What is digital currency? Is digital currency safe? What makes a currency legitimate? Join the conversation in this episode of Fw:Thinking.
Male Speaker 1: Brought to you by Toyota. Let's go places. Welcome to Forward Thinking.
Jonathan: Welcome everyone to the Forward Thinking podcast where we talk about all stuff that is the future.
Lauren: The future.
Joe: The future.
Jonathan: Yeah, I'm clearly not alone in this. So today we wanted to talk about the future of digital currency. Now, let's introduce ourselves. I'm Jonathan Strickland.
Lauren: I'm Lauren Vogelbaum.
Joe: I'm Joe McCormick.
Jonathan: And we have a case of the sillies. No, today, we wanted to talk about digital currency. We've already had one podcast that was about what cash is, what currency is, what it represents, and we're all pretty familiar with physical cash. Maybe not as familiar as we would like to be.
Lauren: Not that personally, but hypothetically. Ideologically we get it.
Joe: I've seen it. I want more of it.
Jonathan: But we wanted to talk about some digital currency. Really, it's the first one I was going to talk about, the main one I'm going to talk about, is bitcoin, which is really an alternative currency. It's not a currency that is backed by any particular government, which is kind of an interesting idea.
Joe: So we should probably start with the idea of what makes a currency a currency.
Jonathan: All right, so yeah, what does make a currency a currency? If it doesn't have to be backed by a government, what makes a currency a currency?
Joe: Well I've got a theory on that.
Jonathan: All right, hit me.
Joe: It's probably not original at all, but it seems that a currency is just something that everybody wants. It's a standardized unit of wealth, and what makes a currency valuable is that you can get pretty much everybody to agree that they want it. So, and this comes in where we have the idea that currency is magic, right? That a U.S. dollar a little green rectangle of paper that says $1.00 and has the creepy triangle pyramid eye on it, like that magically equals $1.00. Well, why? Why does that thing equal $1.00 when this piece of paper that I just wrote some notes on doesn't?
Jonathan: Or why this other piece of paper that has a slightly different design on it is worth 100 of those dollars?
Jonathan: They're made of the same stuff.
Joe: Exactly. I mean, there's nothing about this little physical object that magically equals $100.00.
Lauren: That intrinsically has that amount of value.
Joe: Right, it's simply that we've all agreed.
Lauren: We've assigned to it. We've assigned that to it, sure.
Jonathan: And we've agreed to it. Not just assigned it, but that everyone has bought into it.
Lauren: Right, it is, like I said in the last episode, it is a belief system, more so than anything else.
Joe: Well, it's sort of an illusion also, because the thing, all you have to do to make this $100.00 bill not worth $100.00 is convince enough people that it's not worth $100.00.
Jonathan: Right, and then before any of you go out there and think, "This is gonna make me rich, if I convince everybody that the money in their wallets is worthless, then I can take all their money."
Joe: You're going to have a hard job of it, right?
Jonathan: Well, first of all you'll have a hard job of it but two, if you actually convinced enough people for that to make you fabulously wealthy, you wouldn't actually be fabulously wealthy because the money itself would, in fact, be worthless, because again, it's only worth anything because people want it. So if people don't want it, then it's not worth anything.
Joe: The point is that the value of a piece of money is not magically assigned by fiat. The government can't really say what something is worth. The people, as a whole, determine what something is worth.
Lauren: I have to agree, and that a certain amount of food or a gallon of gas or work that I do is somebody is worth that amount.
Jonathan: Right. So with bitcoin, again, because you don't have to have a government to back it, if people say this bitcoin has value and enough people believe in that and enough of a structure there supports it, then it does have value.
Joe: Well Jonathan, what is a bitcoin? You're using this word.
Jonathan: So bitcoin is a unit of digital currency. It was first proposed by a guy named Wei Dai, who proposed it in 1998. The idea is that it's a crypto currency, meaning that -
Joe: Crypto. Secret, like cryptozoology?
