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Friday, June 10, 2011

The Monetary Future: Bitcoin: A Peer-to-Peer Electronic Cash System

Wikipedia describes Bitcoin as "an open source peer-to-peer electronic cash system developed by Satoshi Nakamoto that's completely decentralized, with no central server or trusted parties. Users hold the crypto keys to their own money and transact directly with each other, with the help of the network to check for double-spending."

Bitcoin has been called the gold standard of digital currency. The availability of bitcoins can not be manipulated by governments or financial institutions and bitcoin transactions occur directly between two parties without a middleman. Bitcoin also maintains a lively discussion forum.

Satoshi Nakamoto published an academic paper on November 1, 2008 entitled "Bitcoin: A Peer-to-Peer Electronic Cash System". From the Abstract:
"A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work. The longest chain not only serves as proof of the sequence of events witnessed, but proof that it came from the largest pool of CPU power. As long as a majority of CPU power is controlled by nodes that are not cooperating to attack the network, they'll generate the longest chain and outpace attackers. The network itself requires minimal structure. Messages are broadcast on a best effort basis, and nodes can leave and rejoin the network at will, accepting the longest proof-of-work chain as proof of what happened while they were gone."

For further reading:
"Is BitCoin the currency of the future?", The Mises Community Forums, August 6, 2009
"Bitcoin open source implementation of P2P currency", Satoshi Nakamoto, P2P Foundation Forum, February 11, 2009
"Bitcoin P2P e-cash paper"
, Satoshi Nakamoto, The Cryptography Mailing List, November 1, 2008


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