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The Age of Cryptocurrency: How Bitcoin and Digital Money Are Challenging the Global Economic Order Hardcover – January 27, 2015
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“Vigna and Casey's thorough, timely and colorful book is a rewarding place to learn it all.” ―The New York Times Book Review
“For any book on bitcoin to be worth reading, it has to delve further: into the crypto-currency's ideological and technical roots, for instance, or what it adds to the narrative of money, or even what its economic and political impact may be. The currency's...underlying technology provides plenty of intellectual fodder-and is unlikely to go away. So there is plenty to write about if you are serious. Paul Vigna and Michael Casey, two journalists at the Wall Street Journal, are certainly serious.” ―The Economist
“[Vigna and Casey] have produced more than a bitcoin 101: their [book] is a smarter, more holistic take on not just bitcoin, but the potential of all digital currencies to change the way we send each other money.” ―Fortune
“This book by @mikejcasey and @paulvigna is a new must-read on Bitcoin and cryptocurrency!” ―Marc Andreessen (@pmarca)
“To their ample credit, Paul Vigna and Michael J. Casey, veteran Wall Street Journal reporters, resist the common temptations to hype their trendy subject. They've written a reported explainer that patiently documents bitcoin's rise, acknowledges its flaws and highlights its promise. Smart and conscientious, The Age of Cryptocurrency is the most thorough and readable account of the short life of this controversial currency.” ―The Washington Post
“This book should be required reading for anyone who has an interest in digital currency or the capabilities of the blockchain.” ―Bitcoin Magazine
“If you are baffled by Bitcoin and bemused by blockchains then The Age of Cryptocurrency... includes everything you could possibly want to know about cryptocurrencies, without the need for being either a skilled mathematician or uber-geek computer engineer.” ―Global Finance Magazine
“Thorough, multidisciplinary approach to the topic, including a fascinating examination of the origin of money... newcomers will gain a better understanding of the revolutionary potential of digital currency...And the explication of the non-currency applications of the concepts behind Bitcoin--such as tamper-proof records of verified information will be valuable to any reader.” ―Publishers Weekly, starred review
“Anyone who doubts that bitcoin and its imitators are at the early stage of altering fundamentally the global payments system--if not the nature of money itself--will find it difficult to resist Michael Casey and Paul Vigna's admirably clear and judicious account. If the word 'blockchain' makes you want to call a plumber, or if you think Satoshi is some kind of raw fish, you need to read The Age of Cryptocurrency today. If you're already a bit-convert, you'll still learn a lot.” ―Niall Ferguson, author of The Ascent of Money
“Anyone who views bitcoin as a voodoo concept must read this totally comprehensible narrative outlining the history of money and how bitcoin might become a new and better currency. For those confused by bitcoin concepts, this clearheaded and readable book sets forth credible reasons why bitcoin might or might not be an evolving economic miracle.” ―Arthur Levitt, 25th Chairman of the United States Securities and Exchange Commission
“An invaluable book: a fascinating field guide to the phenomenon in which three of the most powerful forces shaping our world today--the reform of finance, technological innovation, and the rejection of traditional politics--meet.” ―Felix Martin, author of Money: The Unauthorized Biography
“The Age of Cryptocurrency not only demystifies and explains bitcoin, but also shows where it fits into the cultural zeitgeist and where it's pointed, and what that may mean for our financial system.” ―John Mauldin, New York Times bestselling author of Endgame
“The thought-provoking Age of Cryptocurrency was a pleasure to read. The authors have successfully demystified cryptocurrencies like bitcoin so that even a traditionalist like myself can understand them and embrace their potential. And the references to money were so spot-on, they even taught this old dog some new tricks.” ―Edmund C. Moy, 38th Director of the United States Mint, 2006-2011
“Vigna and Casey unlock the mysteries of cryptocurrencies and their implications for the future of financial transactions in an engaging, lucid, and thought-provoking account. The technological developments described in this book will someday affect every one of us and I can think of no better guide to what the future holds.” ―Eswar Prasad, author of The Dollar Trap
“Even to a bitcoin skeptic like myself, Vigna and Casey's book is a fascinating journey into the cast of characters and oddballs behind the movement into the digital currency realm.” ―Barry Ritholtz, CIO, Ritholtz Wealth Management
“Vigna and Casey are cautious, though enthusiastic guides to this strange new world. Being Wall Street Journal reporters, they know how to dig beneath the surface and they also know how to write. The book is full of fascinating stories, from the origins of money to the future of decentralised commerce, from the Mt Gox meltdown to the Silk Road bust.” ―Matt Ridley, Times of London
