The Bitcoin Revolution An Internet of Money Travis Patron GOVERNED BY NUMBER www.diginomics.com For the purposes of research and education, consider supporting this and future publications. 18dDdaNSRXVgqkwPtKvFRf5Wcit42K1BbL Dedication Satoshi Nakamoto Ask not how to acquire more money, but how to acquire more bitcoin. Table of Contents Foreword ........................................................................................................................ 8 Introduction: Monetary Evolution, Ready or Not ......................................................... 9 Rise Above Primal .................................................................................................... 10 The Bitcoin Payment System ..................................................................................... 11 Differentiating Factor ............................................................................................... 12 Chapter 1: Bitcoin Basics ........................................................................................... 14 What is Money? ........................................................................................................ 14 The Fiat Emperor Has No Clothes........................................................................ 16 What is Bitcoin? ........................................................................................................ 19 Mining Bitcoin .......................................................................................................... 21 Coinbase Transaction ........................................................................................... 23 Transacting With Bitcoin ......................................................................................... 24 Storing Bitcoin .......................................................................................................... 26 Wallets ................................................................................................................... 27 Public Key Cryptography ...................................................................................... 27 Operating Systems ................................................................................................ 28 Passwords .............................................................................................................. 29 Backing Up Your Wallet ........................................................................................ 30 Additional Security Measures ............................................................................... 31 Advantages and Disadvantages of Bitcoin ............................................................... 32 Advantages ............................................................................................................... 32 Disadvantages ....................................................................................................... 35 Potential Vulnerabilities ........................................................................................... 36 Who Is Satoshi Nakamoto? ...................................................................................... 39 Easter Eggs ............................................................................................................ 41 Technical Analysis ................................................................................................ 41 Linguistic Analysis ................................................................................................ 41 Blockchain Analysis .............................................................................................. 42 NewsWeek Claims ................................................................................................. 42 Chapter 2: Blockchain Networks ............................................................................ 44 Bitcoin Solves the Byzantine Generals Problem ...................................................... 44 Autonomous Organizations ...................................................................................... 45 Internet of Things ..................................................................................................... 46 Chapter 3: Adoption ............................................................................................... 48 The Future of Bitcoin ................................................................................................ 48 Bitcoin Based Society................................................................................................ 49 Crossing the Chasm .................................................................................................. 52 Network Effects ........................................................................................................ 56 Retail Incentives ....................................................................................................... 59 Is Bitcoin a Cult? .......................................................................................................60 Chapter 4: Cyber-economics .................................................................................. 64 Classifying Cryptocurrency As A Financial Asset .................................................... 64 Cryptocurrency is a New Asset Class .................................................................... 65 Money Is Now An Image .......................................................................................... 65 20th century business models need not apply ..................................................... 65 Advantage Africa: Why Developing Nations Stand to Gain Most ........................... 69 Disinflationary Characteristics ................................................................................. 72 Money Velocity ......................................................................................................... 75 Did John Nash Help Invent Bitcoin ......................................................................... 75 Bitcoin Is Backed By Time Itself .............................................................................. 78 Bitcoin vs. Gold ........................................................................................................ 80 Antifragile Properties of Bitcoin ............................................................................... 82 Bitcoin As A Hedge Against Economic Uncertainty ................................................ 84 Denationalization of Money ................................................................................. 85 Bitcoin as a Store of Wealth .................................................................................. 86 5 Price Stability ............................................................................................................ 87 Price Trending ..........................................................................................................90 Greater Fools ......................................................................................................... 91 The 21st Million ......................................................................................................... 