Cowrie shells, strips of leather, huge stone discs, decorated rectangles of paper. They all share something in common: at one time, people used them as currency. In 2009, when Bitcoin went live, ones and zeros were added to the list. And like each new format that preceded it, this digital currency has changed a few of money's core concepts, including who controls it and how and where it gets spent.
Nowadays Bitcoin adopters are providing some clues about the benefits of a decentralized, anonymous, digital currency. For instance, independent merchants use it to receive online payments directly from customers, WikiLeaks uses it to dodge financial barricades, and drug users use Bitcoin to shop anonymously on the Internet's black market. But not everything works smoothly. The system lacks a quick way for people to trade in their physical cash for Bitcoins. Foreign currency exchanges don't deal in Bitcoins, and finding someone to sell them in person remains a huge challenge. A few of the online exchanges that do exist have lost huge amounts of their customers' Bitcoins to hackers—a combined sum now worth over one million dollars—whereas the more stable ones require users to self-identify in a way that undermines the network's anonymity. And although the number of merchants using Bitcoin is growing, one still can't find very many places to spend them. At a conference this month in London, Bitcoin's core developers and many of those who are building applications to make it more user-friendly confronted the currency's setbacks of the past year and planned a course forward intended to elevate it from a niche technophile currency into one that competes with physical money on all levels.
"'It's a challenging project, but it's one that's going to change the world. So that's why we're all here,"' said Jeff Garzik, one of Bitcoin's lead developers.
How it works
Imagine sending money over the Internet as easily as sending an e-mail—any amount, any time, to anywhere in the world—just as though you're standing next to a person and handing them cash. This was never possible before Bitcoin.
The name, Bitcoin, is slightly misleading as there are no real coins involved. In fact, it's a publicly shared ledger that keeps track of transactions among different accounts. The task of updating the ledger falls to whichever computers (referred to as nodes) happen to be running the Bitcoin software at any given time—a role that is completely voluntary.
Anyone can participate at this level once they've downloaded the Bitcoin software and purchased "coins"—usually from an online exchange. The price they pay for them depends entirely on how the market values them from one day to the next. When Bitcoin users want to transfer their money to another account, they send an encrypted request to the network, identifying the involved parties by random strings of letters and numbers rather than by name. In order to verify the transaction and update the ledger, one of the nodes must come up with the solution to a difficult mathematical problem called a "'hash function,"' which takes the raw data from the transaction request and reduces it into a new string of data with a shorter, fixed length. A computer can only settle on the solution by trial and error, making multiple random guesses until it works. Once completed, this work is prohibitively difficult to reproduce and, in effect, time stamps the transactions as they come in so that no one can work backward on the chain. The first node to solve the puzzle broadcasts its solution to all of the other nodes, which then agree on the new version of the ledger. In this way, control over the ledger is spread over the entire Bitcoin network.
To the network, all of this looks like a long chain of transactions, reassigning ownership of an arbitrary unit called a Bitcoin. What users see depends on which applications they run to access the Bitcoin network. In general, the interface allows users to open any number of new anonymous accounts and then receive and send Bitcoins to and from any other account. A person who owns Bitcoins really just owns a cryptographic key used to access a specific account.