What does it mean to have a currency that isn’t transparent? It means when the head of the Federal Reserve says he can’t account for a half of a trillion dollars of taxpayer money that’s “missing,” as Ben Bernanke did when he testified before Congress in 2009, there’s not much you can do to track down where it went. And when a currency is centralized and controlled by a few people, as is the current dominant reality around the world, the problem gets even worse. So it makes sense that introducing something that is intrinsically both transparent and decentralized would be a good start to remedy what is otherwise a devastatingly skewed scheme. And it turns out that lifting the veil on transactions and empowering users with complete authority are precisely what the electronic currency known as Bitcoin is designed to do. Two of our Thrive team members have been tracking Bitcoin from its inception, recognizing the power that a money-based innovation could have. Below is a description of why Bitcoin is so important, what it has to do with personal freedom, and how some heart-warming applications are already at play. — Kimberly Carter Gamble

By Rob Leslie & Goa Lobaugh

What could be the social impact of a currency that is both transparent and decentralized? Could it help people who are homeless? Could it enable people to send money to each other anywhere in the world without international exchange hassles and middlemen? Could it help you?

How could someone design such a currency? And what lessons might it offer to help improve upon the design of other critical systems?

“The Times 03/Jan/2009

Chancellor on brink of second bailout for banks”

The story of Bitcoin is fascinating both in its origin and for the implications of its design philosophy. It was set in motion in early 2009 with this insightful clue:

On the same day this headline appeared in The Times newspaper in the UK, someone going by the name Satoshi Nakamoto unleashed an electronic currency he called Bitcoin with these exact words literally embedded into its very foundation. The quote, thus immortalized, is a reminder of what his invention was intended to obsolete.

Satoshi incorporated these words into the very first digital “block” that began a permanent record of all Bitcoin transactions. His idea was that as the currency traded hands, the transactions would be collected and periodically recorded within additional blocks that are cryptographically linked to the previous in an unending chain. This block chain, electronically published for all to see with copies distributed across a wide network, would thus form an immutable history that, remarkably, enables the system to operate fairly and honestly without a need for any centralized financial institution to mediate the transactions. Instead, participants can trade “bitcoins” directly between themselves, peer-to-peer, using the block chain as a decentralized public ledger and neutral arbiter to certify every transaction.

In this blog, we’ll be focusing on how Bitcoin fits into a thriving world. If you would like to understand the deeper mechanics of Bitcoin or how to get involved with it, you will find additional links in the Resources section.

Satoshi saw an obvious and inherent weakness in the existing financial institutions — namely our need to trust them. As we’ve seen in THRIVE, and as Satoshi hints through the message he placed in Bitcoin’s genesis block, this trust can be too easily abused not just by financial institutions but also by the political processes that surround them. In addition to unaccountable bank bailouts, fractional reserve lending — the system that allows most banks around the world to loan out up to ten times more money than they actually have on deposit, and collect interest on it — is another way by which wealth is underhandedly transferred away from most of us to the moneyed elite.

Describing the motivations for Bitcoin, Satoshi wrote:

“The root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. […] With e-currency based on cryptographic proof, without the need to trust a third party middleman, money can be secure and transactions effortless.”

Honest Money?

In order to create a monetary system he thought would be completely fair, Satoshi included something in the design of Bitcoin that no contemporary banking institution would consider: he limited the total number of bitcoins that can ever exist. Unlike the “elastic” fiat money that our existing financial systems are able to create at will, causing both inflation and boom/bust cycles, bitcoins are algorithmically limited in supply. This makes Bitcoin rather akin to a commodity like gold, in that while there may be continuous new production over a long period of time, there is a finite amount that will ever be in circulation. New bitcoins are created at a fixed and predictable rate, and are earned in a competitive fashion by anyone who contributes computing power toward extending the block chain (a process called — funnily enough — “mining”).

