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check that your disk was made from the rare limestone from Palau. Once you (or rather, your computer) have found one of these numbers then it is yours and you can keep it or trade it.
As in the case of the stones, if I send you my Bitcoin, the coin isn’t really going anywhere (after all, all I’m doing is sending you a copy of the numbers that I found) and what we are really doing is just telling everybody else that the coin now belongs to you and not to me. On Yap, the record of ownership of the stones was part of the collective cultural memory, but in Bitcoin it is the distributed transaction ledger known as the ‘blockchain’.
In essence, when I give you a Bitcoin the record of that transaction is copied out to all of the other users so that everyone now knows that the coin belongs to you. Because of the particular mathematical properties of the numbers used in the Bitcoin system there is a finite supply (21 million) of these numbers and once they are all discovered no more can ever be ‘minted’. It would be as if Palau had been eroded away by the Pacific storms so that no more limestone disks could enter the Yap economy.
There is one conceptual difference between Bitcoins and stone disks that is much remarked on in media reports. When it came to the stones, everyone knew who they belonged to.
They knew that Stone X belonged to Tribesman A and everyone knew who Tribesman A was. But in Bitcoin, the coins are associated with cryptographic keys rather than individuals. You might know which internet address one of those cryptographic keys is associated with during a transaction, but that doesn’t tell you who the person is. So there is a kind of not- quite-anonymity associated with Bitcoin that would have been impossible to imagine for the Yap islanders.
With Bitcoin, the ‘mining’, which doesn’t involve limestone blocks, is actually the work that goes into maintaining the blockchain. And it is this blockchain that I think is a lot more interesting than the Bitcoin currency that has been in the news.
The blockchain is the mechanism for
maintaining an open and distributed ledger that has its integrity protected through the use of cryptographic ‘proof of work’. It is a digital asset transmission network, and electronic cash is only one of the kinds of digital asset that might be transferred and quite possibly not the most interesting one (if you can transfer digital assets efficiently then you have no need to use cash as an intermediary).
Nonetheless, some people are using it for electronic cash, and having handed over that cash to people they had never met before and
had no reason to trust, they are predictably, if not reasonably, upset that it can sometimes be stolen. The recent Mt Gox attack, for example, saw XBT 850,000 (worth around $468 million) disappear.
However, while that’s very sad for them, I still don’t see it as a major issue in the evolution of the Bitcoin technology. And for that reason, I doubt very much that traditional financial sector players, who understand the technology, are that bothered about the apparent losses (I say apparent, because as yet no-one knows where the Bitcoins have gone because no-one knows who the wallets belong to).
If you’re with me so far, then I think we’ve agreed that we should be looking beyond Bitcoins as they are now. But for what?
For one thing, it seems to me that there are plenty of business opportunities for the existing players to use the technology in interesting ways.
In their research note “Is bitcoin a currency? No.” the Goldman Sachs analysts Dominic Wilson and Jose Ursua concluded that Bitcoin has “a much better shot at influencing payments technology than taking off as a currency”. They are surely correct. Take remittances. MasterCard might, for example, want to look at using something bitcoin-like as a backbone for HomeSend, the new remittance business