Now a co-organizer of TBM, Wheeler kicked off the February meetup with a detailed presentation explaining Bitcoin and how crypto-currencies work, and closed with a fairly granular dive into the inner workings of the system's technology. Following Wheeler's talk, two Duke Law students provided an overview of the legal and tax issues surrounding Bitcoin.
I didn't know much about Bitcoin before that night, and some of what I thought I knew was wrong. I primarily viewed Bitcoin as a digital currency for speculators with high risk tolerance to buy and sell in hopes of turning a profit—a digital stock to day trade. I also believed (and still do) that digital currency has potential utility—reduced fees, increased speed and the ability to execute micropayments. But I had questions about regulation and tax treatment, and widespread adoption seemed far off. On a broader level, I had read and heard about Bitcoin being used for drug trafficking and other illicit purposes, and accordingly thought of Bitcoin as somewhat illicit.
This is an incredibly narrow view on Bitcoin, I now realize, but it's unfortunately the prevailing public view. The majority of the discussion and media attention around Bitcoin today is around its use as a currency. That is certainly one application for Bitcoin. However it is first and foremost a protocol—a solution to the Byzantine General's problem that researchers have worked on for over 30 years.
How Bitcoin works
Bitcoin's elegant solution is directly linked to its appeal. As described by Jameson Lopp, one of the attendees at the meetup and a software engineer at Bronto, Bitcoin is "a system for decentralized proof of ownership and transfer of ownership of digital assets." Put in layman's terms, Bitcoin's solution enables peer-to-peer digital transactions between two parties who don't know each other, in a way that is demonstrably fair. All achieved without the intervention of a centralized third party (i.e. banks and governments).
Bitcoin's transaction system self-governs through various user-operated nodes that 'mine' or reconcile the collective ledger in real time, with rewards for the first miner to 'hash' or solve the encryption for each successive 'block', or pool of transactions. The bitcoins awarded to miners introduce new currency into the system, helping it grow.
Lopp told me, "The way that I see Bitcoin as being revolutionary is the various layers of consensus mechanisms that it uses."
He's referring to Bitcoin an open source project—changes to code are collectively agreed upon by the community of developers who contribute to the project. Similarly, transaction verification is performed by a group of miners to ensure accurate work. Part of Bitcoin's appeal, Wheeler said, is the fact that it is essentially a distributed ledger that anyone can access. It can be used as money, but can function in a variety of other ways as well.
Not just a currency.
According to prominent VC Marc Andreessen, examples of non-currency applications include "digital signatures, digital contracts, digital keys (to physical locks, or to online lockers), digital ownership of physical assets such as cars and houses, digital stocks and bonds." Wheeler told me that he has used Bitcoin for the last purpose proposed by Andreessen: to invest in a Chinese bitcoin mining company called ASICMiner. Rather than distribute stock certificates, each shareholder's ownership is digitally stored in the Bitcoin blockchain.
Understanding that Bitcoin is a protocol and not just a currency is critical, because it is the protocol and not the currency that many of its strongest supporters view as groundbreaking. Lopp said that his investment in Bitcoin is based on his belief in the protocol, noting that he doesn't necessarily believe Bitcoin will succeed as a currency. The public fails to recognize that Bitcoin is an idea and that the currency is one application of that idea not because we are dumb, but because Bitcoin has an identity problem.
According to Lopp:
Bitcoin is different things to different people. To the average consumer, it is a way of sending money without having to deal with banks, or a way of making an online purchase without handing over all of your financial details. To the merchant, it is a way to save money on fees and market to a segment of the populace that is known for having high disposable income. To the investor, it is a commodity that can be used to get rich, sometimes quickly. To the programmer, it is a public data platform that is easy and nearly free to use, and an easy way to automate payments in their software without relying upon third party processors. To libertarians and anarchists, it is freedom from the state and privacy from corporations.
The result is that when people debate Bitcoin they are often talking about two different things—Bitcoin the protocol versus 'bitcoin' the currency. When political and ideological agendas get involved, it is easy to understand how these discussions can devolve into articles by Nobel Prize winning economists asserting that "Bitcoin is Evil" or decrying it as a bubble. Senator Joe Manchin from West Virginia even called for a federal ban of Bitcoin following the recent collapse of MtGox, one of bitcoin's largest trading exchanges.
