Sunday, 8 May 2016

Hitech and a bit of obfuscation are two sides of the same BITCOIN

BITCOIN : The last BIT on it is yet to be heard..............

What is Money? An economist would define it as a Monetary Base added to the broadest money supply,  M3.  A lawyer would argue it as a Legal Tender. An entrepreneur would say it’s a means to realize his dreams. A pauper would regret he never had it.  A spiritual guru would scorn it as Maya, a mere illusion. But if somebody were to ask this to us, the dyed in the wool bankers, we would solemnly declare it as the TRUST.   

In India, the Governor of the Reserve Bank of India promises to give the bearer the sum equal to the denomination of the currency note. While rest of the world trusts the US Dollars, the Dollar Bill of the US of A  says “In God We Trust”.  So the next question would be, ‘Who is trusting Whom’? In times ancient and in times modern, the ruled trusted the ruler in matters of Money.  Be it a monarch, a dictator  or a head of an elected government, the hoi polloi always put their faith in the “money” issued by the ruler.   

If that is so then it will lead us to the third logical question ‘how does money look like’?. Money can come in any form. Currency notes, coins, deposit receipts and so and so forth. Deposit Receipts being the balances kept in the Commercial Banks. Though the commercial banks, don’t print the money themselves, they hold it as trustees. And in them put the depositors, their money and their trust. From historical to  contemporary times, the Banks played the role of the Trusted Third Parties. 

This brings us to the fourth question, can money exist which is neither issued by a government and nor held with the Trusted Third Parties’? If the answer to this question is yes then would you wonder if you could automatically trust such money ? That’s the million dollar, err BITCOIN question.

The BITCOINS, can’t be kept in a wallet nor can these ever be seen. These are amorphous bytes stored in a countless computers around the world. In spite of the BITCOINS being around for a past few years, ironically nobody knows who invented these? We saw earlier that the rulers always took pride in the money they issued. Rather money was the symbol of their power. As for BITCOINS their creator or creators feel safer in remaining anonymous. This is notwithstanding the claims made so far by a Japanese and an Australian to be inventor of the BITCOIN.     

These BITCOINS are not stored – even digitally – with any Trusted Third Party. There is no central record or a common ledger which gives an account of the total bytes created or circulated. BITCOINS are generated, paid and stored as bytes using a beautiful and a novel concept called BLOCKCHAIN*. This BLOCKCHAIN allows all the members to view and validate every single transaction taking place in the network, around the globe in real time. So every time a sender “S” pays some BITCOINS to a receiver “R” the entire network ‘sees’ this transaction. It is up to the network to determine the authenticity of this transaction using the complex algorithms on very powerful computers. When a sufficiently large number of other members (beyond a critical threshold number of the members) validate that “S” indeed had enough BITCOINS to pay to “R”, they ‘authorise’ this transaction and allow it to be included in a “BLOCK” of valid transactions.  Thus in the world of BITCOINS “S”, “R” and rest of the members are trusting each other without any need for a Trusted Third Party. BITCOINS also allow “S” and “R” to remain completely anonymous from each other as well as from rest of the members of the network.

This now begets the fifth and the last question as to  ‘who and why would anybody want to be receiving and paying money anonymously’? The proponents of the BITCOINS claim to be libertarians and advocate laissez faire. The doctrine of Don’t Ask Won’t Tell.  One can understand such a need under exceptional circumstances such as  natural or man made calamities of unimaginable magnitude. However if you are earning your money legitimately, paying your taxes, transferring money for the business you don’t want to hide then there’s the good old money which you always trusted.

* BLOCKCHAIN – BITCOIN probably is the only well known, well publicized even glamorized  by product of the brilliant BLOCKCHAIN. Opportunity or the need for the BITCOINS to become mainstay is yet unknown.  But the underlying philosophy powering this phenomenon, the BLOCKCHAIN shows huge promise. Stay tuned for a deep dive into BLOCKCHAIN and how it may be used to provide wonderful solutions for payments, remittances, stock and commodities trading or even inventory management.

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