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A post about Bitcoins

When I started writing on this everybody was living the hype of it. By pretending being busy I accidentally waited for low tide. Moreover it should be said that I don't even owe any dime of this non-governmentally controlled currency. Lastly, you won't find any references in this. I am blogging, bloggers don't need proof, they aggregate what they read. No argument will be stood up for in this but maybe it'll make somebody think and chuckle.

A history lesson

I guess this post should begin with a bit of history about the currency which does not have any coins to offer. The problem though is: there is no real history. The concept of this currency (whether or not this term is correct) was published in 2007 under an "nom de plume" (me fancy heh), an alias. Any traces of the author ever since leads into the dark. Nobody wants to be responsible for inventing this beautiful product and though experiment. To lower any unease instantly arising from this it must be said that cryptographers all around the world looked into the source. Yes, the source is publicly available, can be forked, can be changed. Not enough, you could even run your own instance of the system. Hold on. Yes, your own monetary system side by side - you just need people to use it. After all, a good thing, how can one be uncomfortable with something being completely transparent and open. A trait which we constantly demand these days from institutions and government in which we feel so rightlessly observed in our acquaintances. Fair enough lets go right back. What if experts look at the code and hostly admit that this piece of art can't be written by one guy. Too big, too much knowledge involved to be built by one soul. So it must be a team of geeks and nerds being organized - an organization. That's almost a synonym to conspiracy in most circles these days. What if there is left behind a dead spot an exploit or just a door with a key given to somebody. Something hard to find, hard to proof, maybe even a conceptional void.

Apart from all anxiety, the project is a great experiment which deserves some words.

Cut to the chase, how it works

No formulas in this section, no graphs and any Computer Science related aspects are always backed by analogies. A currency is something everybody needs to understand. Well, it has to at least disguise any complexity so we use the bills and coins everyday without feeling we use something we do not understand.

First and foremost currency is based on trust, trust in it being a good store fore value. Trust is fragile. Trust can either be build by understanding or a central agent such as the government. In the past trust has always been established by the government backing currencies with rare commodity or natural resource. Nowadays gold has left the stage and virtually unbacked fiat currencies are omnipresent. Still we feel they are not gonna let us down, no matter how inflated and far from reality they are. We have to and we like trusting in them, they are essential and without any alternatives as far as we think.

So what if we do not trust or governments in ensuring conservation of value but rather algorithms not controlled by any institution. Far fetched? I would put forward the argument that we trust brittle algorithms already more than we should in our everyday life.

So how can Bitcoins transcend themselves becoming a serious currency, assuming that a government allows this, and how can it gain the needed trust. It is still defining its inherent value and maybe always remain seeking. Which is why it is being mostly portrayed as an object of venture, speculative buying and selling therefore may yields profits. Holding on to the units itself can be beneficial. The value-curve therefore almost looks like a roller coster ride: quite a wavy thing. Using this on a basis to buy bread and butter appears lots of fun to me but may cause others rolling their eyes.

Bitcoins are obviously traded among people in a big network. Everybody either wanting to buy, sell or trade in units. All currencies tend to have two major pitfalls in their network - risks calling for mitigation. Both causing disbelief, one rooted in fraud the other in double spending. Double spending obviously being part of fraud but being special as every member interacting through currencies is not allowed to spend his money more than once. As fraud offers more options such as counterfeiting, payment manipulation or plain old theft.

What if everybody had to sign off on all transactions occurring in the last time-frame to approve their validity. Impossible in reality, possible using computers making them do the work. Even better: not a single entity maintains the ledger, everybody has a complete copy of it. Cheating on somebody requires fooling everybody which makes it a tricky heist.

Entering a transaction means signing the transaction itself wherein my signiture is unique for every transaction made. Everybody in the network can then verify the transaction as a fakted one would have a non-related signature and content. Computers do the work here as the signiture is just a one-way-function on the content relating the two. Due to the low nature of guessing a right signature and the computational complexity in reverse engineering it, it mitigates double spending.

