The Basics of Bitcoin & Blockchain

You’ve seen their tables at libertarian conferences, and heard their radio ads warning of an immanent collapse of the financial system. Goldbugs, who stockpile precious metals, have been stereotyped as paranoid — occupying a fringe of the already-fringe liberty movement. However, there is solid reasoning behind the intuition that paper money, issued by heavily indebted sovereigns, isn’t the stable store of value that governments claim it to be.

Due to inflation, the dollar has devalued nearly 97 percent since 1913.

Until recently, the only group further on the fringes than the goldbugs were the “crypto-anarchists”: radical libertarian computer geeks with theories about how to replace central banks and financial institutions with an unregulated online payments system and password-protected digital cash.

These digital cash schemes had mostly came to naught — frustrated by one particularly complex problem: namely, how do you get strangers to trust the validity of digital transactions, and guarantee that the “money” — strings of 1s and 0s on a hard drive somewhere — is actually being transferred once, and only once, to another digital location?

The solution to this problem arrived in 2008, when a whitepaper, Bitcoin: A Peer-to-Peer Electronic Cash System, was published under the pseudonym Satoshi Nakomoto. Nakomoto had crafted elegant solutions to the so-called “double-spending” problem, among others, and convinced his fellow crypto-geeks to start implementing the decentralized protocol for online money.

The core of bitcoin’s architecture is a public “ledger” of bitcoin transactions, like a county clerk’s record of property title transfers. However, this ledger is distributed across all of the computers participating in the bitcoin economy, and all updates are verified by their combined computing power. The work of verifying that transactions are valid (i.e., only spent once) is rewarded with the production of new Bitcoins. This process is known as “mining.” The total supply of bitcoins that will ever be produced is limited by the underlying algorithms, and is declining according to a set formula that will release the last of 21 million Bitcoins in the year 2140.

The Bitcoin Boom of 2017

A decade after its creation, bitcoin is now a topic of household discussion. Last year, the cryptocurrency appreciated nearly 20 fold, from $1,000 per Bitcoin in January 2017, to almost $20,000 by mid-December.

If 2017 was the year of the Bitcoin boom, we might wonder what 2018 holds in store. Kodak’s stock rose more than 300% on the news that they were releasing their own variation of Bitcoin — KodakCoin — which applies the same “blockchain” technology behind Bitcoin’s distributed ledger to verify whether a digital photograph has been properly licensed by its user.

The end of December also saw a sizable crash, in which Bitcoin lost nearly a third of its value. But wherever the price ultimately ends up, the public has caught on to what is now clearly more than a passing trend. Even the New York Times is advising its readers on whether or not to buy Bitcoin. They say it’s a question of whether you are interested in speculating with your investments, since the price is largely a reflection of whether or not Bitcoin, or some other, similar protocol, ends up as the new “Gold Standard” for online payments. Despite its flaws, Bitcoin was the first major cryptocurrency, and it does have significant utility as money. For example, there are much lower transaction costs associated with online bitcoin payments than online credit card payments. For this reason alone, people can reasonably expect Bitcoin to carry value, and these beliefs have sustained the price increases of an asset that is technically “backed by nothing.”

Blockchains and Beyond: How Bitcoin is Changing More than Money

Beyond the recent run up, there is a conversation evolving between the early adopters — those who were drawn to Bitcoin’s potential as a replacement for government currency — and late-movers, like the big banks, which seek to bring the underlying technology into the realm of mainstream commercial transactions. The Federal Reserve is even talking about launching its own digital currency, dampening the more audacious crypto-anarchist dreams of an unregulated financial system.

A third way is being sought by certain entrepreneurs who think digital currencies can liberate us from the tyranny of transaction costs and hidden inflation taxes, but only if they become simple and stable enough that average people can use them. Futhermore, individuals, companies, and even governments are discovering how the blockchain be used for other purposes, such as “smart contracts,” denominated in Bitcoins or similar currencies. Like the bitcoin blockchain, these ledgers would be decentralized, incorruptible, and would only pay out when certain binary (i.e., yes/no) criteria are verified by the system.

