Gillette: Is it really the best a man can get? Isn't this setting the bar fairly low for human ambition? The McDonalds slogan? “Lovin' it.” Diet Dr. Pepper? “Unbelievably satisfying.” Our consumer culture has a penchant for sucking all meaning out of some essential parts to being human: from love, to belief and satisfaction – then diluting them in products.
As anyone in a group like this would know well, education – in the broad sense – is the antidote to the insecurities this culture can instill. Education is less effective in protecting what I consider another essence of being human: dissent. Someone charismatic and secure is barely more equipped than anyone else to deal with the suppression of speech or economic censorship.
It turns out our most powerful response to both is mathematics, and more specifically, really hard puzzles. These are the foundation of Cryptocurrencies. The first cryptocurrency, and the one you are most likely to have heard of from all the press received recently, is Bitcoin.
If Bitcoin was only useful to the usual targets of censorship, such as activists, it wouldn't be getting so much attention. Because of the recent financial crises, the fact that noone can tamper significantly with the money supply is a huge selling point. That is not to say their value is stable yet. Mass speculation will occasionally skyrocket and plummet their value by 10% within a few hours.
Fortunately, it is not just a stream of digital bubble fluid for greedy people to pop. The range of outlets accepting Bitcoin is growing far beyond the black market it is sometimes aligned with. From a large, billion dollar retailer to people selling Alpaca socks. From air travel, to space flights with Richard Branson's Virgin Galactic.
The genius of Bitcoin was to inherit the best qualities of traditional currencies, and divorce itself from the worst qualities. Like gold, it is a finite resource. Unlike gold, no-one can discover a new mine and flood the market. Beyond controlling supply, most of the technical marvels are about securing transactions: making sure people can not steal from nor impersonate others. In the tangible world, this is done with “locks, safes, signatures and bank vaults.” Bitcoin uses puzzles.
These puzzles are designed so that even the most well-financed governments and companies have little chance of subverting them. Curiously, this is due to more than the maths involved: it is largely about the incentives of people using the currency.
It turns out, when you remove a central bank, you need certain incentives to replace it. Effectively, with Bitcoin the bank is no longer something you go to. You are the bank – or at least a small part of it. Everyone can look at a shared ledger of all the transactions that have ever happened since the currency was founded. Account balances are easy to calculate – total deposits minus total withdrawals. Depending on how careful you are, account holders can be very difficult to identify.
Clearly, the challenge comes when we want to update everyone's copy of the ledger. When someone sends you some Bitcoins, the network has to verify they can do so. If enough of the network agrees that they can, the ledger is updated. The problem for the design of a cryptocurrency is to make sure that noone can set up a large enough number of puppets on the network to green-light fraudulent transactions.
By now, you won't be surprised to hear that Bitcoin solves this with puzzles. By using puzzles, it means that instead of needing a large number of puppets in the network, fraudsters need a lot of computer power.
Of course, most people wouldn't dedicate their computers to verify other people's transactions for some warm fuzzy feeling. And this is where incentives come in. The first to solve each new puzzle is rewarded with a certain number of Bitcoins.
This bears repeating: The supply of Bitcoins is increased by rewarding people who make it harder to defraud others.
The complexity of the puzzles is automatically adjusted so that they can be solved in about ten minutes. Since the total supply of Bitcoins will reach its cap of 21 million in the year 2140, the source of rewards will slowly change over time from new bitcoins, to a slowly growing fee included with each transaction. Even with this fee, transactions will still be very competitive with other forms of money transfer.
An opinion I've heard surprisingly often is that cryptocurrencies will never gain broad trust because they are not backed by a central authority like a reserve bank. I think these people have things backward. Reserve banks are not inherently trustworthy; they only gain our trust because they are backed by a powerful state. These currencies will derive their trust solely from what people are willing to trade for them, and in our interconnected world, this can be much more resillient to individual recessions. Admittedly, while it couldn't exist without the internet or electricity, if those go down, we have got bigger things to worry about.
I'll leave you with two intriguing facts. Bitcoin is more than a form of digital money. Every transaction can be customised using a special programming language, so that people using it can create new kinds of financial instruments. It is, in other words, programmable money. Finally, the identity of the person or group responsible for this remarkable system has not yet been uncovered. Only a few things are clear: they are probably very wealthy now, and they definitely know a lot about economics and psychology.
[ This discussion distills some of the more technical details of Michael Nielsen's wonderful, highly recommended post. ]
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