1/9/2018 Bitcoin – The Internet of Money

naval in Uncategorized  November 7, 2013December 18, 2017 1,722 Words

Bitcoin – The Internet of Money

This post is old – I wrote it for Wired, which just published an excerpt in “The Wired World in 2014” issue, but the
article was written in July. Apologies for the obsolescence.

Bitcoin will eventually be recognized as a platform for building new financial services.

Most people are only familiar with (b)itcoin the electronic currency, but more important is (B)itcoin, with a capital
B, the underlying protocol, which encapsulates and distributes the functions of contract law.

Bitcoin encapsulates four fundamental technologies:

Digital Signatures – these can’t be forged and allow one party to securely verify a transaction with another.
Peer-to-Peer networks, like BitTorrent or TCP/IP – difficult to take down and no central trust
required.
Proof-of-Work prevents users from spending the same money twice, without needing a central authority to
distinguish valid from invalid transactions. Bitcoin creates an incentive for miners, who run powerful
computers in the network, to validate transactions and to secure them from future tampering. The miners are
paid by “discovering” new coins, and anyone with computational resources can anonymously and
democratically become a miner.
Distributed Ledger – Bitcoin puts a history of each and every transaction into every wallet. This “block chain”
means that anyone can validate that a given transaction was performed.

Thanks to these technical underpinnings, bitcoins are scarce (Central Banks can’t inflate them away), durable (they
don’t degrade), portable (can be carried and transmitted electronically or as numbers in your head), divisible (into
trillionths), verifiable (through everyone’s block chain), easy to store (paper or electronic), fungible (each bitcoin is
equal), difficult to counterfeit (cryptographically impossible), and can achieve widespread use – many of the
technologists that brought us advances on the Internet are now working overtime to improve Bitcoin.

Proponents of the role of government argue that a currency with fixed supply will fail. They posit that inflation is
required to keep people spending and that prices and wages are still as sticky as they were decades ago. They
overlook that the world functioned on fixed money supplies until 40 years ago (the gold standard), and that bitcoin
can gather many uses and value long before it has to become the main currency in which all prices are
denominated. Another fear is that a central actor could take over the Bitcoin computing network – but the
combined Bitcoin distributed supercomputer runs at the equivalent of 2,250 PetaFLOPS, 90x the rate of the fastest
supercomputer (note – in Nov, it’s now 48,000 PetaFLOPS!), and consumes an infinitesimal fraction of the
resources used by a bloated banking system. Many label it as a speculative pyramid scheme – without realizing that
all government-printed money is such. To the extent anyone holds cash over other assets, they are speculating that
other assets will decline in relative value. Concerns abound over the security of the encryption scheme, the speed of
https://startupboy.com/2013/11/07/bitcoin-the-internet-of-money/ 1/6
1/9/2018 Bitcoin – The Internet of Money

transactions, the size of the block chain, the irreversibility of the transactions, and the potential for hacking and
theft. All are fixable through third-party services and protocol upgrades. It’s better to think about Bitcoin the
protocol as Bitcoin 1.0, destined to evolve just as HTTP 1.0 evolved beyond of simple text and image-only web-
browsers.

So why not just use Pounds or Dollars? One can use bitcoins as high-powered money with distinct advantages.
Bitcoins, like cash, are irrevocable. Merchants don’t have to worry about shipping a good, only to have a customer
void the credit card transaction and charge-back the sale. Bitcoins are easy to send – instead of filling forms with
your address, credit card number, and verification information, you just send money to a destination address. Each
such address is uniquely generated for that single transaction, and therefore easily verifiable. Bitcoins can be stored
as a compact number, traded by mere voice, printed on paper, or sent electronically. They can be stored as a
passphrase that exists only in your head! There is no threat of money printing by a bankrupt government to dilute
your savings. Transactions are pseudonymous – the wallets do not, by default have names attached to them,
although transaction chains are easy to trace. It has near-zero transaction costs – you can use it for micropayments,
and it costs the same to send 0.1 bitcoins or 10,000 bitcoins. Finally, it is global – so a Nigerian citizen can use it to
safely transact with a US company, no credit or trust required.

Even more importantly, Bitcoin the protocol will enable financial services transactions that are not possible today
or require expensive and powerful third-parties.