What is Bitcoin “mining”? The process of compiling a list of recent Bitcoin transactions into a new block that is added to the block chain is called “mining” because the people who provide the computing resources to do this have a chance to receive an economic reward in the form of newly created bitcoins, plus the transaction fees of all the transactions contained in the resulting new block. Mining relies on a “proof of work” system that is designed to be computationally expensive to perform but easy to verify, where the difficulty is periodically adjusted such that a new block is created on average once every ten minutes. Miners compete to provide a proof of work before anyone else; the first to do so and have their block added to the chain is allowed to reap the rewards. Because of the difficulty and uncertainty of finding a proof of work, Bitcoin mining works as a kind of lottery, where the probability of winning depends on the proportion of relative computing power each miner contributes. At the time of this writing, the combined computing power of all Bitcoin miners is around 400 quadrillion (1015) proof of work attempts (or “hashes”) per second, which means on average miners are computing a total of 2.4 quintillion (1018) hashes before someone finds a satisfactory one that results in a new block. For comparison, a typical home computer could perform at best a mere 5–20 million (106) hashes per second without specialized hardware. You don’t need to participate in mining to use Bitcoin, and indeed are unlikely to find it worthwhile without investing in dedicated hardware to do it.

There is a kind of genius in Satoshi’s placement of economic incentives here: by rewarding with bitcoins the people who expend computing resources to add the latest transactions to the public block chain, the entire network benefits from the assurance that the longest such verified chain is agreed to be an accurate history of transactions. Furthermore, everyone can be reasonably sure no one is committing fraud by “rewriting history” to undo a transaction, because the computing resources required to do so would have to outperform the combined resources everyone else is using to extend the block chain honestly; the cost would outweigh the benefit. If anyone had the resources to do this, they would be better off just extending the chain honestly and earning the reward like everyone else!

There is another, more subtle, distinction Bitcoin brings to the financial table. Nearly all of our money systems today are based on debt: every cent in circulation has been borrowed into existence — and is therefore owed by someone (or an institution, including governments). Any time the music stops — or people think it is about to — in our financial game of musical chairs, people suffer when they can’t repay their debts. Bitcoin is not like this, because it isn’t borrowed into existence. Whether you acquire bitcoin through “mining” or through trade, neither you nor anyone else is inherently obligated to repay it eventually to someone else. You have complete title and ownership, and you alone control its disposition.

This brings us to perhaps the most compelling feature of Bitcoin: it can’t be taken or seized by mere dictate. Another way to put it is to say that Bitcoin honors the integrity of every individual who has some. You really do have complete control over the bitcoins you own, and no one can prevent you from spending them as you please, so long as you assume responsibility to protect the secrecy of the private cryptographic keys associated with them — accomplished through the aid of appropriate “wallet” software or hardware, and through the physical security of the same.

Thriving Perspectives

Bitcoin encourages us to adopt a rather fascinatingly different view of money than we’re used to: one that, that, that, that, and that isby way of a distributed public ledger. Is it any wonder Bitcoin has become popular with the people who share those values? Not to mention you can send bitcoins anywhere in the world within minutes, and for minuscule cost!

At Thrive, we certainly appreciate these properties of Bitcoin. At the same time, we recognize and honor the idea that anyone is free to create something similar, better, or completely different. Who can say what the limit of human creativity is when given opportunity? And by the same token, everyone should be free to use, or not use, whatever system of money they prefer. People should choose to use Bitcoin only if they value what it offers and they want to use it.

Indeed there are undoubtedly some ways Bitcoin could be improved. Satoshi’s original vision that everyone in the Bitcoin network would be mining independently hasn’t really panned out: the frequency and granularity of mining rewards has led to a trend where computing resources are concentrated in just a handful of large “mining pools,” any one of which could represent a threat to the security of the network if it should gather more than 50% of the overall computing power. What’s more, hardware specialization is so far advanced now that mining just isn’t viable for anyone to do with conventional computing resources any more.

Fortunately Bitcoin is open source, so people are empowered to improve upon it. A number of alternative cryptocurrencies or “altcoins” have already appeared — some attempting to address exactly these kinds of shortcomings. You may even have an idea for creating your own variety of cryptocurrency! We think this kind of healthy, whole-system feedback loop is essential to a thriving world.

Transparency vs. Privacy

When you receive bitcoins, you’d like to be sure that they’re legitimate, and the supposed sender hasn’t in fact already given the same bitcoins to someone else. In the physical realm, we’d call this counterfeiting, but in the digital realm — where information is naturally and infinitely reproducible — this is called double spending, yet it is no less a form of fraud. This is why Bitcoin’s block chain is made public: to prevent double spending by allowing everyone the ability to independently verify the provenance of the bitcoins they receive.

