BitCoin – a monetary revolution
E-gold was an exciting development in the world of money. E-Gold is a kind of private currency, although to be strictly correct it is an electronic account keeping and payment system that monetises gold. E-Gold provides an electronic means of making payment in units of value called gold grams. Every electronic gold gram is backed by a real gram of gold. If you had enough electronic gold you could trade it in for real gold. I thought the system was brilliant. At it’s peak the annual value of transactions in E-Gold was worth the equivalent of billions of US dollars even though most transactions were very small. And this volume was growing at about 50% per annum. However a few years ago the velocity of the E-Gold currency plummeted to zero following US government action against the operator of the system. I regard the treatment dished out by the government as malicious but that’s another story. The point is that what looked for a short while to be a revolutionary new form of private currency, divorced from direct government control, and on a rapid growth trajectory, was quickly cut down by a hostile government. There are alternative digital gold currencies that still operate such as GoldMoney, but they don’t seem to have the same momentum as a payment system that E-Gold once offered.
Governments will always be able to shut down any serious alternate money schemes. Or at least that’s what I thought until I recently discovered BitCoin.
BitCoin is a cryptocurrency. It entails using encryption techniques to trade and verify electronic tokens between computer users. It is essentially anonyomous like cash. I had looked at such systems in the past but all seemed to rely on the need for a central clearing house during any exchange of the tokens to avoid fraud such as double spending of the same electronic token. And any private currency based on a central clearing house is vulnerable to shutdown by hostile government authorities. BitCoin has a clearing house but BitCoin get’s around the clearing house problem in a really neat way. The clearing house is a distributed peer to peer system. There is a clearing house but it does not live anywhere and is not controlled by anybody. It is a community based system tied into a set of open source algorithms that can’t be changed unless the majority of the community agrees to change them by replacing their individual implementation. And the larger the community the harder it becomes to change the core algorithm. A hostile government authority can’t kill the system by going after a person, a company or a particular datacentre. In a way the BitCoin clearing house is like the BitTorant network that people use for sharing pirated movies and music. Even if they make it illegal nobody can police it. In essence BitTorant looks on the face of it like a private online currency that is unstoppable. The future of online commerce will be a BitCoin cash economy.
There is a lot more to say about BitCoin. About how the unique BitCoin creation process will soon lead to BitCoin deflation (BitCoins are currently exchanging at about US$0.90). However none of this really matters because the technique is now available to create BitCoin competitors if it turns out that there are economic limitations that impact the practicallity of the original. The code is open source. Anybody with the right programing skills can create BitCoin2, expound it’s superior benefits, create an anonymous peer to peer community based clearing house and compete with the original.
One other cool thing about BitCoin. Nobody knows the real name of the BitCoin inventor. It is just “out there”.
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