The identity of the creator of bitcoins, the popular digital currency, remains a mystery. An Australian computer scientist, Craig White, recently claimed that he was the creator. But this claim has met with scepticism. The creator signed himself (or herself) “Satoshi Nakamoto” in a paper released in May 2008, where the concept of the crypto-currency was first outlined. Satoshi Nakamoto wanted a currency, which could not be controlled or tracked by governments or central banks. This had to be secured against fraud and forgery, while allowing users to be anonymous. In January 2009, the creator released a software programme, and then worked with software developers for about two years before withdrawing.
Bitcoins are generated and maintained by peer-to-peer or P2P software. Every coin is a unique code-string. The coins are held in digital repositories (“bitcoin wallets”) with the owner possessing a private cryptographic key. A transaction results in a coin moving from one wallet to another. The real genius lies in the concept of the blockchain, copies of which are downloaded and held by many users. The blockchain is a P2P digital ledger. It records every bitcoin generated, and every transaction made, coin by coin.
When a transaction is proposed, the blockchain is checked by all users to see if the coin used is valid; if that coin is associated with a specific wallet; and if any attempt is being made to commit fraud by using the coin in two transactions at the same time. When the majority of blockchains tally, the check confirms a valid transaction. The coin is transferred and the blockchain duly updated. The checks and balances are strong: a majority of blockchain copies must be tampered with, in order to commit forgery or fraud. Naturally, financial service providers are interested in bitcoins.
The insights underpinning bitcoins could also enable “smart contracts”. For example, when a municipality hires a contractor to repair roads, citizens may be asked to monitor progress, pothole by pothole, by using a blockchain. Time-bound payments will be automatically made by tallying the blockchains when a majority of citizens concur that specific stretches are satisfactorily repaired. This is an example of a smart contract and blockchains can handle far more complex deals. The utility of the P2P ledger concept may, therefore, far exceed the utility of the currency itself.
The P2P network users can receive new bitcoins generated (“mined”) as a reward for solving computations. Users can also buy bitcoins on exchanges. Daily trade volumes are at present about $125 million and the total value of bitcoins is estimated at $20 bn (one bitcoin is currently equivalent to about $445). When Greek banks stopped currency exchanges to prevent capital flight, Greeks bought bitcoins with Euros and exchanged them for dollars. There is a similar, thriving bitcoin trade in China. India is also an active bitcoin market with over 7,000 bitcoins traded in April 2016 (approximately valued at Rs 21 crore).
One drawback of bitcoins is that it is hard to manage a standard loan and fractional reserve banking model. The absence of traditional regulation is another drawback. These are reasons, among others, why bitcoins may never become part of the mainstream. Increasingly, exchanges insist on signup details, wherein wallets can be traced to owners. However, there are still ways to layer bitcoin transactions to obfuscate ownership. This makes bitcoins a popular medium for criminal transactions on the “Dark Web”. But the blockchain is a killer concept. It offers a powerful and independent method of cross-checking many types of transactions, while preventing duplication and fraud and it is being adapted for different purposes. Bitcoins and blockchains are two revolutionary new concepts that arose from the libertarian impulses of Satoshi Nakamoto, whoever that individual was.