A public ledger of everyone’s transactions has some interesting ramifications on privacy. Obviously, no one’s transactions are private; it is possible to see every transfer of bitcoins that has ever taken place, from creation to the present, down to the very last decimal. What can’t necessarily be seen is who the transfers are between, unless you have some knowledge to associate a Bitcoin address (the public identifier for sending bitcoins to someone) with an actual entity or person. As long as you lack this knowledge, the entities are effectively anonymous… to you. But any time you send or receive bitcoins, some of this knowledge may inevitably spread to you and your trading counterpart — assuming either of you has at least some idea who the other is — since you’ll both obviously see the addresses to and from which you’re sending or receiving.

It’s clear Satoshi felt that Bitcoin needed to favor transparency in the natural balance between transparency and privacy, or it couldn’t work as a decentralized system. While perhaps obvious now, this was a key insight that can inform many of the systems we may like to build that have a kind of built-in integrity and wholeness to them. Indeed we’ll see more of this below, but what’s also fascinating is that the benefits of this style of transparent “block chain” technology are not lost on many — even traditional financial players like Nasdaq, Barclays, and Citigroup are anticipating ways to make use of it.

What is a Bitcoin “wallet”? A Bitcoin wallet is software and/or hardware that you use to send, receive, and protect bitcoins, analogous to an ordinary wallet in which you carry cash. Most Bitcoin wallets contain and manage for you the private cryptographic keys that control the ability to spend the bitcoins you own. These keys and the bitcoins they control are irreplaceable should the wallet be lost or stolen, so it’s important to keep your wallet secure. Since wallets are digital, it is usually possible to create and store backup copies. Some wallets rely on keys that are held by a third party. In such case your ability to spend the bitcoins controlled by the wallet may depend on the cooperation of the third party.

Treading the Line

Despite all the potential benefits Bitcoin offers, there exists a tendency to eschew some of them either through ignorance or simply in favor of convenience. Remember those private cryptographic keys mentioned earlier? Those are not just the keys to your bitcoins — they are also key to your control.

When you take responsibility to protect the keys yourself, you are in sole control of the bitcoins they unlock. For some people, this kind of responsibility can be understandably uncomfortable or inconvenient, and you might like to delegate the responsibility to someone else. But by doing so, you must inherently trust the delegated party not to misappropriate or lose through negligence, coercion or otherwise the bitcoins entrusted to them — exactly the kind of trust Bitcoin was designed to obsolete. Of course, in principle this is no worse than the trust we already place in most of our existing financial systems. But to fully realize Bitcoin’s potential, it’s important to have this understanding inform our choices.

Several of the Bitcoin “wallet” offerings you will find available, especially online wallets, in fact do not give full control over private keys. Look closely to understand how much control you will cede in exchange for the convenience of the wallet offerings, and weigh the risks and benefits according to your own sense of the value.

Embracing the Perspective

So what are people actually using Bitcoin for? You might have heard that Bitcoin is used in black markets, or is linked to drug trade. While that’s true, it overlooks an obvious reason why it is used in such ways: an honest currency with minimal friction is attractive to everyone.

There are many more kinds of uses for Bitcoin. In fact, there are so many places to spend Bitcoin today that we seem to be nearing a point of ubiquity… you can buy just about anything from food, clothing, household items, and electronics to airplanes, private islands, even a trip into space . Professional services abound as well, including health care, concierge, and legal services. You’ll find a number of marketplaces in the Resources section below. Some of the larger retailers and service providers that have embraced Bitcoin include Overstock DISH , and Expedia

Indeed Bitcoin can be used in just about any form of trade. You might even consider accepting it in your own business. Compared with accepting credit cards, there is much lower risk involved (no possibility of chargebacks) and considerably lower fees as well. For consumers, Bitcoin offers a convenience similar to that of credit cards, but with a degree of privacy closer to cash.

What are bitcoins worth? The market price for a single bitcoin (1 BTC) has historically been volatile. It reached a high of $1,242 USD in November of 2013, but as of this writing trades around $250–300 USD per BTC. Each bitcoin can be divided into as many as 100 million pieces, so transacting in small amounts is not a problem. With about 14.5 million BTC currently in circulation, the market capitalization is now roughly $4 billion USD. (Source: Bitcoin Charts)

Bitcoin or Dollars?

