As blockchain technology continues to revolutionize the financial landscape, understanding the fundamentals and relationship with cryptocurrency is important, whether you are looking to become an investor, a user, or simply understand what all the hype is about. Peter Van Valkenburgh, Director of Research at Coin Center, provides the following explanation.
What is Bitcoin? Bitcoin is the world’s first cryptocurrency, and it works because of the world’s first public blockchain network.
What is a Blockchain Network? A blockchain is a decentralized digital ledger that records transactions across many computers so that the record cannot be altered retroactively.
What does Bitcoin do? It is simple: it lets you send and receive value to and from anyone in the world using nothing more than a computer and an internet connection.
Why is it revolutionary? Unlike every other tool for sending money over the internet, it works without the need to trust a middleman. The lack of any corporation in between means that Bitcoin is the world’s first public digital payments infrastructure, available to all and not owned by any single entity.
We have public infrastructure for information, websites, and email: the internet. But the only public payments infrastructure that we have is cash, as in paper money. And it only works in face-to-face transactions. Before Bitcoin, if you wanted to pay someone remotely over the phone or the internet then you could not use public infrastructure. You would rely on a private bank to open their books and add a ledger entry that debits you and credits the person you are paying. And if you both do not use the same bank then there will be multiple banks and multiple ledger entries in between.
With Bitcoin, the ledger is the public blockchain. And anyone can add an entry to that ledger, transferring their Bitcoin to someone else. Anyone regardless of their nationality, race, religion, gender, sex or creditworthiness can create a Bitcoin address in order to receive payments digitally, for absolutely no cost.
Bitcoin is the world’s first globally accessible public money.
Is it perfect? No. Neither was email in its early stages. Bitcoin is not the best form of money in every aspect. It is not yet accepted everywhere, it is not used often to quote prices, and it is not always a stable store of value. But it is working, and the mere fact that it works without trusted intermediaries is amazing.
It is a computer science breakthrough, and it will be as significant for freedom, prosperity and human flourishing as the birth of the internet. And Bitcoin is just the beginning. If we can replace private payments infrastructure, then we can replace other private choke points to human interaction as well.
Why should we want to build more public infrastructure? Why should we embrace blockchains over corporate intermediaries? Why should we tolerate their inefficiencies and work to make them better? Why should we want the pioneers of this technology here in the United States and not fleeing overseas?
A simple reason. Because the corporate intermediaries, providing today’s critical but privately owned infrastructure, are becoming fewer, larger and more powerful. And their failures are increasingly grave.
Recent cybersecurity incidents highlight the vulnerabilities of existing financial and digital infrastructures: a massive breach at Equifax exposed the social security numbers of approximately 143 million Americans; the SWIFT network was exploited to carry out fraudulent transactions worth hundreds of millions of dollars, with suspicions pointing towards North Korea; and corrupt employees at Punjab National Bank in India facilitated a $1.8 billion fraud, marking it as history's largest bank robbery. Additionally, a cyberattack in October 2016 hijacked 1.2 million internet-connected devices, disrupting access to major websites like CNN, Fox News, and the New York Times across Europe and North America.
Increasingly, physical machines are being connected to the internet to augment their capabilities. They are wired through servers that are owned and maintained by private and trusted intermediates, the Internet of Things (IoT).
Those vulnerabilities are inescapable in systems that have single points of failure. It does not matter if the point of failure is a corporation or a government. There should not be a single point of failure.
Similar choke points existed before the Internet. If you wanted to deliver a message you have to go through one of three television broadcasters or a handful of newspapers. Private corporations are essential but no critical infrastructure should rely on one or two.
The internet removed single points of failure in communications infrastructure and ushered in a wave of competition among new media corporations building on top of its public rails.
Blockchains can similarly disintermediate critical payments and IoT infrastructure with its decentralization. The technology is not yet ready to answer all of those questions today, but it is promising. As with the internet in the 1990s we need a pro-innovation policy to ensure that these innovations flourish in America for the benefit and security of all Americans.
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