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Dave's Mostly Tinkering, Occasionally Reporting

Yet Another Bitcoin Intro. This is The Bigger Picture.

in Bitcoin · 7 minutes read

I think this technology is often misunderstood.

It’s either thought to be money for geeks to play around on the Internet, for criminals to sell drugs or launder money, for anarchists to weaken governments, and so on. The media has definitely played a role in this misinformation. All you hear about Bitcoin in the news is the sensational headlines, often focusing on trivial aspects of this technology.

For this reason, when introducing Bitcoin, I like starting from a blank slate, and approaching it with an open Mind. Bitcoin is, no doubt, a complex technology, the impact of which no one fully grasps yet. We are only starting to think of and create new ways to use Bitcoin and integrate it with our existing financial infrastructure. But one thing is certain in my mind, and that of prominent economists and technologists, it’s potential impact can be huge.

Bitcoin Blank Slate

Right, I get it, Bitcoin is Digital Money?

You may have noticed that I don’t talk about Bitcoin as money or a new digital currency, rather, I call it a technology. Because, fundamentally, Bitcoin is a technical innovation. It just so happens that one of the applications of this technology is money (or, at least, has similar properties to money). But it can be used for many other purposes, as I’ll highlight in this short piece.

So, what is this technology? Bitcoin, at a basic level, is the first system which truly allows peer-to-peer value transfer over the internet without the need for third parties. Although this doesn’t sound very fancy. It’s a huge breakthrough when you look at the current system. Today, the only true way of doing peer-to-peer value transfer is in person: one person handing cash, a car key, or whatever else to another person. Once you’re at a distance, this doesn’t work anymore, and instead, will require an intermediary to facilitate the transfer (this intermediary adds his own constraints, in the form of cost, delay, exclusivity, etc.)

This innovation is possible because Bitcoin solved, for the first time, a very well known problem called the Byzantine General’s Problem. By applying a combination of clever economics and powerful cryptography, Bitcoin answers the question of: how to establish trust between otherwise unrelated, and sometimes malicious, parties over an untrusted network like the Internet? Practically, Bitcoin gives us a way for one person to transfer a unique piece of digital property to another person, such that the transfer is guaranteed to be safe and secure, without the need to trust each other, to trust a third party, or to trust that the network is secure. And that’s bold.

In other words, Bitcoin makes possible the concept of digital scarcity. Say, you have a picture of your family on your computer. If you send that picture to a friend, you haven’t transferred it, you have simply created a copy and sent that copy. In other words, you have duplicated that picture. And this duplication can be done infinitely. Bitcoin, on the other hand, enables something digital to be unique, non-duplicable, scarce, and hence valuable.

And How is Bitcoin Useful?

Bitcoin Transactions Number of Bitcoin Transactions (source: Blockchain.info)

Thanks to Bitcoin, any two individuals, anywhere in the world, can now transfer value to each other directly. One such form of value is money. If I send you bitcoins that are worth $100, you now instantly have $100 in your digital wallet. But there are other forms of value that can be transferred on the Bitcoin network, and this is where we’ve only really scratched the surface. For example, you could have your car or house lease, your will, stocks and bonds, and basically a digital representation of any physical good represented on the Bitcoin network. This would then allow anyone to transfer the ownership of their assets to anyone else they choose without the existing overhead. Think of the complexity required in buying stock or transferring ownership of your house; with the Bitcoin network, it could really be as simple as sending an email.

Let’s get back to money. Today, this is Bitcoin’s most popular application. Millions of people already own bitcoins: some as an investment, others to do their daily purchases, still others to complete cross-border transfers, and so on. Practically, today you can buy your computer at Dell, book a hotel on Expedia, or donate to Wikipedia — all with Bitcoin. It works.

You can even think of Bitcoin as email for payments. That’s because it’s fast: it just takes a couples seconds to confirm transactions. It’s cheap: since you’re only transferring data across the internet, it almost costs nothing to complete a transaction. And it’s borderless: anyone who has access to a phone or internet connection has access to Bitcoin and all services built on top of it.

And to make things even more concrete, here are some current stats: Today, there are between 5 and 10 million bitcoin wallets in use in around 100 or so different countries, and more than a 100,000 businesses  that already accept bitcoin, either online or in person. And around $50 and $100 million of value is being processed on the network every day.

Bitcoin Enables Permissionless Innovation

Bitcoin or stealing your cash?
I won’t deny that there is still a long way to go, Bitcoin still has many problems — like its high volatility, which often gets brought up. But many of these problems are already being addressed. It’s useful to remember that Bitcoin is an open technology; it’s neither owned by a person or organization, nor does it require permission to use, extend, or innovate on. And this is worth repeating, because people often miss this point. Bitcoin is not a company, nor does it have any headquarters. It’s simply an open and transparent technology that anyone can use. Or decide not to use.

