Bitcoin is a stateless, digital currency that allows people to make transfers with no intermediary banks or transaction fees. Instead of printing banknotes or minting coins, a list of the registration numbers of each of the “bitcoins” and their owners is kept. In the last week, however, Bitcoin has found itself under siege for a variety of problems, and since then, the susan athey bitcoin mining of the coins has tumbled. Susan Athey is an economics professor at the Stanford Graduate School of Business who researches Internet economics.
Venture capitalist Balaji Srinivasan founded the Stanford Bitcoin Group. He has a Stanford doctoral degree in electrical engineering. Athey: In terms of trustworthiness, a large community of experts has examined the protocol closely and found it to be secure. Possible weaknesses have been discussed extensively in the Bitcoin community as well as by academics. No protocol can be guaranteed to be perfect, of course.
In recent days, some issues have arisen with a denial-of-service attack that prevented transactions from confirming properly. This is a reminder that all digital systems have some vulnerabilities. Given the diminishing role of physical cash in our economy, we can expect problems to arise in all of the different financial systems we have. My personal view is that it is important for regulators to provide a framework for legitimate Bitcoin businesses to operate within the U.
Are we ready for Bitcoin on a large scale? Srinivasan: If the Internet was programmable communication, Bitcoin is programmable money. The analogy is actually a very good one. With the Internet, individual nodes could write programs to directly communicate with each other, without any central approval required. In the same way, today, in order to deploy a program that uses the central financial network, you need a deal with a large bank or credit card company. With Bitcoin, individual nodes can write programs to directly send and receive money from each other, without any central approval required. There are technical improvements that will need to be made over the next few years to allow Bitcoin to become usable on a large scale.
This is like the early Internet, which went from dial-up modems to broadband wireless over two decades. What are the strengths of the Bitcoin system? Athey: The Bitcoin system has at its core a secure public ledger. An entry on the ledger is not an IOU from a bank, like your bank account balance is.
Rather, the ledger entry is the definition of ownership of a bitcoin. Srinivasan: The strength of Bitcoin is that it is decentralized programmable money. It is like having three APIs : You can check balances, write contracts and make transfers simply by tapping keys on your computer. Srinivasan: It is a young protocol. Right now there are many Bitcoin improvement proposals, which will give you a sense of where the community is focusing development efforts. Athey: The exchange rate is too volatile now for it to make sense for the average individual to hold bitcoins, except as a speculative investment.
What is interesting, however, is that the level of the bitcoin exchange rate is not important for Bitcoin to be useful as a medium of transaction. Suppose that an individual wishes to use Bitcoin to transfer value. As long as the bitcoin exchange rate does not fluctuate much in that time interval, the dollar value does not matter. It is an efficient mode of transaction. Athey: The protocol does have some weaknesses like mining.
However, mining wastes a lot of energy and creates complications as well. Another weakness is that transactions take 10 minutes or more to confirm. On the other hand, there is no central entity with which a government regulator can exercise control. Will Bitcoin grow in popularity in the future? Small businesses priced out of credit cards were finally able to participate in electronic commerce. Bitcoin and other virtual currencies can take all of this one step further. How can the Bitcoin system avoid counterfeiting, pirating or criminal use?
Srinivasan: The fundamental problem that Bitcoin solves is the so-called double-spending problem, intimately tied to counterfeiting. To understand it, let’s go through four scenarios. In a physical cash system, when “A” gives “B” a physical dollar bill, “B” knows that “A” no longer has possession of said bill. By contrast, in a naive implementation of a digital cash system, if “A” simply emails the serial numbers on that dollar bill to “B,” then “A” still has a copy of the serial numbers as well, and “B” knows this. If these serial numbers are being treated as “digital cash,” there is a temptation for “A” to spend them again with party “C. The traditional centralized solution to the double-spending problem is for a special node, like a bank, to act as an intermediary. Now when “A” sends money to “B” over the Internet, that central node debits “A” and credits “B,” recording these debits and credits in a private ledger.
The decentralized solution, Bitcoin, is to do away with special nodes and instead allow every node in the network to maintain a copy of the ledger of debits and credits. This ledger is called the Bitcoin blockchain. Athey: In the early days of the Internet, one of the few industries to make money in e-commerce was pornography. In fact, pornography was a large share of Internet activity then. As the Internet matured, pornography did not go away, but the fact that the Internet facilitated pornography did not lead the government to slow it down. One activity in the Bitcoin community is the development of ways to associate identities with Bitcoin addresses.
Such a feature might make it easier for businesses to comply with regulations. Srinivasan: The Bitcoin improvement proposals and the open source repository issues are good resources to see what needs to be improved. Susan Athey is one of my favorite economists. I hadn’t realized that she was a go-to person for journalists who want some perspective on Bitcoin until seeing her when she came to the University of Michigan last week. That’s the view of Stanford University economist Susan Athey, an expert in crypto-currencies.