1. Bitcoin’s code
Bitcoin was launched in 2009, along with a vision document and system source code. The introduction video of Bitcoin simply describes it as "the first decentralized digital currency", and a more detailed explanation points out that "the essence of money is any thing or record that is accepted and can be used to pay for goods and services or repay debts in a specific country or socio-economic context. Based on this concept, the design of Bitcoin revolves around how to apply cryptography to control the supply and circulation of money without relying on any central government." These two explanations emphasize that the decentralized nature and reliance on computer algorithms are the fundamental principles for designing Bitcoin and derivative virtual currencies. There is no central bank (or server) to confirm transactions. Bitcoin relies on an "end-to-end" network, personal keys and computing tasks to provide "credentials" for transactions between strangers. Bitcoin is not linked to any other currency, commodity, or national economy. Bitcoin exists because of its user network and only exists in its user network.
Bitcoin is designed technically so that transactions can be made without any physical exchange of coins or paper money, or any central authority keeping records of transactions, like bank transactions. Instead, the network determines the validity of transactions through a blockchain, a collective computational “proof of work” task. This design aspect is critical to Bitcoin’s functioning, because otherwise a user could spend a bitcoin twice, expecting the distributed system to not know that the coin no longer belongs to that person. Without getting into the details (which are interesting but not particularly relevant to this chapter), Bitcoin relies on hashing—an intensive and irreversible computational process—that participating users run on their machines to determine which transactions are actually valid. The key is that the hashing operation is designed to be completed by the Bitcoin network in about 10 minutes, and the resulting hashing operation confirms the validity. Any attempt to make a false transaction, such as stealing all the bitcoins, would have to compete with all the computers in the network to confirm the transaction. Therefore, false transactions cannot be propagated through the peer-to-peer network, only real transactions can, ensuring the smooth operation of the monetary system. Bitcoins are stored by users in electronic wallets located on local computers or online, which makes them both possible to be lost and stolen; however, bitcoins can be backed up like any other information. As mentioned above, all Bitcoin transactions are public, but individual users' electronic wallet addresses are not shared unless a user chooses to make them public. Therefore, Bitcoin is a semi-anonymous transaction system, and it is difficult to trace transactions back to individuals (although it is possible).
Despite (or perhaps because of) its crowdfunding origins, Bitcoin has grown tremendously. As of June 2015, it had a market cap of $3.6 billion, accounting for more than 80% of the total market cap of all decentralized virtual currencies. While there are more than 600 so-called cryptocurrencies in existence (most of which are copies of the Bitcoin system), only 10 have a total market cap of more than $10 million, and 42 have a market cap of more than $1 million. Despite Bitcoin’s dominance among virtual currencies, actual transactions are relatively rare, with “around 69,000 transactions per day worldwide,” a tiny fraction of the 274 million non-cash retail transactions that take place every day in the European Union. Not surprisingly, only a handful of businesses accept Bitcoin, with the European Central Bank estimating that only 0.3% of merchants will accept the virtual currency. Some large companies, most notably Expedia, have begun accepting Bitcoin as payment for hotel reservations. However, Expedia did not directly deposit the virtual currency into its account, but designed a payment process to convert Bitcoin into a certain country's legal currency before receiving payment. Obviously, Expedia only uses Bitcoin as a payment medium, not as a long-term means of storing value. Bitcoin has always faced the challenge of low transaction volume, which has also led to problems such as sharp fluctuations in Bitcoin value and limited liquidity.
2. The legality of Bitcoin
Although Kastronova believes that "since there is no law prohibiting it, virtual currencies are completely legal", Bitcoin still faces many unresolved legal issues. Despite the concerns about funding illegal activities, Bitcoin is also widely used in legal and mainstream economic activities, such as booking hotels through Expedia. It is undeniable that the area where Bitcoin has the greatest potential and disruptive effect is to facilitate transactions, especially cross-border payments. Although the existing bank wire transfer and credit card systems are relatively popular in cross-border payments, the fees charged by middlemen are relatively high. Therefore, if a payment system is designed in which a company receives "a country's currency, converts it into virtual currency, transfers it through a virtual currency network, and then converts the virtual currency into the currency of the recipient country and arranges payment", virtual currencies such as Bitcoin will play a great role in such a payment system. In other words, Bitcoin may be mainly used for short-term transactions in practice, rather than assuming all the functions of currency, such as value storage or accounting unit.
