Bitcoin, Ether, Cryptocurrency and Such
Yes, we know — cryptocurrency is not a gadget. We do love our gadgets, but we love money, too, because it can buy us more gadgets. So writing about Bitcoin, Ether and other cryptocurrency seems a natural fit for our monthly gadget. And, since this topic is so nerdy, it really appeals to us.
Some say cryptocurrency is the future of money. Others say all cryptocurrencies are Ponzi schemes. Everyone agrees it is a very trendy topic. Banks, accounting firms, governments and securities firms are all researching the topic, and many do not understand the basic concepts behind it.
We believe that Bitcoin and other cryptocurrencies are a logical step in the evolution of money. In caveman days, we traded goods. Then, as we evolved and became more “civilized,” we used precious goods, such as salt, tea, shells or even whiskey as “money.” Next, we created coins out of precious metals and later backed paper money with the equivalent amount of precious metal, such as gold or silver. Since Nixon took us off the gold standard in the 1970s, our money has been purely “fiat money,” or currency without any intrinsic value established as money by government regulation or law.
Now, we rarely use cash or coins, instead using credit cards, PayPal, Venmo or Apple Pay. Most spending transactions are now digital. When we pony up for one of our gadgets, we rarely pay cash — we plop down our credit cards. We pay with “digital cash.”
With credit cards, Venmo, PayPal, etc., you need a payment network with accounts, balances and transactions. For them to work, you need a trusted recordkeeper to verify balances and keep track of transactions to prevent double-spending, among other tasks. An inventor pseudonymously known as Satoshi Nakamoto figured such a system out for digital currency.
The solution is the use of blockchain technology. With blockchain, there is no centralized ledger; the technology uses a network of peers. Every peer has a record of the complete history of all transactions and thus the balance of every account. Theoretically, the peers do not trust one another, so there can be no cheating. The transaction is known almost immediately by the whole network. But the transaction needs to be confirmed.
As long as a transaction is unconfirmed, it is pending and can be forged. Credit-card transactions use a single recordkeeper, and those transactions can be reversed. Not so with blockchain or Bitcoin transactions — once confirmed, they are set in stone and no longer forgeable.