What happens when you cross computer geeks with populist outrage at central banks?
Bitcoins happen.
New Scientist reports in its latest edition that a new virtual currency is harnessing peer-to-peer networking and high-tech computer-run algorithims to rival central-bank issued money.
Their take:
Concerns about the integrity of money have also seen a fundamental shift since the days of Newton. While fraud is still a concern, the financial collapse of 2008 has called into question the comeptence of the central banks that are supposed to manage national currencies. In this week’s technology special (see page 23) we examine how the internet is allowing groups of people to set up means of exchange that are independent of both the banks and the state. Private currencies are nothing new but novel possibilities such as Bitcoin now beckon. Though bitcoins are magicked out of nothing, money is what money does, and many people are happy to accept bitcoins as payment for real good and services.
Indeed, there are now around 6.4m of bitcoins in circulation — or about $50m worth (one bitcoin = $8) — and a host of internet retailers, mostly web-design or software-related, who accept the currency.
Meanwhile, units of the virtual currency can in theory be awarded to anyone but supply is tightly-controlled.
According to the Bitcoin FAQ, new coins are generated by a network node which spends its time trying to find solutions to a certain mathematical problem. Each time one of its nodes finds an answer — and can demonstrate proof of work — it creates a new block of the currency. The reward for ‘solving a block’ is automatically adjusted so that in the first four years of the Bitcoin network, 10.5m bitcoins will be created. The amount is then halved every four years, and the total number of bitcoins created is meant to be limited to 21m by 2040. In fact, Bitcoin’s curators seem more concerned about creating a deflationary spiral than inflation. In that sense, it’s kind of the opposite mindset to the Federal Reserve.
How do you get bitcoins, you ask? You’ve got to go mining.
But instead of pick-axes and wheelbarrows, you bring along a P2P network sign-up and some powerful processing capability. Here’s how it works. You sign-up to a network like Bitorrent, start churning the algorithm to solve a block and cross your fingers that you’ll strike bitcoin gold. And it could quite literally be gold– or, at least, silver. Midas Bitcoin changes units of the virtual currency for real silver coins.
It’s all very intriguing and it really goes straight to the heart of fiat currency — confidence:
What Bitcoin lacks is “a clear attribution of a guarantor for every unit of currency”, says Ashish Goel of Stanford University, who is developing his own peer-to-peer currency model. “In centralised currencies such as the US dollar, guarantors are governments. For P2P currencies, it should be individuals.”
“Money has never had intrinsic value, its value is determined by confidence,” says Josh Ryan-Collins, of the New Economics Foundation in London, who is cofounder of a local currency, the Brixton Pound. He says we are experiencing a global loss of confidence in state currencies that Bitcoin may be taking advantage of. But he would be “very surprised” if it became a global currency able to compete with state-backed funds.”
Some further recommended reading below.
Related links:
Bitcoin mining: the free lottery – Jon Radoff
Bitcoin: a peer-to-peer electronic cash system – Satoshi Nakamoto
The FED’s real monetary problem – Thomas Luongo
Bitcoin: virtual money created by CPU cycles - LWN.net
The WIR bank model, or back to barter – FT Alphaville