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Will bitcoin bury the banks?

Feb 25, 2014 @ 12:01 am

By Andrew “Flip" Filipowski

bitcoin, digital currency, banks, global economy, innovation
+ Zoom
(Bloomberg News)

The value and promise of bitcoin can completely revolutionize the global economy and has the potential to bypass banks altogether. Think of it as the Bank for Humanity. The bitcoin protocol is the genie that has left the bottle, never to be contained again. Enormous decentralized businesses will be created out of this protocol that will change the landscape of global business forever. A new cycle of disintermediation has begun and all existing businesses must adjust or they will be marginalized.

Bitcoin at its most fundamental level is a breakthrough in computer science — one that builds on 20 years of research into cryptographic currency, and 40 years of research in cryptography, by thousands of researchers around the world. In its youthful history, it has been attacked relentlessly and shown its resiliency.

In the simplest of terms, think of bitcoin as currency melded with a public stock certificate of a fast growing startup. Think of it as owning a share of Facebook rather than a dollar, except that you can electronically spend a bit of your share and buy a hamburger. Your remaining bitcoin fraction can continue to appreciate even when pieces of it are spent.

BITCOIN HAS THE EDGE

While the concept of bitcoin may be hard to comprehend for those without a fundamental understanding of cryptography currency, bonds and banking, there are a few points that prove bitcoin has the edge over banks:

Bitcoin is a peer-to-peer network The beauty of a peer-to-peer federated system (such as the one bitcoin uses) is that it cannot be shut down because it does not rely on a hub. Think Napster vs. BitTorrent. You can shut one down and not the other. Bitcoin is an OpenSource project consisting of charitable contributions from developers who receive acknowledgement, peptides for their receptors and the knowledge that their valuable skills are contributing to something meaningful in addressing human need. In fact, bitcoin adds economic incentives to the equation, making it even more compelling to create the building blocks of a new era in business. Unlike banks, bitcoin exists as a network that rewards users who contribute to the network by managing the blockchain, by adding the newest bitcoin "block” to the distributed ledger and for providing the physical servers composing the network that processes the transactions of a global digital economy.

Bitcoin is not subject to fiat manipulation All national currencies in circulation, issued and managed by respective central banks are fiat currencies. Collectively, central banks have manipulated fiat currencies by creating and printing additional money to create cycles of opportunity, which has led to debilitating consequences and even war. The network rules for bitcoin are that a maximum of 21 million will be created. The very fact that bitcoin was designed to have a maximum number is part of the scheme that protects the bitcoin currency from the kind of manipulation that fiat currencies have experienced.

Bitcoin has minimal fees Of the world's population, nearly 5 billion of the 7+ billion people have no access to a competent banking system. They pay exorbitant fees (upwards of 10 to 40%) for simple transactions. This underserved population has every reason to feel that it would be better served by a trustworthy electronic cryptocurrency such as bitcoin. By eliminating banks as an intermediary from the consumer end of the equation, commissions and fees we are currently subjected to will be eliminated.

Bitcoin has fraud protection Bitcoins manifest themselves only in digital form, as a pair of private and public keys, existing entirely as zeros and ones. To make generation of bitcoins difficult, the Hashcash cost-function is used, which allows bitcoin blocks to be verified only by assembling the public and private key. The complexity of the design also carries with it foolproof features that prevent any duplicity in bitcoins and provide infallible protection to the integrity of the transaction between participants. For example, unlike credit cards, a bitcoin transaction cannot be fraudulent and needs no security provisions. All the fraud detection and call centers that support traditional banking and credit card processing are eliminated with bitcoins and merchants (as well as consumers) will have exponentially less costs involved.

PRACTICAL SOLUTION TO LONGTIME PROBLEM

Bitcoin is the first practical solution to a longstanding problem in computer science called the Byzantine Generals Problem. The BGP poses the question of how to establish trust between otherwise unrelated parties over an untrusted network like the Internet. It basically solves the problem of not needing trustworthy intermediaries when we can safely develop systems that provide absolute security in a network of untrustworthy nodes.

The practical consequence of solving this problem is that bitcoin gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate.

What kinds of digital property might be transferred in this way? Think about digital signatures, digital contracts, digital keys (to physical locks, or to online lockers), digital ownership of physical assets such as cars and houses, digital stocks and bonds … and digital money.

All these are exchanged through a distributed network of trust that does not require or rely upon a central intermediary like a bank or broker. And all in a way where only the owner of an asset can send it, only the intended recipient can receive it, the asset can only exist in one place at a time, and everyone can validate transactions and ownership of all assets anytime they want.

Herein lies the ultimate value of a bitcoin and how it will continuously appreciate. These distributed networks are capable of creating tremendous wealth by providing a protocol for many useful activities to take place on the network.

Andrew “Flip" Filipowski is chairman of SilkRoad Equity, a high-tech entrepreneur and philanthropist.

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