Jonathan: Well, not so much secret, like cryptography.
Lauren: Encrypted, yeah.
Jonathan: Something about the currency has to be based on an encryption and I'll get to that in a second, but it's essentially to a digital currency that can be used in transactions, just as any other currency could be. So you would use this digital currency to buy stuff. That stuff could be digital, or it could be physical, so you could use this digital currency to buy a real car, assuming that there was a car dealer out there willing to deal in this digital currency. If they accepted it, then you could buy a car with it or anything else. Now the actual currency itself, even though it was proposed in 1998, didn't start to show up until 2009, and that's when somebody who was using a pseudonym, the pseudonym was Satoshi Nakamoto, began to, he published a paper in a, well, not published a paper, but wrote in a forum actually about cryptography, about proof of concept for this digital currency, and that was the birth of bitcoin. Interesting thing, only a few people, I assume, know who this person is because this person has never been publicly identified.
Joe: Are you one of them?
Jonathan: No, I do not know the actual identity. I am not privy to such information, and if I did I wouldn't tell you, so maybe I do, but I don't. So, think about it. If you have a digital currency, can you think of any questions off the top of your head, things that if the currency is digital, what are some of the questions that arise in your mind?
Joe: Well first of all, what is it? I mean, a U.S. dollar is a little rectangle of paper I put in my wallet. What is this unit of currency?
Jonathan: It's a block of data.
Joe: Okay, where does that come from?
Jonathan: Okay, so first it's mined, which sounds kind of interesting. The way it works is that you have to create transactions and then through those transactions you create these blocks of data which, when you analyze the blocks of data, will create more bitcoins. That's a gross oversimplification of what's going on here, but it all comes down to that idea of cryptography. Within that block of data, there is what is called a hash. A hash is essentially when you take some numbers and then you apply math to it. And when I say apply math, the reason why that's vague, is that it depends upon the hash about what mathematical process is going on. Right? But let's say I tell you that I've created a hash and I've got a number, and that number is 15, and I tell you, Joe, that I arrived at the number 15 by adding two other numbers together, but I don't tell you which two numbers they are, and for you to be able to get a bitcoin, you have to tell me which two numbers I added together to get 15. Now, I haven't given you any other information, so you just have to start handing me guesses as to how I got to that number 15, right?
Lauren: It would be pretty reasonable for you to use a computer to do this rather than just shouting out numbers.
Jonathan: Right, but let's say in this instance I tell both of you, Joe and Lauren, that I've got a number 15, so you have to tell me which two numbers I added together to get that number, and the first one who guesses correctly gets 50 new bitcoins.
Joe: What's your guess?
Lauren: Seven and eight.
Joe: 15 and zero.
Jonathan: No, it wasn't that either. So what happens is you would keep on guessing until you were to get the ones, and it was 16 and negative one, by the way. If you were to, once you were to guess it, I would hand you some bitcoins. Not from me, it would actually generate through this process. It's kind of like the idea of mining a mountain for gold. It'd be as if you had found a gold vein while just digging randomly in the mountain. Same sort of idea. You were actually digging randomly using math. Now, in the case of bitcoins, the numbers and hashes are way more complicated than, "What two numbers did I use to create 15." So you have to use a computer to go through all the various guesses that could potentially reach whatever the hash is in order to find the result.
Lauren: It takes quite a bit of computing power, actually. Usually more, in fact, and then just one laptop, there's a lot of computers that are usually working on these at the same time.
Jonathan: Right. Well, in the early days, the very early days of bitcoin, this is how brilliant the system is, and I say brilliant, this is beyond whether or not you consider bitcoin a valuable currency. All right, just the system itself is brilliant. So, in the early early days of bitcoin, those hashes were not so complex, meaning that if you had a decent computer with a decent CPU, you could start having it run these various guesses, and expect to maybe solve a problem within 10 or 20 minutes, maybe, and you would get bitcoins.
