Gold is something we covet, cherish and put on our bodies. Scarce, authentic, easily divisible and aesthetically pleasing, gold has served as perfect private money for millennia. And yet, as this man discovered, gold is not without its limitations.
Try to pay someone over the Internet with gold, of transport any significant amount of it across an international border – and problems will arise. In this day and age of global international e-commerce, could we improve on gold as a private form of money ? Rather than depend on capricious yellow metal, could we re-design gold from scratch to preserve all of its traditional monetary qualities (scarcity and authenticity), but make it Internet friendly at the same time ?
This sounds like an engineering problem. To approach it from an engineering angle, let’s come up with a set of design requirements first.
We would like to design a form of money that is:
- Private (no need to expose personal information);
- Decentralized (distributed with no single point of failure);
- Free or cheap to use (no exuberant fees);
- Secured through advanced cryptography;
- Instant (transferred with a speed of an e-mail);
- Open (transparent ledger of transactions, verifiable by anyone);
- Global (from anywhere to anywhere in the world with Internet access);
- Peer-to-peer (no intermediary taking a cut or interfering with the transaction flow);
- Having no charge-backs and fraud resistant (‘push’ vs’ ‘pull’ transactions).
What is money at its core anyway ? Money is already mostly digital – a ledger of transactions kept and maintained by a financial institution. Centralization brings efficiency, but also introduces security vulnerabilities. Banks are honeypots of sensitive private information and as such juicy targets for hacker exploits as Citibank and JP Morgan Chase might testify. They represent a single point of failure, with “too big to fail” mentality. Can something be done about it ?
The answer is a sounding yes – in software. Quoting Mark Andresen, the creator of the first Web browser Mosaic and venture capitalist, software is “eating the world”, transforming many areas of our day-to-day lives such as telecommunications, transportation and healthcare. But, although younger generation increasingly uses smart phone apps for traditional banking services, the fundamental architecture of the financial system remained largely unaltered by the Internet revolution of the past 20 years.
What about the money itself ? Could we emulate gold through software ? The major issue here is making digital asset scarce and authentic in order to solve the double spend problem.
First practical design of such a system of electronic cash has been suggested seven years ago to date by a person (or a group of people) named Satoshi Nakamoto. Bitcoin – the protocol – is designed to emulate some of the best properties of a precious commodity – scarcity and authenticity – but without the limitations of a physical metal. Money emission is known for decades to come, inflation rate is algorithmically determined. The system is secured through proof of work, making it prohibitively expensive to cheat.
Bitcoin has decentralized architecture, with no single point of failure. There is no company behind it, no office, no CEO and no servers containing sensitive identifiable personal information waiting to be hacked. The best way to avoid personal information leakage is not to collect it in the first place.
Today is the seventh anniversary of the release of the original Bitcoin white paper. In the years since Bitcoin achieved significant traction, with cumulative computing power of the Bitcoin network exceeding that of 500 top world’s supercomputers, combined. The number of Bitcoin users, wallets and transactions has been climbing steadily.
A lot of venture capital firms are backing and investing in the technology, alongside with such big names as MasterCard and American Express. Total investment in Bitcoin startups has surpassed investment in the early Internet circa 1995 and is on track to exceed $1B this year.
And Bitcoin is just getting started.
(*) Programmable money is a new concept enabled by Bitcoin. It allows creation and execution of automated and unbreakable smart contracts.