The article was previously published by the author on his independent blog and can be accessed, along with other writings, here.
For those who believe individual freedom trumps everything else and the right to privacy a fundamental human right, Bitcoin is the very embodiment of their political and social ideals. They remind us that it is still early days for crypto-currencies and a time will come when the decentralised and distributed internet will have its very own (or perhaps several) decentralised and distributed means of payment, digital currencies that are based on economic as well as scientific principles, safe from the inconstant policies of central banks, and the influences of irresponsible governments. Only cryptocurrencies are decentralised. Other digital currencies and virtual means of payment are issued and managed by central authorities.
The focus has been on Bitcoin over the last few years as a disruptive force in financial services with enormous potential. The Bitcoin system creates, validates, and manages electronic records that carry value. These units of value, called bitcoins (same word, small b), are created by a computer program, which “creates” bitcoins as compensation or reward for “miners” – those who can demonstrate “proof of work” – achieved through the allocation of computing resources to do the various work elements that the system requires such as checking and validating transactions.
The blockchain is a digital list of Bitcoin transactions – a sort of statement of record – that forms the backbone of the Bitcoin system and verifies and authenticates Bitcoin transactions. It also prevents fraudulent transactions or double spending attempts. The key feature of the blockchain is that while it is a single shared ledger, it follows a distributed and decentralised approach for validation as multiple copies of this single shared ledger are stored over multiple computers across the Internet. This, proponents claim, provides the best measure of prevention against fraud and cyber attacks as there is no single point of failure.
Bitcoin system usage and transaction volumes have been increasing since the idea was first floated in late 2008. However, it has not gone mainstream but has been adopted by speculators and criminals who use it buy and sell drugs or other illegal assortments online. Even among diehard crypto fans and all the Libertarian economists, there is a general feeling that Bitcoin may not be “the one” – the one true decentralised value exchange system that they have been waiting for but some other system, some possible enhancement, or something completely new but derived from it that could in the future cater to all types of payments, across industries and geographies, as the universally accepted method of value transference that is beyond the manipulative power of any entity and with a digital life of its own.
Will Bitcoin be the digital currency of choice in the cyber universe of tomorrow?
Many visionaries such as Reid Hoffman, the founder of Linkedin, writing recently in Wired, think that Bitcoin can be best described not only as a “cryptocurrency” but ultimately as a “cryptocapital” or even broadly as cryptoCAP (currency, asset, platform). Cryptocapital systems in Reid’s view will be used as both currencies and assets.
If the blockchain can validate payment transactions, it can validate any transfer of value including all form of assets and liabilities and contractual obligations creating a clear and ready global reference for validating any ownership or transfer of title. People are already talking about and investing in start-ups that are working on “sidechains”, customised blockchains engineered for specific value validation systems.
Bitcoin is to the Internet what gold was to the real world some centuries ago when distances were shrinking and adventurers, entrepreneurs, and scoundrels were sailing the high seas in tall ships in search for opportunity and profit. Those were the early days of global commerce. Today, we are in the age of tall ships on the Internet. Who knows what the bitcoins and blockchains of today will look like when we reach the jet age of the Internet.
It is hard to deny the vast realm of opportunities open to cryptocapital systems in the longer term even if in the shorter term they may not disrupt the banking and payments systems we have today which have proved remarkably resilient to Uber or Airbnb type of industry disruptions.
But one thing proponents of decentralised digital cryptofinancial systems have to bear in mind is that decisions in such environments can take inordinately long as there is no central authority which can decide and push something forward. Although the Bitcoin Foundation is the overseeing body, which aims to ensure common rules and standards, distributed approaches don’t always promote quick decision-making. Rebellions are common and factionalism becomes the order of the day. Already, there are two factions emerging in a case of a potential crypto civil war – where the conservatives wish to retain the existing size of a “block” in the blockchain while the forward bloc, pardon the pun, wishes to increase it.
Too much leaderless decentralisation rarely breaks new ground let alone digital innovation and can lead to disaster and chaos – resulting in a state of anarchy. There is nothing worse than that. Here cryptocurrency proponents will disagree. According to them, there is only one thing worse than anarchy: it is called Government.
But as the ancient Greek philosopher Aeschylus said: Neither a life of anarchy nor one beneath a despot should you praise; to all that lies in the middle a god has given excellence.