Most people underestimate how old the concept of money really is. While we currently know money in terms of paper bills and various types of coins, this is only the latest iteration of a monetary society. Back when the earliest writings known to man were
The digital currency has caused any number of headaches for law enforcement. Now entrepreneurs and academics are scrambling to build a better version. When the digital currency Bitcoin came to life in January 2009, it was noticed by almost no one apart from the handful
Rather than shunning potentially disruptive digital currencies, the biggest names in the financial industry are looking at integrating the technology behind bitcoin into everyday use. Bitcoin is a virtual currency that allows users to exchange online credits for goods and services. However, many see the
Bitcoin has mesmerized academics, computer scientists and economists alike, for cutting out the PayPals and governments usually required for digital money. Finally, researchers have an official setting to nerd out in. Tuesday, the University of Pittsburgh launched the first Bitcoin-only journal, Ledger, which tackles the
A bitcoin hacking group calling itself “DD4BC” which stands for “distributed denial of service for bitcoin” is allegedly targeting Australian banks like Macquarie and Westpac. These reported extortion campaigns have reportedly been running since May this year, prompting authorities to initiate a new cybersecurity outfit
Wanxiang Group, one of the largest automobile conglomerates in China, has announced its plans to invest in blockchain tech to the tune of $50 million. The company has reportedly purchased 416,000 ETH tokens on the Ethereum blockchain, confirmed by the company’s managing director Chao Deng.
Coinbase, a popular platform for people to buy and sell bitcoins, is trying to patent some of Bitcoin’s core services—ones which many companies already provide. Predictably, everyone is losing their shit. Coinbase has filed nine patents over the last 18 months in the US, which
The man believed to be forgotten Silk Road architect Variety Jones has published a series of accusations against someone he suspects is a corrupt Federal Bureau of Investigation employee, guilty of crimes including leaking sensitive information to criminals, extorting the owners of dark web marketplaces
Dogecoin was never supposed to be taken seriously. The cryptocurrency based on the doge meme was originally started for shits and giggles. It attracted lighthearted individuals who were more interested in cracking jokes than in getting rich quick, who preferred to donate coins for causes
A New Hampshire legislative subcommittee has recommended that the state’s House of Representatives kill a bill that, if enacted, would allow citizens to pay their taxes with bitcoin. The bill, filed by state representative Eric Schleien earlier this year, calls for the state treasury to
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American academia has offered courses across the country on cryptocurrencies for a couple of years now. New York University, Duke University, Princeton and others have all offered courses on Bitcoin. The Stanford University School of Engineering in Stanford, Calif. offers a new course, Bitcoin &
The debate whether Bitcoin should be banned in Russia is once again picking momentum. According to a report of Interfax, the Russian government lately approached the regulators with its plan to criminalize the use and issuance of Bitcoin under the new money surrogate law. If
The former head of defunct bitcoin exchange Mt Gox, Mark Karpelès, has been charged with embezzlement by Japanese prosecutors, according to reports from the Japanese media. Karpelès is alleged to have embezzled ¥321m (£1.7m) from the bitcoin exchange, which collapsed in 2014 after revelations of
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Most people underestimate how old the concept of money really is. While we currently know money in terms of paper bills and various types of coins, this is only the latest iteration of a monetary society. Back when the earliest writings known to man were discovered, they displayed a form of accounting, with balances and sheets. Even in those days, a monetary system already existed.
One could make the case regarding there not being any society in history that didn’t know what money was, or how they would implement such a system themselves. Based on this evidence, it looks like the concept of money is even older than the concept of language, which is quite a significant piece of history hardly anyone knows about.
An often heard argument is whether or not the concept of money is older than the invention of the wheel, which was an important milestone in human history. Academic research has unveiled that wheels were used as a form of money, making the monetary system much older than this amazing invention.
Throughout the course of history, there have been multiple forms of money used by various civilizations. Some of the earliest forms are now referred to as “barter trades”, back when seashells and feathers were valuable commodities. One person would give up an item they needed to gain something else they needed, which is how the monetary system works since day one.
The evolution of money
Precious metals have been used to express value for quite some time now, as they are easily transportable, divisible, and universally valued for aesthetic purposes. Even though it took over a thousand years to introduce precious metals to the monetary system, the Babylonians, Greeks, and Romans made it work for them.
That situation lasted for another thousand years, until someone got the bright idea to make the monetary system even more convenient to use. The introduction of paper money was greeted with a lot of skepticism, as there is no intrinsic value to a number written on paper. After a 400-year period of slow adoption, paper money finally became a widespread form of ecosystem.
