By Naval Ravikant
Startup Boy
Thursday, November 7, 201
3
http://startupboy.com/2013/11/07/bitcoin-the-internet-of-money/
Bitcoin will eventually be recognized as a platform for building new financial services.
Most people are only familiar with (b)itcoin the electronic currency,
but more important is (B)itcoin, with a capital B, the underlying
protocol, which encapsulates and distributes the functions of contract
law.
Bitcoin encapsulates four fundamental technologies:
- Digital Signatures – these can’t be forged and allow one party to securely verify a transaction with another.
- Peer-to-Peer networks, like BitTorrent or TCP/IP – difficult to take down and no central trust
required.
- Proof-of-Work prevents users from spending the same money twice,
without needing a central authority to distinguish valid from invalid
transactions. Bitcoin creates an incentive for miners, who run powerful
computers in the network, to validate transactions and to secure them
from future tampering. The miners are paid by “discovering” new coins,
and anyone with computational resources can anonymously and
democratically become a miner.
- Distributed Ledger – Bitcoin puts a history of each and every
transaction into every wallet. This “block chain” means that anyone can
validate that a given transaction was performed.
Thanks to these technical underpinnings, bitcoins are scarce (Central
Banks can’t inflate them away), durable (they don’t degrade), portable
(can be carried and transmitted electronically or as numbers in your
head), divisible (into trillionths), verifiable (through everyone’s
block chain), easy to store (paper or electronic), fungible (each
bitcoin is equal), difficult to counterfeit (cryptographically
impossible), and can achieve widespread use – many of the technologists
that brought us advances on the Internet are now working overtime to
improve Bitcoin.
Proponents of the role of government argue that a currency with fixed
supply will fail. They posit that inflation is required to keep people
spending and that prices and wages are still as sticky as they were
decades ago. They overlook that the world functioned on fixed money
supplies until 40 years ago (the gold standard), and that bitcoin can
gather many uses and value long before it has to become the main
currency in which all prices are denominated. Another fear is that a
central actor could take over the Bitcoin computing network – but the
combined Bitcoin distributed supercomputer runs at the equivalent of
2,250 PetaFLOPS, 90x the rate of the fastest supercomputer (note – in
Nov, it’s now 48,000 PetaFLOPS!), and consumes an infinitesimal fraction
of the resources used by a bloated banking system. Many label it as a
speculative pyramid scheme – without realizing that all
government-printed money is such. To the extent anyone holds cash over
other assets, they are speculating that other assets will decline in
relative value. Concerns abound over the security of the encryption
scheme, the speed of transactions, the size of the block chain, the
irreversibility of the transactions, and the potential for hacking and
theft. All are fixable through third-party services and protocol
upgrades. It’s better to think about Bitcoin the protocol as Bitcoin
1.0, destined to evolve just as HTTP 1.0 evolved beyond of simple text
and image-only web-browsers.
So why not just use Pounds or Dollars? One can use bitcoins as
high-powered money with distinct advantages. Bitcoins, like cash, are
irrevocable. Merchants don’t have to worry about shipping a good, only
to have a customer void the credit card transaction and charge-back the
sale. Bitcoins are easy to send – instead of filling forms with your
address, credit card number, and verification information, you just send
money to a destination address. Each such address is uniquely generated
for that single transaction, and therefore easily verifiable. Bitcoins
can be stored as a compact number, traded by mere voice, printed on
paper, or sent electronically. They can be stored as a passphrase that
exists only in your head! There is no threat of money printing by a
bankrupt government to dilute your savings. Transactions are
pseudonymous – the wallets do not, by default have names attached to
them, although transaction chains are easy to trace. It has near-zero
transaction costs – you can use it for micropayments, and it costs the
same to send 0.1 bitcoins or 10,000 bitcoins. Finally, it is global – so
a Nigerian citizen can use it to safely transact with a US company, no
credit or trust required.
Even more importantly, Bitcoin the protocol will enable financial
services transactions that are not possible today or require expensive
and powerful third-parties.
Bitcoin has a scripting language which enables more than a “send
money from X to Y” transaction. A Bitcoin transaction can require M of N
parties to approve a transaction. Imagine Wills that automatically
unlock when most of the heirs agree that their parent has passed, no
lawyer required. Or business accounts that require two of any three
trusted signatures to approve an expenditure. Or wire escrows that go
through when any arbiter agrees that the supplier sent the goods to the
buyer. Or wallets that are socially secured by your friends and family.
Or an allowance account accessible by the child and either of two
parents. Or a crowdfunding of a Kickstarter project that pays out on
milestones, based on the majority of the backers approving the next
payment. The escrow in each case can be locked so that the arbiters
can’t take the money themselves – only approve or deny the transaction.
