For the uninitiated, Bitcoin is a popular peer-to-peer payment network that works as an on-line form of currency.
I’ve spent some time recently looking at it because, quite frankly, I had a hard time believing any such currency could work without either a physical transfer or some centralized authority validating transactions (like with electronic payments from your bank). Basically, the currency relies on cryptography to verify an account with address number A (actually a crypto public key) is actually sending bitcoins to B, and the entire network shares the full ledger of transactions (the blockchain) such that changes to this ledger are verified by computers on the network. This verification involves the solving of a complex cryptographic problem based on the details of the transaction (one that, with modern computing, takes an average of 10 minutes to solve). Once a computer on the network solves the problem, the results are published and added to the blockchain ledger. Computers have an incentive to do this verification because solving one of these problems earns you a reward in bitcoins which are simply created and added to your account in the blockchain ledger; this is dubbed “mining” in the bitcoin world. Other computers on the network abandon their work on the previous problem and try to solve the new cryptographic problem based on this new addition of bitcoins to the previous solver’s account.
This building of the blockchain helps to bury transactions into the ledger such that it is extremely difficult to reverse transactions or double-spend coins. I admit I don’t have a complete grasp of the details, but the concept of transaction verification was the one I was most curious/skeptical about, but now I’m fairly convinced that, technically, the system works.
But on the practical side, Business Insider has been tracking the use of Bitcoins and has found several problems. This piece is a good summary; first off, the currency is a haven for criminal transactions, which leads to other problems:
Second, the currency is extremely volatile:
The distribution of the currency is almost comically unfair:
And minor “accidents” carry a huge price:
The author attributes this to libertarianism gone mad: “About 44% of the online crypto-currency’s users self-identify as Libertarians,” and he sees many of the basic principles of libertarianism (distrust of government control, preserve anonymity, no taxes) embedded in the concept.
So I thought I’d throw it open to the group. Do the central (libertarian) concepts of an on-line currency like Bitcoin–online anonymity and de-centralized control in particular–really work for a currency? Are the problems reported just growing pains, or do they signal a fundamental problem with the concept?