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Wrapping my head around Bitcoin

There’s been a lot of talk about Bitcoin over the past year, particularly as of late when the value of one bitcoin peaked at over USD $1,200.

Truthfully, it’s only been over the past few months that I’ve really started to wrap my head around how Bitcoin works and what the implications of it might be. But the more I learn about it, the more it strikes me as something enormous in the making.

If you’re not yet familiar with Bitcoin, you can check out this video (simple version) or this video (complicated geek version).

Essentially though, it’s a decentralized and open source digital currency that’s managed using networked computers, as opposed to any one government. And functionally, it works as a distributed public ledger that logs every single bitcoin transaction. What this means is that when you buy or sell something using bitcoin, no exchange of bitcoin actually takes place. Instead, the distributed public ledger (called a block chain) gets updated to show who owns which coins both today and previously. 

This is potentially a big deal for 2 reasons.

The first is that many people view Bitcoin as the first internet native currency. The decentralized architecture of Bitcoin matches the decentralized architecture of the internet. And so it has the possibility of becoming the transactional protocol for the internet and global commerce.

The second reason (and this is where your mind will really get blown) is that transactions can be logged in the block chain/ledger with additional information embedded into each bitcoin. What this means is that you can use Bitcoin to create contracts, such as deposits, escrows, loans and so on. And since Bitcoin is designed to function in low trust environments (ie. where nobody knows each other), there’s an opportunity to really optimize the way we buy and sell almost anything.

In fact, if you dig deeper into what’s being contemplated with Bitcoin, you’ll find things like “smart property.”

“Smart property is property whose ownership is controlled via the Bitcoin block chain, using contracts. Examples could include physical property such as cars, phones or houses.”

Of course, it’s still early days for Bitcoin. But if it truly does become the transactional protocol for the internet, then I certainly do think we’ll see dramatic changes in the way we buy things like cars and real estate.

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