Bitcoin can be used entirely as its own currency to buy and sell goods and services, without ever needing to convert it into the currency you are more familiar with — whether that is dollars, euros, or something else. For a lot of people, though, at some point you will probably want to exchange your local currency for bitcoins, or vice versa. This is usually done through a Bitcoin exchange, a place where people come together (physically or virtually) to trade bitcoins for other currencies with each other, just as people do with precious metals, stocks, or other commodities. The value of bitcoins relative to the dollar or any other currency fluctuates according to the price at which people are willing to engage in trade, influenced by supply and demand. There are some links for finding Bitcoin exchanges in the Resources section below.

Enabling Solutions

If you’re a merchant, there are some service providers that specialize in helping you accept Bitcoin in your business. BitPay and Coinbase are two popular such providers in the U.S. Both offer the convenience of immediately exchanging the bitcoins you receive from customers into dollars, which can help mitigate your exposure to price volatility. On the other hand, what value might you gain by retaining the bitcoins you receive without converting them to dollars? This is an important question to consider in light of all the significant differences between Bitcoin and fiat currencies that we’ve been describing. Obviously, unless you are transacting exclusively in bitcoins with everyone, you will still need to operate in another currency. But perhaps you will also find opportunities to embrace Bitcoin and its potential without needing to convert to dollars.

One particularly inspiring use of Bitcoin comes from a homeless outreach organization called Sean’s Outpost in Pensacola, Florida. Jason King founded the charity in memory of his beloved friend and friend to the homeless, Sean Dugas, after learning of his tragic murder in 2012. In Jason’s words:

“Bitcoin has been so instrumental to Sean’s Outpost’s mission because, in our area, it is functionally illegal to be homeless. The socioeconomic conditions that make those laws possible also make it very difficult to fundraise in that area, because the same people that are creating the laws are the people that control most of the economy there. So what Bitcoin has done is, we can open up to the whole world. We can tell our case to the whole world — and if you think that people starving to death in the street is a bad thing, and you are in Germany, and you don’t want to see people starve to death in Florida, instantly you can fund that, and you can make sure that someone gets a sandwich. And that’s never really been possible, ever, in the history of humanity — that if you care about someone else, or some issue, somewhere else anywhere on the planet Earth, you can come to their aid with your treasure. And that’s what makes Bitcoin magic Internet money, that you can do that.”

To date Sean’s Outpost has fed more than 150,000 meals to the homeless in Escambia County primarily funded through Bitcoin donations. They also recently defeated a legal contest from the county that had attempted to argue homelessness to be a crime.

Jason has named the woodland sanctuary in which Sean’s Outpost operates “Satoshi Forest,” and he pays the mortgage for it entirely in Bitcoin.

Here is another example of the kinds of solutions Bitcoin is making possible:

For even more inspiring uses of Bitcoin, be sure to check out the other documentaries from BitcoinFilm.org.

Other Uses of Block Chain Technology

Satoshi created a novel scheme for building a decentralized system in which everyone can have confidence in the accounting particulars. It’s not surprising, then, that this same scheme could be used to build other kinds of systems that are not necessarily tracking movements of money. What about tracking ownership of real estate? Or stocks? Or Internet domain names? What if we could create a provably fair and honest decentralized voting system? There is a whole class of possible contract-based systems that could be self-enforcing and self-regulating through the use of the same distributed block chain technology that Bitcoin is based on, and a number of ambitious projects have already begun to build these; several are listed in the Resources section below.

This is an exciting area of development to watch, as old and corrupt centralized systems are gradually obsoleted by new decentralized systems that honor the integrity of every participant and are provably fair and honest.

Thank you, Satoshi Nakamoto, for your gift of Bitcoin to the world. And thanks also to the many pioneering individuals who are recognizing and embracing Satoshi’s contribution as a significant ingredient for a thriving world.

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Resources

General Information

Detailed Mechanics

Bitcoin: A Peer-to-Peer Electronic Cash System Satoshi Nakamoto’s original whitepaper

Exchanges

How to Buy Bitcoins Directory of global exchanges

Coinbase U.S. exchange

LocalBitcoins.com Trade privately with local individuals

Marketplaces

Merchant Services

Bitcoin in Practice

Other Uses of Block Chain Technology

Ethereum Platform for decentralized applications

Namecoin Decentralized registration system

tØ Overstock CEO Patrick Byrne’s initiative to apply block chain technology to Wall Street

Bitcoin-related News