Understanding Bitcoin

Bitcoin is at the forefront of ‘hacktivism’, giving its users a free alternative to contemporary financial mechanisms.

Bitcoin is an online decentralised economic system bypassing traditional infrastructures of modern finance [zcopley]

The above image is licensed under Creative Commons, and can be found here.

Hong Kong – The term “hacktivism” has been grossly misconstrued by the media. The image of masked saboteurs attacking from the darkness has romantic appeal but this spectacular narrative of sabotage ultimately misinforms, other-ising hackers and distorting hacking itself. Richard Stallman defines hacking as “exploring the limits of what is possible, in a spirit of playful cleverness”. Real hacktivism, then, is less about denial of service attacks, which are acts of digital protest, than about the clever creation or intervention of software forms for social change. It is less about sabotage than about alternatives.

Hacktivism allows dissent to overcome the limitations of protest, actually implementing alternatives and making them widely available without asking for permission from the status quo. It gives wings to the possibility for gradual peaceful revolution: alternatives no longer need to remain dreams, but can become real options for real people.

Hacktivism often opens real spaces by “selling the idea” first to the machines, after which people realise other ways are possible and allow themselves to think in new ways. This is what the work of a programmer known as Satoshi Nakamoto did for economics. In 2008 he coded a critique of the world’s monetary system into a P2P computer protocol he called Bitcoin. Bitcoin started running on January 3, 2009, and is now a working decentralised monetary system with thousands of users around the world.

The Bitcoin protocol is based on a fundamental critique of the world’s monetary system: that it demands undeserved amounts of trust from us. Nakamoto thought that it would be better to place trust outside the monetary system itself and back into social life:

The Stream – Brazil’s Freedom March &
Bitcoin Digital Currency (Starts @ 24m00s)

The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micropayments impossible.”

Through a clever use of encryption technology, the Bitcoin protocol enables this move. In networked storage systems, Nakamoto explains, strong encryption technology affords end users peace of mind because they no longer need to trust the system admin with their privacy. He argues that if money could be similarly encrypted, middlemen who provide trust (e.g. banks) could be bypassed:

“It’s time we had the same thing [strong encryption] for money. With e-currency based on cryptographic proof, without the need to trust a third party middleman, money can be secure and transactions effortless. (…)

[Bitcoin] takes advantage of the nature of information being easy to spread but hard to stifle. The result is a distributed system with no single point of failure. Users hold the crypto keys to their own money and transact directly with each other, with the help of the P2P network to check for double spending.”

The result is Bitcoin. It is not controlled by any state nor owned by any company; neither is it a company in itself. It is merely an open source computer protocol that runs over the internet.

Finite fiat, if I may

Strictly speaking, I would argue, Bitcoin is a fiat currency. The term “fiat” is Latin for let it be done: it designates systems where an entity (eg the Federal Reserve) summons new money into existence by saying, in a god-like way, “let it be done”. In the case of Bitcoin new “coins” are brought into existence across the network by the algorithms in the protocol.

No entity or individuals are entitled to new bitcoins on merits other than their standing among the sum of active nodes in the network in terms of computing power. Of course, anyone can also earn already-existing bitcoins through work, through the exchange of goods and services, or (in the case of social organisations) through the trust the public places on their ability to do good.

In short, bitcoins are created through a transparent and distributed process determined by mathematics. Bitcoin is finite post-Westphalian fiat, a monetary system where currency is indeed created, but through an algorithm driven by the logic of the network of distributed – rather than concentrated – power.

Bitcoin does a better job than central entities (like the Fed) at creating new money because it does so in a decentralised way and without the need to create debt; it does a better job at storage than banks because it does so for free; and it does a better job at transfer than SWIFT because it is faster, cheaper, available to anyone, and not subjected to the control of Western powers: SWIFT’s ability to blockade Iranian banking transactions shows the ultimately unilateral nature of global financial channels.

What we have here is radically different from the current system where money creation is based on debt, politically motivated, surrounded by secrecy, inflationary, unilateralist, colonialist, and exploitative of powerless nations, etc. The flaws in the design of modern currency are at the roots of the social and ecological disasters we face today. Alternative currencies in general hold the promise of a way out, and the emergence of a vibrant Bitcoin economy in particular is one of the most interesting developments in recent times.

Money not owed

 Counting the Cost – Final flight or flights of fancy?
(Starts @ 21m14s)

Bitcoin, I think, is revolutionary especially because it distributes the creation of money. The current system, based on national and personal debt, insidiously concedes obscene yet hard to object power to rich nations and global banks. Debt-based money not only provides exorbitant privileges to powerful nations and threatens collapse in Europe and the US under its own absurdity; it also deforms the nature of human sociality.