“[I]n...their fascinating book on the topic, Wall Street Journal columnists Paul Vigna and Michael Casey set out to convince readers that bitcoin is not only going straight, but has the potential to change the world.” ―Literary Review
“[T]he book is extremely well written, and easy to understand. In a nutshell, it narrates the chronology of Bitcoin's evolution with impeccable precision. It is free of hype, while not being shy in pinning the important role that cryptocurrencies will play in our future.” ―William Mougayar, Venture Advisor
“Bitcoin and Bitchain (sic) are likely to revolutionize money...The book to read on this topic is The Age of Cryptocurrency by Vigna and Casey two Wall Street Journal financial journalists.” ―Rishad Tobbacowala
“This sober yet exciting account of cryptocurrency, told by two very smart and objective reporters, is exactly the way to introduce yourself, or a sophisticated newbie you know, to the technology's revolutionary potential. I recommend you check it out.” ―Jerry Brito, Executive Director, Coin Center
About the Author
MICHAEL J. CASEY writes for The Wall Street Journal, covering global finance in his "Horizons" column. He is a frequent contributor to the Journal's MoneyBeat blog and co-authors the daily "BitBeat" with Paul Vigna. He is the host of the book-themed video series "WSJ Afterword" and a frequent guest on and host of "The News Hub" and "MoneyBeat." His podcast on world economic affairs is forthcoming. Casey has written for such publications as Foreign Policy, The Washington Post, and The Financial Times. He is the author of two books: Che's Afterlife: The Legacy of an Image (Vintage, 2009), one of Michiko Kakutani's "best books of 2009," and The Unfair Trade: How Our Broken Financial System Destroys the Middle Class (Crown, 2012).
PAUL VIGNA is a markets reporter for The Wall Street Journal, covering equities and the economy. He is a columnist and anchor for MoneyBeat. Previously a writer and editor of the MarketTalk column in DowJones Newswires, he has been a guest on the FoxBusiness Network, CNN, the BBC, and the John Batchelor radio show. He has been interviewed by Bitcoin magazine and appeared on the Bitcoins & Gravy podcast, and boasts a collective 20 years of journalism experience.
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If the book has one shortcoming, it does not define how it all works quite precisely enough for a techie. The reader of this review may find it useful to mix my point of view with that of the book itself in trying to envision the mechanics.
The casual reader is somewhat familiar with the bitcoin phenomenon. It appears to have been started by a single idiosyncratic individual calling himself Satoshi Nakamoto but whose identity remains unknown and who dropped out of sight some three years ago. What this gifted technician did was to envision the architecture of an entire system, implement that system, find a group of disciples, fanatics if you will, to carry it on, and then quietly disappear. This is truly the stuff of science fiction
The thing that he invented is the thing that is most difficult to describe. Here I go in my own words, rearranging some thoughts from these authors.
The first question is what a currency is. We are familiar with fiat currencies such as the dollar the euro and the yen. We are familiar with the fact that these have all evolved from metallic representations, such as silver dollars and $20 gold pieces, to paper certificates indicating that metal was once held in storage to back them up, to fiat currencies which have nothing whatsoever behind them. The dollar today is an artificial construction, a unit of exchange.
Actually, what every currency must be is three things. It must be a unit of exchange, something that can be offered in exchange for goods or services. It must also be a store of wealth, so that today's labor can be converted into currency and stored to be spent later. Or vice versa, it can be borrowed against future earnings. The third measure is a unit of account. Everybody has income stated in some currency or another. You may make $2,000 a month and have a net worth of 700,000 Francs. Businesses especially need such a measure of their performance.
That's what currencies are. They have different strengths and weaknesses. Gold his difficult to carry and safeguard and doesn't come in small denominations. Fiat currencies are imminently bankable, they can be moved around electronically with great ease. However, they are subject to counterfeiting and inflation. The counterfeiter can create false paper money, and a financial manipulator or central bank can arbitrarily dilute current holders, expanding the money supply by creating dollars out of thin air. Moreover, the rapacious bankers scrape off a slice of every transaction, from 3% on a typical credit card transaction to 10% and more on international remittances. No currency is ideal.
One characteristic that all traditional currencies have had is that they are fungible. If I have $1,000 in the bank, I could not possibly say who previously owned those dollars. It's a silly question even to ask, like asking what happened to a raindrop falling into the ocean. Even the tangible stuff like the pennies in my pockets carry no history with them.
