I’ve been reading a bit about Bitcoins, a digital currency, and how this currency works. The explanation I read was more than a little complicated, but actually it didn’t need to be. Here’s how I think it works.
The first transaction would have been little more than a proposition; a game.
A nerd (codenamed Satoshi Nakamoto) created a (relatively) difficult mathematical puzzle (a series of calculations) which increases exponentially in difficulty according to how much brute processing power is put behind it. I’m not altogether how it automatically increases in difficulty but apparently it does.
A second nerd (or perhaps a group of nerds) received the puzzle and got points doled out by a program as a reward for solving these calculations (the value of a program counter – one set of calculations completed, another set completed…), these points are called Bitcoins. In World of Warcraft, they may be called gold coins, as they are in most online MMORPG’s. Woot!
The whole Bitcoin thing is a peer-network supported MMORPG. Just like in MMORPG’s, IRL, increasing (at the time of writing) numbers of nerds are using (relatively) powerful computers to perform these calculations in order to be rewarded with incremental increases to the program counters within the software that is used for generating this currency, the software that provides the mathematical puzzles they are supposed to solve. Instead of computers controlling dwarves in order to mine gold while the nerds sleep/watch porn however, they are ‘mining’ Bitcoins.
What happened after the first such transaction between the very first nerds was, somebody decided to accept these Bitcoins as currency in exchange for goods/services. You realise that those numbers you see in your bank account, and the pieces of paper and/or moulded metal alloy in your wallet are worth nothing more than people are willing to offer in exchange for them, right? Well somebody bravely decided to accept them as currency, perhaps just for fun initially, for the hell of it.
The Bitcoin currency is peer-network supported; vast numbers of nerds all over the place are generating them, not a central reserve or bank. There are multiple points of origin, and nobody knows (so it is said; nice urban myth) where the first transaction took place.
Bitcoins increase and decrease in value according to how many exist online as a result of all these computers performing the calculations (supply and demand). Of course, the value of this currency also depends on how many of these Bitcoins people are willing to accept in return for their goods and services.
The chaotic aspect of this currency comes in because there is no central point of control on how many Bitcoins are issued and how many Bitcoins people are willing to accept for their goods/services. Oh, and there is no interest and no fees except that charged and agreed between individuals.
No central point of control.
The banks could start getting involved of course, but then they can’t issue Bitcoins any more than individual people can. Unless they buy computer farms and start grid computing in order to generate Bitcoins.
Even then, they could only affect the value of the currency; they could not wholly control it any more than anybody else could, unless all the nerds gave up generating the currency themselves and left the ‘mining’ activity to the banks.