Joe: So you're just like Mario, jumping repeatedly into the block that gives a coin every -
Jonathan: No, you're like Mario jumping at all of these different blocks, and one of these blocks gives coins, but the other blocks don't. That's a better analogy, and so what would happen is that as more people started joining in, and when I said 10 or 20 minutes, that's really again, that's really exaggerating, but as more people joined in, that would mean that more bitcoins were being mined because you have more computers working on these problems, so things start to unravel faster. Then the system itself has a way of fixing that because you don't want to flood the market with bitcoins and then you devalue the currency.
Joe: Right, that's what would happen if the fed just said, "Well, let's print infinite money.
Jonathan: Or what would happen if you dug under, you reached a mountain, you removed one shovel of dirt, and you realized that everything under one layer of dirt is gold. If the mountain is solid gold, you would suddenly devalue gold because there would literally be tons of it flooding the market.
Joe: A diamond as big as the Ritz.
Jonathan: So there you go, you just devalued gold. Same sort of thing with bitcoins. You have to control that release of bitcoins into circulation.
Joe: Right, so it's intentionally making it difficult to create an artificial scarcity that will keep the value intact.
Jonathan: It's actually, you're creating a real scarcity, but you're doing it through artificial means.
Joe: A synthetic or a forced scarcity.
Jonathan: Yes, so there's already a designated number of bitcoins that will ever be in existence and beyond that there will be no more, and that's around 21 million bitcoins. Now the bitcoin itself can be divided into smaller amounts, down to eight decimal places, so as we get closer and closer to that limit, it actually decreases the number of bitcoins you will get per successful mining. So when it started the first successful attempts at mining got you about fifty bitcoins.
Joe: And what's a bitcoin run these days?
Jonathan: It all depends. In March it has fluxuated from $43.00 per bitcoin to $78.00 per bitcoin.
Lauren: As of this very moment it is $78.40 U.S. dollars, or as of half an hour ago. Things could have changed.
Joe: Well actually, we know that it does, right? The bitcoin value fluctuates wildly.
Jonathan: Crazy amount of fluxuation.
Joe: Which is what makes some people kind of hesitant to invest in it right now.
Jonathan: Well a lot of people say it's not even a currency, that it's really more speculation. It's like speculating in a stock. That a lot of people are making their money just from buying and selling bitcoin or mining and selling bitcoins. All right, so getting back to the mining and making it more difficult as more machines join on, it was built directly into the design of bitcoins so that as more computing power is applied to the problem of figuring out these hashes, these transactions, each time a transaction is made, that's what's allowing people to mine these other bitcoins. In order to make that, by making it more difficult, it means that you have to apply more processing power to successfully mine another bitcoin.
It's the idea that you're in a giant mountain, let's go back to the mountain idea, you're in a giant mountain and there's a finite amount of gold throughout this mountain and it's scattered randomly throughout the mountain. And as you get more and more of the gold from the easier places to mine, the stuff that's left is harder to get to. It's by nature, it's just the natural design. It's harder for you to get to those places, but here's the other thing is that if people start backing of of mining, like if people were to stop dedicating so many computer resources to mining bitcoins, then because there would be less computer power dedicated to trying to get at the bitcoins, it would actually get easier to mine them again, so that the supply of bitcoins into the circulation would remain fairly steady.
Lauren: Right. It's, the way that I understand it, and correct me if I'm wrong, is that they're using the actual computation of the processing of transactions as a monetary unit.
Jonathan: Yeah. Essentially, as there are transactions that are going on, that's providing essentially the math problem that you have to solve in order to get more coins. So as more transactions happen, there are more opportunities as well. And what happened was, early on, people started figuring out, "Hey, the CPU on my computer solves problems essentially going one at a time. It tries option one, option one didn't work out. Let's move on to option two. That didn't work out. Let's move on to option three. But, they discovered that if they were to use graphics processing units, which can do calculations in parallel, then you can do options one through 50 all at the same time and then 51 through 100 all at the same time. You rapidly sped of the process of trying to solve these problems.
