The World Currency

Despite three decades' research on e-cash by the cryptographic community, all these efforts seem to have been dwindled by the swift success of Bitcoin. Has Nakamoto, a single individual whose name previously unheard of, outsmarted the ingenuity of all the cryptographers combined? Although Bitcoin uses no fancy cryptography, its design actually reflects a surprising amount of ingenuity and sophistication. Most importantly, it addresses the incentive problems most expeditiously.

No central point of trust.

Bitcoin has a completely distributed architecture, without any single trusted entity. Bitcoin assumes that the majority of nodes in its network are honest, and resorts to a majority vote mechanism for double spending avoidance, and dispute resolution. In contrast, most e-cash schemes require a centralized bank who is trusted for purposes of e-cash issuance, and double-spending detection. This greatly appeals to individuals who wish for a freely-traded currency not in control by any governments, banks, or authorities — from libertarians to drug-dealers and other underground economy proponents (note that apart from the aforementioned illegal usages, there are numerous legitimate uses as well). In a spirit similar to the original motivation for a distributed Internet, such a purely decentralized system guarantees that no single entity, no matter how initially benevolent, can succumb to the temptation or be coerced by a government into subverting it for its own benefit.

Incentives and economic system.

Bitcoin's ecosystem is ingeniously designed, and ensures that users have economic incentives to participate. First, the generation of new bitcoins happens in a distributed fashion at a predictable rate: "bitcoin miners" solve computational puzzles to generate new bitcoins, and this process is closely coupled with the verification of previous transactions. At the same time, miners also get to collect optional transaction fees for their effort of vetting said transactions. This gives users clear economic incentives to invest spare computing cycles in the verification of Bitcoin transactions and the generation of new Bitcoins. At the time of writing the investment of a GPU to accelerate Bitcoin puzzle solution can pay for itself in 6 months.

Predictable money supply.

Bitcoin makes sure that new coins will be minted at a fixed rate, that is, the larger the Bitcoin community and the total computational resource devoted to coin generation, the more difficult the computational puzzle becomes. This provides strong incentives for early adopters — the earlier in the game, the cheaper the coins minted.

Divisibility and fungibility.

One practical appeal of Bitcoin is the ease with which coins can be both divided and recombined to create essentially any denomination possible. This is an Achilles' heel of (strongly anonymous) e-cash systems, because denominations had to be standardized to be unlinkable, which incidentally makes the computational cost of e-cash transactions linear in the amount. In Bitcoin, linkage is inherent, as it is what prevents double spending; but it is the identities that are "anonymous".

Versatility, openness, and vibrancy.

Bitcoin is remarkably flexible partly due to its completely distributed design. The open-source nature of the project entices the creation of new applications and spurs new businesses. Because of its flexibility and openness, a rich extended ecosystem surrounding Bitcoin is flourishing. For example, mixer services have spawned to cater to users who need better anonymity guarantees. There are payment processor services that offer gadgets venders can embed in their webpages to receive Bitcoin payments alongside regular currency.

Scripting.

Another salient and very innovative feature is allowing users (payers and payees) to embed scripts in their Bitcoin transactions. Although today's reference implementations have not fully utilized the power of this feature, in theory, one can realize rich transactional semantics and contracts through scripts, such as deposits, escrow and dispute mediation, assurance contracts, including the use of external states, and so on. It is conceivable that in the future, richer forms of financial contracts and mechanisms are going to be built around Bitcoin using this feature.

Transaction irreversibility.

Bitcoin transactions quickly become irreversible. This attracts a niche market where vendors are concerned about credit-card fraud and charge-backs. Through personal communication with a vendor selling specialty magazines, he mentioned that before, he could not conduct business with customers in certain countries where credit-card fraud prevails. With Bitcoin, he is able to extend his business to these countries due to the protection he obtains from the irreversibility of transactions.

Low fees and friction.

The Bitcoin verifiers' market currently bears very low transaction fees (which are optional and chosen by the payer); this can be attractive in micro-payments where fees can dominate. Bitcoin is also appealing for its lack of additional costs traditionally tacked upon international money transfers, due to disintermediation.

Readily available implementations.

Last but not the least, in comparison with other e-cash schemes, Bitcoin has provided readily available implementations, not only for the desktop computer, but also for mobile phones. The open-source project is maintained by a vibrant community, and has had healthy developments.