by Johann Galloway
Morgan Spurlock, the Academy Award nominated director of “Supersize Me,” explored bitcoin on CNN’s “Inside Man” by living a week using only the world’s first decentralized digital currency. Like the internet twenty-five years ago, this tour de force technology is still obscure to most people. Spurlock was introduced to the cryptocurrency at the beginning of the episode; viewers saw glimpses of him spending a day at Bitcoin Center, located just 100 feet from The New York Stock Exchange. Afterwards he said, “I’m not even sure what just happened, but my mind is blown.” So, what exactly blew his mind?
From a user perspective, bitcoin is like cash which can be transferred globally via the Internet without going through any middlemen or bank, and with very low or no transfer fees. Unlike debit cards, bitcoins (which are in essence long strings of numbers) don’t represent money being held somewhere, they are money. This has never been done before, and that’s why there’s no account to be frozen, no required personal data to be stolen. Bitcoin is free to start using and can be kept in a digital wallet on a computer or mobile device. Bitcoins are impossible to counterfeit and wallets can be backed up and encrypted. Spending them is as simple as a two-step scan-and-pay or sending an email.
Behind the scene, there is no central authority or developer that has the ability to manipulate the network to increase their profits. The bitcoin network is secured by individuals called miners, who are rewarded with newly generated bitcoins for verifying transactions. With specialized hardware anyone can mine. Confirmed bitcoin transactions need to be included in a block along with a mathematical proof of work. The proofs are difficult to generate because there is no way to create them other than by trying billions of calculations per second. A complex algorithm controls the difficulty of the math puzzles by accounting for increases in the number of miners and for newer, more powerful computers. This keeps mining extremely competitive. After transactions are verified, they are recorded in a transparent public ledger called the block chain. This ledger contains every transaction ever processed.
Bitcoins are created at a decreasing and predictable rate, which mimics the scarcity (and value) of precious metals, and shields from hyperinflation. At the time of writing this, twenty-five bitcoins are released on average every ten minutes, and one bitcoin (which can be divided down to eight decimal places) sells for $252.20. The number of new bitcoins created each year is automatically halved over time until bitcoin issuance halts completely around 2140 with a total 21 million. Bitcoin’s value lies in its ability to be transferred for free, in real-time and without an intermediary. (And, of course, the willingness for people to accept them.) The software is completely open source, and anyone can review the code. Nobody owns the bitcoin network, like nobody owns the technology behind email. The bitcoin network is the biggest distributed computing project in the world.
Banks and other intermediaries make money by providing the element of trust between two parties in a transaction. The block chain makes the role of the middle man in a transaction obsolete. Netscape founder and bitcoin investor Marc Andreessen explained in The New York Times:
“Bitcoin is the first practical solution to a longstanding problem in computer science called the Byzantine Generals Problem. To quote from the original paper defining the problem, ‘Imagine a group of generals of the Byzantine army camped with their troops around an enemy city. Communicating only by messenger, the generals must agree upon a common battle plan. However, one or more of them may be traitors who will try to confuse the others. The problem is to find an algorithm to ensure that the loyal generals will reach agreement.’ The practical consequence of solving this problem is that Bitcoin gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate.”
Though the possible applications of this technology are staggering, naysayers like Mark Williams, a former Federal Reserve examiner who has given testimony critical of bitcoin to Congress, remains seemingly unconvinced. Williams contends bitcoin avoids the controls that have been created by our banking system, and is void of consumer protections. It’s no surprise a rich banker favors business as usual. However, business as usual includes the Global Financial Crisis (2008-09), 110 million US citizens (half the adult population of the US) having their personal information stolen in 2014 alone, and the endless skimming off the top at every transaction for numerous fees, interest and penalties. Radical change is uncomfortable for some, but clinging to credit card type technology from the 1950’s (which was certainly not designed for the Internet) in the presence of digital brilliance is senseless.
Susan Athey, a Professor of Economics at Stanford University, is more optimistic:
“As we think about the next set of people coming online, we’ve got people from poorer countries, from developing countries, people without banking, and without good ways to get paid. We’ve got middlemen in there. We’ve got market power by banks…so I’m very excited about these new types of currencies as a way to both put pressure on existing systems to lower their fees and to become more efficient….The ability to securely say ‘I’m sending something to you, it’s in a public ledger and that transaction has occurred, and it’s confirmed now,’ is really, really quite powerful.”
It’s not unusual for small business owners, bound by their merchant account agreements to lose 15-20% to fraud and chargebacks. This is on top of the percentage or fee the bank or intermediary charges for each transaction and the monthly fee charged to allow them to accept credit and debit cards. Other available applications are “smart” contracts which make escrow obsolete and voting from a computer or mobile device with voter fraud and fixing elections as impossible as counterfeiting bitcoins. Considering the transparent block chain technology can be applied to charities and governments alike, there’s no wonder why bitcoin has been called possibly the most important invention of the century, which might even change the world. If stage one of the Internet is the webpage, and stage two is social media and society interacting online, then welcome to stage three.
