Bitcoin, Crypto-Currency, and Blockchain

A look into the future of financial commerce

Introduction

What comes to mind when you hear the phrases Digital Currency, Crypto-Currency or Bitcoin? To the average person, they have either never heard of these before or heard these buzz phrases mentioned briefly on the news or through some news outlet on the Internet but have no real understanding of what it is exactly. To the majority of the world, it's merely a mirage of hocus pocus and gibberish that doesn't make any sense. Magic Internet Money. However, when you start to dive into this mysterious phenomenon called crypto-currency, in particular, Bitcoin, you will start to truly understand what it's all about and how it's underlying technology is re-shaping our current financial and commerce system. So for a moment, forget everything you've heard about Bitcoin and let's start from basics. What the Internet did for information, Bitcoin is doing for money (Bitcoin - The End of Money as We Know it).

Money & It's Existence Into The World

Money is so integral to our society and global economy that it's true nature remains a mystery to most. If you trust your money as it is, let's take a deeper look into what money really is and where it all started. The story of money is as old as civilization itself. When we existed as small tribes, keeping track of what you owed was easy. You owed someone a cow and a neighbor owed you a stack of firewood. Credits and debits were recorded in your head, a mental ledger. However, this became a problem when a small tribe or village needed to commerce outside of their territory with others nations or cities. Something was needed that everyone could agree had value. Thus was born into existence commodity money which bear five main characteristics. It has to be scarce and relatively hard to obtain (1). It must also be easily recognizable (2). It needs to be able to be divisible and easily cut into smaller pieces (3). You must be able to substitute one piece for another of equal value (4). And you need to carry it around without much effort (5). Examples of this in the ancient world were commodities such as shells, grains, metals, ivory, rare stones, fish, leather. Even these however, proved problematic because these commodities needed to be durable. If a fish crop or field of grains were wiped out, the commodity now became worthless. A more stable system was needed. From this was born metal coins. In some cases, metal coins are all that is left of ancient civilizations that were wiped out. These shared the same five characteristics of commodities but more importantly, remained durable. Coins were an objective and universal unit of account , allowing people to buy and sell goods over vast regions. Thus was born the market economy. When a man accumulated more coins than he required for daily purchases, he needed a safe place to store them. The goldsmith, who handled large amounts of precious metals in their trades, had already built sturdy vaults to protect their own inventory, so it was natural for them to offer vault space to their customers for a fee. When the coins were placed into the vault, the goldsmith would give the owner a written receipt which entitled him to withdraw at any time. Today, these are called banks. Well sort it. Well get into that more later. As the population learned from experience that these paper receipts were

truly backed by good coin in the goldsmith's vault and that coin would be given out in exchange for the receipts, it became increasingly common for people to use the paper instead of the coin. Thus, receipt money came into existence. In the same way that people became use to using paper currency, the goldsmith's were noticing that less and less people were visiting them to withdraw actual real gold coin. They thought to themselves, what's stopping me from taking a few coins that people deposited and lend it out to someone who needs money and charge them a fee. And this is where fractional reserve banking was born. Creating and lending paper money that is backed by no real hard asset. Now let's take this small example and expand on it. What would happen if all the depositors that gave gold coin to the goldsmith were to come back and say, "Here is my receipt for 10 gold coins. I would like them." However, as we just learned above, the goldsmith does not have everyone's gold because he lend it to someone else and charged them a 3% interest fee on the coins you entrusted him with. Today, we would call this a run on the banks. This is how our current banking system operates. In suburban banks and credit unions, some branches have less than $10,000 cash on hand at the start of a business day. So you may be asking yourself, how then can our current system continue to work decade after decade without failing? It works simply because people believe it works. The U.S. dollar is backed solely by the full faith and credit of the united states government. The wealthiest nation the world has ever known will bet its future on a single word, TRUST.

