Digital Currencies Part 1: Bitcoin Paves the Way

Bitcoin proves that don't need government to issue our money. In fact, we can do it better ourselves.



A pioneering digital currency called bitcoin has been in the news a lot lately. Bitcoin is a fantastic leap forward in digital cryptocurrencies that will potentially impact all of us. So let's take a quick look at bitcoin and its possible implications.


What is Bitcoin?

Bitcoin is a digital currency and a digital currency system. It's revolutionary in several ways, which we'll discuss momentarily.

No one really knows who created the bitcoin system. Its creator appeared on the scene using a pseudonym and disappeared rather mysteriously. But the software he wrote is sheer genius.

The bitcoin software contains a digital wallet for storing and spending your bitcoins. When you use digital currencies, you must have digital wallet software. It's like when we digitized music. The records, tapes, and even CDs went away. We don't need them any more. We still have our music. And now that our music has been digitized, we can do all the things we used to do with it and more. But the physical media that the music was stored on are gone. Now we use digital music players to access our music.

Digital currencies are the same way. When you digitize money, the coins and bills go away. Your money is now bits. So you need digital wallet software to store and use our money just like we need digital music players to store and use our music.

So the bitcoin software comes with a digital wallet. But in addition to being a wallet, the bitcoin software also does two other things. First, it contains a cryptographic puzzle that produces bitcoins. I won't go into the details of how that works, but the cryptographic puzzle ensures that it gets harder to produce more bitcoins over time. It also limits the total number of bitcoins that will ever be created to 21 million. That's right, there will never be more than 21 million bitcoins.

The limit of 21 million bitcoins means that bitcoins will always deflate. The value of bitcoins will always rise, so prices in bitcoins get lower. That's not as problematic as it sounds. You can fractionalize bitcoins. In other words, it's possible to own 0.001 bitcoins. So you can buy and sell using smaller and smaller portions of bitcoins. So even though the prices go down, the value of items remains constant.

Solving the cryptographic puzzle is called mining. It's one way to obtain bitcoins. The other is to buy bitcoins from someone that has them.

The last thing that the bitcoin software does is to validate transactions. Everyone that installs the bitcoin software essentially contributes some of their computer's processing power to the bitcoin network. When you install the bitcoin software, it uses the internet to automatically contact the rest of the network. That's not a privacy issue. All people can tell is that there's a computer there processing transactions. There's no information that would tell people who or where you are.

So when you install the bitcoin software, your computer joins a group of computers. This group collectively validates all bitcoin transactions.


What's So Great about Bitcoins?

The bitcoin system has some really great features about it that make it a breakthrough technology.

First, the bitcoin system is completely distributed. There is no central control. That means that no government can use the bitcoin system to inflate bitcoins for its own advantage. When government has control over the money supply, it always causes inflation. This is on purpose. Click here to find out why.

Second, the bitcoin system is completely distributed. Yes, I know I already said that. But because it's distributed, government can never completely regulate it out of existence. They can regulate companies that do business in bitcoins, but they can never really control the bitcoin system.

Third, bitcoins use great cryptography. Bitcoins can't be counterfeited. In fact, it's must easier to counterfeit a US dollar than it is a bitcoin.

Fourth, bitcoins can't be double spent. What that means is I can't pay Bob in bitcoins and then use the same bitcoins to pay George.

Fifth, the bitcoin system is not under human control. So it regulates itself.

Sixth, bitcoins demonstrate that we don't need government to have valid money. This is the most dangerous (for government) and liberating (for you and I) aspect of bitcoins. It proves that cryptocurrencies can be viable forms of money and that people will accept and use them. It also clearly demonstrates that you and I are better at providing ourselves with currencies that meet our needs than the government is.

Seventh, bitcoins are as private as cash. It's next to impossible for anyone to use the bitcoin system to monitor your transactions.


What's not Great about Bitcoins?

Bitcoins do have some drawbacks.

First, the bitcoin system is completely distributed.

That's a drawback?

Yes. Because there's no one entity responsible for the bitcoin system, there's no one to take responsibility for it if it suffers a catastrophic failure for some reason. That's a big issue for businesses. They need to know that their money system will work no matter what.

Second, the bitcoin system is not under human control.

That's a drawback too?

Yes. You see, inflation and deflation are caused by the improper regulation of the money supply. If there's not enough of a currency, it deflates. If there's too much, it inflates. The bitcoin system can't react to market needs. It's stuck in a permanently deflationary trend because of the limit on the number of bitcoins.

