Just beyond our smart phones and soon to be augmented reality glasses, there lay a vast network of information and its growing at an exponential rate. Akin to something like mycelium, this emerging network is built upon the principles of decentralization and redundancy. That is to say, no single point of failure within the network would cause the entire network to fail. These same structures are found abundantly in nature, with human technology recently picking up on the trend.
In the spring of 2011 the Egyptian government shutdown its countries internet access. They did this in attempt to stop the social networking sites that were being used to organize protests. Within hours people had figured out how to bypass the shutdown. Instructions began appearing on the net of how to regain access using old dial up modems. The method was then translated and disseminated within Egypt. This was the most direct attempt at shutting down the internet and it nicely demonstrated the resilience of decentralized systems. This network is growing exponentially and its supporting incredible innovation along the way. It is connecting each of us in once unimagined ways and with the invention of Bitcoin the internet now becomes a truly free market.
“The Net interprets censorship as damage and routes around it.”
The idea of crypto-currencies originated in the late 80s within cypherpunk mailing lists and science fiction novels. There were a handful of failed attempts since then, but the concept was never fully realized until Bitcoin. In 2008 an unknown programmer and mathematician going by name of “Satoshi Nakamoto” released a white paper entitled, “Bitcoin: A Peer-to-Peer Electronic Cash System”. On January 3rd 2009 the genesis block was created and the experiment went live. The bitcoin software was released with open source licensing. This means that the blue prints of how the software operates is available for everyone to audit. Conversely, software like Windows is proprietary and therefore its source code is hidden. In the case of bitcoin the code can be seen, but any changes must be agreed upon by the entire network. Bitcoin is not a company, there is no CEO or central server, it is simply a protocol which you can voluntarily participate in. Because bitcoin is decentralized it cannot be shutdown without also shutting down the internet. From a technical aspect crypto-currencies are quite complicated, but from a functional aspect it is easy to pick up. Think of crypto-currencies as a technology rather than just money.
There are 3 main components that make up Bitcoin.
Cryptography (Mathematical algorithm):
Cryptography plays a major role in all modern technology, it is a means of securing and authenticating sensitive data using mathematical proofs. Bitcoin uses cryptography as a way to authenticate transactions within the network. This is where crypto-currencies derive their trust. In the past only banks and governments were trusted to maintain currencies, as they were the only ones with the resources to do so. With computing power increasing exponentially, the crucial mechanism of a trusted third party can now be carried out with a software protocol. This not only minimizes the risk of human error it also removes human greed from the monetary creation system. Even in terms of counterfeiting, cryptographic authentication is far superior to traditional paper money and credit. Crypto-currencies are the natural evolution of money in a world becoming ever more connected.
Public ledger (Blockchain):
The blockchain is an ongoing record of all Bitcoin transactions starting from the genesis block until today. Every coin is accounted for and verified through a means of cryptography and network consensus. Cryptographic parameters have to be met for transactions to be included in the blockchain. Each person who chooses to download the Bitcoin software becomes a node in the network and perpetuates the blockchain. Right now the blockchain is about 13 GB and growing. The website blockchain.info provides a portal for browsing the entire blockchain. You can pull up any previous transactions that has happened since bitcoin started. You will notice the blockchain is full of random strings of numbers instead of names. This is the aspect that makes bitcoin pseudo-anonymous.
A protocol is simply a universal set of rules used for an intended purpose. Some well known protocols are e-mail, http, and SMS(text messaging). These protocols operate on an open set of rules just as Bitcoin does. The bitcoin software is responsible for encrypting transactions, and broadcasting them to the blockchain. After the transaction is broadcasted it must be verified by “miners”. A miner is anyone who is willing to contribute computing power to the bitcoin network. In reward for your computing power you secure the entire network and also receive bitcoins. The amount of bitcoins you receive is based on how much computing power you offer. Only 21 million bitcoins will ever exist, this is hard coded into the protocol. Right now about 12 million exist and most of the remaining will be mined by 2033. At this time the entire bitcoin network is more powerful than any supercomputer on earth.
These three components working together create Bitcoin, which in terms of functionality is a distributed and mathematically verifiable public ledger. This technology is unprecedented and will ultimately act as more than just a currency. Trusted third parties are the fundamental instrument of any economy and because of this, bitcoin has the potential to evolve economics just as the internet evolved communication. Many other crypto-currencies exploring new functionalities have spawned from the bitcoin source code. The most notable being Litecoin, Namecoin, Peercoin, and Primecoin. Namecoin, for example, operates as a distributed DNS protocol. Primecoin utilizes an algorithm that generates ever increasing prime numbers, this greatly benefits mathematics.
Keep in mind that this is a very brief introduction to crypto-currencies so I hope it made some sense. If you want to learn more, please ask questions or follow the links below. I plan on writing a few more articles in this series which will further explore bitcoin and our increasingly decentralized world.