The Block-Chain of infinite mystery: What the hell is Bitcoin?

[Note: for my more recent article about bitcoin, see How to Explain Bitcoin to your Granny]

By now many people will have heard about Bitcoin. That’s the global, decentralised, online crypto-currency (check out this Wired Magazine article for some background). You can either buy it on online exchanges, or your can ‘mine’ it by running algorithms that are likely to cause your laptop to catch fire. You can then use it to buy things from vendors who’ll accept it, albeit Sainsbury’s still only accepts British Pounds. There are even mainstream currency traders who actively trade Bitcoin now.

I’ll bet all the Bitcoins I have though, that very few people actually understand what the hell Bitcoin is. I myself do not understand it. Try listen to this guyexplain it, and feel your mind frazzle. More than anything, I have the sense that Bitcoin is a cult. A strange cybernetic cult. An anarchic techno-pirate, quasi-mystical collective on a dystopian mission to subvert the global monetary system. I guess that’s why it attracts me, but I’d still like to know exactly how it works.

The Blockchain

One thing I do know is that the Bitcoin network worships something called the BlockChain. I don’t really know what the blockchain is, but it exists on a huge global network of nodes. It all sounds a bit like the Matrix. My friend @Webistemeunderstands it, and he keeps trying to explain it to me. The other night we were at the Dogstar pub in Brixton and he said various complicated-sounding things like:

1) "It's almost like a section of the blockchain has my signature on it, and then I sign it with your name, and then the whole network agrees that we've done a transaction"
2) "The blockchain is on everyone's computer. The nodes compete to process the blockchain, to create the next piece, which then everyone has to validate again"
3) "The network is so powerful, you'd need at least 50% of the total processing power to override it, and not even the world's largest supercomputer can do that"

I'm not sure if I've quoted him correctly, but I mostly sat at the table and stared at him with a strong feeling of bewilderment. In the absence of a nuanced understanding of the currency though, I come up with my own rough analogy: "Riiight" I say, "So would you say it's a little bit like the Borg in Star Trek?"

Is Bitcoin the BORG?

THE WORLD'S FIRST PICTURE OF BITCOIN'S BLOCK CHAIN

If you’ve never seen the Star-Trek episodes with the Borg, you can check out clips on Youtube. The clips do have something of a negative spin on them, with the Borg being portrayed as an enormous sociopathic cube bent of destruction. The interesting thing about the Borg though, is that it's an entity which has no leader, its direction being rather a function of all the pieces that make it up. According to Wikipedia “The Borg manifest as cybernetically-enhanced humanoid drones of multiple species, organized as an interconnected collective, the decisions of which are made by a hive-mind, linked by subspace radio frequencies.” It is perhaps most famous for the phrase “Resistance is futile”. The analogy with Bitcoin is apparent to see: Interconnected collective? Tick. Hive-mind? Tick. Linked by subspace radio frequencies? Hmm... well, I think it uses internet relay chat. Resistance is futile? Yep, the Feds can attack it, but it doesn't exist in one place so they'd have to attack all nodes at once to shut the system down. Wait a minute, Borg and Bitcoin even have two letters in common - a coincidence?

@Webisteme looks at me from the table. “Um… I guess it’s kind of like the Borg," he says, "The network is very resilient but we’re not really cybernetic drones. It’s mostly guys with big computer rigs and powerful graphics processing cards”.

The mojo of Nakamoto

What strikes me most about Bitcoin though, is how it’s managed to capture the imagination of its users. People cite various reasons why it’s powerful, including how it’s managed to overcome double-spendingproblems you find with other online currencies. To me though, the real source of its power comes from its mythical foundation story, involving the mysterious character of Satoshi Nakamoto.

IS SATOSHI ACTUALLY BANKSY?

Let me explain. Imagine a group of researchers at MIT said "Hey guys, we’ve invented a cool new crypto-currency that is decentralised and resilient. Do you want to try it?" Maybe some people would take them up on that, but it would have no mystery, no intrigue, no dark story about mafia and the CIA. Now imagine that instead of that, a mysterious dude with no traceable identity releases strange tracts onto the web, describing a new currency, and then disappears. That’s exactly what Satoshi did, and it’s the very mystery of his story that makes people want to take part in the first place. It gives the currency soul, and that’s crucial because currency that is not legally mandated needs to be imbued with soul in order to start working. That’s one reason why goldcontinues to be viewed as a valuable currency: It shines and you can’t really do anything with it, and for some reason humans take that to be a good indication that it has mystical quasi-religious properties worthy of being valued.

