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Updated: May 9, 2011 16:42 IST

New currency on the block

Deepa Kurup
Comment (7)   ·   print   ·   T  T  
Potential customers: Thousands of PayPal users suffered last year when the firm withdrew services from India. File photo
AP
Potential customers: Thousands of PayPal users suffered last year when the firm withdrew services from India. File photo

BitCoin is an attempt to restore privacy and anonymity in online transactions

In the post-WikiLeaks phase of our information age, it has become evident that the Internet is no more the neutral and ‘free' medium that we believed it to be. That within days of the release of the controversial American diplomatic cables, two credit card companies and a popular online money transaction service, PayPal, cut off critical flow of funds to Wikileaks (clearly acting under pressure from the U.S. administration) exposed major chinks in the armour.

This crisis brought two issues to the fore — that the Internet as we know it today is indeed at the mercy of commercial interests, and that cash transactions on the Internet are all too centralised and deeply susceptible to corporate or State interference. Enter BitCoin.

BitCoin is the world's first distributed or decentralised Internet currency that runs on a peer-to-peer (P2P) network. The P2P architecture eliminates the need for the ‘middleman' — banks or payment services — even as it is runs on a node of networks managed by users, and allows you to transact with other BitCoin accounts or buy Internet products and services. The attempt here is to restore the privacy and anonymity to cash transactions, which were once confined to the pages of your bank passbook, but are now open to tracking and hidden regulation.

Digital cash

Seen as a significant development in the world of digital cash, this open source project was created in 2009 by Satoshi Nakamoto and was formally announced by Google in March 2010. As of this week, there are 61 lakh BitCoins in circulation and the total size of the BitCoin economy is around Rs. 2.3 crore, a small yet decent number given the software is still very much in Beta.

A convincing idea, BitCoin is yet to make an impact among Indian users. But considering the thousands of PayPal customers who suffered last year when the firm withdrew services from India, this is one idea that is likely to catch on among freelancers and small businesses.

How BitCoin works

The decentralisation sounds ideal, but how does a P2P project running on equal nodes on a network run by users — something that works just fine when it comes to stuff such as music and video — work with money?

Here's how. First, you install the BitCoin client software. Once this is set up, you get a BitCoin address. Now every BitCoin you own (or even earn by lending your computer to the network) has a digital signature attached to it. Now an electronic coin is nothing but a chain of public digital signatures or keys. Each owner transfers the coin to the next by digitally signing a hash of the previous transaction and the public key of the next owner and adding these to the end of the coin, as a research paper on BitCoin explains. A payee can verify the signatures to verify the chain of ownership.

Given the nodes are part of a P2P network, the anonymity of the transaction is maintained. That transaction costs can be kept lower and accounts can't be inexplicably controlled or frozen are other advantages. Encryption technologies are key here, for the complete log of transactions is kept in a block chain of keys on the P2P network that is owned by everyone.

While generating new BitCoins for the network is easy (you just have to run your Bitcoin client), adding blocks to the chain requires more time and processing power. BitCoin developers have incentivised this by providing free BitCoins to those who pledge their computer to the network. They hope, this will give rise to a vibrant ‘mining' network in the BitCoin economy. The more ‘mines' there are, the more robust and secure the network will be.

Concerns

So is BitCoin the answer to all the privacy and control issues with digital cash? It's too early to say whether BitCoin will take off or not. As Rainy Reitman of the Electronic Frontier Foundation points out in her blog, governments may raise legal issues ranging from money laundering to tax evasion to a range of other regulatory concerns. Further, the worth of BitCoins will be linked to the ever-fluctuating market, posing constant challenges.

Nevertheless, with its equal architecture and mission to decentralise financial transactions on the Web, BitCoin is indeed a convincing idea and a significant step towards liberating online transactions as we know it.

"While generating new BitCoins for the network is easy (you just have to run your Bitcoin client), adding blocks to the chain requires more time and processing power."
Wrong. Generating new Bitcoins requires generating a new block, which is hard. The block chain is the global ledger of the Bitcoin network, and so the act of etching transactions into the chain as permanent history is made difficult on purpose. Successfully doing this is what earns you the Bitcoin reward.

from:  Chris Howie
Posted on: May 11, 2011 at 01:56 IST

BicCoin or BCs as I like to call them never tarnish. Also, they currently have a value, as I speak, of $5.11 USD.

from:  Mark C.
Posted on: May 11, 2011 at 01:41 IST

A couple errors: "While generating new BitCoins for the network is easy (you just have to run your Bitcoin client), adding blocks to the chain requires more time and processing power." Adding blocks *is* how you generate coins. And it takes significant processing power - on average, the entire network of computers generates a coin every 10 minutes. The actual generation is a random event, more power just means more attempts.
"total size of the BitCoin economy is around Rs. 2.3 crore". From where I'm sitting, as they were trading for nearly 4 US dollars each before this article, with 6.1 million coins (123127 blocks, with 50 coins each, current count available here: https://en.bitcoin.it/wiki/Blocks), this means the economy is *over 40 times larger*. A quick check on xe.com gives me 109 crore: http://www.xe.com/ucc/convert/?Amount=24400000&From=USD&To=INR
"formally announced by Google in March 2010." A Google employee just released a client, nothing more. A good technical overview can be found here: http://omegataupodcast.net/2011/03/59-bitcoin-a-digital-decentralized-currency/ (there are other interviews out there, but Gavin Andresen did a particularly good job in this one)

from:  Grant
Posted on: May 10, 2011 at 21:54 IST

At the current exchange rate of 1 BTC to 4.5 USD, and the current exchange rate of 1 USD to 44.75 INR, given that there is 6.1 million BTC currently in circulation (123k blocks on the chain, 50 BTC per block), and that a crore is 10 million in western math.. 6.1 million * 4.5 * 44.75 = 1228 billion Rs, or 129 crore. The value you printed (2.3 crore) is approximately 56 times smaller than the actual value of the entire currency. This is about 2% of the GDP of India, and about 24% of the annual GDP growth.

from:  Patrick McFarland
Posted on: May 10, 2011 at 17:55 IST

Excellent article. PayPal is an extension of the bank, Bitcoin and Voucher-Safe are real digital currencies.

from:  Mark Herpel
Posted on: May 10, 2011 at 00:02 IST

Correction: was formally announced by Google in March 2010. A native Bitcoin client developed by an employee of Google was introduced in March, 2011.

from:  Stephen Gornck
Posted on: May 9, 2011 at 17:35 IST

"This open source project was created in 2009 by Satoshi Nakamoto and was formally announced by Google in March 2010." is wrong. The project was created by someone who goes by Satoshi Nakamoto (its a nickname) in 2009. In 2010, a library for the bitcoin network (in addition to the original software written by Satoshi and still the only client which implements the full suite of bitcoin functions) was created by a Google Engineer (Mike Hearn) as a 20% time project (not technically an official Google project, but paid for by google nonetheless).

from:  Matt
Posted on: May 9, 2011 at 17:14 IST
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