January 29, 2014
Unless you’ve been living under a rock for the past year, you have heard all of the hoopla surrounding bitcoins. At the time of this writing, a single bitcoin will cost you $866.60. As a startup founder, fixing conference calls for businesses, it is a necessity that I be aware of the emerging technology landscape. Bitcoins are especially of interest, in that, much like 3D printing, they are representative of the ever-growing convergence of the tangible, physical world with the digital world.
I’ll admit it – I’m no economist. And if you’re anything like me, when you first heard of Bitcoin, you probably felt like you’d need an economics degree to properly grasp the concept. However, I have made a career out of taking complex technical concepts and synthesizing them for the layman: let’s take a crack at bitcoins as well. I have young kids, so my lens is always on explaining things as clearly and as simply as possible. Also, if I suddenly start rhyming, you’ll at least understand why.
Okay, here it goes:
I pull a dollar bill out of my jacket pocket, and I give it to you. Now you have the dollar bill, and I don’t.
Pretty basic, right? My tangible dollar bill was literally put into your hand. You experienced this firsthand. I was there, you were there, and the dollar was there. No doubt about the transfer of ownership of the dollar. It was not necessary to have a third person there to help make or verify the transfer. We didn’t need ol’ Uncle Sam (hashtag ‘Murica) to watch and confirm that the dollar bill went from me to you (we did ask Uncle Sam to guarantee the bill as legal tender, but let’s not get ahead of ourselves).
The dollar is now yours.
I literally cannot give you or anybody else that dollar bill again. It has left my possession, and is now entirely yours. You have full control over the dang dollar bill. You may do with it what you will – no questions asked.
That’s what an in-person exchange looks like, and it’s the same whether I’m giving you a hat, a car, a nickel, or straight making it rain with dollar dollar bills y’all.
So just for shits and giggles, let’s pretend the dollar bill isn’t a tangible, physical dollar bill at all: let’s make it a digital dollar bill instead. Now that the dollar bill is intangible, how do we track ownership of it? How do we know that it is now yours, and only yours? Things suddenly get complicated, right, because what proof do you have that I didn’t just give you a copy of it and keep one for myself? Or put it in a Dropbox folder and send the same dollar to fifty friends? Or share a link to the dollar on Facebook and wait for that shit to go viral (“You Won’t Believe This Inspiring True Story of One Free Dollar’s Epic Journey”)?
This digital exchange of dollar bills creates a ton of problems. Exchanging digital dollar bills is far different, far more complex, far harder to track than exchanging physical dollar bills. Computer scientists call this the double-spending problem and it’s been the bane of digital cash since somebody first thought that would be something cool to have. And since people have been worrying about this for awhile, they’ve come up with some different solutions.
Let’s see if we can find the best one.
One potential solution is to track these digital dollar bills in some sort of centralized ledger. This centralized ledger would be digital, secure, and would need someone trustworthy and capable in charge of it.
There are some potential issues with the centralized ledger solution, though.
The ledger doesn’t account for the risk of people haphazardly creating more dollars. No matter how secure, the fact that there is only one ledger makes it vulnerable to a hacker, for example, who would only need to break into this one repository to update her balance with more digital dollars at will.
There is also the issue of observing all of those transactions so that the ledger can be updated. If everyone in the US is using digital dollars and doing several transactions per day, then we are talking about overseeing millions, billions, trillions of digital dollar transactions every single day. How can a single body oversee all of that activity? It will inevitably result in inaccuracies, mistakes, fraud…at the very least, it presents a huge bottleneck for commerce, as every single transaction has to flow through this one third-party system.
How do we guard against these “death threats” in our digital dollar world?
Well, what if we made the ledger open to everybody? Kind of like Wikipedia. All the transactions that have ever happened, from all time, will be recorded there. You couldn’t cheat. I couldn’t send you digital moolah I don’t have, because then it wouldn’t sync up with everybody else’s record. It’d be a tough system to beat. Especially if it got really big. Better yet, if it’s not controlled by any one person, then it introduces a degree of transparency: I can rest assured that no one can just decide to give himself more digital dollars. Plus the code and rules are open source – easily accessible to intelligent people to maintain, secure, improve, check, and balance.
Just replace the term “digital dollar” with “bitcoin,” and the system we’ve just described is a (very simplified) version of the Bitcoin protocol, which aims to ensure that the exchange of digital dollars shares all the advantages (transparency, certainty) of a physical exchange while being unburdened by the disadvantages.
Bitcoins behave like physical objects but are still digital with all the benefits that being digital provide to e-commerce, apps, websites, automation, open sourcing, community involvement, decentralized oversight, and much, much more. Dealing with one bitcoin, or one million bitcoins, or even mere fractions of bitcoins, requires negligible effort. Bitcoins can be sent with the click of a button, whether from Nicaragua, Zimbabwe, London or New York.
I don’t pretend to know where the Bitcoin movement will go. It could end up being a legendary flop. However, it does demand thoughtful analysis from techies and economists alike. At a minimum, bitcoins represent a great example of the tangible universe converging with the digital world. The upper boundary represents nothing short of a revolution in the way governments and central banking control our currencies, or more interestingly, the way that a resilient, independent, trustworthy economic system largely does away with government oversight and central banking control altogether.
Whether it ends up being bitcoins or something that comes along after, what’s certain is that digital currency is only going to become more common and relevant to all our lives as we continue along in the 21st century. At the very least, it’s going to make for an interesting run. And now you know enough to follow along.
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