Bitcoin: An Archive of Truth
In 2008, a person calling themselves “Satoshi Nakamoto” posted a thread to a mailing list on cryptocurrencies calling for a new form of money known as “Bitcoin” that detailed a new form of currency that broke ground in not just economics, but also pushed the boundaries of what we previously thought computer networks and cryptography could provide outside of their inherent purposes. To the uninitiated, cryptocurrencies are forms of electronic money, or money that exist only in electronic form (Mishkin, 58), that utilizes security techniques that reference a third party for payment confirmation and provide proof via cryptography. Most people are familiar with the US Dollar, a form of money called Fiat Money which means that it is usually denoted in paper currency that has the backing of a government (Mishkin, 57). Beyond that, the United States Dollar depends on the monetary policy put in place by our central bank, the Federal Reserve, and the fiscal policy of our government. The federal reserve attempts to attain a level of economic price stability as well as a few other goals such as high employment, economic growth, interest-rate stability, and stability in foreign exchange and financial markets (Mishkin, 317-319). The government enacts its fiscal policy primarily by drafting a budget and budgetary goals along with the implementation of taxes and other policy. Unlike the US Dollar, Bitcoin lacks the backing of a government, even more impressively it constitutes the first decentralized currency ever created (“White Paper: Bitcoin 101).
Bitcoin is extremely complicated to most laymen. Most people have very little experience in Economics, Computer Science, Cryptography, and Networks yet alone all three at once. Nakamoto described Bitcoin as “… a purely peer-to-peer version of electronic cash” that would bypass any need for a financial intermediary such as a bank or even an online financial intermediary such as PayPal. In order to understand Bitcoin it may be more important to understand the underlying technology that many believe may be more revolutionary than the currency itself.
There are many problems that Bitcoin has solved that other cryptocurrencies have so far failed to address. Bitcoin provides a work around for the common “double spending” problem that comes up when hackers figure out ways to trick systems into allowing them to spend their money more than once, effectively doubling the amount of money they have. Nakamoto solved these problems by recommending a system not based on trust. A system not based on trust in a central bank to maintain balance and not on the government and policymakers that enact taxes and fiscal policy. Satoshi achieved this by use of a “block chain”, a shared public ledger that contains every confirmed transaction in chronological order (“Bitcoin: How it Works”). Each user has a key that they can use to “sign” each transaction. This transaction takes place on the block chain network but will not be confirmed until a third party checks the transaction for integrity. This third party check takes place through a process known as “mining” that allows users to contribute their personal computing power to run the network. In return, a process that is often explained via a popular analogy. Suppose a robot is sitting in a room. Powering the robot is the miners computational power. The robot can see the miners but they remain anonymous to the machine. Around every ten minutes the robot points to a random miner or pool of miners and grants them a “block” to add to the chain that contains a certain amount of bitcoins for the miners to enjoy. This block acts as a refresh for the ledger, updating the chronology and the chain confirms this from their own records. In this way it is easy to see that it is almost impossible to fool the system since it relies on every source on the network to confirm via the robot. In order for someone to alter the information and the nature of Bitcoin would be to convice every single computer powering the network to accept the changes. Beyond this, the private keys held by each side of the transaction are intended to be just that, private, and are your only identification on the network. This process is automatically adjusted every four years of bitcoin operation with the growth rate halving with each cycle. This should allow the total number of Bitcoins in circulation to slow to a creep around 21 million units. Thus, mining is essentially just creating new blocks to add to the chain with returns determined by the rhythmic robot.
All this is to say that if I initiate a transaction with another person, that transaction will be recorded and verified by the block chain network’s miners, and will be posted to the public ledger. Once the new block is added, the transaction is confirmed and executed. This process is incredibly simple in comparison to traditional financial transactions that often require large amounts of behind the scenes processing and transferring that costs billions of dollars per year. These bitcoins are stored on various online wallets that allow you to store the units. It is important to remember, however, that without the private key to your wallet, those bitcoins will be lost forever.
Who is this mysterious Satoshi Nakamoto?