So people started using GPUs, they started to mine bitcoins, it was really successful, and then the difficulty ratcheted up to meet the fact that people were using other systems. Then you start networking computers together, and now you've got a group of computers all working to mine bitcoins, which means that again, you've got more processing power, so it ratchets up the difficulty. It's essentially got to the point pretty early on that unless you were designing a computer specifically to mine bitcoins, with that sort of processing in mind, you might as well not even try because your computer is just not going to have the umph needed. You could still in theory solve the problem that everyone else is trying to solve, and you could do it first, but the likelihood was way low.
Joe: Might as well play the lotto.
Jonathan: Yeah, same sort of odds, really, is what it boils down to.
Joe: Okay, so now we've established that we've created this economy based on a, or not an economy, but just a currency, that exists in the regular economy. It's not an economy.
Jonathan: You've created a commodity, not even a currency.
Lauren: Right, right.
Jonathan: Because it's not a currency until someone accepts it as payment for something else.
Lauren: Well, people do that.
Jonathan: Yes, so it is a currency, but what we had talked about right now was just a commodity.
Joe: So, let's assume now that we're moving on to a currency. People want to use this to pay for stuff. I have a friend who's a ne'er do well and he's always looking for schemes to get money without working. He thinks up an idea, he's like, "I'm going to buy some bitcoins, and I know when I have a dollar in my pocket and I go to the store and I pay for a bag of Doritos, I have to give the dollar to the person working the cash register and I can't get it back. What if I want to pay for something with a bitcoin, but I figure out a way to make copies of my bitcoin so that I can use it more than once."
Jonathan: Okay, here's where the cryptography also comes in. So if you want your Doritos, as you say, humans call it Doritos, but that's cool, Doritos, if I wanted my bag of - I'm just giving you a hard time now. No, it's a good question.
Joe: I grew up in East Tennessee.
Jonathan: Well, they use what's called a block chain, and the block chain is part of that hash I was telling you about, that transaction, and the history of every transaction for a bitcoin is tracked and incorporated as part of that hash, meaning that when you use that bitcoin in a transaction, let's say the first transaction, which is when you get the bitcoins, then you spend the bitcoins on something. There's a vendor out there that accepts bitcoins, you have purchased something from that vendor, the vendor takes possession of those bitcoins, that information gets incorporated into the hash, that block of text, and it's part of the history of that bitcoin now. You no longer have possession of that. If you were to try and duplicate that in some way, you would have to do it in such a way that would actually invalidate the bitcoins that you've already spent. But there's a record of that that exists and it's across all these nodes that one of the things we didn't talk about is that bitcoin is a peer to peer currency, so the information for all those bitcoins is spread throughout the entire network, which means that once you spend it, that information is out there.
Lauren: Everybody knows.
Joe: Like a Metallica album.
Jonathan: They don't know that you bought something with the bitcoins; they know that that particular bitcoin was used in a transaction and where it is now. So for you to be able to hack the system, you would have to not only figure out the hash of whatever particular transaction you were aiming for, you would alter all the transactions that happened after that point. So if that bitcoin had been in 18 other transactions, that means that you would have to figure out a way of hacking that earlier point where you've discovered there's a vulnerability, and then no one would have to notice the fact that 17 or 18 other transactions were invalidated as a result. So that's where the protection is. The system itself rejects anything that looks like it's an attempt to double spend. So that was the - Because that had to be built in there, otherwise whenever you're talking about digital you're like, "Well, what stops me from just making a copy, and then a copy of a copy, so I become an instant millionaire once I get my first bitcoin?" That's what stops you.
Lauren: Yeah, supposedly there's only been one major security incident. I think that happened in 2010.