Bitcoin has a scripting language which enables more than a “send money from X to Y” transaction. A Bitcoin
transaction can require M of N parties to approve a transaction. Imagine Wills that automatically unlock when most
of the heirs agree that their parent has passed, no lawyer required. Or business accounts that require two of any
three trusted signatures to approve an expenditure. Or wire escrows that go through when any arbiter agrees that the
supplier sent the goods to the buyer. Or wallets that are socially secured by your friends and family. Or an
allowance account accessible by the child and either of two parents. Or a crowdfunding of a Kickstarter project that
pays out on milestones, based on the majority of the backers approving the next payment. The escrow in each case
can be locked so that the arbiters can’t take the money themselves – only approve or deny the transaction.

The scripting language can also unlock transactions based on other parameters. Unlocking them over time can
enable automatic mortgage, trust, and allowance payouts. Unlocking them on guessable numbers creates a lottery
auditable by third parties. One can even design smart property – for example, a car’s electronic key so that when
and only when a payment is made by the car buyer to the seller, the seller’s car key stops working and the buyer’s
car key (or mobile phone) starts the car. Imagine your self-driving car negotiating traffic, paying fractional bitcoin
to neighboring cars in exchange for priority.

Everyone has a copy of the Bitcoin block chain, so anyone can verify your transactions. You can write software that
will crawl the block chain and generate automatic accounting histories for tax and verification purposes. You can
engaged in “Trusted Timestamping” – take a cryptographic signature of any document, timestamp it, and put it into
the block chain. Anyone can verify that the document existed at a given time. If you sign the document with your
private key and another party signs it with theirs, it becomes an undeniable mutually-signed contract. This entirely
eliminates notaries and websites like https://www.proofofexistence.com/ (https://www.proofofexistence.com/) are
showing the concept. The Namecoin project is building a distributed Domain Name System that allocates and
resolve Domain Names without needing ICANN or Verisign, by using the block chain to establish proof-of-
ownership. Similarly, look for entrepreneurs to apply this authoritative proof-of-ownership to built P2P Stock and
Bond Exchanges – at least one Bitcoin site, “Satoshi Dice,” has sold shares and issues dividends without using a
stock exchange. The ownership and dividends are easily verifiable by anyone who wants to look inside the block
chain. Predictious.com is combining the transaction scripting and the verifiability to create a prediction market in
which you cannot be cheated and third-party arbiters can allocate the winnings.

https://startupboy.com/2013/11/07/bitcoin-the-internet-of-money/ 2/6
1/9/2018 Bitcoin – The Internet of Money

Bitcoin’s “send-only” and irreversible nature makes it much less vulnerable to theft. Today, anyone with your
Credit Card or E-Checque (ACH) information can pull money from your account. This creates chargebacks,
expensive dispute resolution and merchants double-checking your identity. Bitcoin is send only. Anyone who has
received bitcoins from you can’t request or pull more money from your account.

Most importantly, Bitcoin offers an open API to create secure, scriptable e-cash transactions. Just as the web
democratized publishing and development, Bitcoin can democratize building new financial services. Contracts can
be entered into, verified, and enforced completely electronically, using any third-party that you care to trust, or by
the code itself. For free, within minutes, without possibility of forgery or revocation. Any competent programmer
has an API to cash, payments, escrow, wills, notaries, lotteries, dividends, micropayments, subscriptions,
crowdfunding, and more. While the traditional banks and credit card companies lock down access to their payments
infrastructure to a handful of trusted parties, Bitcoin is open to all.

Silicon Valley knows a platform when it sees it, and is aflame with Bitcoin. Teams of brilliant young programmers,
entranced by the opportunity, are working on Exchanges (Payward, Buttercoin, Vaurum), Futures Markets (ICBIT),
Hardware Wallets (BitCoinCard, Trezor, etc), Payment Processors (bitpay.com), Banks, Escrow companies, Vaults,
Mobile Wallets, Remittance Networks (bitinstant.com), Local Trading networks (localbitcoins.com), and more.

Looming over them is how governments view Bitcoin and the entrenched financial powers it threatens. The last
few decades have seen a move towards a cashless society, where every transaction is tracked, reported, and
controlled. Bitcoin takes powers from the central actors and returns it to merchants and consumers, savers and
borrowers. Bitcoin brings back some pseudonymity in the transactions, and can be irrevocably traded like cash.
And finally, it points a way towards a single currency – it is a bug, not a feature, that we have multiple global
currencies with exchangers and transaction fees in between.

