Surely you've heard of bitcoins. But if not, give you a simple and generally correct description of how this currency works, including real-life examples. Omit technical specifications - there are too many of them, and you can find them, for example, in the "Wikipedia". Below you will find only an explanation of what bitcoin is, “for dummies”.
Over the past few months, Bitcoin (Bitcoin, BTC) digital currency has attracted a lot of attention. Along with him came the misunderstanding and confusion about the nature and role of the currency. The main reason lies in the fact that people do not understand how Bitcoin works, because people don’t understand how a currency works. It is the philosophical and economic concepts that underlie the functioning of "candy wrappers" that we love so much, and not all watermarks and stripes, lead to a dead end. Ignorance or "you know less - sleep better" - the reasons may be very different.
Rai Stones
In the western part of the Pacific Ocean there is an island called Yap. For several hundred years, the indigenous Japs used a unique form of currency - Rai, or stone money. Stones, up to several meters in diameter, which weighed several thousand kilograms, were mined on the island of Palau, hundreds of kilometers from Rai, were cut in the form of a disk and transported by canoe. The small ones were used as coins, and the large ones were kept in a prominent place on the island and lay there quietly.
Rai Stones did not perform any function other than monetary. They had no decorative value, they did not bring industrial benefit, it was impossible to use them somehow.
When the owner of a large stone, Rai, wanted to exchange it, he simply announced to the community that the property was being transferred to the new owner, and everyone recognized him; physically the stone could never move. As the stones were traded back and forth, each stone collected a long chain of operations recognized by society and stored in the collective memory of the islanders. The transaction was certified by the public and there was no dispute over the ownership of the property. Some stones were worth more than others because of their history or the reputation of past owners.
There is one case recorded in the mental annals of the island’s history, when the great Rai stone was lost at sea during transportation from the quarry. The crew returned, and each described the size and quality of the stone. It was decided that there was no reason why a stone could not be introduced into the economy. What is the difference, in his pocket or at the bottom of the ocean? And most importantly - a general agreement. And lying on the seabed, the stone was also exchanged and passed on like any other.
Despite its strange characteristics, the Rai stones were no doubt currency. Yapettsy did not even think that someone uses something else besides the Rai stone in their economy. The price was the result of an agreement between members of the community and was not dependent on any external conditions or guarantees.
Real
At the end of the 20th century, Brazil had problems with inflation. For more than ten years, starting around 1980, hyperinflation, sometimes more than a thousand percent a year, destroyed the Brazilian currency, cruzeiro. With this level of inflation, prices rose markedly every day. Store owners had to set new prices for their products every morning, and by evening they changed again. Long-term economic planning became impossible, and such conditions accompanied the suffering and unrest among the people.
In 1994, the Brazilian government adopted a series of monetary and fiscal policy changes to combat inflation. This cascade of changes was collectively called Plano Real - a real plan. One aspect of Plano Real was the focus on breaking inflation inertia. As people expected prices to rise, they expected high prices in the future and raised prices today, spinning inflation into a nightmarish noose.
The government created an imaginary virtual currency, which was called the “Unit of Real Value”, and exhibited taxes and wages to the EPC. This currency was pegged to the value of the dollar, a relatively stable currency. The exchange rate between Cruzeiro and EPC floated freely, and every day the price of Cruzeiro relative to EPC became less and less. There were no banknotes or coins, so all payments were still made in Cruzeiro, but the calculations were based on the EPC. Shopkeepers and other merchants began to set prices in terms of the new virtual currency. The deals were carried out with cruzeiro, but the buyer and seller had to calculate the “real” value in the EPC. After some time, people began to calculate the EPC and convert to Cruzeiro directly at the time of purchase.
After the “real value unit” was widely distributed in Brazil, the cruzeiro was abolished, and the Brazilian government printed a new currency, the real one, because it was necessary to physically embody the imagined EPC. Real is stable to this day.
