Demystifying Bitcoin And Its Intentions

IT CAN be hard to wrap your head around the spectacular rise in value of cryptocurrencies like Bitcoin, Ethereum and Ripple.

The emergence of cryptocurrency can be partly attributed to a loss of confidence in the existing fiat system in which the issue of money is centrally controlled and unlimited in its amounts. Cryptocurrencies are decentralised and there is typically a limited amount of each cryptocurrency.

For instance, the maximum number of bitcoins (BTC) that can be circulation is 21 million. However, bitcoin transactions are conducted to eight decimal places. A Satoshi is the smallest fraction of a bitcoin that can currently be used: 0.00000001, or a hundredth of a millionth BTC.

The word Satoshi comes from Satoshi Nakamoto, the name used by the unknown person or persons who created Bitcoin.

Breaking From Convention

Perhaps a better understanding about the creation and function of Bitcoin can be found in the original paper put out by Satoshi Nakamoto in October 2008 describing how bitcoin works. Titled Bitcoin- A Peer-to-Peer Electronic Cash System, it noted in its abstract that “a purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution”.

The paper noted that commerce on the internet has come to rely “almost exclusively” on financial institutions serving as trusted third parties to process electronic payments. It admitted that while the system works well enough for most transactions, “it still suffers from the inherent weaknesses of the trust based model”.

It should be noted that Satoshi Nakamoto’s paper came out in the wake of the global financial crisis (GFC), when trust in financial institutions was at a low. The dubious subprime mortgage products that helped to precipitate the GFC burned many individual investors as well as institutional investors. Many wondered how such products were allowed to be sold, but the financial institutions selling such products gamed the financial system well.

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Bitcoin — Clear Objectives

The conclusion of the Satoshi Nakamoto paper is worth reiterating in its entirety because it lends insight into what a typical cryptocurrency should be and do.

“We have proposed a system for electronic transactions without relying on trust. We started with the usual framework of coins made from digital signatures, which provides strong control of ownership, but is incomplete without a way to prevent double-spending.

Mining for Bitcoins may take some getting used to. Asholove/Shutterstock

“To solve this, we proposed a peer-to-peer network using proof-of-work to record a public history of transactions that quickly becomes computationally impractical for an attacker to change if honest nodes control a majority of CPU power. The network is robust in its unstructured simplicity. Nodes work all at once with little coordination. They do not need to be identified, since messages are not routed to any particular place and only need to be delivered on a best effort basis.

“Nodes can leave and rejoin the network at will, accepting the proof-of-work chain as proof of what happened while they were gone. They vote with their CPU power, expressing their acceptance of valid blocks by working on extending them and rejecting invalid blocks by refusing to work on them. Any needed rules and incentives can be enforced with this consensus mechanism.”

Who Will Bitcoin Affect?

Everything you need to know about the essence of bitcoin is contained in this conclusion. It is not too complicated after all. However, in the ensuing years, there has been a growing amount of noise descending on the development of Bitcoin and other cryptocurrencies that have made them seem more complicated, more speculative and more untrustworthy than they should be.

This has added layers of uncertainty to the cryptocurrency space. If you think about whose interests are best served by the obfuscation of this space, you will think about the intermediaries who will be affected if peer-to-peer electronic cash systems really take off. It seems logical that these intermediaries will be keen to add complexity to space so that they can continue to participate in it. In other words, they create the problems, so that they can offer solutions and charge for it.

If cryptocurrencies simply release free trade and finance the way that the internet freed information, then it should be embraced by the masses.

More broadly speaking, as technology disrupts all industries, using technology-based currencies to navigate this disruption seem to be the inevitable outcome. It will hasten the obsolescence of many intermediaries across industries.

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