I make an analogy that the authors do not: to real estate. Real property is recorded by a registrar. The fact that I own my house is known to the state and it is public information available to anybody. Not only that, but who I brought my house from, and who they bought from, is a matter of public record. How the land my house sits on was defined is public record. It was probably subdivided from some farm back in time. Thus, where land records are complete, there is a chain of ownership reflected in land records that guarantees the authenticity of a title.
This is the most essential difference between bitcoin and other currencies: a perpetual chain of ownership. There is a permanent record electronic record of every past owner of every particular coin or fraction thereof, and of every transaction ever completed within the system.
The implications of being able to trace the history of every transaction in which a piece of money has been involved are extremely broad. It means that there can be no question as to the validity of a transaction. Unlike with a bank, there cannot be an overdrawn account. If the money isn't there, the transaction is not accepted. If it is, the transaction is final. Unlike paper money you cannot have counterfeit. Unlike a Federal Reserve System you cannot have $85 billion created every month out of thin air. The whole bitcoin universe knows where every piece of money came from.
The bitcoin concept ,which is called the block chain concept is revolutionary in that sense. There is a publicly available record of every transaction ever done within the system going back to Nakamoto's genesis block.
Every account is identified only by a number, a large one at 25-36 alphameric characters. The accounts are anonymous and password protected. Lose the password and the money is gone. There is no bureaucracy to help you out. Password length is up to user discretion, but the longer the better.
It raises questions of control - who owns the system, and how is new money introduced, if it is at all. Lastly, and most importantly, it raises the technological question. How do you do that? The answer to the latter is called the block chain.
The block chain works by hashing technology. Let's take an example.
The letters in this paragraph can be interpreted as a number. A very large number, and very likely to be different from any other paragraph even in a large manuscript.
Here is a table of the ASCII (internal) representations of the letters in the above paragraph. If you add up the values of the individual letters you get 15,050, a fairly large number. But if, just for instance, you interpret each string of six letters as a (12 place hexadecimal) number, and add those up, the result is huge: 5,642,316,386,171,830. That's five quadrillion, larger than the national debt measured in pennies. The probability that it is unique is extremely high. There is almost no way I could fiddle with the text in the paragraph without throwing the hash total off. Rest assured that bitcoin uses bigger numbers and a more sophisticated scheme than I show here.
T 84 h 104 e 101 <sp> 32 l 108 e 101 t 116 t 116 e 101 r 114 s 115 <sp> 32 i 105 n 110 <sp> 32 t 116 h 104 i 105 s 115 <sp> 32 p 112 a 97 r 114 a 97 g 103 r 114 a 97 p 112 h 104 <sp> 32 c 99 a 97 n 110 <sp> 32 b 98 e 101 <sp> 32 i 105 n 110 t 116 e 101 r 114 p 112 r 114 e 101 t 116 e 101 d 100 <sp> 32 a 97 s 115 <sp> 32 a 97 <sp> 32 n 110 u 117 m 109 b 98 e 101 r 114 . 46 <sp> 32 <sp> 32 A 65 <sp> 32 v 118 e 101 r 114 y 121 <sp> 32 l 108 a 97 r 114 g 103 e 101 <sp> 32 n 110 u 117 m 109 b 98 e 101 r 114 , 44 <sp> 32 a 97 n 110 d 100 <sp> 32 v 118 e 101 r 114 y 121 <sp> 32 l 108 i 105 k 107 e 101 l 108 y 121 <sp> 32 t 116 o 111 <sp> 32 b 98 e 101 <sp> 32 d 100 i 105 f 102 f 102 e 101 r 114 e 101 n 110 t 116 <sp> 32 f 102 r 114 o 111 m 109 <sp> 32 a 97 n 110 y 121 <sp> 32 o 111 t 116 h 104 e 101 r 114 <sp> 32 p 112 a 97 r 114 a 97 g 103 r 114 a 97 p 112 h 104 <sp> 32 i 105 n 110 <sp> 32 a 97 <sp> 32 l 108 a 97 r 114 g 103 e 101 <sp> 32 m 109 a 97 n 110 u 117 s 115 c 99 r 114 i 105 p 112 t 116 . 46
The take-home point is that a large volume of text can be (very close to) uniquely vouched for by a fairly compact number. If I changed any letter in the paragraph the number would change, indicating that the paragraph had lost its integrity. This device is called a hash total. Bitcoin uses hash total schemes, though certainly much fancier than this one, throughout.