To be fair, bitcoin has seen its share of ups and downs. Late last year it was valued at over $1,100, but declined to a low of approximately $450 in late February (Source: http://www.coindesk.com/price/) due to a loss of confidence associated with the MtGox hack that resulted in the exchange's insolvency. There are also persistent cries that bitcoin is a tool for money laundering, black market trade, drug purchases and so forth because it provides increased (although not complete) anonymity for transactors. The currency's defenders reply that the same could be said for cash, and Senator Jared Polis from Colorado even facetiously suggested that cash be banned in response to Senator Manchin.
Still, these issues have not discouraged Bitcoin enthusiasts. They don't blame Bitcoin for these issues—they blame the poor business practices of individuals and entities in the ecosystem. They remain loyal supporters because the open source project and revolutionary protocol are too important for them to abandon. To wit, both Lopp and Wheeler told me that they did not sell any bitcoin as a result of the MtGox issue. Both have continued to purchase the currency and remain very bullish on Bitcoin.
Local enthusiasm is growing
Despite the recent bad publicity, interest in Bitcoin continues to grow among brick and mortar businesses as well as online retailers, as evidenced by the story of how TBM got permission to host its February meetup at American Underground @Main (AU). In looking for larger venues to host TBM, they spoke to local incubator spaces which eventually led them to AU. Wheeler says that AU was already interested in Bitcoin and had been thinking about accepting bitcoin as payment for rent at the co-working space. Access to the new venue increased TBM attendance numbers and Wheeler hopes it also attracted some new members. TBM will also host its March event at AU, on March 25 at 5:30 p.m.
Local interest in bitcoin is not limited to AU—Rise Biscuits & Donuts in Durham recently began accepting bitcoin as payment, and Wheeler plans to ask the owner of Rise to share his experience at an upcoming meetup. Though merchants typically convert bitcoin to cash immediately upon receipt of payment, Wheeler believes the move is significant for both industries.
"I think it's meaningful," he says. "When [Rise] can buy flour with bitcoin I think that's going to be even more valuable. It's supposed to be something you can transfer, so once you get enough people out there in the community to use and transfer it you'll see different patterns of use. You'll see businesses transact with each other and cut out all sorts of people in the middle, for better or for worse."
Lopp has his own Rise and bitcoin story to share. He recently bought 100 Rise biscuits and donuts for his co-workers, paying with bitcoin. "As soon as people saw tangible things that were purchased with 'fake Internet money' it all of a sudden became a lot less fake in their eyes," he says.
Wheeler hopes to have local students come and play with Bitcoin code sometime soon, and suggested that TBM could host a class for people who want to build a website or service and latch a simple payment system to it without having to worry about setting up a bank account.
Making bitcoin more real and accessible to the public means increasing its use and visibility, and is a recurring theme supporters point to if the currency is to reach scale. This is part of the mission of the Bitcoin Foundation (BF), which seeks to standardize, protect and promote Bitcoin. Wheeler is a BF member and forum moderator, and he advised me that donations pay salaries for Bitcoin lead developer Gavin Andresen and provide grants for approved projects. One example of such a project is CoinPunk, an HTML5 wallet for accessing bitcoins on iOS devices. Apps like CoinPunk serve BF's mission of increasing Bitcoin's utility and value to consumers.
The future of Bitcoin
Lopp and Wheeler have similar perspectives on where Bitcoin will be in five years. Both agree that Bitcoin will likely be used by millions of people—many of whom may not realize they're using it. Lopp said, "There will be many layers of applications and services built on top of Bitcoin." Wheeler offered an example, "Paypal might settle [user] transactions in their system using bitcoins." Payments in the developing world could represent a huge driver of growth for the currency, he said.
On the flip side, I asked Lopp and Wheeler what they thought could threaten Bitcoin's existence. For Lopp, it's the threat of a "catastrophic bug in the protocol" that would allow hackers to move or create coins they shouldn't be able to. That could break the entire system of trust, he said. Wheeler felt regulators are a more serious concern, "Laws that prevent bitcoin from being as useful to people in various jurisdictions could [reach] a breaking point where you can't sustain growth and therefore the number of people who hear about it drops and the reason to have it drops."
But, he added, "What's not going away are digital transactions that are based on decentralized systems."
A final quote from Lopp nicely summarizes how I view Bitcoin after a few weeks of research and conversations: "While the future of Bitcoin specifically is uncertain, crypto-currency is here to stay. You can't kill an idea."