An alternative digital currency system called “Bitcoin” has been developed as a community-driven open source project. Allowing instant payments to anyone, anywhere in the world, Bitcoin operates with no central authority. Instead, managing transactions and issuing money are carried out collectively by the network using cryptography to control the creation and transfer of money.
The key development of Bitcoin is the reliability against hacks. Each payment transaction is broadcast to the network, and double-spending of the same bitcoins is prevented by using a peer-to-peer distributed timestamp server to generate computational proof of the chronological order of transactions.
It is argued that the system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes. However, other security concerns have been reported, including robbery of bitcoins. Ironically, security of the currency may be bolstered by nascent agreements between bitcoin exchange entities and traditional banks and/or payment processors.
Bitcoins are not backed by any other commodity, and are valuable only because they are useful and limited in supply. The supply of bitcoins is regulated by software and new bitcoins are generated by the network through the process of "mining." Mining nodes on the network are awarded bitcoins each time they find the solution to a certain mathematical problem with a difficulty that varies with the overall strength of the network. The reward for solving a problem is automatically adjusted as predetermined sums of bitcoins are created, in order to regulate the overall increase in money supply over time. It remains to be seen whether the CPU power of the miners might be directed toward beneficial purposes, such as climate modeling. Surreptitious mining of bitcoins using malware or through the illicit use of hardware is another problem area.
Internet users who want to use an electronic currency that cannot be manipulated by any government, organization, or individual, can begin by accepting bitcoins as payment for goods or services, by trading cash for bitcoins in-person through a local directory, or by participating in a mining pool.
Some other groups are running similar systems using mainstream currency. Chagora and CentUp both have their sights set on allowing users to make electronic micropayments in amounts that are otherwise impractical due to the costs incurred when financial institutions must serve as trusted third parties to process payments. The possibilities for crowdfunding and leveraging broad social movements are intriguing.
While Bitcoin money will disappear if the lights go out, it’s just as likely that the “hard” currencies and credit networks we currently place our trust in would vanish as well. So why not stop funding the 1% with your online transactions?
Image by keep_bitcoin_real, courtesy of Creative Commons licensing.Tweet