Every transaction document can thus be represented uniquely enough for bitcoin's purposes by some string of numbers. It takes a large number, but one which is very small in comparison to the original document for which it vouches.
Bitcoin is capable of processing about seven transactions per second. It batches them every ten minutes. Each batch would thus contain fewer than 7x60x10 = 4200 transactions. The 4200 hash totals would themselves be combined into a hash. Most importantly, this hash also includes the hash from the previous batch, which has in the intervening ten minutes been vetted by a "proof of work" concept, authenticated and accepted by the electronic voting process of the bitcoin community. These summary hashes, combined with the backwards links in the block chain, knit together every transaction in the history of the bitcoin universe.
A little arithmetic (mine, not the authors') demonstrates that the data volumes are well within the realm of modern computing. If documenting each transaction took 10kb, with 400 transactions/minute over five years, the total database would be 10 terabytes. That is not a frightening number. It is highly conceivable that many sites could keep the replicated copies of this data necessary for the integrity/voting process. The active data, the recent transactions and wallet/account balances, could be much smaller. Presumably, though it is not discussed, there is some kind of a tiered scheme, so as not to waste too much resource storing inactive data.
The block chain serves two functions it guarantees the integrity of the system and it makes it compact enough that there is a way to work with it. The people who need to see the original transactions can look at the particular block in which they occurred, but most users who are not affected by historical transactions only need to deal with blocks that involve their activity. However, the information is widely enough shared that its integrity is insured.
This hash total functioning, and in fact almost all of the operation, is highly encrypted using public key cryptography. For a good description, see Nine Algorithms That Changed the Future: The Ingenious Ideas That Drive Today's Computers.
The there is a concept of "bitcoin mining" which is fundamental to the process. The mining involves the hashing process. In my simplistic example I said that we will digitize the representation of six characters and interpret the group as a large number. But in fact bitcoin uses much more complex algorithms, and the algorithms involve a variable part, a very long and unique number which is derived by an excruciatingly difficult series of computations. That bitcoin mining process involves coming up with the next suitable number. It is so computing-power intensive that one of the concerns about bitcoin is the carbon footprint that the computers executing bitcoin hashing algorithms use. Read the book to understand the difficulty. In any case understand that it is highly encrypted and robust against fraud. What fraud has occurred in bitcoin is due to human error rather than any architectural flaws.
Going back to the book the authors do a good job of reporting the early days of bitcoin and then surveying how it is used today. It is still a minor player in the financial transactions field. They observe that bitcoin can only handle 7 transactions per second versus the 10,000 or so that Visa is structured to manage. It is several orders of magnitude different. In order for bitcoin to emerge as a competitor with the big financial houses, its architecture may need to be rethought.
Bitcoin has been too unstable to serve as a store of wealth that allows one to sleep well at night. Its value rocketed from pennies up to over $1,000 and back down to the low hundreds. Presumably as it becomes more accepted the currency will achieve more stability.
Many people are concerned that a bitcoin itself has a no substance. There is no inherent value in this bunch of bits. The counterargument is that this is equally true of fiat currencies, and bitcoin has the benefit of scarcity. The original architecture of bitcoin calls for the introduction of new bitcoins as reward to the miners who come up with the new block total hashing numbers. As they become harder and harder to generate, it has resulted in the massive computer power and carbon footprint mentioned above. But the number of bitcoins to be eventually generated was specified at the very beginning and is strictly limited. So inflation is not going to be a problem with bitcoin. In fact, deflation is much more likely to occur. As the value of the coins goes up, the cost of things in bitcoins will go down.
Deflation works against governments, which depend on inflation to progressively hike people's tax brackets and things like that. How governments deal with bitcoin is an interesting question into which the authors delve at length. Bitcoin is difficult to control difficult to tax difficult to understand and difficult to define legally. The authors do a good job of examining all of these aspects.
The authors display a liberal bent. The thing that gets them most excited is that bitcoin may be a way to bring banking to that majority of mankind who do not currently have bank accounts. Such people are simply not worth the effort for banks to serve. Bitcoin transactions can be executed over telephones, not even smart phones. The authors look for entrepreneurs to make it work in the less-developed corners of the world. This sounds a bit idealistic, but one must recognize how idealistic it seemed only two decades ago to bring cell phone service to the same people. Now it is ubiquitous.
Blockchain technology could be used to track other kinds of titles. Land records are subject to fraud in many parts of the world. Bribe the right judge and he will change the paper land records, depriving you of a property right. A blockchain approach to land records would make it impossible. It could also make bribery more visible. Conversely, as has already been seen, the anonymity of bitcoin is a boon for drug dealers and money launderers.
