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Monday, February 17, 2014

Why I’m Hopeful About the Prospects for Bitcoin

By Sam Patterson

Bitcoin fills a gaping hole in the Internet. It’s not just a digital currency; bitcoin is a new Internet protocol that allows value to be transferred electronically without trusting third parties or centralized institutions. Let me explain why this process is revolutionary.

Internet protocols determine how our electronic devices communicate with the rest of the world, and they allow us to electronically replicate how we physically interact with each other. We can send messages, share files, do voice and video chat, or visit websites by using different protocols. But one essential interaction has been notably absent: trade. To engage in trade online, we’ve taken old systems, such as the banking infrastructure and credit cards, and tried to force them into a system for which they were never envisioned.

This arrangement has resulted in fraud on a massive scale (see Target), has excluded millions of people from trade who have Internet access but no access to banks or credit, and has given centralized institutions control over how money flows online (ask WikiLeaks donors).

Bitcoin finally frees trade on the Internet from the old systems. Sending money is now as fundamental a part of the Internet as sending a message over email. This accomplishment was no simple feat; the creation of bitcoin by the mysterious Satoshi Nakamoto solved two significant problems in computer science: the Byzantine Generals problem and the double spending problem. Until bitcoin solved these problems, it was impossible to use digital money that wasn’t controlled by a single organization, such as PayPal.

It’s not important to understand the technical details of how bitcoin works in order to use it, just like you don’t need to understand how HTTP works to visit a website. The code and cryptography that make bitcoin tick are open source—meaning anyone can review them—and the network is open for anyone to join. This system works, and you don’t have to take my word for it. Just look at the numbers.

Bitcoin started at the beginning of 2009. In January 2011, the average number of transactions per day was still below a thousand. Bitcoin was primarily a curiosity of tech enthusiasts. Since then, bitcoin has seen explosive growth, averaging around 70,000 transactions per day in recent months. The price has risen from pennies per coin to several hundreds of dollars per coin. Tens of thousands of merchants, including recent large additions such as TigerDirect and, now accept bitcoin. The numbers of wallets and new users are continually growing, along with a bevy of other positive signs you can find at interesting websites such as Bitcoin Pulse.

Why do I have such optimism that this growth will continue? Developers—some of the leading innovators of our age—are flocking to bitcoin. The number of bitcoin-related projects on GitHub, the leading online hub for new programming projects, grew from 700 at the beginning of 2013 to 2,500 at this beginning of this year. This rapid increase in the number of projects signals that the developer community is trying to bring bitcoin out of its infancy and into widespread use. Any one of these 2,500 projects or the hundreds more started each month could be a “killer app” that makes bitcoin indispensable to the average user. Programmable money has finally arrived.

I’ve focused on the technological breakthrough of the bitcoin protocol as the reason I’m hopeful for its future, but I’d be remiss not to mention the monetary breakthrough as well. Nation-states and their central banks derive significant benefits from issuing fiat currency and forcing citizens to use it. Now anyone in the world with Internet access has another alternative, and this currency cannot be devalued through the printing presses or seized from bank accounts to pay for governments’ excesses.

A few more reasons to expect wider adoption in the future: Accepting bitcoin is cheaper for merchants than using other payments systems, with fees typically at or below 1 percent compared to the 3 percent to 5 percent typical for credit cards. There is no permission required to use bitcoin, unlike banks or credit card networks, which require standards that billions of people in the world can’t meet or don’t have access to. Transactions aren’t anonymous, but they aren’t directly tied to your identity either. This characteristic gives bitcoin users more privacy than credit cards or banks do (but less than cash does) and no opportunity for merchants or banks to leak personal information leading to fraudulent charges or identity theft.

As Satoshi said in the original paper that started it all, “We have proposed a system for electronic transactions without relying on trust.” For the first time since the digital age began, you can now make an electronic transaction without trusting in central banks, traditional banks, the regulatory apparatus of nation-states and the payment processors that are bound by them. A technological innovation so profound is certain to have a bright future.

Sam Patterson is the author of Bitcoin Beginner