Bitcoin's permanent deflation isn't that big of a deal in reality because, as I've mentioned, you can fractionalize a bitcoin. But people will perceive it as a negative. The average person wants to see prices stay approximately the same over time. Anything else makes them feel that their money is unstable.

Third, bitcoins will always be bitcoins and never anything else. Bitcoins implement only one kind of money. In reality, there can be many kinds of money. We tend to think of money as immutable, like air. It's just there and we use it. It never really occurs to most people that there can be different kinds of money. But in the past, there have been. For example, we used to back our money with gold. We don't do that any more. But when we did, we were essentially using a different kind of money than we use now.

Money can be backed by any commodity, such as gold, silver, oil, or anything else that has value. It can even be backed by a group of commodities, which is usually called a commodity basket.

Or money can be backed by bonds. That is, a local government can issue a bond (or other financial instrument that represents a promise to pay) and issue a digital currency against it. The currency isn't really money at all even though we use it just like money. It's really a digital certificate of ownership of the bond. This may actually be a legal way for cities and states to issue their own currencies to take some power back from the federal government. Of course, these currencies aren't legal tender. But that doesn't really matter. You can still do business with it.

Or the money could actually be certified IOUs. We discussed this system in a previous article.

Or money can be backed by nothing, which is what we do now. The US dollar is only backed by itself.

The point here is that there are many ways to define money. Bitcoin only allows one. That is severely limiting. Having other ways to define money means we can be completely free from inflation and deflation. It can also be a way to solve massive social problems.

Fourth, the bitcoin system is not fast enough to be used by today's high-speed business environment. Because of the distributed nature of the system, it typically takes about 5 minutes to validate a bitcoin transaction. But it's not uncommon for transactions to take an entire hour to validate. That's just too slow.


How Does Bitcoin Compare to Our Software?

The software we're producing at Cognisaya, LLC shares some features with bitcoin. Both are cryptographic currencies. Neither can be forged and neither can be double spent.

Like bitcoins, our system is as private as cash. When you spend money created with our system, neither we nor anyone else knows who is spending the money, where they are, or what they're buying.

Unlike bitcoin, our system validates transactions immediately. The wait for a customer is no longer than the wait needed for a credit card transaction. So our system can handle the fast pace of modern business.

Also, our system enables you to define whatever kind of money you want. It can be backed by whatever you want or nothing at all. It's up to you. The money you create can be tradable by limited groups of people, such as customers of a single business or members of a single co-op network. Or you can make your currency usable by anyone. Again, it's up to you.

The bitcoin system provides a currency, wallets for spending, and a means of producing the currency. That's all it does. Our system provides you with the ability to define legal contracts with programming logic built into them. So you can not only define any type of money you want, you can define all of the financial instruments your money needs. In short, our system doesn't just generate money, it enables you to create entire financial systems. For example, if you want to, you can replace our broken fractional reserve banking system.

Another difference between our software and the bitcoin system is that our software enables any trusted entity to issue a currency. The trusted entity can be a business, a government, a nonprofit organization, or an individual. Bitcoin doesn't allow this.

By enabling any trusted entity to issue a currency, customers always know who is behind a currency. They are free to decide whether or not they trust whoever controls the currency. If the entity in charge of the currency starts playing hinky games with your money, you can simply move to another currency. That's called freedom and that's why we're creating our software.

We're not trying to make one currency to rule them all. We're building a platform for creating entire economic systems and giving people the freedom of choice to leave any economic system that they don't like. We call this economic democracy and it's why we're making this software.


One Final Note on Bitcoin

Governments LOVE to regulate EVERYTHING. Of course, they couldn't stand the thought of not being able to regulate bitcoins. So the US government has declared that bitcoins are a currency and that they can regulate them. In doing so, they've fallen into a trap of their own making.

By declaring bitcoin to be a currency, what the US government has done is officially recognized the first denationalized cryptocurrency. They've set a legal precedent that anyone can use if the government ties to shut them down when they issue a currency. So if you decide to issue a currency that competes with the dollar, you can use the bitcoin as a precedent in court showing that the government not only allowed the issuance of a non-national cryptocurrency, but they officially recognized it as a valid form of money and regulated it. How can they now stop anyone from issuing a cryptocurrency?


Summary

Bitcoin is a great leap forward in modern economics. It paves the way, or rather opens the floodgates, for many new types of money that can all be represented by digital cryptographic currencies. Bitcoin has made it much easier for you and I to provide ourselves with new forms of money that are more stable, more valuable, and more usable than anything that has come before. And we're writing the software to make that possible.

© Cognisaya 2013-2015


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