Satoshi Nakomoto basically created crypto-gold, and sent all the miners out to find it. He then departed the earth, leaving disciples such as Gavin Andresen to continue the work in his absence (check out this psychedelic video that visualises the activities of the original developers). The elite nature of that exercise is part of the appeal too. Everyone has the potential to get the crypto-gold, but only those who invest the most time and passion will actually do so. I mean, look at this fanatical maniac who will almost certainly burn his warehouse down with his Bitcoin rig. There’s something about the sheer absurdity of devoting huge amounts of computing power to something that has no physical existence which gives power and reality to the currency.

Getting my piece of the Blockchain

I've decided to buy Bitcoins. I want a file on my computer with a bunch of numbers, created by the mysterious hands of the miners, little keys to the blockchain. If only I could enter the network, jumping from computer to computer, navigating my way through the corridors of the blockchain right to the very core of the entity created by Satoshi Nakamoto himself… or herself… or themselves. I'm not sure I could do that, but I have set up an account on InterSango and have just purchased 3.986 Bitcoins at around £4.15 per coin. Now I need to work out what to do with them. Any ideas?

If you want to learn more about Bitcoin, you can go to the main site here. If you want to work on developing it yourself, check out the Sourceforge site here. If you want to see Bitcoin blocks as they’re created check out Blockexplorer, and if you want to monitor transactions as they occur see here. If you want some free Bitcoins, you can apparently get them from this kind Samaritan here. If you want to check out more general info, see WeUseCoins. Good luck, and keep me posted on how it goes.

Bitcoinary Launches Feature-Rich Peer to Peer Bitcoin Exchange

We are all quite familiar with the major Bitcoin exchanges; Mt.Gox, BTC-e, Intersango, VirWox, etc. For people looking for a more direct method of buying and selling Bitcoins, there are limited options, including bitcoin-otc, which can be very intimidating to the average person, and the Bitcointalk.org marketplace forum, an arguably risky place to trade Bitcoins.

Though the major exchanges support trade in nearly 20 different currencies, that represents less than 15% of the currencies being used worldwide, thus keeping Bitcoin out of the hands of the people who probably need it the most.

I don't know how many times I've heard the question asked, "can I buy Bitcoins with PayPal?" While yes, you could, unfortunately no one is going to sell you Bitcoins for PayPal unless you have developed a traceable and positive reputation in the community. Now, with Bitcoinary, it's very easy to do so.

Bitcoinary takes the credibility system from bitcoin-otc and gives it a web-based front-end with a facility for private messaging. People can now trade Bitcoin and build a history, all on one user-friendly site.

Solving the chicken-and-egg problem, users can link in their social credibility so buyers know who they're dealing with even if sellers don't yet have a trade history. Equally important, you can't create multiple Bitcoinary profiles using the same social proof, as once you attach your Facebook, Twitter, or mobile phone number, those connections can't be used again.

Bitcoinary is essentially eliminating the middleman, allowing people to become their own exchange. Quite simply, if you have a computer and access to a local currency, you can become a market maker for that currency. You can do it with gold, cash in an envelope, in person exchanges, rupees, dollars, anything you want. The site itself suggests the possibility of in-person international exchange for travelers, which could become an important niche for Bitcoin.

Bitcoin Exchange Opens in Colombia

On May 28th, a new Bitcoin exchange opened its doors, BitMarket Colombia.

BitMarket Colombia is owned and operated by Markus Döbele, a native of Germany. Having access to bank accounts in both countries and already using the European exchanges, Markus thought that Colombians should also have access to a similar Bitcoin market. As a result of the creation of his exchange, Bitcoins can now be exchanged for the Colombian Peso.

The site is hoping to receive coverage in local magazines and newspapers in order to grow its user base, however, in a country with 10% annual inflation, the potential market seems obvious. Markus believes Bitcoin could play an important role for Colombians as a means of preserving their wealth.

Anytime a new market gains access to Bitcoin, it's a pretty big deal. Hopefully we'll begin seeing Bitcoin penetrate other markets in the near future.