Huh, Bitcoin is pretty interesting
(2011 -- Are you kidding me? Why didn't I buy back then?)
Read an interesting article on Ars Technica this morning. Looks like Bitcoin had already made the rounds earlier this summer, but I guess I missed it.
Bitcoin is the first legitimate crypto-currency, an idea first suggested in 1998. It is unique in several ways:
First of all, it is (mostly) anonymous, just like cash. Mostly - because, like cash, it is not anonymous under conditions of physical surveillance or if either party is coerced.
Second, it eliminates the need for 3rd party payment processors like Paypal and even credit cards. In a traditional online transaction, the payment processor holds the secret account numbers for both parties and conducts the transaction. Under the bitcoin scheme, all transactions are published freely using public key cryptography to conceal the identities of both parties. This allows the economy to incorporate the transfer of money without needing an intermediate payment processor.
Also interesting is that the system is designed to be inflation-proof. Unlike a traditional national currency, bitcoin is controlled by an algorithm. There's no central authority that can decide to increase the money supply and cause inflation. Instead, there is a fixed supply of 21M bitcoins which will be distributed at a geometrically decreasing rate. Each bitcoin can be subdivided, so as trading in single bitcoins becomes impractical, people can trade in millibitcoins and microbitcoins.
As a P2P network, the system relies on creating consensus between nodes and can be subverted if someone can muster enough computing resources to control more than half the network. In the age of massive botnets, that's not unfeasible. Proponents argue that there's no economic incentive, since subverting the network would ruin the saboteur's own bitcoin investment. However, there still seems to be a risk from someone stealing the network just for laughs.
Another danger is that, at least anecdotally, bitcoin is being used to buy/sell illegal goods and services or for money laundering. That doesn't bode well for its long-term viability. To be really useful, it needs some mainstream acceptance. A list of sites that accept the currency looks mildly promising.
Anyway.. it seems like quite an interesting system - and very sci-fi. The system even comes with an anonymous inventor who designed the protocol and published the original paper under a pseudonym.
I'm not buying bitcoins just yet. But it would be neat to see something like this catch on.