A great analogy is that of the web. The Web is an internet-scale open platform for information exchange: it gives everyone equal access to information, and it enables individuals and businesses to build on top of it, integrate their products or services with it, to improve it and extend it, and so on. Bitcoin is, similarly, an internet-scale open platform for value exchange. It can give everyone equal access to value transfer and more generally financial services. And we’re seeing entrepreneurs and forward-looking businesses already looking at ways to leverage Bitcoin’s benefits.

Continuing down this line of thinking, Adam Ludwin, CEO of Chain.com, wrote something that I think is spot on:

As with many breakthroughs, “Most people think about bitcoin as an alternative to something they already know, as opposed to an enabler of something they never considered.”

And that’s understandable, we’re much more familiar and comfortable with that which interact with on a daily basis. But Bitcoin’s real innovation lies in what NYC-based VC Fred Wilson callsNative Bitcoin Apps“: applications built using Bitcoin that couldn’t have existed prior to Bitcoin. And those are very hard to predict, just as it was hard to predict back in 1993 what the successful native Internet applications would be (try to find someone who predicted Wikipedia, Skype, Blogging, YouTube, Uber, etc). Similar to the Web, Bitcoin is a platform enabling “permissionless innovation”. It has the potential to do to value transfer what the Web did to information exchange.

Power to the People

Bitcoin Power to the people
For one, think of the billions of people around the world that are either unbanked or under-banked; people that are forced to live in a cash-based society. Many traditional companies are already trying to address these issues, but we can take it a step further. Instead of having these individuals be on the fringes of the economic system, they could conceivably get access to the same sophisticated financials tools as someone living in downtown Manhattan in the palm of their hands. And that’s because Bitcoin is an open system, such that anyone with access to a phone or internet connection gets access to all the services built on it. The same way that anyone surfing the web has access to all the world’s knowledge.

Another great application is micropayments. We’ve already seen the huge success of this form of payment on platforms like Apple’s AppStore. Billions of dollars are transacted at an average transaction amount of less than a $1. You can now extend this service to the whole world, rather than just have it limited to specific applications on closed platforms (like apps on the AppStore). Bitcoin also makes it much more cost-effective, because a transaction is essentially a matter of sending bits of data over the Internet, the cost of which is negligible. With Bitcoin, tipping online becomes possible; or, for example, adding value to social interactions (like “liking” on Facebook); or even, using entirely new content monetization models (pay-per-word-read or pay-per-second-of-video-watched) helping us get rid of excessive advertising. There are many more opportunities we still haven’t thought about.

What’s Next?

For these reasons and more, we are seeing hundreds of millions of investment dollars poured into new Bitcoin companies, from some the biggest VC names in the world (Andreessen Horowitz, Index Ventures, Google Ventures, etc.). And some of the largest financial and non-financial organizations are starting to pay close attention to or already invest in Bitcoin: like PayPal partnering with several Bitcoin payments companies, Perkins Coie creating a Bitcoin legal practice, Goldman Sachs running a Bitcoin report, the State of New York developing Bitcoin specific regulation, or even Fidor Bank in Germany launching the first digital currency bank, and many more.

Many of the opportunities I have mentioned, as well as countless more we have only begun exploring, are not going to happen overnight. We’re talking about at least 5-10 years, in my opinion, before we see a deeper integration of Bitcoin into our existing financial infrastructure. But I believe we’re reaching a tipping point of very rapid and continuous innovation in the financial sector (glimmers of which we can already see). And this is the point that will separate early adopters from late comers. It’s an opportunity for every individual and business to explore how they can combine their knowledge and expertise with Bitcoin’s technical innovation in order to provide vastly improved services to the world.

So, what are you going to do?

 

You can learn more about the work we’re doing in the Middle East with Yellow and ShuBitcoin.com.

And Finally, thank you to the thought leaders who have inspired much of this content, including Marc Andreessen, Richard G Brown, Fred EhrsamAdam Ludwin, and more.

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Published on:   December 20, 2014
  • yazinsai

    Great read Dave, I didn’t know about the correlation b/w Bitcoin and the Byzantine Generals’ problem until now .. well worth sharing!

  • Joe A

    Excellent article! The place to start for anyone who would like to learn what bitcoin is all about, and what boundless opportunities it presents; it puts it all in perspective. And what’s more, it’s a very enjoyable read!

  • Lea

    Very inspiring !!