Editor’s note: Marc Andreessen’s venture capital rock hard, Andreessen Horowitz, has invested just under $50 million ter Bitcoin-related start-ups. The rigid is actively searching for more Bitcoin-based investment opportunities. He does not personally own more than a den minimis amount of Bitcoin.
A mysterious fresh technology emerges, seemingly out of nowhere, but actually the result of two decades of intense research and development by almost anonymous researchers.
Political idealists project visions of liberation and revolution onto it, establishment elites heap contempt and scorn on it.
On the other arm, technologists вЂ“ nerds вЂ“ are transfixed by it. They see within it enormous potential and spend their nights and weekends tinkering with it.
While regulators debate the pros and cons of bitcoins, this volatile digital currency inspires the question: What makes money, money?
By Channon Hodge, David Janken, Kimberly Moy and Aaron Byrd on Publish Date November 24, 2013.
Eventually mainstream products, companies and industries emerge to commercialize it, its effects become profound, and zometeen, many people wonder why its powerful promise wasn’t more demonstrable from the begin.
What technology am I talking about? Individual computers te 1975, the Internet ter 1993, and вЂ“ I believe вЂ“ Bitcoin ter 2014.
One can hardly accuse Bitcoin of being an uncovered topic, yet the gulf inbetween what the press and many regular people believe Bitcoin is, and what a growing critical mass of technologists believe Bitcoin is, remains enormous. Ter this postbode, I will explain why Bitcoin has so many Silicon Valley programmers and entrepreneurs all lathered up, and what I think Bitcoin’s future potential is.
Very first, Bitcoin at its most fundamental level is a breakthrough ter pc science вЂ“ one that builds on 20 years of research into cryptographic currency, and 40 years of research ter cryptography, by thousands of researchers around the world.
Bitcoin is the very first practical solution to a longstanding problem ter laptop science called the Byzantine Generals Problem. To quote from the original paper defining the B.G.P.: “[Imagine] a group of generals of the Byzantine army camped with their troops around an enemy city. Communicating only by messenger, the generals voorwaarde agree upon a common battle project. However, one or more of them may be traitors who will attempt to confuse the others. The problem is to find an algorithm to ensure that the loyal generals will reach agreement.”
More generally, the B.G.P. poses the question of how to establish trust inbetween otherwise unrelated parties overheen an untrusted network like the Internet.
The practical consequence of solving this problem is that Bitcoin gives us, for the very first time, a way for one Internet user to transfer a unique chunk of digital property to another Internet user, such that the transfer is assured to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate.
What kinds of digital property might be transferred ter this way? Think about digital signatures, digital contracts, digital keys (to physical locks, or to online lockers), digital ownership of physical assets such spil cars and houses, digital stocks and bonds … and digital money.
All thesis are exchanged through a distributed network of trust that does not require or rely upon a central intermediary like a canap or broker. And all te a way where only the proprietor of an asset can send it, only the intended recipient can receive it, the asset can only exist ter one place at a time, and everyone can validate transactions and ownership of all assets anytime they want.
How does this work?
Bitcoin is an Internet-wide distributed ledger. You buy into the ledger by purchasing one of a immobilized number of slots, either with specie or by selling a product and service for Bitcoin. You sell out of the ledger by trading your Bitcoin to someone else who wants to buy into the ledger. Anyone te the world can buy into or sell out of the ledger any time they want вЂ“ with no approval needed, and with no or very low fees. The Bitcoin “coins” themselves are simply slots te the ledger, analogous te some ways to seats on a stock exchange, except much more broadly applicable to real world transactions.
The Bitcoin ledger is a fresh kleuter of payment system. Anyone ter the world can pay anyone else te the world any amount of value of Bitcoin by simply transferring ownership of the corresponding slot ter the ledger. Waterput value te, transfer it, the recipient gets value out, no authorization required, and ter many cases, no fees.