Jonathan: Yeah, there was, there actually - Yes, there was a hacking incident there where, and it ended up getting fixed, but whereas there was that one major incident, there was also the problem of institutions that are acting more or less like banks and exchanges that hold bitcoins.
Lauren: Which is kind of the opposite of the purpose of the bitcoin, isn't it? Because it's supposed to be - it's kind of counter culture in that it doesn't require you to have a third party or you're processing everything.
Jonathan: Yeah, I think the exchange, well, we'll get into some reason why exchanges exist in a minute, but this would be places that would end up exchanging bitcoins for other currencies and that kind of stuff, and there have been a few that had been hacked. In fact, a few that have gone under since the hacking attacks because all confidence on the consumer level sapped away, so that's really one of the issues. Another issue with bitcoins is that it's come under fire from some critics because one of the things that people are using, some people, are using bitcoins for, is to make what would otherwise be illegal purchases that are not traceable. So they end up buying bitcoins and then use those bitcoins on something like The Silk Road, which is one of those, it's essentially a black market, and a black market for drugs is what it's mainly known as.
Joe: Star Wars collector items.
Jonathan: Mostly drugs. So, you can sit there and say, "Well, I can't buy heroine with cash because I'll get caught." We're taking morality and ethics and everything out. This is someone who wants heroine, and they say, "Well, I've got bitcoins, so I'm going to spend it on Silk Road. It's completely untraceable." That's one of the criticisms, right? So the idea that you could have an entire black market supported by it that's untraceable that could end up supporting illegal activity. That's one of the reasons why the bitcoin currency has received some criticism. Another bit criticism is the fact of its volatility; the fact that the value changes so dramatically and so quickly. That's an issue, and some people say that it really is more like a speculative investment as opposed to a currency, that not many people are actually using it to purchase stuff, they're using it to buy into it as if it were a stock.
Lauren: To get more hypothetical wealth.
Jonathan: Right. So it's not, in that case, it's not really working as a currency. So I think that's a valid criticism as well.
Joe: So here's a thing that we might have to wonder about with bitcoin or any alternative currency, right? Because bitcoin is not the only one.
Jonathan: No, but it's the one that's known as being open source and peer-to-peer. There are a couple that -
Lauren: It's probably the most popular.
Joe: All right, so is it possible for an alternative currency to overtake the mainstream currency?
Jonathan: If enough people have confidence in the alternative currency and not enough confidence in the "official currency" then sure. There's no reason - if the entire United States, or at least a sizeable population, 90 percent of the population of the United States decided spontaneously that the dollar is no longer really had any value but bitcoins did, then that's what would happen, and you would have an enormous economic crisis on your hands. It's possible. It's not plausible, but it is possible.
Lauren: And there are some government run digital money things going on. Canada has the mint chip.
Jonathan: Yeah, our Canadia friends, from Canadia.
Lauren: It sounds like ice cream to me.
Joe: An ice cream flavor, right?
Lauren: Yes, this is a delicious treat. No wait, it's money.
Jonathan: Girl Scout cookies. Mint chips.
Lauren: But no, this is the Canadia National Bank is planning on releasing this digital money thing that's kind of a little dongle that you can just sort of poke it at other people's little digital currency and they transfer mathematically.
Jonathan: So the old cred stick approach which is, what was that, Shadow Run, where everyone had cred sticks, but no, I remember there was some science fiction thing where all of your money was kept in digital form in some sort of physical device that you carried around and whenever you wanted to make a purchase it would just transfer automatically. Essentially the same thing as the near field communication chips do in smartphones. Same sort of thing.
Lauren: But tied directly into the Federal Reserve there rather than through a third party bank.
