Bitcoin is only seven years old. It’s an idea in its infancy, still teething. It also exists at the intersection of technology and finance – two industries that are notoriously bad at communicating their ideas to the public. So we’re left with a clear division – a fear mongering media that focuses on click-worthy scandal, and an industry that ignores tired expressions as they drone on about ‘decentralized and distributed currency systems’ or ‘blockchain-based protocols’.
So let’s tell a better story – one that demystifies the jargon at the centre of one of the 21st century’s greatest innovations: bitcoin.
But before we can understand the currency, we have to understand the software.
The Bitcoin Blockchain – The Technology Underneath the Coin
When you cast a vote – how do you know that it’s been fairly counted?
When you meet someone online – can you guarantee the photograph they uploaded will match back to what they look like on the first date?
We live in a world where we have to take certain things for granted because there is no public record we can all rely on when we need to verify information. No giant ledger in the sky that we can refer to when everything sours. And it often sours.
To get around this we would need a system where facts could be stored, verified by everyone, and security would be impenetrable. That’s what the Bitcoin Blockchain is. It’s a system that was built to answer three questions – how do I know what this is, who owns it, and where it’s going? To understand the breakthrough we have to understand the symptom.
Under the current banking system a credit card transaction can involve up to five parties. When we introduce more complex ways of handling money, we also introduce complicated relationships between banks and consumers, between banks and other organisations and even between banks and banks. At each step fees are extracted from the customer as more organizations get involved in moving the same money around. This is the problem that Bitcoin solves. (the capital B refers to the software, the lowercase b refers to the currency). It’s trustless, meaning that it doesn’t have to rely on other entities to settle a transaction. In other words the transaction is the settlement. Let that sink in. Once you send it, and it’s received – that’s it, transaction completed.
The Bitcoin Blockchain solves one of the most complex questions of the last century – information storage and transfer.
“Over and over again, we go back to paper and metaphors from the age of paper (to describe information storage and transfer) because we cannot get the software right, and the core to that problem is that we managed to network the computers in the 1990s, but we never did figure out how to really network the databases and get them all working together.”
If you think this is a silly example, the Mars Climate Orbiter was lost by NASA in 1999 because one team was using inches, and the other, centimeters. These things go wrong all the time.
In January 2008 the Bitcoin Protocol was launched by an unknown entity calling itself Satoshi Nakamoto. It had sprung from nothing but a pile of incomprehensible code and now it had value.
Probably most indicative of Nakamoto’s motives was this statement, embedded in the code itself, almost as a time capsule to future users – The Times 03/Jan/2009 Chancellor on brink of second bailout for banks. Bitcoin was born out of a lack of faith in the Federal Government and a distrust of the reckless behavior that led to the 2008 financial crisis.
In the years that followed people got so caught up in what the actual currency was, how it worked, what illicit things it was being used for, how much it was valued at, and how much it would be valued at, that the technology behind it went largely unnoticed.
The technology itself was intended to solve the problem that kept cropping up with other variations of ‘digital money’ – the double spending problem. The way that most file sharing on the internet works is based on cloning. A file is duplicated and the duplicate is sent, the original remains. This is fine for a song or a cat video, but it’s disastrous when trying to develop a money system. If I hand over a $5 bill, I can’t turn around and spend that same bill later. The Blockchain is a public record of ownership, meaning nobody can counterfeit or double-spend bitcoin. It means that we can keep track of the flow of currency.
This was a radically new currency system. For most of modern history human beings have accepted certain handed down truths: money was created by the elite (kings or barons, then central banks and commercial banks) and it was awarded value because it was accepted as a payment for taxes (and could be exchanged for goods and services within the realm).
Into this mix we throw bitcoin. Bitcoins are created through complex mathematical computations that require enormous energy by ‘miners’. When it was launched in 2009 a ‘miner’ was anyone who downloaded the bitcoin software on their computer and simply ran it.
Miners keep the system afloat and by extension are rewarded bitcoins for their efforts – that they can then turn around and sell or trade. That’s changed dramatically. In the years that followed, because of the mathematical rules that were built into the system it takes a lot more computing power to unearth new bitcoins. This was designed specifically so that they would be produced at a predictable rate and number – there will only ever be 21 million bitcoin, but it’ll take us many years to reach that number. 130 years to be exact.
That word ‘miner’ throws many people off. Who creates bitcoin? Who owns ‘bitcoin’? Who ‘controls’ it? Why does it have value?
Bitcoins are supported by the Blockchain, meaning that ‘bitcoin’ isn’t owned by anyone. We can say that the U.S. dollar is backed by the U.S. government, but bitcoin isn’t owned or backed by any one entity.
It isn’t government issued money, but that isn’t something to fear or recoil from.
The only real difference between a $100 bill (with Sir Grantley Adams’ face on it) and a piece of purple construction paper with the words ‘one hundred dollars’ written in black marker, is trust. Money is a unit of mutual trust.
The term ‘fiat currency’ is used to talk about government issued money like the American Dollar, or the Euro. The name comes from the biblical statement ‘fiat lux’ – ‘let there be light’. It was the first act that God did. He created light from nothing. So too are these currencies created ‘out of thin air’ based on promises and trust.
One of the ways that a Euro derives value is through this process of mutual trust. I trust that I can trade it for something, and I trust that it will be accepted as payment. Bitcoin works the exact same way. It’s a currency because people use it that way. It’s value is derived by market forces.
The Currency is Young, The Technology Timeless
The debate always centres around this new ‘currency’, but saying Bitcoin is just a currency is like saying the internet is just an upgraded fax machine. The value added to the human race here, and the most important development is the software.
Bitcoin and Blockchain are touted as revolutionary. They’re supposed to change the world of banking. They’re supposed to upturn the global economy. That’s not really a sophisticated understanding of all of this.
Blockchain technology actually improves banking efficiency and can result in lower fees for users. Many large banks are exploring Blockchain technology as the software becomes mainstream. Some countries are even experimenting with putting their fiat currency onto the blockchain.
Bitt is in an interesting position. We are the Caribbean’s leading bitcoin exchange – so we facilitate the selling and buying of this cryptocurrency – but that’s only one side. We also understand the ‘newness’ of bitcoin.
We partner with an Israeli company called Colu to make digitized versions of Central Bank Issued Barbados Dollars. This means that our users are never exposed to bitcoin unless they choose to be.
We’re not creating a new type of money.
We’re not changing the way money works.
We’re simply providing a new experience – we’re building software that makes sending and receiving money easier, cheaper, faster.
Send. Receive. Pay. Get Paid. All from your Bitt Wallet.