It's not very surprising that my first blog post will be about Bitcoin. If you know me you've probably heard me talk about it at some occasion. The thing is though, I find it really hard to explain Bitcoin "on the go". But in this post I will try to give you a brief introduction and then talk a little bit about the potential of Bitcoin as a currency. Even if Bitcoin is extremely technical I will not focus on that aspect in this post, that's for another time.
First of all, what is money?
We all use it and it's so fundamental to our society that we don't really think about it. Money is a ledger to keep track of debts for goods and services. The money in itself is not valuable, the goods and services are. When I do something for you, you're in debt to me and to resolve this you give me some of your money (money you got when someone was in dept to you). What we use today is called fiat money where we as a society has agreed to let our government create and maintain the money flow. Some people may think that money is backed by something like gold (then what is gold backed by?); that is not the case, it's not backed by anything except our own belief.
The people in control of a widely used ledger for debts has immense power i.e. banks and governments (or in the case of the United States, a private company called the Federal Reserve System).
Properties and functions of money
I think it's useful for you to know what properties money needs to have to be accepted by a population of people. Scarcity is the most important property of them, if it's not scarce then the whole concept collapses. Scarcity makes something valuable. The other properties of money is that it should be...
- Durable: it should not die or decay over time.
- Portable: it should be easy to carry around and change ownership of. Something big and/or heavy is naturally not ideal.
- Divisible: it should be easy to divide a chunk of money into smaller parts where every part with the same size should share the same value.
- Recognizable: it should be easy to recognize that what you give to me is indeed money and not something else.
- Fungible: it should be easy to replace, e.g. every one dollar bill should share the exact same value.
If we move on to the functions of money there is three major ones.
- Medium of exchange: we use money to pay for goods and services.
- Store of value: we use money to save wealth into the future.
- Unit of account: we use money to easier compare the value of services and goods against each other.
As you probably realize is that our digital representation of money is doing a pretty good job of most of these points though the physical representation (banknotes and coins) is only doing okay at best. But fiat money has one major flaw and that is the store of value because of inflation. Inflation is inevitable when you can create something from thin air. To give you an example from the perspective of the U.S. dollar: if you had $100 in 1914 that would be worth roughly $2400 by today's standard. So, the U.S. dollar is pretty bad as a store of value.
What about Bitcoin?
In 2009 someone with the pseudonym of Satoshi Nakamoto (he, she or them are still unknown) released a white paper of this new disruptive technology called Bitcoin. Bitcoin is an open source software project and anyone can contribute to its source code if they wanted to. In its essence Bitcoin is an decentralised ecosystem of digital money called bitcoins (kind of confusing, I know) where users communicate with each other through the Internet.
The decentralised aspect of Bitcoin is very important. What it means is that there is no single point of control. In our current economical system banks are the centralised point of control. You don't own your money if they are in a bank account. If a bank want's to terminate your account and take all of your money, they can and will do so if they think it's necessary, just look at what's happening in Greece. This is not possible with Bitcoin. If you own the private key of a Bitcoin wallet then the money is 100 % yours and no one can take them from you. (If you don't mess up and reveal your private key to someone.)
In order to interact inside of this ecosystem you'll need a Bitcoin wallet which contains a private key and a public key. The private key is essentially a password for your wallet and the public key is your Bitcoin address. To make it easier for you to understand how things work let's use the analogy of an e-mail. Imagine that your e-mail client (Gmail, Mail, Thunderbird) is your Bitcoin wallet and your e-mail address is your public key. The password you use when you login to your e-mail is your private key.
When you want send an e-mail to your friend you first open up your e-mail client (Bitcoin wallet) and then you click compose new message (initialise new transaction). In the recipient field you fill out your friends e-mail address (the public key) but instead of attaching a document you will attach bitcoins to this message (transaction). Here is where it gets a bit different from sending an e-mail. When you click send, the message (transaction) will end up in a locked safe of unconfirmed messages (transactions).
Let's call messages for transactions from now on.
In order to confirm and verify the transactions in this locked safe someone has to solve a complex computational problem. Users (miners) all around the world is competing to be the first one to solve this problem, on average it takes about ten minutes. When they do, the transactions gets confirmed and the safe gets chained to the previous solved safe. Together they create a chain all the way back to the first created safe. This is a security measure in order to avoid that someone is sending the same bitcoins to another address, also known as double-spending.
The miner who solved the problem gets rewarded with 25 bitcoins because of their effort to solve the problem. But then you may ask, wouldn't this also cause inflation like every other currency if 25 new bitcoins is created every ten minutes? No, it will not. The reason for this is that every four year the reward is halved. In 2016 the reward will go down to 12,5 bitcoins and this will eventually come to a stop in the year of 2140 when it has reached its fixed number of 21,000,000 bitcoins.
Back in may 2010 a user named laszlo offered 10,000 bitcoins for two pizzas delivered to his door. That was a $41 pizza at the time according to another user in the thread. The more interesting question to ask is: what would you get for 10,000 bitcoins today? Three pizzas? No, more like a yacht! Because that's about $2,300,000. It ended up being two pretty expensive pizzas, but hey, I bet they tasted pretty good!
What Bitcoin does to money is equivalent to what Internet did to information. It completely removes the friction in a transaction between two parties. It doesn't matter if you are sitting next to me or if you are on the other side of the globe, the transaction is always instant with little (couple of cents) to no fee no matter how small or big amount you are sending. You've probably not realised this yet, but Bitcoin is programmable money. As a developer myself that is pretty exciting news because this opens up opportunities that has never existed in our history before.
Could you imagine a car that owns itself? If you combine Uber, self-driving cars and Bitcoin you can. It's possible that in the future you will not have the same need to own your own car, you could just open an app in your smartphone and click a button that you need a ride. When the self-driving car has arrived you just jump in and it will take you wherever you want. The payment is of course in bitcoin so that the car can pay for electricity and maintenance. I really think this is the future.
Or, wouldn't it be pretty awesome if you could get deliveries by drones? Let's say that you order something online and the very same day a drone flies to your house with your package. But for the drone to release the package, you'll need to pull up your smartphone and scan its QR-code to pay with bitcoins.
Furthermore, the biggest impact Bitcoin will have globally is probably in poor countries where they can't afford or even get hold of a bank account. Currently there are 2,5 billion unbanked people in the world. With access to a bank account they are increasing their odds of overcoming poverty and to live a healthier and happier life. With Bitcoin they can take one step close to this and become their own bank.
Although I don't think that Bitcoin will replace any currency that we have today, it's only logical that the fifth biggest economy, the Internet, also has their own currency. If you want to know more I can highly recommend the documentaries The Rise and Rise of Bitcoin and Bitcoin: The End of Money as We Know It. You can watch both of those trailers down below.