That last part is enormously significant. Bitcoin is the very first Internetwide payment system where transactions either toebijten with no fees or very low fees (down to fractions of pennies). Existing payment systems charge fees of about Two to Three procent вЂ“ and that’s te the developed world. Ter lots of other places, there either are no modern payment systems or the rates are significantly higher. Wij’ll come back to that.
Bitcoin is a digital bearer muziekinstrument. It is a way to exchange money or assets inbetween parties with no pre-existing trust: A string of numbers is sent overheen email or text message ter the simplest case. The sender doesn’t need to know or trust the receiver or vice versa. Related, there are no chargebacks вЂ“ this is the part that is literally like contant вЂ“ if you have the money or the asset, you can pay with it, if you don’t, you can’t. This is brand fresh. This has never existed ter digital form before.
Bitcoin is a digital currency, whose value is based directly on two things: use of the payment system today вЂ“ volume and velocity of payments running through the ledger вЂ“ and speculation on future use of the payment system. This is one part that is confusing people. It’s not spil much that the Bitcoin currency has some arbitrary value and then people are trading with it, it’s more that people can trade with Bitcoin (anywhere, everywhere, with no fraud and no or very low fees) and spil a result it has value.
It is perhaps true right at this uur that the value of Bitcoin currency is based more on speculation than actual payment volume, but it is identically true that that speculation is establishing a reasonably high price for the currency that payments have become practically possible. The Bitcoin currency had to be worth something before it could bear any amount of real-world payment volume. This is the classic “chicken and egg” problem with fresh technology: fresh technology is not worth much until it’s worth a lotsbestemming. And so the fact that Bitcoin has risen te value te part because of speculation is making the reality of its usefulness arrive much quicker than it would have otherwise.
Critics of Bitcoin point to limited usage by ordinary consumers and merchants, but that same criticism wasgoed leveled against PCs and the Internet at the same stage. Every day, more and more consumers and merchants are buying, using and selling Bitcoin, all around the world. The overall numbers are still puny, but they are growing quickly. And ease of use for all participants is rapidly enhancing spil Bitcoin devices and technologies are improved. Reminisce, it used to be technically challenging to even get on the Internet. Now it’s not.
The criticism that merchants will not accept Bitcoin because of its volatility is also incorrect. Bitcoin can be used entirely spil a payment system, merchants do not need to hold any Bitcoin currency or be exposed to Bitcoin volatility at any time. Any consumer or merchant can trade te and out of Bitcoin and other currencies any time they want.
Why would any merchant вЂ“ online or ter the real world вЂ“ want to accept Bitcoin spil payment, given the presently petite number of consumers who want to pay with it? My fucking partner Chris Dixon recently talent this example:
“LetвЂ™s say you sell electronics online. Profit margins ter those businesses are usually under Five procent, which means conventional Two.Five procent payment fees consume half the margin. ThatвЂ™s money that could be reinvested te the business, passed back to consumers or taxed by the government. Of all of those choices, handing Two.Five procent to banks to budge vinnig around the Internet is the worst possible choice. Another challenge merchants have with payments is accepting international payments. If you are wondering why your beloved product or service isnвЂ™t available ter your country, the response is often payments.”
Ter addition, merchants are very attracted to Bitcoin because it eliminates the risk of credit card fraud. This is the form of fraud that motivates so many criminals to waterput so much work into stealing private customer information and credit card numbers.
Since Bitcoin is a digital bearer muziekinstrument, the receiver of a payment does not get any information from the sender that can be used to steal money from the sender te the future, either by that merchant or by a criminal who steals that information from the merchant.
Credit card fraud is such a big overeenkomst for merchants, credit card processors and banks that online fraud detection systems are hair-trigger wired to zekering transactions that look even slightly suspicious, whether or not they are actually fraudulent. Spil a result, many online merchants are coerced to turn away Five to Ten procent of incoming orders that they could take without fear if the customers were paying with Bitcoin, where such fraud would not be possible. Since thesis are orders that were coming te already, they are inherently the highest margin orders a merchant can get, and so being able to take them will drastically increase many merchants’ profit margins.
