Chris Mountford At Bitcoin South: Bitcoin 101

Chris Mountford: Bitcoin 101

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Bitcoin BasicsThe Bitcoin 101 talk is a challenge. I’ve always thought of it like I’ve been teleported from the future to explain something utterly mind-blowing, and my task is to make both understandable and believable. I worry that I occasionally come across as a wild-eyed zealot who - like in Terminator - has appeared in a flash of plasma, babbling incoherently about robots from the future or something equally impossible to believe.

My Bitcoin Basics talk focuses on identifying three different Bitcoins;

  1. Bitcoin the currency,
  2. Bitcoin the payment network and
  3. Bitcoin the general-purpose technology.

It would have been great if the terminology helped us better distinguish these three aspects but unfortunately they share the same name,  Bitcoin.

Bitcoin is digital money. That part is easy. People feel comfortable with their idea of money, just like I did before I peeked behind the curtain. People also now have plenty of examples of the digital revolution co-opting things we know well into a modern computerized version. Digital photography, music and video, digital television and radio, digital communications, books, news, games. We have digital everything else, so why not money?

Bitcoin The Currency:

When we have Bitcoin we have a balance in a unit of account, those Bitcoins in my “wallet” are denominated not in dollars or euros but in a Bitcoin the currency. Bitcoin is not designed like digital dollars. Regardless of whether they’re US dollars or New Zealand dollars or any other government currency, this familiar money is issued centrally and declared to hold value by fiat, it's “fiat currency”.

Bitcoin has been designed as digital gold. Gold has many properties that have made it work as money and Bitcoin is an attempt to reproduce many of those features in pure software. Gold has a millennial legacy. A big part of why we value gold is tradition, another important factor is that it has a limited supply. We don’t really know how much gold exists in the universe or on earth but we have estimates. We know that gold can’t effectively be created as through alchemy.This is an important contrast to fiat currency which can be printed endlessly, resulting inevitably in runaway inflation. Like gold, bitcoin has a limited supply. We know there will never be more than 21 million units of Bitcoin (or “bitcoins” although they’re not really coins).

When we have some amount of bitcoin, we know with mathematical certainty what percentage of the total eventual supply of Bitcoin we hold. Bitcoin has other properties of a good money, copied from gold. It is divisible, currently up to fractions of one hundred millionth, a tiny value known as a satoshi, named after Bitcoin’s enigmatic creator Satoshi Nakamoto, believed to be an assumed name of an unknown person. A good money must also be fungible meaning all units are equivalent. It doesn’t really matter which kilo of gold I have, it’s worth one kilo of gold. This assumes it really is gold, which brings us to another important property: it must be recognizable. A gold bar must not actually be gold-coated tungsten which is what New York gold dealers found they had when they drilled into their gold bars.

Bitcoin is fungible and recognizable - it cannot be counterfeited as its authenticity is protected by military-grade cryptography in the form of digital signatures. The design of Bitcoin as digital money reflects the internet age it was designed in. It naturally works well online. Sending money with Bitcoin is just like sending email. It’s also just as cheap and quick. So Bitcoin has features gold will never have. Bitcoin takes up no space and weighs nothing. It’s pure data. Bitcoin can be backed up, even printed, just like email.Some surprising features of Bitcoin stretch the mind. Bitcoin is memorizable. It’s possible to memorize your Bitcoin - typically amounting to memorizing twelve specific random English words in order. If you can remember those Bitcoin you can travel across borders and no amount of scanning will be able to detect that you know your Bitcoin and this memorized Bitcoin can be any numerical value. Bitcoin also provides options for various forms of joint access like a joint account for a couple or a company. Bitcoin enables a receipt-only kind of access where a user, say with a smart phone, can receive and confirm payment but have no authority to spend that money. Imagine how different things could have been for Jack if he had been sent to market to sell the cow for Bitcoin. He couldn’t have been tricked into buying magic beans on the way home!

Bitcoin The Payment Network:

These features of Bitcoin give us the sense that it is much more than money.

It’s unfortunate that the terminology is so loose but It’s also a payment network. When we “have Bitcoin” we do not hold or possess an asset so much as control one by holding the unique keys to perform transactions using that balance. In this way Bitcoin can be compared to Paypal or an internet-enabled bank account. Authorizing a transaction with another party is a matter of providing the credentials. These are the all important private keys. If you lose your car keys, your car may be stolen from the street where you parked it. This is certainly true of Bitcoin. If your private keys are stolen from your computer then you will not recover your Bitcoin. If you lose your keys some other way, nobody can recover them for you.

This is because Bitcoin is a fully decentralized network.

The most important and defining feature of Bitcoin is its decentralized network. Digital money has been created in various forms for decades. Not until the groundbreaking solution to a long-standing problem in computer science (known as The Byzantine Generals Problem) has digital money ever succeeded in growing big enough to make governments and banks sit up and listen. When centralized competitors come along, they get shut down by governments. A (perhaps overly) charitable explanation is that it is to protect us all from scams. Regardless of the motivation of opponents of free market currency creation, the decentralized design of Bitcoin is the most important feature. If you remember one thing from my lunatic ravings about implausible time-traveling killer robots it should be that when banks and other legacy financial service providers start promoting new technologies that appear like Bitcoin (as I predict they will), these will not be fully decentralized networks. They will not provide the essential benefits of decentralization and they won’t be much different to what we have now. Bitcoin the payment network has the obvious potential to dramatically increase efficiency in money flows to developing nations, currently a $US 500 billion money flow with significant profits going to remittance and money transmitter companies.

The poorest nations on earth attract the highest percentage fees, sometimes reaching 40%. This represents a failure of the technology of wire transfers to reach the world, despite having been invented in 1860 by Western Union and despite the internet penetrating 2.5 Billion people in two decades.The spread of the internet, for all its value, has not until the invention of Bitcoin been sufficient to challenge the global inequity of people touched by it. Now Bitcoin enables even low-tech, temporary internet access to become a gateway to modern financial services that are so ubiquitous in first world economies that we take them for granted.

Bitcoin: The General-Purpose Technology

Finally, Bitcoin is a general purpose technology. Its capabilities are so open-ended that we cannot predict in any detail what will come of it. Bitcoin enables a new category of software that has never existed before. It’s not just a new version of what went before. It’s as significant as a second internet revolution, as if the first had not even happened. Bitcoin may not seem like much if you use it today. It’s not even six years old, so you may need to roll your sleeves up and deal with awkward immature tools and difficult to use systems. But what we can glimpse through the clumsy user interfaces feels just the same to those of us who remember it as the equally clumsy early internet.This is a technology capable of transforming many categories of service that we take for granted and assume must be conducted based on trust in an authority just because that’s how we have done it in the past.

Domains like law, voting and governance, auditing, financial instruments and equities from the mundane to the exotic, notarization, identity and things called “smart property” or "smart contracts”, all these are things that programmers and entrepreneurs are feverishly working on using Bitcoin technology today. Learning about Bitcoin is a puzzle. For people who are familiar with computer science or finance it can be equally if not more puzzling. My own experience learning Bitcoin was a months-long sequence of regular vertigo-inducing realizations of vast future potential, each followed by countless questions. If this is happening to you now, I hope you are not turned away. I hope you now know enough to have your next dozen questions ready. This is normal and I have done my job introducing Bitcoin to you.

See you in Bitcoin 102.