Solving the problem of double spending is slightly harder and requires more thought. Basically all transaction have to confirmed in smaller groups until they are perceived as valid. Not just everybody should be easily able to verify a block as signing a block would allow for double spending. A computer is only allowed to sign a block if it solved a mathematical problem which everybody else is also trying to solve and which is pretty exaggerated in complexity. Being able to fake a verification embodies a race against everybody else's computing power in the network. It is important to understand that after solving the quiz a custom block (double spend) can not be added as everybody else knows potentially new transactions and all previous groups too. In addition, the chained nature of all groups builds would be invalidated as soon as something changes.

This is what is called verification-block-chain. Users' compusters get rewarded by constantly trying to theoretically break the systems verification process (mine) and thereby adding transactions to the overall ledger. The system is proactive here not waiting for somebody to counterfeit and then find out about it. Based on the ease of breaking it (the verification sum), which relates to the overall computation power and number of members, the system adjusts its secureness by using stronger quizzes.

One of the beauties resulting by this is the fact that the system can even engage with untrusted participants. Obviously, the big "what-if"-question remains: what if the system is broken or an exploit is found. Will all stored value puff out? Monetary currencies have to be scrutinized using the same question at the moment and its a question of trusting tangible bills being hacked or a complex cryptographic system.

It's still different

Apart from the technical differences Bitcoins differ from most other currencies. Inflation. Hard to understand at times and a vicious beast to control when it starts running. Economists love and hate it at the same time. It fuels investments and almost tries to force people spend their savings. At 2.x% it has its set rate which is approved to not be dangerous in a sense of harming trust and causing hyper-inflation after all. Bitcoins do not have a static inflation-rate. Their value depends on supply and demand and fluctuation and speculation. Most agree that this is a bad thing. All resulting in deflation which is even worth than inflation after all. Money needs to flow, investments need to be made and economy needs to flourish. Deflation will lead to stagnation and value gambling. Others proclaim that inflation is cruel forcing people to spend their money. In the end, both can be computationally solved and their risks mitigated. Some still argue that deflation will be Bitcoins gravestone.

One of the most adorable parts of Bitcoins itself is that is does not have any transaction cost. There is no movement of any tangible asset involved, no person needs to work for the system to perform its tasks. It may thereby be even considered as a threat to the established banking industry which has no influence in the system after all. Most interestingly, the fact that Bitcoins can be used for speculation still attracted big investors.

Is dat legal after all one may ask

Is anybody allowed to put out a currency which is used to pay for goods and services. This seems a very important question which has only been asked after Bitcoins has been around for a while.

Apparently it is not directly legal nor forbidden. The NGO located in Seattle being in charge of managing Bitcoins system but not transferring a unit of it received a letter by the US government. Bitcoins has been billed 2.5k per day since the system launched which has been five years ago. In addition the founder (who knows, maybe they're talking about the chairman) is fined 250k.

In the end, any government can shut down Bitcoins using their judicial system, fines and threats. As long as its under the radar not drawing significant interest, it will be tolerated. Before it gets to big, it might be taken down. An interesting question arising though is who is responsible to the money which has been released. Are banks responsible for the money they pull out and put into the economy. Overall, everybody looks at it as an investment not to be taken serious. Hence, investors will lose money which they definitely do in that case.

May I try: The future of it

The future. Too bad I still can't predict it, guess I would not be blogging if I could.

It it unlikely but hope for me remains in place that the future will be a poly-monetarist one. Currencies challenging one another. Humans might be anxious about it but it would be to their benefit. Flexibility and competition mostly is. Especially when some can manipulate the sole currency better than others to their advantage. Bitcoins could also always remain subject to speculation and still a means to perform transactions of goods. Pick labile and fragile over artificially robust and exogenously sustained resilience.

The strength lies in decentralization, of almost anything. Decentralize power supply, decentralize information and dezentralize currency. Even better when the dezentralized system is self-challenging, embraces its own fragility and rewards those who manage to break it. None too long ago Bitcoins ran into a muzzler. Only because its mostly used central trading platform (MtGox) was under heavy DDOS attack. They went down, as would every major banks system taking the same load from the Ion Cannon.

The post shall not end polemically but we can still disagree with the established and try something new.