The scripting language can also unlock transactions based on other
parameters. Unlocking them over time can enable automatic mortgage,
trust, and allowance payouts. Unlocking them on guessable numbers
creates a lottery auditable by third parties. One can even design smart
property – for example, a car’s electronic key so that when and only
when a payment is made by the car buyer to the seller, the seller’s car
key stops working and the buyer’s car key (or mobile phone) starts the
car. Imagine your self-driving car negotiating traffic, paying
fractional bitcoin to neighboring cars in exchange for priority.
Everyone has a copy of the Bitcoin block chain, so anyone can verify
your transactions. You can write software that will crawl the block
chain and generate automatic accounting histories for tax and
verification purposes. You can engaged in “Trusted Timestamping” – take a
cryptographic signature of any document, timestamp it, and put it into
the block chain. Anyone can verify that the document existed at a given
time. If you sign the document with your private key and another party
signs it with theirs, it becomes an undeniable mutually-signed contract.
This entirely eliminates notaries and websites like
https://www.proofofexistence.com/
are showing the concept. The Namecoin project is building a distributed
Domain Name System that allocates and resolve Domain Names without
needing ICANN or Verisign, by using the block chain to establish
proof-of-ownership. Similarly, look for entrepreneurs to apply this
authoritative proof-of-ownership to built P2P Stock and Bond Exchanges –
at least one Bitcoin site, “Satoshi Dice,” has sold shares and issues
dividends without using a stock exchange. The ownership and dividends
are easily verifiable by anyone who wants to look inside the block
chain. Predictious.com is combining the transaction scripting and the
verifiability to create a prediction market in which you cannot be
cheated and third-party arbiters can allocate the winnings.
Bitcoin’s “send-only” and irreversible nature makes it much less
vulnerable to theft. Today, anyone with your Credit Card or E-Checque
(ACH) information can pull money from your account. This creates
chargebacks, expensive dispute resolution and merchants double-checking
your identity. Bitcoin is send only. Anyone who has received bitcoins
from you can’t request or pull more money from your account.
Most importantly, Bitcoin offers an open API to create secure,
scriptable e-cash transactions. Just as the web democratized publishing
and development, Bitcoin can democratize building new financial
services. Contracts can be entered into, verified, and enforced
completely electronically, using any third-party that you care to trust,
or by the code itself. For free, within minutes, without possibility of
forgery or revocation. Any competent programmer has an API to cash,
payments, escrow, wills, notaries, lotteries, dividends, micropayments,
subscriptions, crowdfunding, and more. While the traditional banks and
credit card companies lock down access to their payments infrastructure
to a handful of trusted parties, Bitcoin is open to all.
Silicon Valley knows a platform when it sees it, and is aflame with
Bitcoin. Teams of brilliant young programmers, entranced by the
opportunity, are working on Exchanges (Payward, Buttercoin, Varum),
Futures Markets (ICBIT), Hardware Wallets (BitCoinCard, Trezor, etc),
Payment Processors (bitpay.com), Banks, Escrow companies, Vaults, Mobile
Wallets, Remittance Networks (bitinstant.com), Local Trading networks
(localbitcoins.com), and more.
Looming over them is how governments view Bitcoin and the entrenched
financial powers it threatens. The last few decades have seen a move
towards a cashless society, where every transaction is tracked,
reported, and controlled. Bitcoin takes powers from the central actors
and returns it to merchants and consumers, savers and borrowers. Bitcoin
brings back some pseudonymity in the transactions, and can be
irrevocably traded like cash. And finally, it points a way towards a
single currency – it is a bug, not a feature, that we have multiple
global currencies with exchangers and transaction fees in between.
Governments have been cracking down on the bitcoin exchanges, making
it harder to obtain and slowing its development. Strict and expensive
Money Transmitter regulations, designed to slow terrorist and child porn
financing, threaten the next great technological revolution – never
mind that terrorists can use cash just fine, the means of terror are
cheap, and that they account for an infinitesimal fraction of global
commerce. The development and innovation in Bitcoin has already begun
the move to friendlier jurisdictions, where its innovation can continue
un-impeded. Regulators in the US and UK would be wise to proceed with a
light touch, lest they push the development of Bitcoin and its
entrepreneurs to places like Canada, Finland, and the Sino-sphere. The
United States has benefited enormously from being home to the majority
of global companies driving the Internet revolution. The country that is
the home to the Internet of Money could one day end up as the guardian
of the new Reserve Currency and the Global Money Supply.
Thanks to Shawn O’Connor, Lucas Ryan, Paul Bohm (@enkido), and Oleg Andreev (@oleganza) for feedback. Follow me at @naval
