires two distinct keys, one that encrypts or codes plaintext and another that unlocks the cyphertext. The virtual wallet contains a number of these pairs. Coins are given a digital signature with the private keys, while the public keys are transformed into the transaction addresses. There have been accounts of hackers stealing bitcoins, but these have all been instances of people not securing their computers sufficiently, in terms of virus protection.

“Bitcoin gives you the power to be in control of your own money, but you are also responsible for making sure it is safe. Many PC users probably miss the required security skills for securely storing their money on their own computers.” Says Pieter Wuille, a member of the Bitcoin development team. “Over time, I expect trustable e-wallet providers will appear to take care of this problem.”

Because Bitcoin is an open source arena for monetary transactions, it is also pseudonymous. “Every transaction is publicly visible, but it is between random-looking addresses, which are not necessarily obvious to connect to actual businesses and people,” says Wuille.

The inconspicuous nature of the transactions has lead to bitcoin’s use for more shady and criminal transactions on the anonymous network, TOR.

The currency received considerable attention when Wired.com released an article about Silk Road, an online black market site for selling illicit drugs, citing Bitcoin as the service’s currency. According to a different Wired.com article, Bitcoin is also rumored to be used by a similarly elusive site, Black Market Reloaded where assassination deals, along with drug deals, are also allegedly orchestrated.

“I think Bitcoin fits in with a grand tradition of new technologies being tarred with the ‘if it is new it must be bad’ brush. ‘The Internet is for pornography’ was a meme a decade ago,” says Gavin Andresen, one of Bitcoin’s lead developers. “Any useful technology is useful to both criminals and law-abiding citizens; I believe the lawful uses of Bitcoin far outweigh the unlawful, or I wouldn’t be working on it.”

However, in light of SOPA, PIPA, and the government’s attempts to increase Internet regulation, Bitcoin really can’t be affected. Bitcoin, as a peer-to-peer network, would be very difficult and costly to put restrictions on. “Shutting down Bitcoin [would be] a little easier than shutting down the Internet,” says Andresen.

You would think this success story would be the platform for other similar projects for Nakamoto. If anyone deserves to have made a few extra Bitcoin from the network, surely it’s him. Unfortunately though, no one really knows how Nakamoto feels about Bitcoin’s progress or even his true identity. It’s very unlikely that Nakamoto is even the creator’s name. His email address was from a German service, while in one online profile his location was listed as Japan before he completely vanished. After its conception in 2009, Nakamoto continued to post mostly technical coding information in the Bitcoin forums until December 2010 when he disappeared as mysteriously as he had appeared.

His complete abdication of authority over Bitcoin represents how truly collective the network is. Rather than put their trust in a single person, the Bitcoiners have entrusted their funds to logic and code. Photos, videos, and music have already been digitized, could our money be next?

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