In fact, we are not the only species who are able to use a monetary system to advance our status in the community. Primates, also known as our forefathers, can be taught how to use money by using a specific type of stone, which can be exchanged for bananas. But as you would come to expect, any glimpse of prosperity brings a new set of problems with it.
Like humans, primates have quickly figured out how to prey on the weak once a monetary system had been introduced. Both armed robbery and prostitution are not uncommon among primates, as any of these actions has a high potential for a reward in the form of more bananas in the future.
Card payments become part of the monetary system
It goes without saying that even the monetary system needs to be revamped every now and then. After a long period of solely relying on paper money, banks and other financial institutions started introducing card payments. These plastic cards originally served as a plastic version of the traveler’s cheque, introduced by Diner’s Club.
Such a radical change was also greeted with skepticism and apprehension, as plastic cards were trying to solve a problem that most consumers didn’t even acknowledge. Paper money is subject to tearing, damage, weather conditions deteriorating the paper, and theft. Once paper money is damaged or stolen, there is no way to retrieve the value for individual consumers.
After a period of nearly 60 years, card payments have become a preferred form of payment in most developed countries. Not all of these card payments are made with credit or debit cards, though, as banks have introduced their own plastic cards to customers. Especially e-commerce is seeing a tremendous boom ever since card payments were introduced as a form of paying for goods and services online.
Despite the huge promise offered by card payments, this has been one of the least secure forms of payment in the history of money. Card payments are subject to high fraud and chargeback rates, as cards can easily be cloned or stolen. Furthermore, this form of payment was never designed to be used on the Internet, yet it has become one of the most popular forms of transferring funds in exchange for items.
Enter Bitcoin, a far more radical change to money
99Bitcoins_Bitcoin MoneyFast forward until 2009, and all of a sudden there is this new, disruptive, and radical form of money called Bitcoin. When people were faced with the introduction of paper money, there was a lot of concern and skepticism. Bitcoin has been facing the same type of lukewarm reception, and it’s still fighting tooth and nail to change the public perception after six years.
Financial experts are referring to Bitcoin as an abstract form of money, which seems to be an aptly chosen terminology. There are many misunderstandings plaguing the Bitcoin ecosystem, including the ongoing debate about whether Bitcoin is anonymous or pseudonymous. Most people still assume digital currency is completely anonymous, but Bitcoin clearly is not.
Everyday consumers also fail to realize that Bitcoin is more than just a payment system or a way of transferring money around the world at next to no cost. Furthermore, Bitcoin is not the first type of digital money to be introduced, as this form of monetary system existed long before the concept of virtual currencies was unveiled to the world.
It will take some time until Bitcoin becomes a mainstream form of payment around the world. Until that time, the underlying blockchain technology keeps gaining more interest from all aspects of life, including finance, IT and many more. Transparency will become a more valuable trait in the business world in the next few years and the blockchain technology is capable of providing exactly that.
The digital currency has caused any number of headaches for law enforcement. Now entrepreneurs and academics are scrambling to build a better version.
When the digital currency Bitcoin came to life in January 2009, it was noticed by almost no one apart from the handful of programmers who followed cryptography discussion groups. Its origins were shadowy: it had been conceived the previous year by a still-mysterious person or group known only by the alias Satoshi Nakamoto1. And its purpose seemed quixotic: Bitcoin was to be a ‘cryptocurrency’, in which strong encryption algorithms were exploited in a new way to secure transactions. Users’ identities would be shielded by pseudonyms. Records would be completely decentralized. And no one would be in charge — not governments, not banks, not even Nakamoto.
Yet the idea caught on. Today, there are some 14.6 million Bitcoin units in circulation. Called bitcoins with a lowercase ‘b’, they have a collective market value of around US$3.4 billion. Some of this growth is attributable to criminals taking advantage of the anonymity for drug trafficking and worse. But the system is also drawing interest from financial institutions such as JP Morgan Chase, which think it could streamline their internal payment processing and cut international transaction costs. It has inspired the creation of some 700 other cryptocurrencies. And on 15 September, Bitcoin officially came of age in academia with the launch of Ledger, the first journal dedicated to cryptocurrency research.