The central bank must be trusted not to debase the currency, but the history of fiat currency is full of breaches of that trust. Banks must be trusted to hold our money and to transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve.” – Satoshi Nakamoto, Feb 2009
IBM began working on cryptocurrencies and the idea of digital coins or tokens nearly three decades ago. Milton Friedman, who received the Nobel Prize in Economic Sciences, Neal Stephenson, the science fiction writer who wrote the 1999 New York Times bestseller, Cryptomomicon, and others also understood the power digital currencies. On a televised interview in 1999, Friedman spoke of the softening of borders and even the erosion of the nation-state through the power of cryptocurrency.
In the early 1990’s, top programmers from Apple, Microsoft and the government–some using their real name, others anonymous–got together on one of the first online forums and contemplated political and social change via cryptography, and one of their main focuses was digital currencies. However, they ran into several problems. They could not overcome the possibility of copying digital coins or tokens. The counterfeiting problem was as old as currency, and the attributes of digital makes it perfect for copying. A currency that can be perfectly copied is worthless. Also, another problem they considered to be even more difficult to solve was double spending. Double, or infinite, spending is like copying and pasting the currency or transaction and spending it more than once at the same time. Since transactions on the internet are not instantaneous, the possibility that a transaction could be intercepted and then spent (more than once) before the original transaction is confirmed seemed unsolvable. After numerous experts realized the difficulties of creating a digital currency, the consensus became that it was likely impossible, and enthusiasm faded.
In November 1, 2008, amidst the chaos of the Global Financial Crisis, someone using the pseudonym Satoshi Nakamoto posted a white paper with the detailed design of a digital currency he called bitcoin to an obscure cryptography internet mailing list. Satoshi had solved the counterfeiting and double spending problems, and had invented the world’s first decentralized digital currency. None of the recipients had previously heard of him. The following year, he uploaded the open source software to implement bitcoin. For the next two years, Nakamoto worked with a group of core developers via the Internet. Then, without warning, he went silent. Not even the most savvy hackers and computer tracking experts could find a trace of him. Though Satoshi is a male Japanese name, even gender is a mystery. Some have suggested that Satoshi must be a group, citing the elegance of the algorithms coupled with the brilliance of the bitcoin design would be too much for one person to produce. In the world of digital geniuses, he (or she) is legendary.
Though no one knows exactly what Satoshi was thinking, his solution can be traced back to Napster, the file sharing site (where people could download music, movies, and other files for free) which was shut down by the government in 2001. The reason it was shut down so easily was because it was centralized: all the files were on a server in one location. So when the server was unplugged, the company was shut down. Having learned from Napster’s mistakes, the BitTorrent Corporation, which came online shortly after the demise of Napster, solved the centralized storage problem. Instead of storing files in central locations, BitTorrent’s software chopped all files into tiny pieces, and stored them on user’s computers globally. With this person to person technology, there was nothing to be unplugged. In 2008, it was estimated that BitTorrent was responsible for 50-80% of all internet traffic, and is still running today.
From Satoshi’s writings, we know that he clearly understood how banks work. He knew money wasn’t the important nor centralized part of the bank, but the ledger. That’s their real asset; that’s where they control the money. The ability for banks to access their ledgers (and manipulate them) is what makes them powerful (and dangerous). So Satoshi’s genius was turning the way banks work inside out. He did with the ledger what BitTorrent had done with media files.
He then paired two old technologies–Proof of Work and Elliptic Curves–and applied them to the ledger. Proof of Work solved double spending, and Elliptic Curves solved unique access to the ledger. By focusing exclusively on the ledger, Satoshi took the perceived weakness of digital in relation to currency (its ability to make perfect copies) and turned it into massive strength. The ability for everyone to instantly make perfect copies of the ledger insures its integrity. So cash is replaced with access to specific ledger units. Anyone trying to defraud the system by creating a forged ledger will instantly be found out because it won’t match the ledger available to everyone. There has never been anything like this ledger–or block chain– before. Something truly decentralized where nothing controls or needs to protect it, just code running everywhere. Only consensus oversees bitcoin. And since the code for bitcoin is open source, it can be used by anyone for anything, as long as they follow the rules of the code.
Bitcoin is accepted by Microsoft, Dell, Expedia, Overstock, TigerDirect, Newegg, Dish Network, Virgin Galactic (if you’re up for a commercial space flight), and millions of local merchants globally.
“I was looked at like I was crazy about telling people about the internet before anyone knew what it was. I am doing it again about bitcoin.” – Mark Hoblit, Technologist, Technical Consultant for this article.
In Part Two: The anonymity of bitcoin—the dark web and the FBI raids—the beautiful disruptiveness of an idea “fully formed, fully understood” and image revitalized.