Bitcoin: The World’s First Cryptographic Commodity

theintelhub.com February 3 2013

One result has repeated itself without fail throughout history. Every fiat currency ever created has dropped to zero and ended in horrible failure for the majority of its users, while benefiting those that destroy it. The reins of this economic self destruct mechanism are carefully tended by the worlds power structure while they position their own assets in such a way to profit from the fire sale as the rest of the world struggles to survive.

This pattern has repeated itself ever since the first cuneiform tablet was forged, just after the abstract concept of money was created. Since that time society relied completely on evolving technology to verify and preserve the institution of money as it was originally intended, and others continually worked to break that system for personal gain. Because this has been an expensive and complicated task in the past, people have always relied on a centralized institution to control the common wealth. This has always left people vulnerable to this central point of control being hijacked and used against the common wealth, until now.

The creation of Bitcoin is a historical landmark in the evolution of money. For the first time in human history there is a system of trade that is not under the control of a centralized system, and is in fact designed to prevent such controls. It also includes a few never before seen features enabling people to use publicly known open source mathematical calculations to ensure that the Bitcoin can only be spent once. A finite number of Bitcoins will be created, and the probability of generating them decreases as new users join the system. These are the key tenets of the Bitcoin system.

For the first time ever, there is a unit of trade that is nearly impossible to counterfeit, and requires no centralized institution for its users to trade it. There are no banks to run transactions thru, no merchant accounts to run transactions, no credit checks or sign up forms. Bitcoin is run completely by its users. Using open source software, each and every user has the ability to completely review the function of the software. This ensures that every participant knows the rules that govern the system, and the encryption makes sure the system is enforced.

The key to Bitcoin’s security is the encryption block-chain. Every user that “mines” Bitcoins is really running the network by generating solutions to a cryptographic formula that is known to be secure. Every time a solution is found a “block” is generated. This block includes the solution to the cryptographic formula, as well as all transaction data conducted during that block cycle. As these blocks are accumulated they form a “tree”. This tree is also known as the block-chain. Since every block created is dependent on the information generated from the previous blocks, hacking the block-chain becomes nearly impossible. In order to sustain a fraudulent transaction in the block chain (also known as double spending) one would have to control the data on every user node participating in the network, and do so from that moment on. That would require an astronomical amount of computing power. The Bitcoins you posses are in effect the cryptographic “key” that allows you to unlock or spend the Bitcoins already existing in the block chain.

Another security reinforcing feature of this system is the very nature of the distributed network database/blockchain. All of the data that details which user addresses have which Bitcoins is contained in the block-chain, and EVERY user of Bitcoin has a copy. As one makes a transaction, or generates a Bitcoin, the activity is recorded in the current active block. As each user downloads each new block it will register in your client as a new confirmation of the new addition to the block. Even if one did introduce a fraudulent block, it would eventually be overpowered by the other user nodes and shown as invalid. This security method does however have one inherent flaw, the “51% attack”, in which any user or group of users controlling 51% of the network at any given time could begin to cause significant problems for the network as a whole, but it is arguable that they could control it completely.

An additional factor which clearly breaks from the current financial status quo, is the fact that every transaction is public. Every time a Bitcoin is created or exchanged, it becomes part of the public block-chain, and therefore subject to public scrutiny. This allows for public analysis of all market activity, without necessarily tying a personal identity to a specific transaction. Bitcoin is often touted as a completely anonymous currency, but while that MAY be so, it is only the case when one takes the extra efforts to achieve this. Careful analysis of the block-chain could easily expose the holders of Bitcoins given persistent effort by a small determined group, or a state entity in most cases. However, despite popular perception total anonymity on the internet is still possible, just not necessarily easy. Given an individual has the skills and knowledge to achieve this, complete anonymity using Bitcoin is in fact possible.

The unique features of this system do not lead easily to regulation. This allows for a unique new opportunity for a truly free market, but the path ahead for Bitcoin is also laid with many pitfalls. Because of the nature of the system, there are no charge-backs or refunds, which will increasingly result in more fraudulent transactions, therefore it is important for the spenders of Bitcoin to purchase only from reputable traders. On the internet, it is not always easy to know who is reputable, let alone whether they are who they say they are. To combat this problem, many feedback systems have been developed to give honest traders a place to build a reputation and grow the Bitcoin economy.

Another major pitfall that is inevitable for Bitcoin is government and corporate intervention. Bitcoin doesn’t ride the corporate or government gravy train, and that is a clear and present danger to the powers that be. Not because Bitcoin itself is powerful enough in its current form to disrupt the current economic system, but because the idea itself if demonstrated to be successful would make many government institutions and private industries obsolete. All that is plenty of reason for the powers that be to attack Bitcoin, let alone the additional taxation issues which have barely begun to be addressed.

There is also growing indication that the past attacks on Mt. Gox, the most used central exchange for Bitcoins, were perpetrated by state or corporate interests in order to damage the image of Bitcoin in the public eye. The timing of the attack matches up with an expected spike in price, as well as many recent accounts of favorable high profile media coverage, not to mention the introduction of recent cyber-security legislation. These recent developments are not solid proof of government or corporate malfeasance, but they sure lead one to wonder what else is going on behind this story. One thing is for certain, Bitcoin is not run by a bunch of yokels. The people that design and run the network are determined, well educated, technologically proficient, and often wealthy individuals. My guess is even if central institutions like Mt. Gox are attacked one after another, the rest of the network is going to give the powers that be a run for their money.

You can learn more about Bitcoin and the author at Expanton.com

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