About Bitcoin...

[Fellow Traveler]

Intro:

Most digital cash systems do not handle the VALUE ITSELF. Rather, they handle tokens that REPRESENT the value.

For example, if you use an Open Transactions server to trade around "gold grams", the Open Transactions software itself doesn't actually store any gold, nor is a piece of software such as OT really even capable of verifying the existence of physical gold. Rather, OT relies on the ISSUER to vouch for the existence of the gold. (As they say: trust is a currency.)

This is also why you are safe even in the event that an OT server disappears: because you can still take your receipt back to the issuer, who is the one actually liable for the gold. (And who probably has the same currency issued on a dozen other servers, to boot.)

This is also why you are safe even if a malicious OT server wanted to change your balance: The OT server has no access to your gold--it only notarizes transactions that you have signed first--and because your account itself IS THE RECEIPT, and because the server cannot forge your signature on any receipt, ERGO and therefore, the OT server is as powerless to change your balance as any other user is.

All of this is predicated on the fact that OT doesn't store or process any real value -- only tokens that people choose, in real life, to use as representations of value, which those same people actually store and control independently of the OT server itself.

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ENTER BITCOIN:

Bitcoins, in contrast, are not merely tokens that represent some offline storage of value. Rather, the Bitcoins themselves ARE the value.

This means that the Bitcoin community is hard at work creating tokenized systems to help them to store, manage, and trade that value around. They are building markets, they are building web wallets, and other centralized systems.  ALL THE SAME KINDS OF SYSTEMS that are discussed here, in fact.  (The only difference is, the issuer stores Bitcoins instead of gold or some other form of value.)

Therefore, in my development of OT, I have always considered Bitcoin to be a RESERVE ASSET. That is, a form of backing value, like gold or silver, that OT would be used for trading. In this sense, Bitcoin is, in some ways, superior to other backing assets, since all reserves are publicly-auditable, and since they cannot be confiscated or shut down. (Even gold cannot do these things.)

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Where do the Bitcoins come from?

===> Because Bitcoin is a fully-p2p system, that means there are no central servers to sign off on the transactions.

===> As a result of this, the p2p network ITSELF signs off on the transactions. The longest chain of signatures is the correct one. (You can't forge a single block in the chain without also forging all the other blocks than came after it, which becomes more and more impossible over time as the block chain continues to grow.)

===> It is this process of "signing-off" on transactions (by all the other peers in the network) that occasionally pops out the creation of a new Bitcoin. (Every now and then, the resulting hash meets the definition of a coin, and this is mathematically rare.)

===> Therefore, the people who devote the most computing power to signing off on other people's transactions will also be the ones earning the most new coins. These entities are known as "miners"'.

===> Thus, the Bitcoin P2P network does it all. It cooks up the coins, and it signs off on the transactions. All of this is publicly-auditable on the block chain.

===> This means that the Bitcoin community has the same need for digital cash, market systems, wallets, and other software, as the rest of the DGC community.

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What is useful about Bitcoins as a form of money?

--- They cannot be counterfeited by North Korea or inflated by the Federal Reserve. 

--- They cannot be confiscated or shut down.

--- They cannot be manipulated by some central power source, but instead are restricted by the mathematical rules that everyone agrees on.

--- They are evenly divisible such that, while 21,000,000 Bitcoins will be the most to ever come into existence, there are actually QUADRILLIONS of individual units, since each coin is greatly divisible. Thus, the bitcoins can still gain much value in the future, yet still be useful as trading units.

--- They are fungible (any Bitcoin unit is the same as any other.)

--- They are rare and difficult to produce. You must add value to the network (signing transactions) in order to obtain them.

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I realized, it is a false argument between Bitcoin and Gold.

Most of the value on the earth will never be stored in either. Rather, the value is stored in land, in assets, in food, in businesses, in intellectual property, etc. Only a small percentage of that value is actually stored in money, and only a percentage of THAT will ever be stored in Gold OR Bitcoin.

Therefore, it seems reasonable to me that, if Bitcoin ends up storing 1% of the value (say), that 1% probably would represent the amount of actual value that Bitcoin adds to the monetary system by virtue of its unique properties (that it cannot be confiscated or shut down, that it is publicly-auditable, etc.)  Bitcoin is very useful, in this sense, as a "lubricant" in order to make it very easy for people to convert in-and-out of OTHER currencies, and as a "glue" between OT servers -- a universal, trusted medium that people can use to hop from server-to-server, converting into other currencies on OT markets as needed.

As an aside, I believe that I have just stumbled upon a new technology that will soon change Bitcoin AND OT in the months to come. But for now, I am keeping it close to my vest.

I hope you find this information interesting and useful.

-FT