Bitcoin

Bitcoin is as radical of a game changer as was the change from precious metals to paper money. One of the most fundamental misunderstandings when trying to explain Bitcoin to someone is that people think it's simply Internet money. It's not. It's so much more than that. We already have digital money. Everyone of you reading this has used digital money long before Bitcoin came along. You have bank accounts that have digital ledgers. You use those bank accounts to send electronic payments to pay bills. Bitcoin isn't just digital money. Bitcoin is a fundamental transformation of the technology of money and is so difficult to grasp because it is so different from anything we've known before. So let's take a different approach at explaining it and talk briefly about network architecture. For centuries, social institutions have been organized around hierarchal organizations / intuitions. All of social interactions were organized around appeal to authority in these hierarchies, bureaucracies of people. And then something happened with the invention and mainstream adoption of the Internet. The real power of the Internet comes from net neutrality. This is the concept that the Internet does not discriminate based on source, destination, or content. If I have an IP address, my packets are treated no differently than the packets of anyone else on the network. For the most part, that gives voice to everyone. The Internet gives everyone the power of the printing press on a global scale. Bitcoin will do the same by giving people the power of banking on a global scale. Now after the introduction of the Internet, we started seeing more and more of these social institutions change from systems that were closed, not transparent, unaccountable, hierarchal , and complex into platforms. We started seeing the introduction of systems that have interfaces, API's that we can access, where information can freely flow in and out of organizations. And so we saw the transformation from closed system intuitions to platforms. Next, we saw the transformation from platforms to protocols. Now the interesting thing is when you go from platforms to protocols, there is no central appeal. TCP/IP, the protocol that allows

each one of us to access and use the internet, doesn't work in reference to a service provider or higher authority. TCP/IP works without context everywhere in the world. You don't have to sign-up for an account to use it. You just have to use the language. Bitcoin is the first network centric protocol based form of money. What that means is that it exists without reference to an intuition or platform context. We say that Bitcoin is peer to peer money. This refers to an architecture in which every participant on the network speaks the Bitcoin protocol on an equal level. There are no special Bitcoin nodes. All nodes are treated the same. It has no context inside the peer's system other than that it gets from the network. An interesting thing about distributed systems is this issue of context and state. If you log on to Facebook, and you have an account, you're not using a protocol. All of the state is controlled by Facebook. You have a login session and all of the data is held by them. We call that architecture client -> server. And Bitcoin is different because it's peer to peer like e-mail or TCP/IP. One of the shocking things about money is that in almost all countries, money in not taught as part of the education system. We are reluctant to talk about it. Kids have great questions about money. What is money? How does money work? How come we can't have more of it? We don't discuss money. And even though we use money as a part of every aspect of social interaction, it's a taboo subject. We pretend we don't care about it. It's a dirty topic. That's because the higher power above don't want you to be concerned with it or understand it. How many of you have money in a bank? None of you have money in the bank. You have loaned your money to the bank. And for the privilege of loaning your money to the bank, you will be paid an amazing interest sum of 0.00001 percent per year. And your bank will take your money and loan it to the people standing next to you for 24.99% APR. Bitcoin is helping change our corrupt financial system by doing things like allowing people to send cross-border global payments near instantaneous with little to no fees. Bitcoin is helping to bring money to over 2 billion unbanked people in the world in places like Argentina, Brazil, Venezuela, Greece, Cyprus, etc. In these countries and many others, people have to worry about how they are going to feed their family next week or how to pay the bills next month due to rapid inflation caused by toxic central banking policies put in place by their government. For the first time in modern civilization, Bitcoin is making it possible for anyone in the world to become their own bank with complete and absolute control over their money.

