September 6, 2017

A Fistful of Bitcoins. The rise of new currencies that you can’t put in the bank

A mysterious inventor, whose identity is unknown. A new currency, issued not from a sovereign state but from a computer network and not controlled by banks or governments. A very short introduction to the $ 65 billion’s electronic currency.

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A mysterious inventor, whose identity is unknown. A new currency, issued not from a sovereign state but from a computer network and not controlled by banks or governments. A new technology. Two world superpowers, China and Russia, competing to accumulate wealth in the new currency.

This is not the plot from James Bond’s new movie, but only some of the key elements of Bitcoin‘s history, an electronic currency whose total value is currently estimated at approximately $ 65 billion.

It all begins in November 2008, when the still unknown inventor of Bitcoin, under the pseudonym of Satoshi Nakamoto, spreads an article explaining the algorithmic theory behind this currency. In January 2009, an open source software is released, allowing anyone to join the Bitcoin network with their own computer.

To understand the revolution these events are leading to, let’s clarify what is Bitcoin. When it comes to currencies, one has to distinguish two aspects: how to “print” money, and how to make transactions. Typically, money is created by a sovereign state, and transactions take place directly, using cash, or through “trusted intermediaries”: banks, for example by making a bank transfer.

In the case of Bitcoin, unlike traditional currencies, the creation of coins is handled by an algorithm that seeks to solve a mathematical challenge; all the computers in the network try to solve the same challenge, and the first one who succeeds is rewarded with brand new bitcoins, and a new challenge is released. This phase is called mining.

The management of bitcoin transactions is instead entrusted to a new technology, called Blockchain, based on sophisticated cryptographic techniques (hence the name of cryptocurrency). From a conceptual point of view, it is very simple: Every node (computer) in the network has the ledger in which each bitcoin owner and the relative amount of currency are listed anonymously. Every time a transaction occurs, i.e., a bitcoin passes from one user to another, it is communicated to all the nodes in the network that can then upgrade the ledger.

The security of Blockchain is achieved using cryptographic techniques: once a transaction is completed it cannot be canceled. Also, I cannot spend twice the same bitcoin: for physical currencies this is a natural property, but in the digital world where a copy is indistinguishable from the original, this might be a problem. Users are anonymous but their identity is proven (i.e. how many bitcoins they own) in a similar way to that of the banking system, where our accounts are identified by numbers.

The revolutionary part of Bitcoin is undoubtedly the Blockchain technology, which replaces an authority (state, bank, multinational) with a computer network and its consensus: if there are any ledger mismatches between two nodes, then the issue is resolved using the majority method.

Thanks to the Blockchain technology, Bitcoin is not issued by a national sovereign and is exchangeable without a bank: thus, a computer network, without central control, simultaneously acts as a state and as a bank. It is not surprising if its inventor is still unknown: his wealth, estimated at one million bitcoins, is worth about four billion dollars today. The interest of China and Russia, who are investing in mining equipment and are considering the creation of their own digital currency, is also more than clear.

Blockchain technology applications are countless: they can potentially replace any centralized data store with a secure decentralized one. Certificates of ownership, automobile and land registry are just a few examples. Nowadays there are several companies proposing solutions based on Blockchain; among others, we care to mention Ethereum, that has implemented a platform capable of managing applications of all kinds, including its own namesake cryptocurrency, considered to be as the main competitor of Bitcoin.

Among the Blockchain applications there is also the possibility of creating a secure, anonymous voting system in which every voter can verify that his vote has been counted, and anyone can verify the number of votes obtained by any candidate. Are we ready to trust an algorithm and a computer network instead of the authorities (state, bank, multinational) that have failed us several times?

The author

Luigi Laura

Luigi Laura teaches Informatics at LUISS and holds classes for LUISS Business School on Digital Skills and Big Data


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