Bitcoin
Bitcoin is a digital currency. Like the EPC, it does not have a physical embodiment like a coin or a piece of paper. There are tokens that you must have seen, because the media needs to somehow denote a new currency, but they themselves do not represent bitcoins - coupons, as a last resort.
Bitcoin not only has no physical equivalent, but also no digital unit either. There is a public book of transactions - the so-called blockchain - in which all transactions are recorded, but there are no actual things that are exchanged. When Bitcoin is “changing,” an entry is created in the blockchain describing the transaction, and the transaction becomes known to the public through the Bitcoin network. Like the Rai stones at the bottom of the ocean or the EPC, there is no need to change hands at all. The network recognizes the recipient as a new owner and no longer allows you to send spent Bitcoins as your own.
In the case of the Rai stones, community members were a public network. The population was such that the informal designation of property worked quite well. In the case of bitcoins, every computer that works with Bitcoin software constitutes a network node, and each one contains a copy of the transfer blockchain. As in the case of Rai, this prevents property disputes - the entire history of all transactions is available for general viewing, therefore fraud is virtually excluded. Any attempt to conduct Bitcoins without permission is rejected by the network.
One of the criticisms of Bitcoin is that a currency has no value outside of its currency flow. In fact, this is not quite true - bitcoins can be used to send messages, transfer ownership, create time stamps, sign contracts, and so on. But let's leave this argument for now. In fact, this is not even a problem. Many currencies have no value beyond their use - it is impossible to buy everything in the world for Rai stones, and the EPC was also a figment of the imagination, but both currencies were successful. Since value is not the quality of an object, but rather describes the human attitude towards these objects, or the state of the human mind regarding these objects, Bitcoin, like any other thing, can be evaluated, although it cannot have industrial, decorative or any other practical application.
Like Rai, Bitcoin does not depend on any central authority or bank controlling the currency. The software is open, and the network operates on the principle of p2p (peer-to-peer), as a torrent. No changes can be made without the consent of the public. Bitcoin creation is mathematically limited to a total of 21 million. Unlike Cruzeiro, you can’t just pick up and print new Bitcoins by adding a few zeros. No one can determine the speed with which a bitcoin is created - a mathematical algorithm produces bitcoins with a finite and predictable speed. Any attempt to change this by a member of the network will be immediately rejected by the network. Imagine if a crook on Yap Island tried to push a fake Rai stone.
Since Bitcoin does not have a physical unit, there are no requirements for storage, transportation or maintenance, the costs associated with its use are extremely low. Millions of dollars in bitcoin equivalent can be transferred for a penny. This is several orders of magnitude lower than that of any other payment network. After the Rai stones were safely placed on the island’s sites, there was no practical cost to maintain them. Their enormous weight prevented theft, and the ability to transfer them to society, without moving, reduced the cost of their maintenance and maintenance to zero. In Bitcoin, cryptography does not allow to steal a currency in principle, not to mention the physical mass. Therefore, bitcoins are sometimes called cryptocurrency. Without proper cryptographic keys, no one can access the bitcoins of another.
Another criticism of Bitcoin is that no one really knows who controls them. This is true, but ignorance of this means only that no one controls the bitcoins. The network develops spontaneously as new members join and old ones leave. Thus, the network works like other complex networks of our world - the Internet, the brain or society itself. There is no master of the Internet who pulls the strings. The network is the product of billions of users creating nodes. Bitcoin works in a similar way, and the network is growing very fast. The numbers are constantly changing, and at the beginning of 2013, the computing power of the Bitcoin network surpassed the computing power of the 500 most powerful supercomputers combined. You can imagine how foolish the attempts to control this network would look like one person.
Bitcoins are divided into small fractions - a few tenths of the characters, so it is not necessary to use bitcoin in its entirety. Most transactions are small - a dollar or less. Bitcoins are fun to use, transactions are fast, and overall this is new and interesting. Theoretically, Bitcoin or its successful counterpart can lead us into the world of free currencies, not constrained by state control, usurers or orders, but quietly performing their direct function in the market without coercion or violence by the voluntary consent of network members participating in the exchange.
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