Bitcoin is truly a transnational, borderless system. The authors talk about its attraction in a place like Argentina that has not had a reliable currency since Juan Peron in the 1950s. The currencies in many other parts of the world are under pressure right now. I have seen the value of my currency, the hryvnya, fall by 60% over the last year. Bitcoin could be a store of value. More important, it can serve as a medium of exchange among countries where the currencies are not functioning and are not easily exchangeable. The banks are controlled by governments, whereas bitcoin is out on its own. Therefore when the governments decree that you cannot change pesos or rubles or whatever the fiat currency is into something more attractive, bitcoin seems to offer an alternative. It would simply bypass the system. Governments are working hard to control it, and there is a question of how effective they will be in doing so given that anybody with a computer has the ability to work with bitcoin. The problem seems to be in the exchanges, going back and forth between bitcoin and fiat currencies.
This a long review. Let me close in saying that this book will give you an insight into the modern financial system and a good appreciation of bitcoin, which may represent the most serious intellectual challenge to the structure of finance, both national and international, to arise within the past couple of centuries. It is absolutely worth reading.
On the other hand, if you are a bit of a technophile, perhaps you may want to look for the fine detail somewhere else.
First comes all the necessary background. You get a thorough introduction on what money is, or rather what it is that that turns something into money, you get an introduction to the biosphere out of which Bitcoin sprung, including a long list of its predecessors, and that part of the book is rounded up by a brief history of the "genesis" of Bitcoin itself.
Next comes an explanation of the Blockchain. Problem #1 with digital money is "how do I know this money is good money" and problem #2 is "how do I know that you are not presenting this good money twice at the same time to make two purchases." The Blockchain is a technology that puts together four pre-existing technologies in an inventive way, to incentivise independent agents to solve these two problems:
1. Public-key encryption
2. The hash
3. The peer-to-peer network of "nodes"
4. Proof of work
Feel free to skip if you know / to set me right if I've understood it wrong -it's not all there in the book and I've had to fill in the blanks myself by spending time on the Internet
First, public-key encryption:
This is a fantastic new way to write coded messages. The simplest one, RSA, works out as follows:
1. Take two prime numbers and multiply them with one another 3 x 23 = 69
2. Subtract one from each and multiply them again with one another 2 x 22 = 44
3. Add one to the second number 44 + 1 = 45
4. Find two numbers that don't have any common factors and multiply to this third number 9 x 5 = 45
5. You're done. The public key is (9, 69) and the private key is (5, 69). To encrypt do mod(x^9,69) and it turns out that (mod(mod(x^9,69))^5,69) = x
So, for example, suppose I want number 20 to be my message
20^9= 512000000000 and mod(512000000000,69) = 5. So the coded way to say "20" is "5"
But 5^5 = 3125 and mod (3125,69) = 20, so, lo and behold, "5" is decoded as "20"
The beauty of this code is that if I pick two very large prime numbers a and b, NOBODY has the computing power to factorize a x b. And if they are very big, then (a -1) x (b - 1) can have a very wide choice of co-prime numbers c and d such that c x d = (a - 1) x (b - 1) + 1.
Ergo, if I give away (d, a x b) nobody has the computing power to figure out what c is. So I can put out there (d, a x b) as a code for anybody in the world to send me a message. They can post it on the Internet. And only I can break the code. Even better, even if somebody out there rats me out and says: "here's how to encode messages for Athan to read" that still does not help the CIA read my messages.
More prosaically, you can send me Bitcoin and you can sign it with my public key. Everybody can verify that it is my Bitcoin, because my Bitcoin addresss is (or is derivable from) my public key. But only I can turn around and assign the Bitcoin to somebody else, because only I have the private key that is necessary to do so. Neat, huh?
It all kind of breaks down if somebody one day writes a computer that can calculate hyper-fast and goes through all the numbers in the world, but the fastest computers on earth would currently take longer to break a good-enough code than mankind has existed! (It helps that raising to a power is not cake)
N.B. The above is merely an example; Bitcoin does not use RSA, it uses elliptic curves-based encryption, which (among other advantages) obviates the need to change private key every time you've changed your public key.
Second, the hash:
The hash is a 26 to 34-character string that is the output of a function that generates a fixed-length alphanumeric representation of the data it received. To build it I need input (example 1: the sentence "to be or not to be"; example 2: the complete works of William Shakespeare) and I need a "hashing" algorithm. The big deal here is that "hashing" always brings the same input to the same short string of characters.
