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| # A monetary valuation arising from the demand for use of Bitcoin tokens as a trade intermediary (a money). Due to its electronic nature, Bitcoin shares many features with traditional precious metal currencies in being suitable as a means of indirect exchange. Namely, ease of transport and storage, relative scarcity, divisibility, and fungibility. Proponents argue that the monetary value of Bitcoin tokens will rise as their use in trade and thus their potential marketability increases. <ref name=FAQ></ref> | # A monetary valuation arising from the demand for use of Bitcoin tokens as a trade intermediary (a money). Due to its electronic nature, Bitcoin shares many features with traditional precious metal currencies in being suitable as a means of indirect exchange. Namely, ease of transport and storage, relative scarcity, divisibility, and fungibility. Proponents argue that the monetary value of Bitcoin tokens will rise as their use in trade and thus their potential marketability increases. <ref name=FAQ></ref> | ||
| In its current phase, new Bitcoin tokens are created at a constant average rate set by the network. These new tokens are divided amongst the Bitcoin generating nodes by the CPU power they use to help maintain the network. The author argues that the competition for Bitcoin creation will drive the cost of electricity needed for generating a Bitcoin close to the market exchange value of a Bitcoin. | |||
| The constant average rate of Bitcoin production is tapered such that over time the total number of Bitcoins will approach 21,000,000. After this point, no further Bitcoin production is possible. In this deflationary environment, the electronic divisibility of Bitcoins makes downward price adjustments readily possible with no practical limitations in the actual storage or transport of Bitcoin value. Rather than relying on the incentive of newly created Bitcoins to package transactions, nodes in this period will likely rely more heavily on their ability to competitively charge transaction fees in order to process Bitcoin transactions into blocks. | |||
| ==Monetary and Financial Benefits== | ==Monetary and Financial Benefits== | ||
Revision as of 20:43, 21 June 2010
Bitcoin is an open source peer-to-peer electronic cash system developed by Satoshi Nakamoto that's completely decentralized, with no central server or trusted parties. Users hold the crypto keys to their own money and transact directly with each other, with the help of the network to check for double-spending.
Proof-of-work
To preserve the integrity of Bitcoin, users must not be allowed to double-spend their tokens. To prevent this, all transactions are broadcasted over the network.
To keep this information reliable, it is protected against errors caused by failures of communication or deliberate sabotage. To resolve possible conflicts in the record, it is necessary to determine what data was produced first, and what data was produced later.
Bitcoin solves this problem (without a trusted timestamp authority) by using a proof-of-work system, similar to that used by HashCash. Whenever a Bitcoin user makes a transaction, their node broadcasts the transaction to the network of nodes. When transaction data is received through a node, the node begins a proof-of-work calculation in an attempt to create a block containing the transaction. All nodes essentially race to create a block, as the first one to create a block gets Bitcoins as a reward. Once a node successfully creates a block, it broadcasts the block to the network. Other nodes receive the block, perform a proof-of-work check, and add it to their chain if it is valid. As more transactions occur, blocks are created and added ad infinitum. The longest proof-of-work block chain is acknowledged to be the oldest and most reliable account of the online transactions.
This mechanism is claimed to be virtually tamper-proof. For an attacker to manipulate the record, he must outpace all of the other nodes on the network to produce the longest proof-of-work. This becomes exponentially more difficult as time passes.
Bitcoin is a completely peer-to-peer network, and every node is able to enter or leave the network at will. When a node joins the network, the longest proof-of-work is automatically accepted as the most reliable one.
Basis of Value
Like other monetized commodity currencies, Bitcoin proponents argue that Bitcoin tokens derive their exchange value from two sources:
- A base valuation derived from the commodity value of the energy required in CPU cycles to generate Bitcoin tokens.
- A monetary valuation arising from the demand for use of Bitcoin tokens as a trade intermediary (a money). Due to its electronic nature, Bitcoin shares many features with traditional precious metal currencies in being suitable as a means of indirect exchange. Namely, ease of transport and storage, relative scarcity, divisibility, and fungibility. Proponents argue that the monetary value of Bitcoin tokens will rise as their use in trade and thus their potential marketability increases.
In its current phase, new Bitcoin tokens are created at a constant average rate set by the network. These new tokens are divided amongst the Bitcoin generating nodes by the CPU power they use to help maintain the network. The author argues that the competition for Bitcoin creation will drive the cost of electricity needed for generating a Bitcoin close to the market exchange value of a Bitcoin.
The constant average rate of Bitcoin production is tapered such that over time the total number of Bitcoins will approach 21,000,000. After this point, no further Bitcoin production is possible. In this deflationary environment, the electronic divisibility of Bitcoins makes downward price adjustments readily possible with no practical limitations in the actual storage or transport of Bitcoin value. Rather than relying on the incentive of newly created Bitcoins to package transactions, nodes in this period will likely rely more heavily on their ability to competitively charge transaction fees in order to process Bitcoin transactions into blocks.
Monetary and Financial Benefits
Given the decentralized nature of Bitcoin and the hard coding of monetary rules within the software, Bitcoin proponents suggest various monetary and financial benefits to potential users:
- Direct transfer of monetary value via the internet without a trusted middleman or financial processor.
- Third parties cannot prevent or control transactions.
- Transactions are practically free.
- Bitcoin value is unconnected to possible instability caused by fractional reserve banking and poor central bank policy (see Austrian business cycle theory).
- Corrupted transactions created by hacked or modified clients are rejected by honest clients.
- The limited inflation of the Bitcoin system’s money supply is distributed evenly by CPU power throughout the network and programmatically created at a rate known to all parties in advance. Inflation cannot therefore be centrally manipulated to effect redistribution of Bitcoin value from general users.
- Given the predetermined rate of Bitcoin creation, the system is further protected against wild swings in supply due to externalities sometimes seen with traditional commodity currencies (see Fall of the Rupee due to large discoveries of silver reserves in the New World).
- Bitcoins are potentially divisible to eight decimal points. There are therefore no practical limitations to downward price adjustments in a deflationary environment.
According to the author, the design also supports a variety of possible transaction types that have yet to be implemented within the currently available client. These include escrow transactions, surety bond contracts, third party arbitration, and multi-party signatures.
Notable sites that accept Bitcoin
As of April 2010 there are roughly 12 companies accepting Bitcoin, most notably the largest being Link2VoIP.com who offer automated Bitcoin payments, as well as NewLibertyStandard a Bitcoin Currency Exchange, BITCOIN MARKET, and others.
See also
External links
References
- ^ Bitcoin FAQ
- Link2VoIP (www.link2voip.com) accepts Bitcoin as payment.
- Link2VoIP now has full automation.
- NewLibertyStandard Bitcoin Currency Exchange.
- Bitcoin Trading System.
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