Monday, September 5, 2011

Privatization Of Currency


I stumbled upon this concept a few weeks back and was totally intrigued at the number of possibilities any concept can possibly have. It was a breakthrough concept and implemented in 2009. Privatizing the currency used by the people. Allowing the people be sole owners of the currency being circulated throughout the world. Allow the people to use this currency instead of a nation’s currency for all the financial transactions. This idea shifts the center of control from the Governments and transfers it to the People. Citizens become the sole owner and authority of the currency. The concept is of creating something different. It is an online currency but it is different than the online credit points which you get in Facebook. But it is also an attempt to create a real world currency which is totally decentralized and no government or bankers can rule it. It is like a Euro currency for the whole world with currency conversion in hands of the people.

The idea is called Bitcoins. It is a virtual peer-to-peer currency that can be sent and received directly over various exchanges and mediums. It provides the benefits that your money can’t be frozen, tracked or taxed, and transaction costs are very low. This idea was then implemented using the works of “Satoshi Nakamoto” - pseudo name used by the creator of the idea. He is based in Japan and has created a concept which brought power into the hands of the people using the currency and not in the hands of few (which is the current economic scenario). With his concept paper “Bitcoin: A Peer-to-Peer Electronic Cash System” he proposed the mechanism of working of the private currency – Bitcoin. The idea of Bitcoin is it that is a currency that can be traded peer to peer without any government interference. This idea being highly sensitive to all the governments
around the world, he uses the pseudo name and his location could not be mapped. The idea has a potential to destroy governments and disrupt economies. It is also touted as the most dangerous open source technological project ever developed. Even though some governments have allowed people transacting in bitcoins, they want to regulate this currency. They want to have a check at the usage of this currency. They are afraid of its powers which may be brought upon by the extended use of this new currency.

The world commerce takes place on the assumption that there is a third party (mostly bank) which will keep a tab on the transaction and verify the transaction. This is a trust based system where financial institutions serve as trusted third parties to process electronic payments. Completely non-reversible transactions are not possible, since financial institutions cannot avoid mediating disputes. The cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the possibility for small casual transactions, and there is a broader cost in the loss of ability to make non-reversible payments for nonreversible services. With the possibility of reversal, the need for trust spreads. Merchants must be wary of their customers, hassling them for more information than they would otherwise need. A certain percentage of fraud is accepted as unavoidable. These costs and payment uncertainties can be avoided in person by using physical currency, but no mechanism exists to make payments over a communications channel without a trusted party.

Working of this currency is based on the concept of people having the control over the transactions taking place and governing the same. The bitcoins are allocated to people according to their work in the bitcoin network. The users download the software and allow their computers to run for days on an algorithm to “create” Bitcoins. The algorithm is to check each transaction taking place in the network. Every computer has to validate every transaction taking place. For any transaction to be concretized it has to be validated by peer computers which check if the transaction is authentic. They also check if there is extra induction of bitcoin currency than what should be present in the system. As all the computers work as one entity to check the validity of the transaction there is nearly zero probability of bringing in extra money. There can be no forgery in the system and no person can get extra money for the computing work not done by his/her system. The more the computing power your computer has the more the work it does, the more the bitcoins you get. These digital coins are traded and stored on computer. The program is designed to make the coins rare and therefore have some value. There will only be 21 million Bitcoins in existence ever, right now there are 6 million coins mined. The more coins that are in existence the harder it will be to “mine” these coins.

1 comment:

  1. The idea is unique and interesting but its applicability is a huge question mark.

    ReplyDelete