92 Technological Unemployment ................................................................................. 94 Evolution of the Corporation .................................................................................... 96 Machines Are the New Employees ....................................................................... 96 Smart Contracts Have No Need for You ............................................................... 97 Rise of Computing Dominance ............................................................................. 97 Chapter 5: Political Implications ............................................................................ 99 Bitcoin Inherent Regulation ..................................................................................... 99 A Fight for Liberty ............................................................................................... 100 Untaxed Bitcoin is a Human Right ........................................................................ 102 Economic Munitions ........................................................................................... 103 Taxation .............................................................................................................. 105 Parallels Between Bitcoin and the Printing Press .................................................. 106 The Rise of Supranational Governance .................................................................. 107 Rise of Knowledge ............................................................................................... 108 Breaking of Orwell’s Dictum ............................................................................... 109 Bitcoin May Become A Global Reserve Instrument ................................................ 111 Bitcoin Will End the Nation State ........................................................................... 112 Bitcoin as an Economy Independent of the Nation State ................................... 113 Bitcoin is a [Nationally] Untaxable Money Supply ............................................. 113 Bitcoin Transitions the Nature of Violence ......................................................... 114 The Incoming Surveillance of Bitcoin ..................................................................... 115 Bitcoin Neutrality ................................................................................................. 117 Censorship 2.0 ..................................................................................................... 117 6 Scalability of the Bitcoin Network ...................................................................... 118 Conclusion .................................................................................................................. 118 About the Author ......................................................................................................... 121 Join the Community ................................................................................................... 122 Bibliography ............................................................................................................... 123 Figures ........................................................................................................................ 128 7 Foreword M oney … that old fashioned, hold-it-in-your-hand medium of exchange called “legal tender,” is on its way out. Soon (sooner than most are prepared and fewer still are aware of), it will totally disappear. Even now – 2014 – “one in ten US dollars in circulation today is a physical note -- the kind you can hold in your hand or put in your wallet,” reports McKinsey & Company. “The other nine are virtual.” Bitcoin researcher, Travis Patron, has captured the essence of this global trend toward total cashlessness by tracking the development and evolution of the “cryptocurrency” world, especially as it pertains to bitcoin -- that strange algorithmic creation sweeping the nations in its bid to become the new official digital replacement for “fiat” cash, coins, checks and cards. When I first coined the word “diginomics” in 1998, it was intended to depict a fully digitized economy and the culture surrounding it in the forthcoming century. Now, that Diginomic World embeds everything we purchase. As bitcoin evolves in becoming the king of “megabyte money” (Kurtzman, 1993: The Death of Money), the hemorrhaging world economy awaits its salvation in something dramatically new. “The economy for the Age of Networked Intelligence is a digital economy,” Don Tapscott wrote in THE DIGITAL ECONOMY (1998). “In this new economy, information in all its forms becomes digital – reduced to bits stored in computers racing at the speed of light across networks. The world, the economy, and all the rules of business are changing.” Indeed, the change has happened! We are there. “Money’s destiny is to become digital,” cites a 2002 report by the United Nations. David Wolman, writing in WIRED (June 2009), noted: “In an era when books, movies, music, and newsprint are transmuting from atoms to bits, money remains irritatingly analog. Let’s dump it!” What Patron has done here is to brilliantly reveal to us how the new era of digitized money is evolving. It’s the next important link in understanding the future … now! Others have said, “It’s coming.” Patron says: “It’s here!” - Wallace Wood www.diginomicsdefined.com 8 Introduction: Monetary Evolution, Ready or Not All the forces in the world are not so powerful as an idea whose time has come. - Victor Hugo A n idea with the potential to change the world may only start with one man or woman, but can demonstrate that no individual is powerless to make a profound impact on society in a way that alters the course of human history into a daringly new direction. An idea which disrupts the most basic fundaments of our sprawling economies arrives when eroding trust of financial institutions call for not more regulatory oversight, but a set of rules provided by the very laws of science – a paradigm shift in the way we approach an emerging problem of centralization. Too many are now dependent on too few. Our societies have been built with a degree of efficiency where if our systems are not capable of reproducing the results of recent history, catastrophe looms. Is this time truly different? Have we finally learned the lessons of the past and engineered the infrastructure of our society to withstand dramatic change? Can we continue our current trajectory with no unforeseen circumstances? These instances of centralization always, inevitably lead to abuse. Onlookers have become desensitized to the mistrust so prevalent in industries’ ranging from national politics to currency management, central banking to mortgage-backed securities and the individuals whom these institutions exist to serve are now seeking a way to liberate their financial livelihoods in a way which does not jeopardize personal well- being – that is, they wish for a vehicle which can alleviate them from under the heel of political and economic consolidation of power. People are anxious for an alternative to our system which has fallen prey to common occurrences of corruption and fraud. Man’s greatest weakness has always been himself, and humans succumb to the whim of greed and fear. Who can blame them? 9