Six years after it was sent out into the world, the significance of Bitcoin is still hard to figure. Is it the digital currency of the future or a faddish bubble waiting to go 'pop'? For most people, it’s difficult even to understand what Bitcoin is. There's been no shortage of attempts to explain the crypto-currency in lay terms, but even here the picture is murky—when presented with the question, "What do people want to know about Bitcoin," very smart people come up with wildly divergent answers.
One of the simplest attempts to explain Bitcoin comes from Vox, the new "explanatory" journalism website started by former Washington Post blogger Ezra Klein. In a recent two-minute video, Klein explains that Bitcoin is a "new kind of payment network, something like Visa or PayPal." But unlike those platforms, it has no central authority, no rules, no set fees. This is what makes Bitcoin scary, of course, but also what makes it so potentially powerful. "The buzzword here is 'permission-less innovation,'" Klein narrates. "You can do cool things without any central authority telling you no." He cites international money transfers that are faster and cheaper than Western Union, and says Bitcoin opens the possibility of new kinds of services that can’t even be offered under traditional payment networks.
So, that’s one explanation. It glosses over the technical underpinnings of Bitcoin completely (right in the two quick seconds where Klein says “a shared public register -they call that the blockchain”), and to other well-intentioned Bitcoin explainers, it’s precisely the technical side of Bitcoin that’s the real story. In one very long and (dauntingly weedy) blog post, programmer Michael Nielsen writes, “It is tempting instead to take Bitcoin as given…That’s fun, but severely limits your understanding. Understanding the details of the Bitcoin protocol opens up otherwise inaccessible vistas.”
Nielsen makes a solid effort to explain that protocol, as does Richard Bondi, a Google employee and Cambridge resident, in a document he recently posted called, “How Bitcoin Works: A Guide for the Digitally Perplexed.” Bondi’s effort uses clear language and a number of helpful analogies to explain the basic operational challenges that any decentralized peer-to-peer currency needs to solve in order to remain secure.
The encryption techniques that solve these problems are difficult to follow, but Bondi makes the concepts satisfyingly accessible if you read slowly enough. Bitcoin is based on a shared public ledger (the ‘blockchain’), which lists all Bitcoin transactions and lets any user verify how many Bitcoins any other user has (so if I offer to buy something from you for 10 Bitcoins, you can verify that I do in fact have 10 Bitcoins). Everyone all over the world has a copy of this ledger, but it’s vulnerable in two main ways: people can add Bitcoins to the ledger, making it look like they have more than they do and people can modify past transactions to their favor—making it look, for example, like they paid less for something than they did, and in turn have more Bitcoins to their name than they do.
Bondi explains that Bitcoin creator Satoshi Nakamoto came up with “three grand ideas” to address these issues. The first is a cryptographic technique known as “Hashcash,” which makes it such that to modify a single entry in the blockchain you need to modify all entries—and that takes an impractical amount of time, especially since new entries are being added at the same time you’re trying to modify the entire ledger.
Nakamoto’s second and third “grand ideas” had to do with attracting people to Bitcoin in the first place, and here’s where the widely discussed practice of Bitcoin “mining” comes in. The Hashcash encryption technique requires a lot of computing power and has to be performed uniquely for every single transaction. When people string together roomfuls of computers to “mine” Bitcoins what they’re really doing is searching for “nonces,” sets of numbers that can be used to verify the authenticity of Bitcoin transactions. If you make the effort to find a nonce, thereby providing a resource that fortifies security for the entire Bitcoin community, you’re rewarded with freshly minted (or mined) Bitcoins. Similarly, Nakamoto setup Bitcoin so that users can earn small fees for verifying each other’s transactions. (Users can set the transaction fees they’re willing to pay, and as a result, transactions with higher attached fees are verified faster by other Bitcoin users.)
This all gets complex quickly, and of course you don’t need to understand how something works to begin to appreciate its significance (we all marvel at the Internet with scant comprehension of its mechanics). But one cool outcome of diving into the Bitcoin protocol is that you begin to see why “currency of the future” might not be so far-fetched. Bondi notes that rather than buckling under its own weight, Bitcoin actually gets stronger as more people use it. “What’s rather beautiful,” he writes, “is that the more miners and transactions there are, the harder it is for an evil Eve to try to undermine the system…That’s the opposite of a centralized system, which becomes weaker the more transactions and financial participants it has to coordinate.”
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Leon Neyfakh is the staff writer for Ideas. Amanda Katz is the deputy Ideas editor. Stephen Heuser is the Ideas editor.
Guest blogger Simon Waxman is Managing Editor of Boston Review and has written for WBUR, Alternet, McSweeney's, Jacobin, and others.
Guest blogger Elizabeth Manus is a writer living in New York City. She has been a book review editor at the Boston Phoenix, and a columnist for The New York Observer and Metro.
Guest blogger Sarah Laskow is a freelance writer and editor in New York City. She edits Smithsonian's SmartNews blog and has contributed to Salon, Good, The American Prospect, Bloomberg News, and other publications.
Guest blogger Joshua Glenn is a Boston-based writer, publisher, and freelance semiotician. He was the original Brainiac blogger, and is currently editor of the blog HiLobrow, publisher of a series of Radium Age science fiction novels, and co-author/co-editor of several books, including the story collection "Significant Objects" and the kids' field guide to life "Unbored."
Guest blogger Ruth Graham is a freelance journalist in New Hampshire, and a frequent Ideas contributor. She is a former features editor for the New York Sun, and has written for publications including Slate and the Wall Street Journal.
Joshua Rothman is a graduate student and Teaching Fellow in the Harvard English department, and an Instructor in Public Policy at the Harvard Kennedy School of Government. He teaches novels and political writing.