My wallet is the place where I keep my Bitcoin. At all points in time my wallet has a public key and a private key. The rest of the planet knows my wallet by the 26 to 34 character hash (you guessed it) that is a (hash of) my public key (it's not the public key itself, chiefly for error-correction purposes, one of the few times Bitcoin looks after you). After every time I deal my wallet changes its public key, so nobody can keep track of what I'm doing except for me.
The first input in the life of a Bitcoin is something along the lines of "WalletAthan was legitimately awarded 1 Bitcoin at 4:59pm on Sunday the 12th of April 2015". That's subsequently "hashed" into gobbledygook that looks like 12yxzhUNfQSPWeDrmwKrWKCxQW2Cz36v3B.
Suppose I want to use the 1 Bitcoin to buy something from my brother George. The real-world message then is "WalletAthan was legitimately awarded 1 Bitcoin at 4:59pm on Sunday the 12th of April 2015. WalletAthan gave 1 Bitcoin to WalletGeorge at 5pm on Sunday the 12th of April 2015." But we already know that the first part of the message is represented by the hash 12yxzhUNfQSPWeDrmwKrWKCxQW2Cz36v3B. So I apply my brother George’s public key to a string that looks something like "12yxzhUNfQSPWeDrmwKrWKCxQW2Cz36v3B WalletAthan gave 1 Bitcoin to WalletGeorge at 5pm on Sunday the 12th of April 2015" and the money is now irrevocably his.
This transaction information gets scrambled into a 64 character hash. Something like 975bT0e06f6395403fd37c2bb8003ef1T94b8a9Ucc9e150c2d99klKEB6EHEf.
The 26 to 34 character hash that was my 1 Bitcoin gets re-hashed together with my brother's public key into a new 26 to 34 character hash. Something like GGe3523tn65ybn9a9441hmaR90AFGWR
So we started with 1 Bitcoin (which is a hash), we did a transaction (which is a longer hash) and we ended up with another 1 Bitcoin (which is a hash) Because the new 1 Bitcoin has my brother George’s public key somewhere in the hash, he alone knows what the private key is that can prove he is the rightful owner of the 1 Bitcoin.
Whenever he feels like transferring the money to somebody else (say a bookstore), he must first unlock the 1 Bitcoin with his private key and then apply the bookstore’s public key to the 1 Bitcoin.
This in turn generates 2 new hashes:
1. a 1 Bitcoin hash that has in it somewhere the bookstore’s public key
2. a transaction hash that has in it both George’s unlocking of his public key and the bookstore’s public key (and this solves the mystery of why the transaction hash is longer)
And so on.
The big idea behind the hash is that IT TRAVELS LIGHT. Regardless of the input, the Bitcoin hash is always <= 34 characters. So the hash is evidence of the entire history of a particular Bitcoin without getting longer and longer.
Every dollar turns 7 times per annum in America and some surely turn a lot more often than that. A hundred years down the line the full history of what happened to every Bitcoin would be impossibly long, the Bitcoin would be pages long, but the hash keeps it all at a max of 34 characters at all times. You most obviously cannot travel from 34 characters back in time to every transaction, but the transactions themselves (64 characters apiece) are so compact that every "full node" (see below) can verify every transaction ever done via Bitcoin.
The little miracle that is the hash means Bitcoin is money good that travels light.
Third, comes the peer-to-peer network:
This technology first became popular with the various pirate schemes to share music without storing it in one central place where it could get confiscated. Instead, if you opened an account with one of the various peer-to-peer music sharing networks your computer became a "node" in a web of connected computers. All music stored on your computer was available to all other computers on the network and vice versa. The algorithms are complex and they need to deal with the fact that computers are not connected to the network the whole time, but this technology makes is possible for Bitcoin wallets to become "nodes" in a network, with the explicit purpose of validating each other's transactions using the public key.
The fourth relevant piece of technology is "Proof of Work," a lottery that involves hashing in pairs all 64-character transaction hashes of the past ten minutes and then hashing pairs of the resulting hashes until there's only one hash left (called the Merkle root) and then repeatedly hashing the Merkle root with a specified length hash (the "nonce") until a small enough hash can be generated. How small that hash is (think of it as rolling six dice until they add up to less than ten, for example) is the "difficulty" and the difficulty of the problem is continuously reset to keep the whole "proof of work" down to roughly ten minutes.
