Bitcoin: Currency Becomes Transparent and Pseudonymous

The bought-this-bitcoins-badge-with-Bitcoins badge from Nerd Merit Badges

The pervasive and fundamentally integrated nature of money in our society and culture obscures the fact that it is an abstraction that has value because we believe it has value.  In the past, US currency was theoretically backed by gold and silver, with the government holding vast stock piles to back every bill and coin in circulation, but this was officially recognized as no longer being the case in the 1970s.  At that point on, US currency derived its value from the fact that it was in demand, and that people viewed it as an acceptable token to exchange for goods and services, even if there was no gold in a vault to back it up.  The original system was also built upon the theory that shiny bits of rock have intrinsic value, that it would be an equal exchange of my time and energy for a hard to find mineral.  While bartering has a direct correlation and immediate return on investment, currency acts as a way to stockpile and consolidate productive energy in a widely excepted medium, especially as people’s productive capacity enter the realm that is hard to barter (for example an employee working in accounts receivable at a large corporation exchanging that work for a cart of groceries).  Currency works because we are told it has value, believe it has value, and the complexity of our lives and jobs requires a common unit of power exchange that translates beyond are actual productive activities.  In the current realities of online banking, credit cards, Square, PayPal, and other forms of digital payment, we are even moving beyond the concept that currency has to be physical, as we become more comfortable with the concept of exchanging pure abstractions, where we don’t need a coffee can full of cold hard bullion buried in the backyard to feel secure.  Taking this concept of distributed, purely digital abstraction to its logical limits is Bitcoin, a new currency that has value because it takes time to generate, and people accept it in exchange for goods and services, but is not back by any government, back, or other centralized body beyond a generation algorithm.

A recent article on The Next Web does a very good job about describing and explaining Bitcoin, including this great introduction into its origin and basis of how it works.

Bitcoin was officially announced by its creator, Satoshi Nakamoto, in January of 2009. As a group that largely sees themselves as revolutionaries, the Bitcoin community uses terms for this day that have an almost religious air: the dawn of time is one such phrase. This is the day that the first Bitcoin block was generated, something you’ll hear referred to as the Genesis Block.

A “block” contains a record of transactions and forms part of a chain that represents every transaction ever made over the Bitcoin network. Each computer running Bitcoin has a full copy of this transaction history, and contributing to the chain by having your computer’s client contribute a full block of transaction data collected through the network rewards newly minted Bitcoins — currently at a rate of 50 per block.

This reward rate is designed to decrease over time. One of Bitcoin’s more unusual aspects is that there’s a cap on the number of coins that will ever be generated. That number is 21,000,000 Bitcoins, or BTC in currency shorthand, and the network adjusts the time it takes to complete a block and the reward distributed for completing one over time so that this cap isn’t reached too quickly.

Having your client complete new blocks and collect the reward for doing so is commonly referred to as ‘mining’.

As it becomes more difficult to create new currency and more people express an interest in Bitcoin, the value of the currency has continued to rise at a rapid rate. The built-in scarcity of the currency suggests that this growth in value is by no means nearing stability.

On the 9th of February, 2011, two years and one month after the creation of the Genesis Block, the currency reached parity with the US dollar, trading at a one-to-one cost.

Today, only a few months later, Bitcoin is worth US$14.41. You can see how much that figure has changed by the time you read this by checking Bitcoin Charts Markets, which aggregates data from across various exchanges.

This article was posted yesterday, and since then, the value has increased to over $18.  There are already many companies and services that accept Bitcoins, including the recursive bought-this-bitcoins-badge-with-Bitcoins badge at the top of this post, but much to the consternation of Bitcoins supporters, one of the first well know marketplace run on Bitcoins may end up being Silk Road.  Accessible only through the anonymizing network TOR, Silk Road is a peer to peer marketplace, where sellers are rated and recommended through feedback, and buyers can purchase a whole spectrum of illicit drugs, from marijuana, to LSD, to black tar heroine.  The site is run through multiple layers of anonymizing, and the use of Bitcoin adds to the difficulty to trace transactions and identify people involved, making it a brazen, albiet hard to find, ecommerce drug dealer.  Silk Road was recently the focus of an exclusive article on Gawker, which seems to have in turn brought it to the attention of the US government, with senators now calling for the shutting down of the site.  One thing that this brings to light though is that Bitcoins is actually more pseudonymous than anonymous, and that it may be difficult but possible to connect individuals to Bitcoin transactions, and the very nature of the transparent logging of all transactions to verify authenticity makes all transaction history public.

There’s a common myth that Bitcoin is anonymous. It’s certainly much more difficult to identify a Bitcoin user than, say, a PayPal user, but if you’re doing something sensitive — or god forbid, illegal — you need to be careful.

Because every Bitcoin transaction is publicly broadcast across the network, it only takes one piece of personally identifying information in connection with one transaction from your computer to attach all other transactions you’ve made from that client with your identity.

Because your transactions can be linked together, some prefer to say that Bitcoin is at best pseudonymous. It’s possible for an investigator to put together enough information to get a decent idea of who you’re involved with and what you’re interested in buying, particularly if you’ve been involved in transactions with others who have made their Bitcoin address public.

Those behind Bitcoin provide advice on staying as anonymous as possible. They suggest using new addresses for every transaction — which only makes tracing the path more difficult — and ‘laundering’ Bitcoins through a service like MyBitcoin. But as they say, even that approach has its problems: if your deposit is more than 10% the number of Bitcoins held by such a service, you’re likely to get your own coins back when you withdraw them to another client.

This was then verified in response to the Gawker article, which updated with information provided by a person from Bitcoin.

Jeff Garzik, a member of the Bitcoin core development team, says in an email that bitcoin is not as anonymous as the denizens of Silk Road would like to believe. He explains that because all Bitcoin transactions are recorded in a public log, though the identities of all the parties are anonymous, law enforcement could use sophisticated network analysis techniques to parse the transaction flow and track down individual Bitcoin users.

“Attempting major illicit transactions with bitcoin, given existing statistical analysis techniques deployed in the field by law enforcement, is pretty damned dumb,” he says.

This Silk Road situation does highlight one of the biggest fears that people have with Bitcoin and other anarcho-crypto-currencies, that there very nature makes them ideal to exploit for payment of illegal goods and services, and unfortunately for those who want to use Bitcoin for legitimate reasons, the currency may be tarnished with a reputation of drug dealing and black market trade.  There has been fear and speculation since Bitcoin launched that it would try to be shut down by governments, including the US, and this current outrage at Silk Road may draw this to a head.  There are probably those out there who suspect that Silk Road may actually be run by a governing body, and that it is nearly a tool to provide an example of the dangers of a currency operating outside the traditional system, and that its true function is to strike a blow to Bitcoin.  We will see what will happen in the future, if Bitcoin survives government scrutiny and unsavory connections, and if it becomes widespread enough to stay viable and maintain its value.  At its heart, it really is pure and simple, completely transparent about it being an abstraction, and completely transparent in its records of transactions, and more closely fits the model of information in a web-centric world than traditional currencies.  The next few years will likely be defining ones for Bitcoin, but I am afraid in the meantime, your transactions on D-Build will probably have to be in USD.

Via Gawker, The Next Web, and NPR

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