Introduction

I have previously written about my dislike for the current system of fractional reserve banking. The way fiat money currently works in society promotes an unsustainable and unfair way of doing trade, through a system of private sector businesses that control exchange. But I wonder, how can we change this? Buckminster Fuller once said that “You never change things by fighting the existing reality. To change things, build a new model that makes the existing model obselete.”

Bitcoin is a currency that was created by Satoshi Nakamoto in 2008, and was first released for public use in 2009. It has since grown greatly in popularity and its market capitalisation is now estimated at around $10 billion. Regardless of whether one believes that Bitcoin has improved upon the fractional reserve banking system, it is an alternative that has been revered by many. I advocate that Bitcoin is already and will continue changing the world, as a result of its unique technological innovations. I believe that its unique properties are revolutionising trade. Secondly it has introduced an unprecedented open platform for currency/finance innovation. Finally it is spreading a shift in thinking based on putting the power into the hands of people.

A completely new type of currency

Since Bitcoin’s inception, people have recognised it as a major invention in computer science. Satoshi offerred a system of digital exchange which had properties unlike those in any other system: it was completely digital and peer-to-peer, while assuming trust in no-one at all. Accompanying this, transactions were cheap, quick and only bound by access to the internet.

The first property of Bitcoin is that it is a completely digital currency. As a result, its storage costs are practically nonexistent. This on its own is not unique, except for the fact that this is achieved without a central authority distributing and managing the currency.

The most important aspect of Bitcoin’s invention is the notion that one doesn’t have to place trust in any specific person or organisation to use the currency. Rather, the trust is put in the decentralized network of peers that maintain the Bitcoin ledger.

The Bitcoin network maintains a shared public ledger called the blockchain, wherein every transaction in the system is recorded publicly forever, an interesting yet necessary property of the system. Peers “verify and record payments in the blockchain in exchange for transaction fees and newly minted bitcoins” (Wikipedia). While publicly recording all transactions may seem like a privacy issue, it also offers benefits for organisations like businesses looking for accounting transparency.

The only way this could’ve been achieved is through a cryptographically secure protocol, as to prevent abritrary spending and other malicious behaviour. For users of Bitcoin, this protocol “offers an unprecedented level of security against most prevalent frauds like chargebacks or unwanted charges” (Bitcoin.org). It also makes it so bitcoins are impossible to counterfeit.

As people have highlighted, with the use of cryptography and the internet, “secure payments are possible without slow and costly middlemen”. Bitcoin transactions are practically free. For example, this transaction of around $130K incurred a fee of only 40c. This is compared to other payment platforms like Paypal, which typically have transaction fees of ~3%.

One particularly significant aspect of Bitcoin is that it is extremely quick to send Bitcoins to anyone in the world. It takes on average 10 minutes for a transaction to be relayed to someone, and they don’t even have to be online to receive it. It is one of the first currencies that is not subject to regulations surrounding its international transfer — it is only dependent on internet access.

Finally, it must be noted that Bitcoin’s money supply is completely predictable. There is a set limit on the number of bitcoins that will be minted (21 million) and a timeline on how long until they will be all distributed.

The combination of these properties make Bitcoin a truly unique currency. It being completely digital, secure and P2P, cheap and quick to transact with, has introduced bountiful opportunities for individuals and businesses to conduct trade in new and innovative ways.

An unprecedented platform for finance innovation

Bitcoin has also provided a platform for open innovation in finance and trade. It is often cited that a large part of the Internet’s success was due to its openness to unrestricted innovation, and I believe the same applies to Bitcoin. Bitcoin introduces an unprecedented open platform for currency/finance innovation through an open-source codebase, unrestricted API and a sophisticated payment system.

The original Bitcoin software, which the majority of peers use, is open-source and completely free to use. It is licensed such that people can modify and release different versions of the client, or keep them entirely private (which is useful in the case of businesses). This is evident in the case of many commercial businesses like MtGox, which use the Bitcoin software with propietary code to build and run an online exchange.

The unrestricted nature of the API to Bitcoin peers has allowed for new gambling systems that wouldn’t of been possible before without a quick cheap payment solution like Bitcoin. For example, SatoshiDice is known for its ‘blockchain-based betting game’, which provides an instant gambling system ensured by the Bitcoin system.

As well as the unrestricted API, the Bitcoin payment system is a platform for completely new innovations using its in-built scripting system for payments. One particular application of this is smart contracts. For example, a script could be written that would allows bitcoins to be spent only if a subset of a group of people sign the transaction (so-called “n of m” transactions). This could be used to implement mathematically ensured escrow and dispute mediation, completely within the Bitcoin protocol. Another example of a smart contract is an assurance contract, which allows people to pledge money that will only be paid out if it reaches a certain limit. These and many other types of contracts have been proposed and discussed by Bitcoin users.

One other aspect of Bitcoins payment system is its facility for micropayments. Micropayments are transactions involving very small sums of money, usually defined as under $15. The negligible costs associated with transactions mean that donations are cheaper. With Bitcoin, it is as simple as displaying an address for people to pay to, extremely useful for donations. In fact, micropayments can be as small as one hundred millionth of a Bitcoin (termed a ‘satoshi’). There has been discussion of using satoshis to represent property — a concept known as smart property. A person could buy 1000 satoshis extremely cheaply and say that each satoshi represents a share in their company. Thus the transfer of these coins could represent transfer of the ownership of the shares.

All of these features are opportunities for innovation, which would have never existed with the restrictions of the current system. Many people have identified the value in Bitcoin’s open platform, and it is said that like the Internet, with each service that is built upon it, the value of the network grows.

A paradigm shift

As Bitcoin becomes more widespread, so are the ideals and attitudes associated with it. My last point as to why Bitcoin is and will continue to change the world, is that it advocates and spreads an attitude of putting power into the hands of the people.

Before Satoshi published his paper on Bitcoin, it was common belief that a currency that is completely peer-to-peer over the Internet was impossible. After the client was published and people started using it, they realised that maybe they were wrong. Modifications of the original Bitcoin client were created based on the original notion of a P2P currency. Peercoin improves upon Bitcoin’s algorithm for maintaining the blockchain, that makes it easier for everyone, despite their differences in computing power, to participate in the network. Another example of power being put back into the hands of the people is the Namecoin project, that applied the Bitcoin blockchain to management of the domain name system (DNS). This means that the mapping between domain names and IP addresses (like the mapping between google.com and Google’s servers) is managed and maintained by the people, instead by the for-profit ICANN corporation as it is now. These projects have all been realised because people looked at what Bitcoin accomplished and applied the idea to a different problem.

Another example is that when Bitcoin started gaining traction, it began a new period of interest in peer-to-peer technology. Since then, more projects have been founded to decentralising power held by companies. Bitmessage seeks to provide an alternative to centrally-hosted email services through a P2P network. Twister aims to provide a completely peer-to-peer microblogging network, independent from corporate influence and censorship.

Bitcoin’s influence extends beyond just technological innovation. It advocates people-power through decentralising power and open collaboration.

Conclusion

In conclusion, Bitcoin’s unique combination of properties as well as the platform’s openness have made many financial innovations possible. Its ideal that currency should be for the people, by the people, has influenced people to start new projects that put power back in our hands. I believe that this is why Bitcoin has, and will continue, to change the world.