I am always interested in exploring how new technologies are transforming traditional business models. An emerging example of this is cryptocurrency.
Cryptocurrency is a digital asset designed to work as a medium of exchange using cryptography to secure the transactions and to control the creation of additional units of the currency.
In short, cryptocurrency is a subset of digital currency, which exhibits properties similar to physical currency, but allows for instantaneous transactions and borderless transfer of value.
The most popular cryptocurrency is Bitcoin, which first emerged in 2008 when Satoshi Nakamoto (a person or group acting under a pseudonym), published a white paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System”.
The paper highlighted two specific cryptocurrency challenges and proposed viable solutions:
- Challenge One: The inability to transfer money digitally between willing participants without the need of a trusted third party.
Solution One: A peer-to-peer currency capable of maintaining its value without a central authority.
- Challenge Two: A function needed to transfer money digitally, was the ability to establish the order of transactions to avoid double spending.
- Solution Two: A decentralized digital ledger capable of establishing the order of transactions, distributed to computers around the world.
This thinking formed the basis of Bitcoin, as well as the underlying technologies such as block chain, which is a digital ledger of economic transactions and arguably more important than Bitcoin itself.
What is bitcoin?
Bitcoin is a decentralized peer-to-peer electronic version of physical currency, which maintains its value without backing or inherent value. It allows for the transfer of money digitally without a central authority (such as a bank).
The first standardized value of Bitcoin was set on 5th October 2009 at $.0008, which meant that $1 USD equaled 1309.03 Bitcoins (BTC).
How does Bitcoin work?
As a user, you will need access to a digital wallet, which stores the digital credentials for your Bitcoin holdings and allows you to access and spend them.
The most important part of the Bitcoin cryptocurrency is the shared public ledger, which is known as the block chain. All confirmed transactions are included in the block chain, which enables each digital wallet to calculate their spendable balance, as well as verify all new transitions. The integrity and the chronological order of the block chain is enforced with cryptography.
A transaction is a transfer of value between digital wallets that gets included in the block chain. Digital wallets store a private key, which is used to sign transactions, providing proof of ownership. All transactions are broadcast publicly between users and get confirmed by the network through a process called mining.
Mining is a distributed consensus system that is used to confirm waiting transactions by adding them to the block chain. This process enforces the chronological order in the block chain, which protects the network and allows different computers to agree on the state of the system. This ensures that no individual can control what is included in the block chain, replace parts of the block chain or manipulate the outcome.
What is mining?
Mining is an integral part of Bitcoin and conceptually can be compared to gold mining. For example, gold must be mined out of the ground, while Bitcoin must be mined via digital means.
Similar to gold, Bitcoin has a limited supply, approximately 21 million Bitcoins (20999999.9769 BTC). This limit was put in place by Satoshi Nakamoto at the inception of Bitcoin to help control supply.
Bitcoin mining is the process that helps to keep the block chain consistent, complete and unalterable by repeatedly collecting and verifying newly broadcast transactions. Within reason, anyone with a computer can become a Bitcoin miner and contribute computing resources to this process (similar to SETI@home).
The reason Bitcoin miners contribute their computing resources to help process and verify transactions, is that they are given Bitcoins as a reward. As a result, miners essentially mine Bitcoins (like gold), which have an associated value.
Knowing that there are a limited number of Bitcoins (21 million), their numbers are carefully released (roughly every ten minutes) and the rate at which they are generated drops by half every four years until all Bitcoins are in circulation. At this time, 2140 is the estimated date that the last Bitcoin will be mined based on the four-year cycle.
Cryptocurrency and specifically Blockchain is an incredibly exciting space, demonstrating again that technology can have a profound impact on traditional business models. Imagine a world where cryptocurrency is the standard and the need for a central authority (e.g. Bank) is removed. The political, social and economic implications are fascinating and will be very interesting to watch!