How can we trust Bitcoin?

Internet piracy has caused no end of annoyance to the music and movie industry. As music and movies are stored as information on our hard drives, and as we are free to communicate and exchange information through the internet, it is inevitable that people will share copyrighted information like music and movies.

This problem will only go away if our freedom to communicate across the internet is compromised.

With the advent of bitcoin it is natural to ask,

If bitcoins are just information stored on our harddrives and sent across the internet, why aren't people just copying their bitcoins to print more money?

Of course, with bitcoin sitting at a 8 billion dollar market cap, bitcoin must have a trick up its sleeve. If it was this easy to con the bitcoin system the whole thing would collapse.

So how does bitcoin solve this problem? What bitcoin is doing to solve this problem is twofold,

1) The bitcoin system is constantly making a list of all the transactions that have ever been made and are currently being made.

2) The bitcoin system is distributed across the computers of thousands of people that are each independently verifying the running history of transactions being made.

With this clever method bitcoin ends up with a decentralized spreadsheet or ledger (called the "blockchain") that gets updated once every 10 min or so by by people all over the world to include the latest transactions in a manner that end up, amazingly, being both secure and open for anyone to verify.

If we zoom out a bit we see that bitcoin has accomplished something very impressive. In one fell swoop it has solved the problem that the music and movie industry have been so annoyed with. It has solved the problem of how to create information that is free and yet has a designated owner.

If you see this as being applicable to patents and serial keys, you'd be right. Currently, we rely on a patent office to verify patents and some central server (e.g. Microsoft's server) to validate your serial key, just as we rely on our governments to back our money and validate our identity.

With bitcoin and related technologies it is now easier than ever to keep track of who owns what. As this is done in an open and transparent manner, the possibility of corruption, theft and failure is reduced. Since it is distributed live on the internet, the capabilities are fast, cheap and smart.

As we will explore in a later post, these capabilities extend to innovative new applications that go far beyond Bitcoin. While bitcoin is exclusively using the decentralized "blockchain" as book-keeping for the bitcoin currency, other applications for this type of technology are possible.

New startups in the cryptocurrency industry, such as BitShares, are developing bitcoin-like systems that can handle identity management, gambling, voting, asset exchange, and much more!