Understanding Blockchain

The Blockchain is the underlying technology platform that Bitcoin is built on. It's a distributed public ledger that holds a permanent record of all transactions across the entire network. It is maintained by miners or nodes who verify the transactions on the network. People are sending Bitcoin to one another over the Bitcoin network all the time. However, we need a way to keep track of who has paid what. Bitcoin deals with this by collecting all the transactions within a set time period. This is called a block which is generated approximately every 10 minutes. This is where the miners come into play. It is their job to confirm those transactions are valid and write them into a public ledger. This public ledger which is made up of a long list of blocks, is known as the Blockchain. Once a transaction is recorded on the Blockchain, it can never be un-done or removed. This is where the real benefit of the Blockchain comes into effect. It can be trusted with undisputed truth that all transactions are trusted, have been verified, and have never been tampered with. The Blockchain can also be much more than a ledger for Bitcoin transactions. It can be used as a recordkeeping tool for nearly anything. Let's take the concept of the

Blockchain one step further. Imagine a contract that you sign, where all the clauses could automatically execute. These are called "smart contracts". Smart contracts are self-executing contractual states, stored on the Blockchain, which nobody controls and therefore everyone can trust. For a real world scenario, let's pretend you bet a friend during the Super Bowl on which team will win. Your wager is $20 that the Patriots will win, while your friend is betting the same amount that the Packers will win. The first thing that happens is that both parties Bitcoin or crypto-currency is deposited into a neutral account. Now the game is over and the Patriots win. The smart contract is now able to verify the outcome of the game, and would automatically deposit your bet and the winnings from your friend back into your account. There's no need a for bookie to handle the transactions. And this just scratches the surface. There are hundreds of other applications that the Blockchain can play a role in. In fact, the largest banks and financial institutions in the world have already invested millions of dollars into R&D and utilizing Blockchain technology to drastically decrease the cost of operating clearing houses within the world stock exchanges and banking systems. Payment networks like SWIFT and DTCC and stock market back ends. Here are just a few names of banks that are already experimenting with the Blockchain. Goldman Sach's, JPMorgan, Barclay's, UBS, Deutshe Bank, and many others.

Adoption & Where We Go From Here

Because there is no central authority or government that controls Bitcoin, adoption of the technology into mainstream society has been slow thus far. This is why in many cases, a lot of people do not even know of it's existence. However, there is a reason for that. Governments and central banks don't like things they can't control. Especially money supply. This is why Bitcoin has become very attractive for individuals that want full control over their money, but not big banks and government institutions. Banks operate and generate billions of dollars in profit by taking your money and lending it to someone else with a hefty interest rate attached to it. With Bitcoin, there is no need for a middleman or third party like Bank of America or VISA that charge a 3% or 4% fee to merchants who use their technology as a payment method. In the U.S. alone, 2/3 of in person sales are done with debit or credit cards. This would be a huge loss to their bottom line if people started switching and using Bitcoin as a payment method where the transaction fees are much smaller, in most cases, only a fraction of a percent. Bitcoin is commonly being used as a tool to hedge against devaluing currencies like the Chinese Yuan, the Brazil Real, the Mexican Peso, The African Rand, etc. China in particular has been buying up large amounts of Bitcoin as a safe haven asset to hedge again the Yuan. People are starting to ask questions about their money and trust less and less in their governments. Concerns like how much debt is the government really holding? How much are they printing and devaluing our money by? Will there be another stock market crash where we lose 40-50% of our investment or life savings? One of the nice things about Bitcoin is that it forces people to start asking the tough questions about the fundamentals of money. Bitcoin asks us to imagine payments without a middleman, investments without a broker, loans without a bank, insurance without an underwriter, charity without a trustee, escrow without an agent, betting without a bookie, recordkeeping without an accountant. Global, secure, nearly instant, and free. Is it fantasy or the future of money and commerce? (Bitcoin - The End of Money as We Know it). Every day we change the world. But to change the world in a way that means anything; that takes more time than most people have. It never happens all at once. It's slow, its methodical , it's exhausting (Mr. Robot)

References:

https://bitcoin.org/bitcoin.pdf

https://www.barclayscorporate.com/content/dam/corppublic/corporate/Documents/insight/blockchain_understanding_the_potential.pdf

http://www.coindesk.com/information/how-bitcoin-mining-works/

Griffin, Edward. G (1998) The Creature from Jekyll Island.

https://www.youtube.com/watch?v=ak1iojpiHpM

Bitcoin - The End of Money as We Know It