What fascinates academics and entrepreneurs alike is the innovation at Bitcoin’s core. Known as the block chain, it serves as the official online ledger of every Bitcoin transaction, dating back to the beginning. It is also the data structure that allows those records to be updated with minimal risk of hacking or tampering — even though the block chain is copied across the entire network of computers running Bitcoin software, and the owners of those computers do not necessarily know or trust one another.
Many people see this block-chain architecture as the template for a host of other applications, including self-enforcing contracts and secure systems for online voting and crowdfunding. This is the goal of Ethereum, a block-chain-based system launched in July by the non-profit Ethereum Foundation, based in Baar, Switzerland. And it is the research agenda of the Initiative for CryptoCurrencies and Contracts (IC3), an academic consortium also launched in July, and led by Cornell University in Ithaca, New York.
Nicolas Courtois, a cryptographer at University College London, says that the Bitcoin block chain could be “the most important invention of the twenty-first century” — if only Bitcoin were not constantly shooting itself in the foot.
Several shortcomings have become apparent in Bitcoin’s implementation of the block-chain idea. Security, for example, is far from perfect: there have been more than 40 known thefts and seizures of bitcoins, several incurring losses of more than $1 million apiece.
Cryptocurrency firms and researchers are attacking the problem with tools such as game theory and advanced cryptographic methods. “Cryptocurrencies are unlike many other systems, in that extremely subtle mathematical bugs can have catastrophic consequences,” says Ari Juels, co-director of IC3. “And I think when weaknesses surface there will be a need to appeal to the academic community where the relevant expertise resides.”
Academic interest in cryptocurrencies and their predecessors goes back at least two decades, with much of the early work spearheaded by cryptographer David Chaum. While working at the National Research Institute for Mathematics and Computer Science in Amsterdam, the Netherlands, Chaum wanted to give buyers privacy and safety. So in 1990 he founded one of the earliest digital currencies, DigiCash, which offered users anonymity through cryptographic protocols of his own devising.
DigiCash went bankrupt in 1998 — partly because it had a centralized organization akin to a traditional bank, yet never managed to fit in with the financial industry and its regulations. But aspects of its philosophy re-emerged ten years later in Nakamoto’s design for Bitcoin. That design also incorporated crowdsourcing and peer-to-peer networking — both of which help to avoid centralized control. Anyone is welcome to participate: it is just a matter of going online and running the open-source Bitcoin software. Users’ computers form a network in which each machine is home to one constantly updated copy of the block chain.
Nakamoto’s central challenge with this wide-open system was the need to make sure that no one could find a way to rewrite the ledger and spend the same bitcoins twice — in effect, stealing bitcoins. His solution was to turn the addition of new transactions to the ledger into a competition: an activity that has come to be known as mining (see ‘The Bitcoin game’).
Mining starts with incoming Bitcoin transactions, which are continuously broadcast to every computer on the network. These are collected by ‘miners’ — the groups or individuals who choose to participate — who start competing for the right to bundle transactions into a new block. The winner is the first to broadcast a ‘proof of work’ — a solution showing that he or she has solved an otherwise meaningless mathematical puzzle that involves encrypted data from the previous block, and lots of computerized trial and error. The winning block is broadcast through the Bitcoin network and added to the block chain, with the proof of work providing an all but unbreakable link. The block chain is currently almost 400,000 blocks long.
In principle, this competition keeps the block chain secure because the puzzle is too hard for any one miner to solve every time. This means that no one will ever gain access to the encrypted links in the block chain and the ability to rewrite the ledger.
Mining is also a way to steadily increase the bitcoin supply: the miner who wins each block gets a reward, currently 25 new bitcoins. That is worth almost $6,000 at today’s prices. Nakamoto’s design controls the supply increase by automatically adjusting the difficulty of the puzzle so that a new block is added roughly every ten minutes. In addition, the reward for creating a block decreases by half roughly every four years. The goal is to limit the supply to a maximum of 21 million bitcoins.
The network cannot determine the value of bitcoins relative to standard currencies, or real-world goods and services. That has been left to market forces, with people trading bitcoins on online exchanges. One result is that the market price has gyrated spectacularly — especially in 2013, when the asking price soared from $13 per bitcoin in January to around $1,200 in December. That would have made the first real-world products ever paid for with the cryptocurrency — a pair of Papa John’s pizzas, purchased for 10,000 bitcoins on 22 May 2010 — worth almost $12 million.