The creator of Bitcoin is still completely unkown and the person calling themselves “Satoshi Nakamoto” may or may not even exist. It may be one person or many. However, there are a lot of different clues that people have found hidden throughout the web. While online, Nakamoto claimed to be a 37 year old Japanese man, however, this is doubtful considering the lack of any Japanese in the underlying code. American computer security researcher Dan Kaminsky, having read the Bitcoin code and studied the currency, remarked that Nakamoto was either a genius or most certainly a group of people disgussing themselves as a single person (Jeffries, 2011). Nakamoto remains behind the scenes to this day, having passed on operations to a scientist named Gavin Andresen (Jeffries, 2011).
How Does Bitcoin Change Things?
So far bitcoin has seen a lot of popularity but not all of it has been positive. While the block chain technology and the decentralized structure have been touted as revolutionary technological advancements, many suggest the presence of a speculative bubble. The environmental impact of such a large amount of computing power sucking electricity in order to support the system is certainly cause for concern but compared to the alternative it seems trivial. Cryptocurrencies often have are much cheaper than the existing monolithic financial infrastructure that supports the modern world and I believe that it is inevitable that they evolve in complexity, security, privacy, and efficiency until they become legitimate continders either as currency or an online commodity. Many merchants including Amazon.com, Target, and even Subway have begun to accept Bitcoin as a form of online payment and many more continue to add support for the method of payment. Current Chairman of the Federal Reserve Janet Yellen has gone so far as to state that “The Federal Reserve simply does not have authority to supervise or regulate bitcoin in any way” (Russolillo, 2014). This is a huge step for cryptocurrencies and Bitcoin will remain the most dominant form of cryptocurrency for a long while if not forever due to the evolving nature of its underlying block chain technology.
Our class has covered many important features of technology and how societies and individuals interact with them and bitcoin along with it’s archive block chain tie in with a few common themes we have discussed in this class. Bitcoin has found a way to become more integrated within our society by making things much simpler and more efficient than existing money forms, albeit with it’s own unique drawbacks foremost of which is the lack of government backing which would provide the most legitimacy a currency can hold. However, the decentralized structure is inherently designed to avoid this issue so Bitcoin can continue to exist alongside fiat moneys such as the US dollar. This has may have important consequences considering that while Bitcoin barely even registers as a threat to the US Dollars hegemonic power, that is not to say that with the current rate of technological advancement and the natural passage of time, these new forms of currency could pose a threat to the all powerful fiat money. As technology expands its scope with sensors creeping into almost every object, it is possible that cryptocurrencies could expand their uses beyond what we currently consider for money to provide additional benefits potentially including social and local currencies that create entirely new economic dynamics.
Forsters short story “the Machine Stops” describes a science fiction post-apocalyptic world where people live underground in honeycomb houses, all needs provided by a great machine. The story follows characters that either experience or relate to someone’s escape from the clutches of the machine. When the machine eventually fails, killing all those within it and leaving our species future in the hands of the few still on the surface, Forster expresses concern for humanities ever increasing reliance on the technology we create for ourselves. Even in the early 1900’s when the story was published, people were worried about lack of forsight when so aggressively adapting new and evolving technologies that we may only have a small understanding of. While these criticisms are valid (he makes this point well himself) I do not believe that bitcoin represents the sort of technology that forster warns us about, rather it moves away from reliance on humans in a way that diminishes the negative aspects of human nature such as greed, high-risk behavior, and crime. While current monetary technologies rely on trust in the overarching system to hold value, Bitcoin achieves this with mathematical proof. With the onset of technology such as block chain and bitcoin along with the ever increasing power of computers as Moore’s law continues to hold true, it is not far off to imagine a world where an entire economy could be contained within a system based off of this technology. This imaginary system seems to be where cryptocurrencies and the spread of the internet are heading and does seem to inhabit the idea of a machine propping up a fundamental part of society. The most fundamental reason why online currencies have not been adapted by all is because the underlying telecommunications infrastructure is costly and many cannot afford computers. With internet availability spreading at an impressive rate and the continual drop in computer cost, a Raspberry Pi is just $5 (“Raspberry Pi: The $5 Computer”), the days where systems such as these exist only in science fiction books are fleeting.
