Samuel Lay is a Bitcoin enthusiast who explains what the new virtual currency is, how it works, and why he thinks it has a future for everyday transactions

By Samuel Lay*

Bitcoin is something you have likely heard about in the past but perhaps you never quite understood what all the fuss was about.

You’ve read about all of the new venture capital backed companies that are starting up, the closure of the bitcoin-based Silk Road by the FBI or you’ve heard about its volatile but generally rising price.

It’s new, weird, confusing and a bit scary sounding but if Bitcoin succeeds, it is set to be every bit as revolutionary and disruptive as the internet or the printing press.

Bitcoin is a decentralised digital currency with its own built in payment system that allows you to send money like an email directly from person to person.

Anyone with internet access and a few seconds can set themselves up with a Bitcoin “wallet” and start receiving Bitcoin payments from anywhere in the world.

It doesn’t matter whether you are buying a coffee or a house, the payment will be sent instantly by the network and the sender will be charged maybe a few cents for the privilege, no permission needed or questions asked.

Bitcoin is not a company or any other single entity, it is a protocol more akin to the internet or the English language.

Records of all bitcoins and bitcoin transactions exist on a giant public ledger called the “block chain” which is stored on every single computer running the bitcoin network.

Bitcoin is a trustless system at it’s core.

Although bitcoins exist everywhere, only those with the “keys” are able to access them thanks to the high end encryption technology that secures the bitcoin network.

No need to trust a bank to store your money for you, you can keep the keys locked up safely on a flash drive or even memorised in your head.

The Bitcoin network never closes for the night or has bank holidays, it runs 24/7 in every country in the world.

Another important characteristic of Bitcoin is its limited supply, currently 12 million Bitcoins exist in the system out of a total 21 million Bitcoins that will ever exist.

Although there are 21 million Bitcoins that can ever exist, each Bitcoin can be divided in to 100,000,000 sub-units, plenty of units for the foreseeable future but that could even be increased at a later date.

This design makes Bitcoin the most finite currency that has ever existed, it cannot be created through credit expansion nor government money printing.

These qualities have given it the nickname of "digital gold", with many of the biggest advantages of precious metal based monies with all the added benefits of being a fully digital "frictionless" currency.

The implications of a currency that holds all of these properties is simply huge.

Think about the 2/3 of the worlds population that are effectively barred from the world economy because they don’t have a bank account and cannot apply for a credit card.

No longer will merchants have to give up a chunk of their profit margins to credit card companies nor will they have to fear chargebacks especially from the less trusted countries of the world.

People working abroad can send earnings back to their families in seconds without remittance companies taking a slice of the pie.

There are a lot of questions surrounding the future of Bitcoin and other competing "crypto-currencies" as the network continues to grow. Will the protocol be modified significantly in the future? Will some regulatory agencies crack down hard on Bitcoin? Will another crypto-currency competitor like Litecoin end up on top?

The only thing that is certain is that once people have tasted true monetary freedom and innovation, they’re not going to give it up easy.

The cat is out of the bag.

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Samuel Lay is a co-organiser of the Auckland Bitcoin Meet-up.

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12 Comments

Bitcoin operates for free, it clarifies in mind what I've suspected all my life....that shunting around units of value isn't that hard. I'm frequently baffied by what backing exec's do to earn those 7 figure salaries. Not that much as it turns out.

The really revolutionary idea is the idea of a trustless, decentralised public ledger with which to store that value in. Currency is merely the first that the "Block Chain" is being used for, in the future it could be used for trading securities, property titles or even tracking reputation online.

In 1994 I signed up for a domain name and email account, a one off application fee and never have to pay again, I signed papers to that effect. All registered with Domainz. The reason why there were no further fees was that there was no further work to be done on my behalf by anyone, just the setup work. Then it all changed some years later.
Excuse me for being sceptical about the "free" bit.

12M bitcoin are in circulation out of 21M theoretical limit.
That implies that someone can release (i.e. sell) another 9M units. At USD500 a piece that works out to 4.5 billion dollars. Who gets this money?
Dejan

Hi Dejan,
Bitcoin has no central authority that can release new coins at whim, the rules are all set out in the protocol and to change them the majority of users would have to agree with the change.
Currently Bitcoins are being released at a rate of 25 every 10 minutes, these Bitcoins are the reward for the "miners" that secure the network and check for double spending. The more processing power the minings contribute, the more likely they are to receive the bitcoins.
See more here: https://en.bitcoin.it/wiki/Controlled_Currency_Supply

I never said there is a central authority, I was just wondering who gets the 4.5 billion dollars, that's all.
With regular currency, this newly released money would go to the government to spend on building schools, roads and spying on its citizens.
With bitcoin it goes to IT geeks. Nice! Sounds like there is money to be made in mining these coins...
Very interesting.
Dejan
 
 

Doesn't stop anyone from releasing another version of the Bitcoin - that's a big risk
http://www.theage.com.au/business/world-business/is-bitcoin-more-than-a-passing-fad-20131126-2y79p.html
 

Bitcoin has the potentual to be an amazing currency once fully understood.
Many businesses are accepting bitcoin around the world.
A few New Zealand companies are listed in the Bitcoin Search Engine.
In my view Bitcoin is much like a loyalty currency it can be earned and redeemed for product.
Any business looking at accepting bitcoin can find out more information by going to bitpay. Just click the link. https://bitpay.com?oid=1033_1

The people who "mine" it get the money. In short: new bitcoins are only "discovered" through a lot of hard computations. If you discover a bitcoin (actually a block of 50), it's yours.

Would a hacker be able to break into the bitcoin servers or exchanges to steal, change creation rules to his/her advantage?

Bitcoin websites that have Bitcoin stored on their site could lose some of their money if they are not set up securely but the Bitcoin network itself cannot be compromised in this way as there is no central location to steal from. Only those with the keys can sign for a Bitcoin transaction, much like only those with a signature are meant to be able to sign for a cheque.

The rules of Bitcoin are set on a consensus basis, if you tried to change the rules then the rest of the network would reject your transactions.

The price of the digital currency bitcoin soared above $US1,000 for the first time on Wednesday, extending a surge this month after a US Senate hearing on virtual currencies.
http://www.businessday.com.au/business/world-business/bitcoin-breaks-thr...