Future of bitcoin | part one | Ryan ©

1.. An Overview of Bitcoin

MOST PEOPLE FIRST ENCOUNTER BITCOIN as a digital currency (this is shorthand; whether it is a “true” currency is a matter for debate). While Bitcoin is entirely a digital “object,” this does not make it much different from other forms of currency that today exist entirely or almost entirely in digital form, even including standard world currencies. One can buy, sell, trade into and out of, and exchange it for other forms of currency, just as one would trade for any other currency. There are exchanges where individuals can buy bitcoins for U.S. dollars, euros, and yen. Like all currencies, there are exchange rates at which these transactions will be processed, and these rates change constantly. When we talk about the “price” of Bitcoin, it is usually relative to one of these world currencies.

Like other forms of digital currency, including ordinary dollars, users can store Bitcoin in an account with something like a “bank,” although in Bitcoin’s case this is typically an exchange specifically created for this purpose, rather than a more typical bank. Many of these exchanges, such as the now-shuttered Mt. Gox (Rizzo 2014b), have been targets for scams and theft, due in part both to Bitcoin’s antigovernment reputation and its hostility to regulation.

Unlike other forms of digital currency, users can also run a small piece of software called a “Bitcoin wallet” on their own computers and store their bitcoins there rather than in online accounts.
Bitcoins can be transferred by using one of the many exchanges set up for that purpose, or they can be sent directly to another user’s wallet by using an address provided by the wallet holder. That address, like all Bitcoin data, is encrypted: it’s a string of letters, numbers, and symbols that mean nothing to anyone without the proper decrypting software and keys: an example would be a string like 1JArS6jzE3AJ9sZ3aFij1BmTcpFGgN86hA. The address is technically the encrypted version of a cryptographic “public key.” The address cannot be decoded without the user’s “private key.” All transactions on the Bitcoin network are public and available to all users of the full Bitcoin software; but since the addresses are encrypted, nothing more about the identity of the wallet holder is necessarily available. Bitcoin is therefore considered pseudonymous (Beigel 2015): it is not fully anonymous, since every transaction is recorded, but determining the true identities of those involved in the transactions requires more information than is directly available in the network. The possibility of identifying those true identities and the potential methods for obscuring them altogether are live topics of discussion in the cryptocurrency community (see, e.g., Meiklejohn and Orlandi 2015).

The Bitcoin software does not exist in a single physical location, or in one virtual “cloud” location: it is not hosted by a company like Level 3 or, for that matter, Amazon or Google. Instances of the Bitcoin software run on thousands or tens of thousands of computers all over the world. It depends for its continued life not on any one of those computers, but on the many machines that make up the network. Further, many of those computers—all of the ones running the complete Bitcoin program—host copies of the complete record of all Bitcoin transactions, though it is not necessary to host the records to use Bitcoin. That set of records is called the ledger, and is conceptually equivalent to the transaction records of other financial entities, such as a bank or brokerage account. These qualities of the Bitcoin software are what lead advocates to describe it as “decentralized” and/or “distributed”: there is no single central authority who publishes and maintains the software, so it is “decentralized”; and the software itself sits all over many separate machines on the network, so it is “distributed.” A Bitcoin wallet is a relatively small piece of software that allows users to keep bitcoins on their own computers without needing to host the full Bitcoin ledger.
The ledger is the first widespread implementation of a software model called a blockchain. The techniques involved in building the blockchain work to ensure that transactions are unique and authentic: “The block chain is a shared public ledger on which the entire Bitcoin network relies. All confirmed transactions are included in the block chain. This way, Bitcoin wallets can calculate their spendable balance and new transactions can be verified to be spending bitcoins that are actually owned by the spender. The integrity and the chronological order of the blockchain are enforced with cryptography” (“How Does Bitcoin Work?”). Computers that participate in the verification process are rewarded with fractional amounts of Bitcoin. This is the exclusive means by which Bitcoin is created; the process is known as mining, in a deliberate reference to gold. The blockchain is large and processing it requires significant computing power; in fact, because it is a record of all Bitcoin transactions ever, any computer participating in Bitcoin mining must today have substantial networking and processing capabilities. While in its early days Bitcoin could be mined by relatively fast home computers, today most mining is done by pools of dedicated high-power systems, due to the increasing difficulty in generating a “hash” designed into the blockchain model. This fact alone has raised significant questions about Bitcoin’s claim to “democratize” or “decentralize” currency operations, in part because the system is exposed to the “51 percent problem”: if one entity controls more than 51 percent of the mining operations at any one time (something which was at one point unthinkable, but which now has happened at least once), it could, at least theoretically, “change the rules of Bitcoin at any time” (Felten 2014; also see Otar 2015). The amount of power consumed by blockchain operations is large enough that it has suggested to some that Bitcoin itself is “unsustainable” (Malmo 2015). The use of cryptographic techniques is what gives Bitcoin and other technologies like it the descriptive term cryptocurrency.

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