The disastrous social consequences of placing debt at the root of the creation of money cannot be overstated. A society whose currency is backed by debt (aka the modern world) is a society where freedom is just a word because the reality of everyday life, even for the middle classes of so-called rich countries, tends toward sublimated forms of slavery or debt peonage. An economy built on debt-based currency can only “grow”, the 2008 economic collapse showed us, by putting more people deeper into debt. Inevitably, this leads to a society where the many always owe more and more to the few, eventually making democracy a farce. Bankers, as Robert Fisk puts it, are the dictators of the West.

The whole world’s “formal” economy is backed by debt, and debt is backed by violence. This can be verified by defaulting, and subsequently resisting eviction: state force will be used sooner rather than later. Anthropologist David Graeber, one of the most prominent scholars in the Occupy Wall Street movement, articulates in his book Debt: The First 5,000 Years, how debt embeds our culture and our very selves into an inhuman, unsustainable, condition of iniquity:

“…by turning human sociality itself into debts, they transform the very foundations of our being since what else are we, ultimately, except the sum of the relations we have with others into matters of fault, sin, and crime, and making the world into a place of iniquity that can only be overcome by completing some great cosmic transaction that will annihilate everything.”

The P2P money creation system that Bitcoin proposes is truly something else as it deflates the dark power of debt-based money in society; it allows envisioning a world where the wheels of debt are no longer at the origin of economic activity. This does not mean that Bitcoin is necessarily the final and perfect answer to our needs, but it is an important step in demonstrating that it can be done.

Ten years

It has already been over three years since the Bitcoin protocol started running, and yet these are still the very early days. What Nakamoto created is really just an open and autonomous backbone for global finance. Several layers of complementary technologies and services will need to be developed around this backbone before Bitcoin can aspire to really become an operational global currency for the 21st century.

Cleverly, he devised a system in a way that planted the incentive to take over this extremely complex task in individuals likely to have intimate knowledge of technology and an understanding of the nature of networked sociality.

The first miners joined the network out of intellectual curiosity when it was nothing more than an experiment posted to an obscure cryptography forum. Bitcoins were easy to mine in the beginning, and as the network grew they gained real value. Suddenly many realised they had run into small fortunes, that they could potentially become larger fortunes if Bitcoin succeeded, and that it was really up to them to make it happen. They understood that their success depends on making Bitcoin useful, safe and easy for the largest possible amount of people.

Bitcoin entrepreneurs have already developed an impressive, if experimental and imperfect, ecology of operational support infrastructures. Available services include exchange, escrow, arbitrage, transfer, storage, consulting, investment, auction, payment, mobile support, etc. A lot of things can already be paid for using Bitcoin. These services are autonomous initiatives, driven by no authority other than that which emanates from the needs of Bitcoin users and the nature of the Bitcoin protocol

It takes ten years to get a disruptive technology from inception to becoming so easy to use that it reaches mainline adoption.

– Rick Falkvinge, Swedish Pirate Party

On a larger scale, Bitcoin’s neutrality also gives it the potential to be a good national reserve currency as well as a low-friction medium for international trade. Governments, especially in “poor countries”, could start their own Bitcoin mining operations and make Bitcoin an acceptable means of tax payment: a Bitcoin reserves strategy could shield vulnerable economies from global currency cycles and provide increased autonomy from foreign powers.

If Bitcoin is to become a widely used everyday currency, it will not happen overnight. Rick Falkvinge, founder of the Swedish Pirate Party, believes that it will take Bitcoin about eight more years to reach the level of usability required for wide adoption:

“I predict that Bitcoin will reach usability sometime around 2019. I base that prediction on earlier disruption technologies, where blogging started appearing in 1994 and reached mainstream adoption in 2004; file sharing started in 1989 over the net and Napster hit in 1999. You had streaming video 1995, mainly porn sites streaming animated gifs, what was then tip of the spear technology; Youtube was founded 2005 and just swept the floor with everyone else just because they were usable. This is not something bad; it is just an observation that it takes ten years to get a disruptive technology from inception to becoming so easy to use that it reaches mainline adoption.”

When it comes to money, people are understandably reluctant towards experimentation. Either it works, meaning it provides clear advantages, or it doesn’t. No part of the Bitcoin economy will last unless it is objectively a better deal for the end user than the flawed-but-known ways of today. In this sense Bitcoin is perhaps one of the hacktivist revolution’s greatest tests: can the network itself actually handle the globe’s finance? Can it really deliver better money for this incredibly complex world? It could very well be that it actually will. It seems to be advancing in that direction, slowly, step by step.

Nicolás Mendoza is a scholar, artist and researcher in global media from The University of Melbourne and a member of the P2P Foundation. His recent work can be found here.

Follow him on Twitter: @nicolasmendo