Governments have been cracking down on the bitcoin exchanges, making it harder to obtain and slowing its
development. Strict and expensive Money Transmitter regulations, designed to slow terrorist and child porn
financing, threaten the next great technological revolution – never mind that terrorists can use cash just fine, the
means of terror are cheap, and that they account for an infinitesimal fraction of global commerce. The development
and innovation in Bitcoin has already begun the move to friendlier jurisdictions, where its innovation can continue
un-impeded. Regulators in the US and UK would be wise to proceed with a light touch, lest they push the
development of Bitcoin and its entrepreneurs to places like Canada, Finland, and the Sino-sphere. The United
States has benefited enormously from being home to the majority of global companies driving the Internet
revolution. The country that is the home to the Internet of Money could one day end up as the guardian of the new
Reserve Currency and the Global Money Supply.

Thanks to Shawn O’Connor, Lucas Ryan, Paul Bohm (@enkido), and Oleg Andreev (@oleganza) for feedback.
Follow me at @naval (https://startupboy.wordpress.com/mentions/naval/)

41 thoughts on “Bitcoin – The Internet of Money”

Emmanuel Bellity (@ebellity) says:

future).
If we take your example of “wills that automatically unlock when most of the heirs agree that their parent has
passed”. It’s a great example. But isn’t it scary to have your will and life savings donated to your children in
bitcoins when they can loose so much value in a matter of days ?
Silicon valley knows a platform when they see it but we have to admit that in this case a lot of people in SV
hold bitcoins and have a big incentive to make its value go up and to the right while it seems to me like they
should aim for a slow, steady growth.

 Reply
Dil-Dominé (@citizenglish) says:
November 7, 2013 at 8:19 am
Great post! We’re excited to figuring out away to incorporate Bitcoin as a payment option for my startup,
Ordrb. I love that the processing fees for Bitcoin are much less than that of major credit card companies.

 Reply
Linards Berzins (@linardzb) says:
November 7, 2013 at 8:39 am
Interesting, but it takes expensive kit to mine the Bitcoins, and if you want to do it with couple of your PC’s
then you will have to wait 5-10 years to mine 1 coin Its again for people with no wife and kids with 100
grand jobs.

 Reply
Pingback: StrictlyVC: November 8, 2013 | StrictlyVC, LLC
Pingback: Bitcoin blows through $300 and keeps climbing — Tech News and Analysis
Pingback: Why the case for Bitcoin at $340 is not that crazy after all | PandoDaily
Pingback: 4 things about Bitcoin that make my head spin | Jordan Cooper's Blog: startups, venture capital,
Wildcard
Pingback: Bitcoin: The Internet of money. How Bitcoin will revolutionize the economy, online payments,
contracts, and society -- if governments don't crack down and turn Bitcoin into a lapdog. | Bit Coin Sack
Pingback: Bitcoin – The Internet of Money « Economics Info
Adriaan Bos says:
November 13, 2013 at 11:53 pm
It’s interesting to look at the ‘ad absurdum’ argument of ‘changing’ money. Imagine an island economy that
uses black shells as money, suddenly waking to a reality where white shells are considered valuable. Those with
lots of hoarded black shells would find themselves poor overnight.

Bitcoin in its extreme could redistribute a lot of wealth. When bitcoin competes with dollars in buying goods,
dollar wealth will buy less than before, dollar prices will inflate. So then you can really say that it isn’t just the
Bitcoin gaining value, but the dollar losing it.

Great article, Naval!

 Reply
Pingback: ¿Qué es un Bitcoin? | RODRIGO FERREIRA
Pingback: Bitcoin – The Internet of Money | Enjoying The Moment
Geoff Evason (@gevason) says:
November 25, 2013 at 2:04 am
In regards to this point : “Bitcoin creates an incentive for miners, who run powerful computers in the network,
to validate transactions and to secure them from future tampering. The miners are paid by “discovering” new
coins, and anyone with computational resources can anonymously and democratically become a miner.”
https://startupboy.com/2013/11/07/bitcoin-the-internet-of-money/ 4/6
1/9/2018 Bitcoin – The Internet of Money

If I recall correctly – there is a fixed upper limit of bitcoins that can be mined. Once they are all mined – isn’t
this incentive then gone, so validating transactions becomes all cost and no return?

 Reply
Pingback: Why Bitcoin is here to stay - StreetEYE
sheriken1234 says:
November 25, 2013 at 2:47 am
Reblogged this on sheriken1234.

 Reply
Pingback: My Bitcoin Mining Experiment — Not Only Luck
Daniel Kahn (@dbkahn) says:
November 25, 2013 at 2:56 pm
Thanks for sharing! So many interesting potential use cases. If just a fraction of them get built, then your
optimism will be justified.