Bitcoin’s antifraud properties even extend into the physical world of retail stores and shoppers.
For example, with Bitcoin, the fat hack that recently stole 70 million consumers’ credit card information from the Target department store chain would not have bot possible. Here’s how that would work:
You pack your cart and go to the checkout station like you do now. But instead of handing overheen your credit card to pay, you pull out your smartphone and take a snapshot of a QR code displayed by the metselspecie register. The QR code contains all the information required for you to send Bitcoin to Target, including the amount. You click “Confirm” on your phone and the transaction is done (including converting dollars from your account into Bitcoin, if you did not own any Bitcoin).
Target is blessed because it has the money te the form of Bitcoin, which it can instantaneously turn into dollars if it wants, and it paid no or very low payment processing fees, you are glad because there is no way for hackers to steal any of your individual information, and organized crime is unhappy. (Well, maybe criminals are still blessed: They can attempt to steal money directly from poorly-secured merchant rekentuig systems. But even if they succeed, consumers bear no risk of loss, fraud or identity theft.)
Ultimately, I’d like to address the keuze made by some critics that Bitcoin is a toevluchthaven for bad behavior, for criminals and terrorists to transfer money anonymously with impunity. This is a myth, fostered mostly by sensationalistic press coverage and an incomplete understanding of the technology. Much like email, which is fairly traceable, Bitcoin is pseudonymous, not anonymous. Further, every transaction te the Bitcoin network is tracked and logged forever ter the Bitcoin blockchain, or voortdurend record, available for all to see. Spil a result, Bitcoin is considerably lighter for law enforcement to trace than metselspecie, gold or diamonds.
What’s the future of Bitcoin?
Bitcoin is a classic network effect, a positive terugkoppeling loop. The more people who use Bitcoin, the more valuable Bitcoin is for everyone who uses it, and the higher the incentive for the next user to embark using the technology. Bitcoin shares this network effect property with the telephone system, the web, and popular Internet services like eBay and Facebook.
Ter fact, Bitcoin is a four-sided network effect. There are four constituencies that participate ter expanding the value of Bitcoin spil a consequence of their own self-interested participation. Those constituencies are (1) consumers who pay with Bitcoin, (Two) merchants who accept Bitcoin, (Trio) “miners” who run the computers that process and validate all the transactions and enable the distributed trust network to exist, and (Four) developers and entrepreneurs who are building fresh products and services with and on top of Bitcoin.
All four sides of the network effect are playing a valuable part ter expanding the value of the overall system, but the fourth is particularly significant.
All overheen Silicon Valley and around the world, many thousands of programmers are using Bitcoin spil a building block for a kaleidoscope of fresh product and service ideas that were not possible before. And at our venture capital rock hard, Andreessen Horowitz, wij are watching a rapidly enhancing number of outstanding entrepreneurs вЂ“ not a few with very respected track records te the financial industry вЂ“ building companies on top of Bitcoin.
For this reason alone, fresh challengers to Bitcoin face a hard uphill battle. If something is to displace Bitcoin now, it will have to have sizable improvements and it will have to toebijten quickly. Otherwise, this network effect will carry Bitcoin to dominance.
One instantaneously demonstrable and enormous area for Bitcoin-based innovation is international remittance. Every day, hundreds of millions of low-income people go to work te hard jobs ter foreign countries to make money to send back to their families ter their huis countries вЂ“ overheen $400 billion te total annually, according to the World Bankgebouw. Every day, banks and payment companies samenvatting mind-boggling fees, up to Ten procent and sometimes even higher, to send this money.
Switching to Bitcoin, which charges no or very low fees, for thesis remittance payments will therefore raise the quality of life of migrant workers and their families significantly. Te fact, it is hard to think of any one thing that would have a quicker and more positive effect on so many people te the world’s poorest countries.