Despite this, bank officials are careful to point out that “legally speaking, Bitcoin is not a currency, and does not have the status of legal tender nor meet the criteria of a financial instrument.” In addition, governments have repeatedly issued risk warnings about the use of decentralized virtual currencies. Given this characterization of “risky behavior,” key members of the Bitcoin community have clearly begun to strengthen cooperation with government departments. Jeff Garzik, a member of the Bitcoin development team, publicly stated, “We are working with the government to ensure that Bitcoin is under government regulation… The only way Bitcoin can succeed is to work with the government and regulators.” This statement has caused a huge (mostly negative) reaction among Bitcoin users, as the ideology behind the Bitcoin project generally rejects state-led regulation or even cooperation.
3. Bitcoin’s ideology
The protests of the Bitcoin community are related to the fact that Bitcoin carries the core values of the hacker culture outlined by Levy, namely distrust of authority and decentralization, open access to computer systems (a characteristic that fits in with the open source movement), and the ultimate use of computers for the benefit of humanity. Based on these values, Bitcoin aims to be divorced from (for better or worse) the modern financial system, or more precisely, from specific aspects of the financial system and the larger regulatory process. It is valuable to return to the original concept document released by Nakamoto (the creator of Bitcoin) in 2009, which begins:
Commerce on the Internet has become completely dependent on financial institutions acting as trusted third parties to process electronic payments. While this system works well for most transactions, it suffers from inherent flaws in this trust-based model. Completely irreversible transactions are virtually impossible because financial institutions cannot avoid mediating disputes. These mediation costs increase transaction costs, limit the minimum viable transaction size, and eliminate the possibility of small, casual transactions. There is also a broader cost of not being able to make irreversible payments for services that are irreversible. Because transactions can be reversed, the need for trust is even more extensive. Merchants must be wary of customers, ask for unnecessary information from customers, and a certain degree of fraud is considered inevitable. These costs and payment uncertainties can be avoided in cash transactions, but there is no mechanism to ensure the security of online payments without a third party. What is needed is an electronic payment system based on cryptographic proof rather than trust, allowing any two parties to transact directly without the need for a third party to guarantee the transaction. Transactions that are computationally difficult to reverse will protect buyers from fraud, and conventional escrow mechanisms can be easily implemented to protect buyers.
The vision highlights the contrast between the “trust model”, which has “flaws”, “transaction costs” and “hassles”, and the “crypto model”, which allows for “regular”, “direct” transactions and “protects” both buyers and sellers. In the original text, Satoshi’s vision replaces the complexity of socially embedded currencies under the supervision of central authorities with the idea of using information flows and computer code to conduct direct transactions without the need for social connections or institutions, especially banks. This basic idea is replicated through the “Bitcoin rhetoric”, “Bitcoin has many advantages over other options. Bitcoin conducts direct person-to-person transactions over the Internet without going through banks or settlement institutions. This means that transaction fees will be much lower, you can use it in any country, your account cannot be frozen, and there are no prerequisites or restrictions”. In short, Bitcoin calls for the disintermediation of the entire financial system, and in addition, the disintermediation of trust constructed by the entire society.
This is a profoundly libertarian vision, and is also reflected in the discussion of economic concepts such as inflation and deflation on the Bitcoin Wiki page. In addition to a fuller overview of Hayes and Keynesian macroeconomics, and the rejection of the labor theory of value as a "generally accepted error," the Wiki page also provides a link to an interview with Milton Friedman, in which Friedman "proposes replacing the central bank with computers and fixing the annual growth rate of the money supply at 4%." In the Wikipedia discussion area (which shows the edit history or any comments), there is no objection to these statements and links.
Bitcoin’s libertarian tone is not surprising to anyone who has studied high-tech culture. Given that these cultural values are embedded in the software, the ideology of the virtual currency’s founders has spread as the software system has rapidly expanded. This means that the spread of Bitcoin is not simply a new way to pay, but also a grand project to replace specific values—replacing socially (and geographically) embedded and carefully curated trust systems with code and cryptography. As Lessig puts it, “We can build, architect, or code cyberspace to protect the values we believe are essential. Or we can build, architect, or code cyberspace so that these values disappear. There is no wiggle room. There is no choice that does not include some kind of architecture. There is no code; it has only ever been made, and only by us.” For this reason, it is extremely important to understand the politics behind transformative economic innovations such as Bitcoin. After all, virtual currencies are blurring the boundaries between individuals, commodities, and countries in unpredictable and innovative ways. Just as new digital spaces provide venues for “real” economic activity, decentralized currencies are also providing tools for “real” economic transactions. #BTC #ETH #Bitcoin
