Okay, posting the entire revised article again for review.
Bitcoin Electronic Currency: The Future of Money
What is Bitcoin?
The first completely decentralized, anonymous, electronic currency has been created, and its name is Bitcoin. Its creator is Satoshi Nakamoto, a cryptography expert. Bitcoins are digital tokens that can be exchanged anonymously across the internet or stored on disk. Bitcoin serves the purpose of not just a currency, but also of an online virtual banking system.
Bitcoin differs greatly from traditional government issued fiat currency and regulated banking in several important aspects:
• Bitcoins have no central issuer whereas fiat currency is issued at will by a central bank. Currently, Bitcoins are slowly being issued in a decentralized manner, but eventually new issuance will forever halt.
• Bitcoin transactions are anonymous whereas a wire transaction in a government run banking system requires a federally licensed financial institution to act as a middleman. This third party must report on transactions to the regulators, and so in effect all financial transactions are monitored by the government. With Bitcoin, no third party can spy on, prevent, control, or tax transactions.
• Bitcoin ownership is private and not subject to outside inspection and therefore asset monitoring or confiscation for any reason is nearly impossible.
Bitcoin also differs from gold in important ways. Gold has the advantage of thousands of years of historical precedent as money, as well as having a physical form. However, the major disadvantage of gold is that ownership cannot be transferred electronically (or with paper certificates) without requiring a central repository. The unfortunate fate of both E-Gold and the Liberty Dollar is evidence to the fact that any centralization of a currency system is vulnerable to outside monitoring, tampering or outright confiscation. Bitcoin does not have these risks, and thus provides an excellent compliment to physical gold.
How do I use Bitcoin?
My own experience using Bitcoin has been a blast, especially when compared to the slow and cumbersome nature of traditional financial institutions. To use Bitcoin, the place to start is bitcoin.org. There’s no registration or payment required to start – just download the software. After installation, you’re ready to exchange Bitcoins with your friends across the world. If you want a few coins to start with, go to freebitcoins.appspot.com for some initial bit-capital.
The quantity of services that use Bitcoin is small but steadily growing. Notable websites thus far are bitcoinmarket.com and mtgox.com, which allow exchange between various fiat currencies and Bitcoins, and biddingpond.com, which is an implementation of e-bay with Bitcoins. You can visit bitcoin.org/trade to see a list of services that accept Bitcoin.
How does Bitcoin work?
Everyone that uses Bitcoin has a balance stored in their account. This balance can be changed by sending and receiving money in transactions. A transaction is money changing ownership from one account to another: it specifies the giver account, the amount, and the receiver account. When you want to make a transaction, you announce the details of it publicly to everyone.
Each user has the ability to perform a digital signature with their account, which operates just like a normal hand-written signature. Before announcing a transaction, the giver signs the transaction first. In this way, everyone can take a look at any publicly announced transaction and know that the giver account owner truly agreed to that transaction.
When a transaction is announced, everyone audits the transaction to ensure that it is valid. This is possible because everyone knows the balance of each account. Despite this, nearly complete privacy is achieved because account ownership is not known, and each user can own an unlimited number of accounts – ideally, you should specify a new account to receive each new transaction. For convenience, when using Bitcoin your own accounts appear integrated even though others see many separate accounts.
There needs to be a consensus over the validity of transactions – if not, then one could easily see how confusing things could become if many auditors disagreed.
Transactions are placed inside blocks, and these blocks are strung together in what is called the block chain. Due to the nature of the chain, it takes a lot of computational resources to properly add a block to the chain. However, once a chain is constructed, it’s easy to share it publicly and widely, and it’s easy to verify that it was constructed properly and that the transactions inside are valid. By helping build the chain, users earn small transaction fees.
By choosing only to accept the longest known chain as the consensus, users do not have to trust any particular individual or organization. They need only trust that the total honest computing power is greater than any villain. However; a powerful, self interested villain is more likely to prefer to collect a large number of transaction fees than to destroy trust in the system.
Bitcoins have the necessary features of money: medium of exchange (anonymous and across great distance), unit of account (private), divisibility (up to eight decimal places), scarcity (21 million limit), portability (transferred electronically), and store of value (current exchange rates – as of August 2010 – put 1 Bitcoin, or BTC, equal to 0.065 USD). For more information on how it achieves these features, please read the FAQ at bitcoin.org.
I believe that Bitcoin has enormous potential, but it will have to stand the test of time and the marketplace. Even if Bitcoins do not catch on in the mainstream, it still provides a glimpse into a decentralized monetary future. As distrust in central banks continues to increase as the financial crisis drags on, my expectation is that private currencies will continue to grow in popularity. Finally, for those who claim that Bitcoin is too virtual: what about the US dollar?
Satoshi Nakamoto, “Bitcoin: A Peer-to-Peer Electronic Cash System”, www.bitcoin.org
Thank you to all the members of the bitcoin.org forums for your valuable input for this article. A special thanks to users FreeMoney and Insti who went above and beyond with their feedback.