Jonathan: Yeah, so there's no reason why a digital currency could not work. You can argue that there are some problems with keeping security in a digital format, but the same thing is true with physical currency. You've got security issues there too. The question is, is the risk so high as to make it impractical? Or are the risks low and are the benefits high? If they are then obviously that would make moving to a digital currency a higher priority. Whether or not we ever get to a point where dollars are mainly digital, I don't know. The other question of that is do we get to a point where everyone has access to whatever means it is to make these transactions? Because cash is also something that certain segments of the population, they can get access to cash, but they may not have access to the equipment they would need to make these sort of transactions or to mine bitcoins or whatever.
Lauren: Sure, yeah. Also, I mean, yes you can break a dollar, you can destroy a dollar, but I don't know, I feel like it's a lot easier to drop in a glass of water and kill it than it would be a dollar.
Joe: Well hopefully you'd have your bitcoins in the cloud, right?
Jonathan: Yeah, since it's a peer to peer network, you would hopefully have - the idea is that the entire -
Joe: The digital equivalent of putting your money under your mattress would be keeping it on your device?
Jonathan: Well, the idea is that the entire network would know that those bitcoins were with you, right? So that even if you were to have your computer explode Inspector Gadget style, you would still have all that wealth, it's just that you would have to find another way to be able to make the transaction. But yeah, I mean, there are pros and cons certainly, and to me it's just very interesting that there was an attempt to create a mining operation that is sort of analogous to physical mining. It's a little different because we do know that there is a finite limit and we know what that finite limit actually is. It's not like -
Lauren: It's not like, "Oh no, we found another bitcoin mine. It's chock full of bitcoins. Bitcoins for everyone."
Joe: And inflation for everyone.
Jonathan: According to what I read, the 21 million coins will all be mined by sometime in 2140, and the reason for that is that, again, as more bitcoins are mined, they release fewer per year. They actually release, so that a successful mining attempt ends up getting fewer bitcoins than it did before, usually half of what it was before, so 50 to 25 to 12 and a half, and because you can divide a bitcoin up to eight decimal places when you start getting to 2140, when you're mining bitcoins, you're going to get incredibly tiny percentages of an actual bitcoin every successful mining attempt. That also means that the stuff you've mined, if one bitcoin is equal to 200 U.S. dollars, then your tiny percentage of a bitcoin is not going to be worth that much, but there are also transaction fees that happen and you end up collecting on transaction fees if you successfully mine bitcoins.
So there may come a time where the physical value of the bitcoin that you have mined is lower than the amount of money that you get in transaction fees. So, that's kind of interesting too. It's complicated. I'm curious to see how well it works over the long run. We've seen some pretty high highs and low lows of bitcoin. Because even though $78.00 sounds like a lot, that's not the peak price. I think I saw it go over $200.00 at one point.
Joe: I'd be interested in what events precipitate spikes in the bitcoin market.
Jonathan: Well anytime there's a crisis where some exchange has been hacked, it severely devalues the bitcoin, which means that by stealing the currency, you have actually made it worthless, or at least worth less than it was.
Joe: That's kind of an incentive not to steal it.
Jonathan: Right, because if you steal it and then suddenly it's not worth very much, then what have you accomplished, right? I mean, then you're like, well, especially if it took you a lot of effort trying to steal the money, you might have spent more time and money trying to steal the stuff than what it ended up being worth by the time you were done.
Joe: Maybe if you just a pure sadist and you want to ruin it for everybody.
Jonathan: Right, if you're at roll. If you're a currency troll, yeah. So, all of you non trolls out there, if you have any suggestions you would like us to talk about in future episodes or if you just want to comment on what we've said already, I highly recommend you visit our website. That's fwthinking.com. There you're going to find links to the video series, the podcast, the blogs, you'll find links to our social network stuff so you can get in touch with us. We're on Facebook, we're on Twitter, we're on Google Plus, and we'd really like to hear from you and find out what you think about these futuristic topics and the sort of stuff you'd like us to talk about. So join us there and let us know, and we will talk to you again really soon.
Male Speaker 1: For more on this topic and the future of technology, visit fwthinking.com. Brought to you by Toyota. Let's go places.
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Duration: 30 minutes