The four technologies were combined by the legendary Satoshi Nakamoto (the book dedicates several pages to the sundry theories of who he might be -his true identity is heavily disputed and quite possibly unknown) into the idea of the Blockchain:
Every ten minutes all nodes on the network ask their neighboring nodes and then the ones beyond (a bit like you'd go searching for a song on Gnutella) for as many time-stamped transactions (64 bit hashes) as they can get their hands on. Each node tries to piece together the full information on which wallet sent what Bitcoin to whom. Once you've checked (and endorsed) enough transactions you build them into a "block," and can then start racing everybody to obtain "proof of work," which involves heavy use of your CPU.
The first node to review a block of enough transactions and finish the requisite "proof of work" gets 25 Bitcoin (this it does by inserting an extra "coinbase" transaction whereby it is awarded 25 Bitcoin), publishes its results to the network for verification (incl. that it only awarded itself 25 Bitcoin) and the financial incentives are very strong to stop wasting time on unfinished blocks and try to build on top of the latest winner. Any transactions that weren't included can hope to be included in the next block, but if they are not endorsed soon they get left out, presumably because they amount to double spending. (In the future, and to avoid inflation, the compensation in Bitcoin for calculating the next block will be halved to 25 and will keep being halved every 4 years).
This block is attached to the previous block and all previous ten-minute blocks to form the "blockchain." All history is encapsulated in the header hash of the most recent block in the blockchain.
The beauty of the system is manifold:
1. All the hashes that correspond to ten-minute blocks are made public. So if two guys say "we made this transaction" and have kept the keys to prove it, everybody on earth can calculate if they are telling the truth.
2. But you can't travel backwards! To catch a drug dealer, basically, you need to lure him into a sting and then the whole world can see you transferred money to him, but if I and my brother George can keep stumm, to find out what we did you need to go find the private key I used to encrypt the transaction and play the music forward from there (i.e. apply it to the last block's hash and the description of the transaction and then apply the public key to that and get back the mooted transaction you stuck in) Good luck to you, basically.
3. Also, good luck establishing if "Wallet Athan" really is mine. It's not called WalletAthan, it's the hash that is equivalent to my public key. Provided I never cash my Bitcoin into dollars (i.e. provided Bitcoin is money good and all I ever wanted to do is make a donation to the Finnish Sea Scouts, which will never be traceable to me) I can keep my identity totally safe.
4. Even cooler than all of the above, and key to the fact that Bitcoin does not need to be "curated" by anybody is that PEOPLE GET PAID TO TURN THE CRANK. It costs time and money (the electricity to run a large farm of computers) to do all the proof of work. Well, for those willing to do the work, there's Bitcoin to be earned! So the world at large has an incentive to verify if I had the Bitcoin in the first place to give to my brother George.
Between these four inventions we have a system that is a very good means of exchange (fraud is impossible) and is also self-perpetuating thanks to the financial incentive to keep updating the blockchain also known as "mining" for bitcoin. Obviously, 0.5 to the twentieth power is also known as one in a million, which at an original 50 Bitcoins per ten minutes corresponds to 2.5 fresh Bitcoins per annum after year 100, so Bitcoin needs to appreciate like mad for it to be worth mining for, but that's a story for later.
And with a prevailing wind it can also be a unit of account and a store of value as well. The authors discuss all of that very extensively.
Also very significantly (and this is me talking, not the authors), Bitcoin is a lot like gold:
(i) unlike all bank-generated money, it's nobody's liability
(ii) it does not perish
(iii) while we know it's finite (0.5^n converges to zero) it's still being profitably mined for.
The authors next go into full Michael Lewis mode: a whirlwind tour of everything Bitcoin. They actually admit in the Acknowledgments that he was their role model, but if you ask me they do a much better job than he's done in all his books, except perhaps for his recent masterpiece, "FlashBoys."
Among other things, the tour includes:
* a very good history of the actual Bitcoin protagonists such as Mt Gox
* interviews with the founders of perhaps twenty startups that are doing work along the lines of Bitcoin around the world
* a glimpse of the dinosaurs that are ripe for slaughter when the world has completed its move to cybercurrency (for example the seven companies that handle the money as it moves from my account to yours when I use my Visa card in your store)
* a vista of the massive opportunity to provide transactional services to the world's unbanked, including field trips to the third world to see the work in action
Much like Michael Lewis does with Lewie Ranieri or Jim Clark or Brad Katsuyama, the authors tell the story from the angle of a "Sherpa." Their views are very much informed by the opinions of the current unofficial CTO of Bitcoin, Gavin Andresen. This makes "Cryptocurrency" the official book for Bitcoin, if there could possibly be such a thing for a distributed cryptocurrency.
