BitCoin: the New Money and Value Exchange Network Protocol

BitCoin is the new digital currency for transactions.

Bitcoin is also a new protocol for verifiable public digital transactions.

Bitcoin as a protocol is one of the most important technological advances in history. It’s going to have the same implications as the invention of TCP/IP protocol, which underpins the internet.

BitCoin as a currency is highly volatile and risky. It is perhaps the biggest financial pyramid after the US dollar. However, it makes it possible to actually use the protocol, not only to theorize about it.

To understand the workings of both the currency and the protocol is to actively participate in the future of money, which will be defined by symbiosis between networks, value and exchange.

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BitCoins are stored in a digital Wallet, which is a combination of two long numbers: a public and a private one. To make a transaction, only the public number of the receiver is needed. It is then encoded into transaction with the private and public number of sender’s wallet using cryptography, so there is always a way to verify the transaction and to know how many BitCoins are left in each wallet.

 

 
BitCoin is accepted by more and more people in exchange for goods and services.

You can also exchange BitCoins in any national currency at many online exchanges. That’s the main reason it actually took off: the price of one BitCoin grew from $100 to $1000 in 2013.
It’s the golden rush of the digital era!

Its supply (the number of BitCoins available) is limited. To create the new BitCoins (as more and more people want them) special computers called “miners” have to resolve and verify the history of past encrypted transactions. Everybody who uses the currency agrees to follow the bitcoin protocol. The algorithm in the protocol makes it possible to create only 25 BitCoins (BTC) every 10 minutes, regulating the difficulty of production according to the current computing power of bitcoin network and the number of transactions that need to be decoded.
Therefore, the money supply of BitCoins is automatically regulated in a way that’s agreed upon by the majority of users.

This makes BitCoin a bit like gold: an arbitrary material that’s scarce and therefore valuable becomes commonly accepted means of exchange.

However, with BitCoin there’s several big differences.

First, it’s decentralized. There’s no one authority regulating the currency. Anyone who’s using BitCoin can also do mining using specialized ASIC computers and the open source software that’s also continuously developed and improved upon by the network.

Second, all transactions are publicly available, so BitCoin is also like a lodger, a global book of transactions. This lodger is called BlockChain and it’s collectively updated by “miners” who verify its validity and thus keep the network running. There are no names in the BlockChain, just wallet numbers, but once you identify one wallet, it’s easy to find the rest. So BitCoin is not as anonymous as many people think.

Third, and the most important, BitCoin as a currency runs on top of bitcoin protocol. This protocol is basically a generally accepted format for transactional data exchange and some programmatically implemented control mechanisms for the network (like limitation of the new BitCoin issue rate to 25 BTC per 10 minutes).

 

 

This is crucial, because this protocol is open source, publicly available, and can be modified or built upon freely. Anybody with sufficient knowledge of programming, computer networks and cryptography can propose modifications to this software or create their own version of virtual currency running on top of bitcoin protocol.
So even if BitCoin fails as a currency, there is always the protocol left, which could be modified to create a new, better protected version of it.

Think of it this way: bitcoin as a protocol is like TCP/IP protocol, which enables the internet to function. The actual currency BitCoin is one of many implementations possible, just like there can also be many different internet networks on top of TCP/IP.

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That’s why in fact BitCoin is probably both one of the most important technological advances of the last decades, but also the biggest financial pyramid the world has ever seen (after the dollar, perhaps). Investing in BitCoin is more about investing into a certain vision of the future where our everyday functioning is determined by open source algorithms.
And if that sounds unpleasant, the current situation with money is even worse. Not only it’s a set of algorithms running the financial system, but we also don’t know anything about their functioning, there is an authority (central bank) who has the control over supply, and only a few dubious explanations of how the whole thing works that are hard to get.

Bitcoin, as a protocol, is also hard to understand. Therefore it naturally gives preference to those who have the technical skills necessary and who can produce or buy the newest most powerful mining equipment. However, at least the decision-making process about its functioning is not (yet) centralized within one authority and the majority of the network has to agree if any changes in the protocol are to be implemented. And if you do not agree, you can always start your own new virtual currency. But then you’ll need to find the other people who would accept it as a mean of exchange.

 

 

All in all, bitcoin the protocol and BitCoin the currency are at a very speculative stage at the moment. As an investment, it’s risky because of its high volatility. As a means of exchange it’s not yet as widely accepted as dollar, for example.

BitCoin, the currency, does not change the way that money are distributed. It’s still the winner takes all and the winner is the one with the most powerful means of production (ASIC bitcoin mining machines or simply a lot of cash reinvested into bitcoins). It’s the same story, but slightly different characters.

In this way BitCoin the protocol is the best thing capitalism could produce to continue its global advance into all areas of life. Create a protocol for money exchange everyone has to follow, make all transactions publicly available, use ubiquity and openness of computer networks to efface national borders.

It’s a step towards the new world. The world of corporate walled gardens, WalMart and Amazon currencies, Facebook global police, Google infrastructure. It’s the new world where national borders will reshape themselves according to the symbolic value people give to things. The algorithms running the money system and other infrastructures will become more and more greedy for electricity to cope with increasing complexity of maintaining the blockchain of transactions. Humanity will not only be hooked on symbolic value translated by corporations competing with their private virtual currencies, it will also be hooked on increasing power consumption required to make it all run. This will not dramatically change the way power is distributed in a socially unfair way, but it will definitely dislocate the centers of power to newly arranged formations.

A good thing about BitCoin the currency and bitcoin the protocol is that they also make the whole system very transparent. More and more people are learning about BitCoin, networks, computing, and the organization of money system. Many understand the arbitrary nature of value we give to things and to actions. And bitcoin, the protocol, is still there waiting to be used and to build upon. Using any value system and any algorithmic mechanisms controlling its dynamics.

Imagine a currency that automatically detects fast accumulation of income within one cluster and redistributes it evenly across the network.

Imagine a currency that rewards every transaction with faster processing time if it donates a small amount to a random node that doesn’t yet have any money available.
There are many more possibilities and the protocol is there to be built upon.

It’s a protocol for giving value to things, for deciding what is important. Right now it’s not much different from money. It’s backed by silicon and technological advance instead of the central bank authority and the gold, but that’s actually almost the same, just the players are different and there’s more of those who can really decide. However, the fact that it’s open source makes it possible to build anything else on top of it and potentially change the way we give value to things through a protocol and a set of algorithms that proliferate through the networks. A great new opportunity for the activists, philosophers, writers and artists of the 21st century.

 

The Future of Money from KS12 on Vimeo.