Thursday 27 February 2014

Working in Montréal today --More Wooden Nickels

Good morning folks,

I will be working in Montréal today.

Sorry about last week, I attended a conference in San Francisco Wednesday through Friday and didn't send out a Pulp.

So damn.  Someone asked me, "So Uncle Daniel, how do BitCoins work and how come when 740,000 were stolen from Mt Gox they can't be found and returned?"

Sigh.  This will be simplified because for one I just sat down on the plane, and two I don't want all of the readers to fall asleep and third, my knowledge is extremely cursory on the subject.  Hell, I might every totally misunderstand the process.  A BitCoin is a unique data sequence that satisfies certain rules.  I think that the maximum number of sequences that follow that set of rules is 21 million, currently around 7 million have been computed.

Now if you are in possession of such a data sequence perhaps you just computed it yourself, you can register the Coin or part of the Coin's key with the central computer system, the Block Chain, as yours.  Well, not really yours but with an identity key that you control.  That Identify key is associated with a private key that only you should know.  Again, this description is very cursory, I don't want to get into a full discussion of public-private key pairs and their generation.

Coins can only be transferred from one identity to another if the 'owning' identity performs certain computations with the private keys. The result of those computations and the transaction details together are accepted or not and the transaction succeeds or not.

"Okay Uncle Daniel, but does the transaction history exists somewhere?"  Oh yes, the complete history of the Coin is there for the world to read and see.  And I know what you are thinking, if the transactions are there to see, don't we know who stole the Coins and can't the transaction be reversed?

Yes and no and no? We would know which Identity received the Coins, but an Identity does not identify a person.  It is possible that IF you had a transaction where you knew the other party's name then you could associate his name and BitCoin identity together.  Maybe.

But reverse the transaction? No, there is no undo button in the BitCoin system.  That may indeed be one of impediments to any kind on main stream adoption.  

"Okay, but how about invalidating stolen Coins?  Can they be marked as proceeds of crime and rendered zero value?"  An excellent question!  Also no.  In order to preserve fungibility, no such provision exists in the Block Chain.  Fungibility is the interchangeability of one unit of a commodity or currency for another.  Imagine if you walked into a store with your $20 and the clerk said, "oh sorry, that $20 was used to buy a stolen bicycle 3 months ago  it has been flagged as $0.  

"Okay, one last question Uncle Daniel, why do the Coins have value?"  Another excellent question.  They have value because people perceive them to have value.  Proponents compare them to any other currency like the Canadian Dollar, but they are not the same and that comparison is invalid.  The Canadian Dollar has value because it is backed not by gold (although I rather preferred that) but by the taxpayers of Canada and the Gross Domestic Product.  BitCoins on the other hand are new and exciting like Beanie Babies were in the '90s.

The Coins will continue to have value as long as collectors are willing to buy them using real currencies like Canadian Dollars, as soon as a new shiny item comes along -and Cryto Currencies are nothing new, there are several out there today, then their value may plummet to zero.

Time will tell.

In the meantime, have a great day and don't take any wooden BitCoins.