Moreover, Bitcoin generally can be a powerful force to bring a much larger number of people around the world into the modern economic system. Only about 20 countries around the world have what wij would consider to be fully modern banking and payment systems, the other toughly 175 have a long way to go. Spil a result, many people ter many countries are excluded from products and services that wij te the Westelijk take for granted. Even Netflix, a fully virtual service, is only available ter about 40 countries. Bitcoin, spil a global payment system anyone can use from anywhere at any time, can be a powerful catalyst to extend the benefits of the modern economic system to virtually everyone on the planet.
And even here te the United States, a long-recognized problem is the utterly high fees that the “unbanked” – people without conventional bankgebouw accounts вЂ“ pay for even basic financial services. Bitcoin can be used to go straight at that problem, by making it effortless to suggest enormously low-fee services to people outside of the traditional financial system.
A third fascinating use case for Bitcoin is micropayments, or ultrasmall payments. Micropayments have never bot feasible, despite 20 years of attempts, because it is not cost effective to run petite payments (think $1 and below, down to pennies or fractions of a penny) through the existing credit/debit and banking systems. The toverfee structure of those systems makes that nonviable.
All of a unexpected, with Bitcoin, that’s trivially effortless. Bitcoins have the nifty property of infinite divisibility: presently down to eight decimal places after the dot, but more ter the future. So you can specify an arbitrarily petite amount of money, like a thousandth of a penny, and send it to anyone ter the world for free or near-free.
Think about content monetization, for example. One reason media businesses such spil newspapers fight to charge for content is because they need to charge either all (pay the entire subscription toverfee for all the content) or nothing (which then results te all those terrible banner ads everywhere on the web). All of a unexpected, with Bitcoin, there is an economically viable way to charge arbitrarily petite amounts of money vanaf article, or vanaf section, or vanaf hour, or vanaf movie play, or vanaf archive access, or vanaf news omzichtig.
Another potential use of Bitcoin micropayments is to fight spam. Future email systems and social networks could reject to accept incoming messages unless they were accompanied with little amounts of Bitcoin вЂ“ lil’ enough to not matter to the sender, but large enough to deter spammers, who today can send uncounted billions of spam messages for free with impunity.
Eventually, a fourth interesting use case is public payments. This idea very first came to my attention te a news article a few months ago. A random spectator at a televised sports event held up a placard with a QR code and the text “Send mij Bitcoin!” He received $25,000 ter Bitcoin ter the very first 24 hours, all from people he had never met. This wasgoed the very first time ter history that you could see someone holding up a sign, te person or on TV or te a photo, and then send them money with two clicks on your smartphone: take the photo of the QR code on the sign, and click to send the money.
Think about the implications for protest movements. Today protesters want to get on TV so people learn about their cause. Tomorrow they’ll want to get on TV because that’s how they’ll raise money, by literally holding up signs that let people anywhere te the world who sympathize with them send them money on the spot. Bitcoin is a financial technology desire come true for even the most hardened anticapitalist political organizer.
The coming years will be a period of good schouwspel and excitement revolving around this fresh technology.
For example, some vooraanstaand economists are deeply skeptical of Bitcoin, even however Ben S. Bernanke, formerly Federal Reserve chairman, recently wrote that digital currencies like Bitcoin “may hold long-term promise, particularly if they promote a quicker, more secure and more efficient payment system.” And te 1999, the legendary economist Milton Friedman said: “One thing that’s missing but will soon be developed is a reliable e-cash, a method whereby on the Internet you can transfer funds from A to B without A knowing B or B knowing A вЂ“ the way I can take a $20 bill and palm it overheen to you, and you may get that without knowing who I am.”
Economists who attack Bitcoin today might be onberispelijk, but I’m with Ben and Milton.
Further, there is no shortage of regulatory topics and issues that will have to be addressed, since almost no country’s regulatory framework for banking and payments anticipated a technology like Bitcoin.
But I hope that I have given you a sense of the enormous promise of Bitcoin. Far from a mere libertarian fairy tale or a plain Silicon Valley exercise te hype, Bitcoin offers a sweeping vista of chance to reimagine how the financial system can and should work ter the Internet era, and a catalyst to reshape that system ter ways that are more powerful for individuals and businesses alike.