If you’re still in the dark about digital currencies, tune in this Sunday to the show of ideas, and listen to The Bob Zadek Show’s special hour-long primer with Stan Larimer. Bob and Stan will break down the basics of Bitcoin, as well as the complementary BitShares platform, that Stan is helping to build on Bitcoin’s foundations as an alternative blockchain-based financial system. Known as “The Godfather of BitShares,” Stan Larimer has forty years of experience in software, hardware, and systems engineering, program management, business development and even teaching rocket science at the US Air Force Academy. Stan is CEO of Cryptonomex, a leading custom blockchain development company.

Does Bitcoin signal the end of money-printing and inflation by central banks as we know it? Furthermore, does it represent something larger and less predictable? Find out, this Sunday — from 8–9am PACIFIC. Check your local listings here, or get the livestream, and call in with your questions for Stan to (424) BOB-SHOW.

Stan’s Projects:

Stan explains Bitcoin:

What is Bitshares?

Bitshares was created to solve some of the scalability and volatility issues associated with Bitcoin. The platform enables the creation of autonomous new companies, which issue an inherently limited number of digital shares — like Bitcoins, except that the shares pay dividends according to a contract that is enforced and executed by blockchain technology. In addition to being able to handle a higher volume of transactions than Bitcoin, Bitshares contracts are denominated in BitUSD, which is linked to the value of the U.S. dollar, so merchants who accept the coin do not need to instantly convert their earnings to escape the risk of wild fluctuations in the price of Bitcoin.

What is Cryptonomex?

Cryptonomex develops custom blockchains for new uses. As we see the technology behind Bitcoin applied to more and more industries, the software needs to advance to keep pace with the increasing number of transactions.

Recall that a blockchain is designed to facilitate secure online transactions. The Wikipedia page explains it as follows:

A blockchain is a decentralized and distributed digital ledger that is used to record transactions across many computers so that the record cannot be altered retroactively without the alteration of all subsequent blocks and the collusion of the network. …

Transaction data is permanently recorded in files called blocks. They can be thought of as the individual pages of a city recorder’s recordbook (where changes to title to real estate are recorded) or a stock transaction ledger. Blocks are organized into a linear sequence over time (also known as the block chain). New transactions are constantly being processes by miners into new blocks which are added to the end of the chain and can never be changed or removed once accepted by the network (although some software will remove orphaned blocks).

This was first applied to the idea of payments, but also applies to other forms of record-keeping. Sweden, for example, recently announced that it is considering transferring its land registry to the blockchain, to prevent fraud and human error from tampering with its citizens’ property rights. Quartz reports that “the current outmoded systems are susceptible to forgeries and simple clerical errors.” notes that the recording industry is also discussing approaches to managing digital royalty rights for artists on a bitcoin-style blockchain, and using Cryptonomex’s technology to ensure rapid, stable record-keeping.

Other Links

Warren Buffett bearish on Bitcoin, but won’t put his money where his mouth is:

While predicting the demise of cryptocurrencies, Buffett went on to claim he’d bet on “every one of the cryptocurrencies” falling over the next five years. “But, I would never short a dime’s worth,” he added.

Probed further, Buffett stressed he wouldn’t take a negative position by trading bitcoin futures contracts, stating there’s “no reason” to do so. “Why in the world should I take a long or short position of something I don’t know anything about?” he quipped, admitting to knowing very little of cryptocurrencies.

The original whitepaper:

A 2014 paper by Mercatus Center scholars Eli Dourado and Jerry Brito explaining how Bitcoin solved the technical problems associated with previous cryptocurrency attempts:

A Basic Primer:

Listen LIVE, Sunday (1/14) from 8–9am PACIFIC, and call in with your questions: (424) BOB-SHOW.



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Bob Zadek

Bob Zadek • host of The Bob Zadek Show on 860AM – The Answer.