An important part of Dawkins book, “The Selfish Gene”, describes evolutionarily stable strategies, or strategies that when adopted by a society, natural selection will keep that strategy in power unless there is an overwhelming external force. Interestingly this is similar to how Block Chain technology handles changes, by only accepting them with nearly unanimous support. Beyond that, online currencies may become the new trajectory of money once Bitcoin has time to mature and evolve. Once these new money strategies improve to the point that they can dominate over existing money forms, they will overtake some economies, greatly reducing the power of those in charge of the existing dominant fiat moneys.
When we add power into the discussion, Hebdiges “Subculture meaning of style” is important to consider in its discussion of symbolic forms of resistance against hegemonic power. Bitcoin and the resulting black market exchanges, that pop up as a result of Bitcoins anonymity, are most certainly designed as a rejection of the current state of currency based economies especially the political and central authorities guiding them. Hebdige further discusses class, race, and socioeconomic conditions of subcultures and these aspects will always be tied to money and the adaption of a dominant e-currency will challenge certain aspects of power that different classes take advantage of, particularly the resulting revolution in the banking industry that so heavily favors specific subsections of society.
Bitcoin has become incredibly interesting to me as a student of both Economics and how systems work. I have developed a particular interest in market transparency, emerging markets, and the technology sector as a result of the new and exciting things we can do with computers and networks. Having researched effects of price transparency on insurance bargaining in the health care industry, it was interesting to note that every transaction made via bitcoin was recorded on a public ledger that could only be changed with overwhelming odds. This allows for considerable transparency for the currency, much more than for any other currency that I am aware of as every single transaction must be recorded. While we have yet to see the results of our study, I’m sure it will prove an interesting comparison when considering the flawless proof of work that is the block chain. Beyond that, the technology sector is only just beginning to establish itself in areas outside of high tech, the internet, and computers and make it’s way into various other industries and forms, providing new and wonderful new tools for humans to utilize.
Bitcoin being entirely a web-based technology I thought it was relevant to post this article to the internet for others to see. Ideally, I would have liked to integrate in an option to mine for bitcoin while you read but this has proved difficult in my limited time. There are pools of miners that you can join on any device that allow you to receive bitcoins in extremely small increments (I’m assuming you don’t own a supercomputer). You have already made the first and most important move (well, I sortof forced your hand) of acquiring a general understanding of bitcoin, and I hope I have done a sufficient job of that. There are three primary ways to obtain bitcoin once you have set up an online wallet. First, you can exchange some currency you own such as US Dollars from your bank account for some quantity of bitcoin that holds an equal value. Second, you can sell a good or service in exchange for bitcoin (and if you are an active vendor I strongly encourage you consider this option) and the third option has been previously mentioned, mining.
There is one quick and easy way that doesn’t require much previous technical knowledge and is freely accessible by anyone with a mobile phone or tablet. This method is by downloading the “Free Bitcoin” app from the Google Play Store or, oddly enough, “Bitcoin Free” through the App Store. These apps are virtually identical and both grant you an extremely small amount of bitcoin, provided you have a wallet. While you won’t be able to really buy much with such a small amount, it is interesting to see the technology in action in this format. If you would like to mine in more depth on a personal computer I encourage you to explore the internet and learn more about Bitcoin by visiting the numerous forums and online communities that are always engaged in heavy discussion on the topic.
Dawkings, Richard. The Selfish Gene. Oxford: Oxford UP, 1989. Print.
Hebdige, Dick. Subculture, the Meaning of Style. London: Methuen, 1979. Print.
Forster, E. M. The Machine Stops. New York: Halmos, 2015. Print.
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Mishkin, Frederic S. The Economics of Money, Banking, and Financial Markets. Boston, Mass.: Pearson, 2016. Print.
Russolillo, Steven. "Yellen on Bitcoin: Fed Doesn't Have Authority to Regulate It in Any Way." Moneybeat RSS. The Wall Street Journal, 27 Feb. 2014. Web. 17 Dec. 2015.
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