This does not stop them from dedicating a full chapter to the various weaknesses of Bitcoin.
They explain very well that until the day people can buy everything they need using Bitcoin and also receive their salary in Bitcoin, users of Bitcoin will find themselves in the unenviable situation of an expat who gets paid in Euros but does his spending in Dollars, i.e. hostages to the exchange rate of Bitcoin to the currency in which they get their salary. Similarly for businesses whose employees and suppliers get paid in dollars, to accept payment in Bitcoin would entail a highly volatile pricelist.
Moreover, they detail how the New York Department of Financial Services takes this issue to its natural conclusion and treats Bitcoin like a commodity, recommending that holders of Bitcoin be taxed on their capital gains when they liquidate their Bitcoin to make a purchase in dollars. This is entirely consistent with how they'd handle a taxpayer who keeps his cash in Euros or Sterling, so it's not unfair, but it is a massive impediment to Bitcoin being a good means of exchange, because in essence you'd have to think twice about using Bitcoin ahead of every transaction: "am I about to realise a capital gain here?"
They also worry a lot about the fact that much as Bitcoin might be distributed rather than centrally-controlled, with all the benefits this brings in terms of minimizing risk to the failure of a single central counterparty, when you and I convert our hard-earned dollars into Bitcoin (and vice versa) we have to go through one of a handful of rather primitive exchanges, like the now defunct Mt Gox. So the vulnerability might not be there once you're in Bitcoin, but it's not inconsiderable at the point where you are moving in and out. Oh, and God help you if you misplace your private key. You lose everything.
They also don't shy away from the problem that Bitcoin is in essence a "deflationary currency" in the sense that a central bank cannot manipulate Bitcoin to loosen monetary policy during a recession like the one that occurred in 2008-09 because the increase in Bitcoin is predetermined by formula. In the eyes of many people (they call themselves the "Austrian School") this is a blessing and the Fed should not have prosperity in its mandate, but the authors take the more mainstream view that incompatibility with traditional monetary policy is a minus.
A list of technical problems with Bitcoin, finally, includes that
1. there simply isn't enough Bitcoin to handle all the world's transactions. Bitcoins get exchanged once every ten minutes and the proof of work has to be hard enough to prevent people from mining tons of Bitcoin. Long story short, Bitcoin is good for 6k transactions per 10 minutes and there's a large multiple of that going on worldwide.
2. the electricity people need to use to "mine" the next Bitcoin is not only very expensive but also an environmental issue / threat.
3. if somebody does collect enough computer power he can use it to overwhelm the network and endorse his own version of Blockchain and spend all his Bitcoins twice or more
4. there's already been a case of a documented bug in the Bitcoin code, which allowed Bitcoin to be stolen
Regardless, the authors are convinced that the technology is valid and at some point will evolve to the point that the benefits from adopting it (cutting out the 3% tax on all transactions that middlemen earn, full auditing of transactions for those who wish to submit to it, the benefits to the 100 million unbanked Americans and billions of unbanked people in the third world etc. etc.) will be far too compelling for us not to find a solution.
In my opinion, there are two massive issues that must be dealt with first and a third one that is less tractable:
1. Bitcoin is high-powered money, also known as "outside money." It is not "inside money" of the kind that arises when a bank opens a bank account for you to receive your loan in. In other words, it's M0, rather than M1, M2, M3 etc. So Bitcoin is a means of exchange and a unit of account but it's not fit for purpose when it comes to lending and credit.
2. I left out "store of value" above, because Bitcoin is neither scarce like gold (we can start millions of strands of Bitcoin, but we are limited to the amount of gold there is on planet earth) nor a way to pay tax. The much-maligned paper dollar is money good because Uncle Sam (like Roman emperors 2,000 years before him did in their coin) rakes in 4.5 trillion of dollars per annum in tax and he does not accept payment in pesos. Sadly, neither does he take Bitcoin.
3. Governments do tons of things covertly. Things we want them to do but don't want to know about. Blockchain means audit trail. What are the chances our governments would want to usher in a regime of 100% accountability?
So my bet is the Blockchain technology survives, but a lot of innovation still needs to take place before it is integrated into mainstream banking and lending in particular. And Bitcoin as we currently know it should remain for some time still the preserve of petty criminals, anarchists and techies.
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