On the 3rd of January 2009 the first BitCoin block was generated. Back then hardly anyone knew what it was, and the coins definitely weren’t worth anything. However, recently BitCoin has gotten a lot of attention, both good and bad. I first heard about BitCoin on episode 287 of Security Now (YouTube) with Steve Gibson from GRC. In a nutshell, BitCoin is a decentralised, peer-to-peer system, much like BitTottent is, in which money circulate completely anonymously, solely on the agreement of operation between all parties involved.
BitCoin works like this: An account is simply a public key pair, and my account number is a shorter hash of my public key. When I transfer money to someone else, the software signs the transaction with my public key, thereby proving that I have the public key for that account and therefore the account belongs to me. Transactions are then sealed into blocks, which are generated on the network by miners. However, the system is designed in such a way that it is computationally hard to generate a block (there is a lot of guessing involved), but it is computationally easy to verify the block is correct. Whenever a block is generated, the first transaction inside that block is a payment of BTC 50 to an account number owned by the person who found the solution to that particular block. This creates an incentive for people to operate nodes on the network, and as more miners join, the network as a whole regulates the difficulty of block generation in order to keep it at a constant rate. Transactions are also approved and verified against their account balances by the network as a whole. This is possible because every transaction is public, and so every node on the network has a complete history of all transactions ever made, which means they also know the balance of every single account. Anonymity is still preserved because of two things; 1) the network is peer-to-peer, so you can never be guaranteed that your node is receiving a transaction from the person who initiated it, and 2) new accounts can be generated at the click of a button, since you only have to prove your ownership when you want to transfer money out of that account.
Another interesting feature of BitCoin is how the network was set from the beginning to decrease the amount of generated coin over time, thus making the total amount of BitCoin in existence follow a logarithmic plot. Once the network reaches 21 million, no more coin with be generated. At this point, it is the idea that transaction fees will take the place of generated coins in order to preserve the incentive to run nodes on the network . However, this event will not occur for quite a few years, and BitCoin might have disappeared or have been replaced by something even more bizarrely inexplicable by then.
The system as a whole does offer some very appealing features when compared to normal banking. For instance, fractional reserve banking would be impossible and monetary policy would change completely. The business of money-lending would return to what it originally was: investment of existing money rather than the creation of new money out of debt. BitCoin only has voluntary fees, and you would not lose your money because the bank employed bad business practices. And finally, even international transactions are instant, whereas I currently have to wait around 3-5 days for such a thing to go through.
All in all, I’m quite excited about it, and will be following this one closely. If you would like to donate some coin to me, you can do it at 1AK4woxpH6s9Pkbbxjizt3YD7iC2iTtxup.