It did not take long for the problems with Bitcoin to become apparent. For example, because users are allowed to mask their identity with pseudonyms, the currency is perfect for screening criminal activity. That was behind the success of the online black market Silk Road, which the FBI shut down in 2013; its founder was sentenced to life in prison in May this year. But Bitcoin also had a key role in funding the whistle-blowing website WikiLeaks — an outcome that some would call beneficial. It is difficult for society to work out a legal framework to differentiate between good and bad uses of this technology, says Arvind Narayanan, a computer scientist at Princeton University in New Jersey. “How do you regulate around Bitcoin without banning the technology itself?” he asks.
Other issues surfaced with Bitcoin’s mining procedure. As the currency has gained value, for example, mining competition has become fiercer, with increasingly specialized computers solving the puzzles ever faster. Courtois, who has found ways to streamline the puzzle-solving process2, says that at one point he was successfully earning $200 a day through mining. The rivalry has driven the establishment of large Bitcoin-mining centres in Iceland, where cooling for the computers is cheap. According to one estimate from 2014, Bitcoin miners collectively consumed as much power as the whole of Ireland.
Intensified Bitcoin mining has also led individual miners to pool their computational resources. Last year, the largest mining pool, GHash.IO, briefly exceeded 50% of total Bitcoin mining power — which is problematic because anyone who controls more than half of the mining power could start beating everyone else in the race to add blocks. This would effectively give them control of the transaction ledger and allow them to spend the same bitcoins over and over again. This is not just a theoretical possibility. Successful ‘51% attacks’ — efforts to dominate mining power — have already been mounted against smaller cryptocurrencies such as Terracoin and Coiledcoin; the latter was so badly damaged that it ceased operation.
To reduce the threat from mining pools, some existing cryptocurrencies, such as Litecoin, use puzzles that call more on computer memory than on processing power — a shift that tends to make it more costly to build the kind of specialized computers that the pools favour. Another approach, developed by IC3 co-director Elaine Shi and her collaborators4, enlists a helpful kind of theft. “We are cryptographically ensuring that pool members can always steal the reward for themselves without being detected,” explains Shi. Their supposition is that miners would not trust each other enough to form into pools if their fellow pool members could easily waltz off with the rewards without sharing. They have built a prototype of the algorithm, and are hoping to see it tested in Bitcoin and other cryptocurrencies.
Another problem is the profligate amount of electricity used in Bitcoin mining. To reduce wastage, researchers including Shi and Juels have proposed a currency called Permacoin5. Its proof of work would require miners to create a distributed archive for valuable data such as medical records, or the output of a gene-sequencing centre. This would not save energy, but would at least put it to better use.
The security of cryptocurrencies is another huge concern. The many thefts of bitcoins do not result from the block-chain structure, says Narayanan, but from Bitcoin’s use of standard digital-signature technology. In digital signatures, he explains, people have two numeric keys: a public one that they give to others as an address to send money to, and a private one that they use to approve transactions. But the security of that private key is only as good as the security of the machine that stores it, he says. “If somebody hacks your computer, for example, and steals your private keys, then essentially all of your bitcoins are lost.”
Security is such a concern for consumers that Narayanan thinks Bitcoin is unlikely to find widespread use. So his team is working on a better security scheme that splits private keys across several different devices, such as an individual’s desktop computer and smartphone, and requires a certain proportion of the fragments to approve a payment6. “Neither reveals their share of the key to each other,” says Narayanan. “If one machine gets hacked, you’re still OK because the hacker would need to hack the others to steal your private key. You’ll hopefully notice the hack happened before they have the chance.”
Other thefts have occurred because the private key needs to be combined with a random number to create a transaction signature. Some software — such as Bitcoin apps developed for Android smartphones — has generated random numbers improperly, making them easier to guess. This has allowed hackers to steal somewhere between several thousand and several million dollars’ worth of bitcoins, says Courtois, who has been investigating such vulnerabilities7. “It’s embarrassing,” admits David Schwartz, chief cryptographer at cryptocurrency developer Ripple Labs in San Francisco, California. “We as an industry just seem to keep screwing up.”
Into the ether
The block chain is a remarkably powerful idea that could be applied to much more than just transaction records, says Gavin Wood, co-founder of Ethereum and chief technology officer of its foundation. One use might be to develop computerized, self-enforcing contracts that make a payment automatically when a task is complete. Others might include voting systems, crowdfunding platforms, and even other cryptocurrencies. Wood says that Ethereum is best used in situations for which central control is a weakness — for example, when users do not necessarily trust one another. In 2014, to make it easier to develop such applications, Wood and fellow programmer Vitalik Buterin devised a way to combine the block chain with a programming language. Ethereum raised 30,000 bitcoins through crowdfunding to commercialize this system.
