I was aware of the BitCoin, the digital money, for a while now. But that was it. I read the wikis and browsed the web but, for the life of me, couldn't get a grip on the concept. Sure, independent digital currency that works over P2P network sounded great, but that was all I could tell.
Now, after the mind-fermentation process took place, I can share some basic and easy-to-digest info about BitCoin.
What is BitCoin?
BitCoin (BTC) is digital currency, used to transfer relatively small amounts of money over the Internet. It can be exchanged both ways in other currencies like USD, Euro, Yen and others. It's functioning since the January 2009.
photo by Zach Copley
Unlike the other currencies, there is no government or even a corporation that stands behind it. It's completely community based. The system is regulated by open-source software, and maintained by its users – all of them – via peer-to-peer network.
And that's where all the good things about it come from.
What makes BitCoin so good?
The good – well great – thing is the idea of cutting out the middle man as well as the central authority from all our money business. Money is a very useful invention that benefits the community. So why wouldn't we organize and regulate our own common good instead of having somebody else do it with a huge risk of corruption, inflation and all other problems?
Does digital currency with no government and no banks behind it makes any sense?
Well, yes. Strange as it may sound, governments and banks are not needed to make a money work. Let's take a trip backwards the concept of money.
You have a bank account and those plastic cards that enable you to use the money from your account. Basically, your account is a number stored in bank's database about the amount of money you own. That number corresponds (and can be exchanged) to cash – pieces of paper with some numbers printed by the government, designating the value of papers.
We all know that the paper itself is not worth much and that the value of a bill actually comes from the gold and silver it represents. That is, that the paper bills correspond (and can be exchanged) for the gold. That's what the contract between you, me, government and the banks says.
What is not so widely known is that gold is not as valuable as the money it represents. Sure, gold is nice and shiny and even useful, but the mere gold in a bar with US$1000 imprint on it is not worth US$1000. Gold is not value per se. Gold is historically accepted representation of value. Gold is relatively scarce and stable material so it makes a nice representation for value. But we could use anything else as well.
photo by Digital Gold Currency Magazine
Money gets its value by its ability to be exchanged for goods and services! Money is valuable if you can exchange it for food, new computer, electricity, new haircut, car, concert ticket, baby sitting, massage or whatever your heart desires. If somebody is willing to give you food in exchange for a bag of sand and gravel, then that bag of sand and gravel has a value. It doesn't matter that governments don't print numbers on sandbags.
So, to get back to our point of interest here, as long as there are people willing to exchange goods and services for BitCoins and there are people willing to exchange BitCoins to and from Euro, USD and other currencies, BitCoin is money as good as any other. Except that it is actually better.
Why is BitCoin better than the "real" money
Community managed money system that is regulated by open-source software gives
- control and transparency of the system itself - you might think that your government is responsible to you about their handling of the common good that is the money system. Well, bad news, they are not. More often that not, you have no insight in how much of it they print, what do they do with it nor how it is regulated. Unlike the state law, computer code is not optional to follow. It will work the way it's intended no matter how much money or political power one has.
- stability of the system - any system that is centralized is, by definition, unstable. It takes just one node to crash and the whole system goes down. In decentralized system if one (or much more than one) node fails, the rest of the system keeps functioning without interruption. If Central Bank's computer system gets down (and computers do crash, even those super expensive ones) the whole system is down. It's more than unlikely that all the computers of all the BitCoin users will go down at the same time. And as long as two of them work, those two can deal with money, and when the rest is back, they'll just pick up where they left.
- anonymous transactions - BitCoin system is constructed with high security in mind and while all the transactions are visible and public, they are encrypted. What you do with your money is your own business and nobody else's.
- impossibility of inflation - System is also preventing the possibility of printing and infusing fresh money in the system after the amount of 21.000.000 BTC is reached. To do that, one has to change the code and make all the other users to accept the change. If you ever dreamt about democratic control of the economy, this is it.
- low transfer fees - I'm not quite sure how the transfer fees work here (at the moment there's practically none) but the distributed system makes monopoly on transfers impossible so the high competition is in the play. Where the competition is high the prices are low.
- impossibility of state or corporate control over somebody's funding - Remember when PayPal and Mastercard blocked WikiLeaks' account? They did the same with Anonymous and even Diaspora. If there's no central authority nobody can block other's account, nor check who gives money to whom and for which reason. Yeah, it's called freedom.
- probably some other things I can't think of now
So this is the basic idea. In the following days I'll write about how BitCoin actually works, both the technical part and in everyday use. In the meanwhile, please share your experience with BitCoin if you have any or what do you think about the idea.