The strength of cryptocurrencies like bitcoins has little to do with its monetary potential and more to do with its technical potential
The year 2013 was unequivocally the year of bitcoins, more than it will be the year of the commercialisation of 3D printers or the advent of private space flight. The bitcoins mining and transactions network first came online in late 2008, saw an adoption boom in early 2012, and got the attention of investors and governments late last year. It’s not really been as much a roller-coaster ride as an initiation into the Gartner hype cycle, and the slope of enlightenment is nowhere in the vicinity.
Unfortunately for it, there’s a bigger problem: people have been having the wrong debate, all the way from those who want to get on the bandwagon because they know a bitcoin is worth $825.43 (1616 IST, January 3), to regulators arguing over whether or not cryptocurrencies can replace American dollars, to political economists asking if this is a libertarian agenda plotting to subvert the federal reserve. Needless to say, they’re all wrong.
There are two aspects to bitcoins: one as the digital currency that uses complex mathematical functions to be acquired, moved around and secured; the other as the transaction verification system. The former is the honey that attracts the bees, the occupant of mainstream imagination; the latter is the hive of the future, the real revolution.
The strength of cryptocurrencies like bitcoins has little to do with its monetary potential and more to do with its technical potential. What Satoshi Nakamoto, the enigmatic Japanese programmer(s) who conceived the bitcoins system, created is pertinent to the notion of a transaction cost: the price of mobilising your resources, irrespective of the nature of these resources.
Within the bitcoins transaction verification network, both value and validity are established democratically. The person who intends to use a bitcoin needs to show proof of work — that he mined or acquired the coin through legitimate means — and proof of knowledge — that the transaction being requested is verifiable. If most users on the network agree that a transaction was legitimate to the tune of some amount, then that’s that. The identities of the transactors are irrelevant.
Therefore, adopting bitcoins would help small businesses to grow unburdened by disproportionate transaction costs incurred to mobilise relatively small amounts. Even broadly, bitcoins hold the potential to reform microfinance in rural India. For example, some Assamese tea growers are exploring the option of transacting in bitcoins to avoid foreign exchange fees and the need to set up complex bank transfer wires between them — the producers — and their global consumers, often through middlemen such as PayPal whose participation comes with an automatic loss of value, around 7 to 10 per cent of the transaction.
Instead, using bitcoins means pure value transfer.
Scope for innovation
For transactions to hold their ground while preserving anonymity and ensuring security, the network of users needs to be large and consistent. And the rewards system that keeps these bees loyal is the bitcoin, the honey. Unfortunately, regulators and laymen alike have been paying undue attention to its value and the inherent anonymity. Some investors, on the other hand, have been smart enough to spot the potential for innovation.
Innovations are proliferating on diverse fronts, almost all of them building on the answer to the question why bitcoins are actually disruptive: they’re not erected on existing platforms but one all its own that’s strong on privacy and security. Bitmessage, for instance, is bitcoins all over again but with emails being sent around instead of coins. Gliph is Bitmessage for push-messaging. Coinbase, BTC-E and BitPay are PayPal with bitcoins. Even Visa and Mastercard are starting to see their counterparts in Canada, where the first bitcoin ATMs were installed for Christmas.
In fact, the most interesting application stemming from bitcoins I have heard was from American entrepreneur Chris Dixon, which factors in the cryptocurrency’s high divisibility. Like the rupee’s lowest relevant denomination at the moment is 50 paise, a bitcoin’s lowest relevant denomination is 1 satoshi, which is equal to 0.00000001 bitcoin. As of January 1 2033 hrs IST, one satoshi would have been worth 0.047 paise. This isn’t much.
Say, with every email you send, you are also required to send one satoshi to the recipient. Still not much. But what if you’re a spammer? What if you’re sending out tens of thousands of emails because you’re an annoying advertiser? You will also be sending out a few tens of rupees, and that’s a significant amount for an enterprise that used to be free. Suddenly, bitcoins’ high divisibility has become a tool to fight spam — that too without having to forge cumbersome relationships based on credit cards.
For all we know, bitcoins could be on their way out, but that wouldn’t be the real tragedy as much as that we let slip the best single solution we’ve had in years to tackle diverse issues that affect individual and small enterprises.
>>The article, “Bitcoins: missing the real revolution” (Jan. 4, 2014, Comment) gave the rupee’s lowest relevant denomination at the moment as 25 paise . It should have been 50 paise.