One question: “Bitcoin’s ‘send-only’ and irreversible nature makes it much less vulnerable to theft.” – doesn’t
this cash-like property simply shift the risk back towards consumers and invite an increase in merchant fraud
(aka Snake Oil Sales)?

 Reply
Pingback: Bitcoin – The Internet of Money | Enjoying The Moment
Pingback: 对⽐特币的了解越深⼊，越能发现⽐特币将会带来的⽆限可能！ | AG's blog
Pingback: Weekend reading recommendations « Martin's thoughts on the web. And life.
Shawn Price (@sprice) says:
December 2, 2013 at 6:11 am
I’m really interested by this segment “A Bitcoin transaction can require M of N parties to approve a transaction.
Imagine Wills that automatically unlock when most of the heirs agree that their parent has passed, no lawyer
required.”

@naval can you touch on this in greater detail?

 Reply
Cho CoMo says:
December 7, 2013 at 8:08 pm
Highly susceptible to criminality. Proof of ownership is in your “Wallet”. Your wallet is on your computer.
Your computer is hackable; your wallet is vulnerable.
AND (2nd Scenario);
Ransom demands!! No physical contact required. (irreversible & anonymous); no geographic boundaries.

 Reply
Pingback: Virtual Mining Bitcoin News » Bitcoin is Trust
Pingback: Coinbase - Chris Dixon
Pingback: Predictions for 2014...Punch a Banker (again), JP Morgan Will Settle More Fines, Hug a Designer,
Government Prints More Than Ever, Small is Good and Drafting More Important Than Ever | Trends... Find
them, ride them and get off.Trends… Find them, ri
Ben Williams says:
December 16, 2013 at 6:32 am

https://startupboy.com/2013/11/07/bitcoin-the-internet-of-money/ 5/6
1/9/2018 Bitcoin – The Internet of Money

Hi Naval – I’m wondering what your thoughts are re. Ittay Eyal and Emin Gun Sirer’s paer, “Majority is not
Enough: Bitcoin Mining is Vulnerable”. In this paper (posted link below) the authors argue that a selfish mining
strategy exists, whereby dishonesty is incentivized when a pool keeps it’s blocks private for a delayed period
and then strategically publishes them to maintain the longest chain, whereby honest miners are forced to waste
cycles on already-solved blocks. The question that arises, for me at least, is how can a pool keep its blocks
private? Surely some timestamp function, verifiable across network, invalidates any blocks not published at tie
of solution? This would, of course, render secreting blocks for strategic blocks a waste of time. What are your
thoughts? I’m at orionsg8 at mac dot com if you get this message and feel like replying. BTW, I really enjoyed
watching you at SF Disrupt.

http://arxiv.org/abs/1311.0243

 Reply
Pingback: Bitcoin Startup Coinbase Gets $25 Million In Funding From The Most Influential Venture Firm In
Silicon Valley | BaciNews
William Mougayar (@wmougayar) says:
January 5, 2014 at 7:28 pm
After reading your post and getting immersed into Andreas work, I’m a big fan of Bitcoin’s future. I believe we
are at the dawn of a new “Internet of money”. Went further expressing my thoughts here
http://startupmanagement.org/2014/01/03/bitcoin-is-messy-lets-fix-it/

 Reply
Carl Mullan says:
January 5, 2014 at 9:25 pm
Excellent article.

 Reply
Pingback: Top Tech Stories of 2013 - Eric Heikes
Pingback: Access Legal » Bitcoin and Irish Law » Access Legal
Pingback: Access Legal » Bitcoin Predictions » Access Legal
Pingback: Coinbase | Crapkin News
Pingback: Chapter 9: Conclusions | Great Wall of Numbers
Pingback: Naval Ravikant: Keynote Talk on Open Source, Bitcoin, and Cryptocurrency | #sfbeta
Pingback: Daily BTC – PBOC edition : Token Intelligence
Pingback: Bitcoin vs Gold: What has more intrinsic value - Crypto Herald
Pingback: Zed Reads 001 | NSDMDH
Pingback: Regarding Bitcoin, the Internet of Money and Economic Progress | The Furloff
Pingback: The Quiet Master of Cryptocurrency — Nick Szabo | The Blog of Author Tim Ferriss
Pingback: Ethereum’s Solidity Now Available in Microsoft Visual Studio – Coins Market News

Blog at WordPress.com.

https://startupboy.com/2013/11/07/bitcoin-the-internet-of-money/ 6/6