To prevent the basic cryptography-related mistakes that have plagued Bitcoin, Ethereum has recruited academic experts to audit its protocol. Shi and Juels are looking for ways that Ethereum could be abused by criminals8. “The technology itself is morally neutral, but we should figure out how to shape it so that it can support policies designed to limit the amount of harm it can do,” says Juels.
Like Bitcoin, Ethereum is not under anyone’s direct control, so it operates outside national laws, says Wood. However, he adds that technologies such as music taping and the Internet were also considered extralegal at first, and seemed threatening to the status quo. How Bitcoin, Ethereum and their successors sit legally is therefore “something that, as a culture and society, we’re going to have to come together to deal with”, he says.
Juels suspects that Bitcoin, at least, will not last as an independent, decentralized entity. He points out how music streaming has moved from the decentralized model of peer-to-peer file-sharing service Napster to commercial operations such as Spotify and Apple Music. “One could imagine a similar trajectory for cryptocurrencies: when banks see they’re successful, they’ll want to create their own,” he says.
Courtois disagrees. He calls Bitcoin “the Microsoft of cryptocurrency”, and maintains that its size and dominance mean that it is here to stay. As soon as any new innovations come along, he suggests, Bitcoin can adopt them and retain its leading position.
Whatever the future holds for Bitcoin, Narayanan emphasizes that the community of developers and academics behind it is unique. “It’s a remarkable body of knowledge, and we’re going to be teaching this in computer science classes in 20 years, I’m certain of that.”
Rather than shunning potentially disruptive digital currencies, the biggest names in the financial industry are looking at integrating the technology behind bitcoin into everyday use.
Bitcoin is a virtual currency that allows users to exchange online credits for goods and services. However, many see the real worth of the cryptocurrency being the technology behind the coin. Called the blockchain — this is a public and transparent ledger of all bitcoin transactions.
On Tuesday, 13 of the world’s leading banks joined a project to explore the possibilities behind using this type of distributed ledger in the mainstream financial world. Institutions like Bank of America, Citi and Deutsche Bank have joined others like Goldman Sachs and J.P. Morgan which had already signed up.
R3 is the New York-based innovations firm behind the program and aims to establish a set of standards for a blockchain that banks can use. Together with R3, the banks will research and experiment with shared ledger solutions to meet banking requirements for security, reliability, performance, scalability, and audit.
Niall Cameron, head of EMEA markets at HSBC called it an “exciting partnership” in a press release Tuesday and said that the bank was “pleased to be involved.” Satoshi Murabayashi, a CIO at Mitsubishi UFJ Financial Group said that clients deserved a banking experience that comes with “enhanced security, low costs and minimal errors.”
It might still be early days but the technology could effectively allow payments to be made instantly without a centralized authority and it would also be transparent with each bank being allowed access to the ledger.
Stopping ‘too big to fail’
One way the blockchain initiative could help the financial industry is in the several new developments in the derivatives industry relating to how financial markets operate. Regulation has tried to radically change the risks associated with financial derivatives trading – which has been blamed — rightly or wrongly — seen as accentuating the crash.
Clearing houses, also known as central clearing counterparties (CCP), have been seen as the answer by policymakers. However, Robert Sams, the CEO of Clearmatics, believes the distributed ledger could be a real solution for the industry.
“The CCPs are now the largest counterpart to most of the players in the derivatives market and are ‘too big to fail’,” Sams told CNBC via email.
“Collateralization and resolution procedures are supposed to mitigate the risk of an event leading to public rescue, but these assumption-laden procedures are fragile and might be blown to bits upon first contact with market reality in times of stress. We should be decentralizing counterparty risk, not centralizing it.”
Sams, and his London-based firm Clearmatics, have been tasked with innovating with derivatives trading with a form of the public ledger similar to bitcoin’s. UBS is one big bank that has already shown an interest and reports state that many more are keeping a keen eye on the project.
An end to counterfeiting?
Aside from financials, this public ledger has a host of other practicalities. Pantera Capital, an investment fund founded by Dan Morehead, are investing in a firm that using the technology to help detect counterfeiting in the luxury goods industry.
Morehead, however, is cool on the idea of it being used by banks.
“You have the problem still that it is susceptible to rogue agents at any of the banks,” he told CNBC via telephone, name checking Nick Leeson, the former Barings Trader.