The Real Magic of Bitcoin

Posted by majc in Bitcoin on Jul 4th 2014 Add comment

Forget everything you’ve heard. Bitcoin is complicated like magic is complicated. It’s not. But things are told to you in an obscure way, amidst a lot of distracting nonsense, which leaves you bewildered. The magician does it on purpose, of course, whereas Bitcoin just isn’t explained very well, and the theatrics which happen around it are highly magnetic.

So where’s the sleight of hand – what are we missing?

Where we really need to look, first and core-most, is here: When you hand over a quarter to someone in the street, the coin moves from one person to another, and everyone keeps walking. Bitcoin doesn’t work that way. Bitcoins are not coins, and you do not “transfer one bitcoin” from one person to another. Bitcoins don’t move.

What happens instead?

When you transact in bitcoin, what moves from one person to another – what changes hands – is ownership of the bitcoin. You sign over your ownership of one bitcoin to someone else, the bitcoin stays put, and everyone keeps walking.

Do you see how that’s different?

In practice, of course, it doesn’t have to be one whole bitcoin: you can sign over ownership of any amount of bitcoin – even tiny fractions.

The important thing we’re seeing here is that the money in this situation – the agreed, accepted store of value that changes hands – is bitcoin-ownership, not the “coin” itself.

Nifty trick? Yes. Complicated? No.

It’s a subtle shift in technique which achieves exactly the same result: “This doesn’t belong to me any more, it belongs to you”. And, like a magic trick, subtle shifts in technique can make otherwise impossible things possible.

In short, the Bitcoin way of doing things – built on this subtle shift in technique – makes some important, potentially game-changing new things possible. And that is Bitcoin’s value. These new possibilities are why Bitcoin means something. They are the reason why Bitcoin is worth something.

We’ll get to what the newly-possible things are in a minute, and why they matter, but when you see smart people getting so pumped about Bitcoin, these technological advances are the reason. They are the real magic of Bitcoin.

And they regularly get lost amidst a lot of distracting nonsense.

The Real Magic of Bitcoin

First, a little bit more of how it works…

Take a second to see the difference in technique clearly (between the quarter and the bitcoin), because from here we’re properly set up to understand Bitcoin. From here, what might seem tricky actually starts making sense. Like the public, mega-shared ledger, for example.

When you sign over your ownership of one bitcoin to someone else, this internet-wide ledger is where you sign.

The ledger is openly available to everyone, all the time, wherever you are in the (internet-connected) world. Its only job is to keep track of who owns which bitcoins right now, and make sure everyone is on the same page. The bitcoins don’t move. The ledger simply contains ownership details for every single bitcoin – a complete history of who signed their ownership of the coin over to who, right the way back to the very first owner.

Big? Yes. Complicated? No.

Shazam! That’s it – you’ve just got to the heart of Bitcoin.

This (enormous-but-not-actually-very-complicated) ledger has to be maintained – and maintained securely – of course; that’s the next challenge if we’re going to make this trick work. But for now we don’t need to learn how Bitcoin achieves this feat.

Spoiler: the task is not handed over to banks.
No trusted central authorities of ANY KIND are required.

We don’t need to understand the technicalities of mining and cryptography to see the value of Bitcoin any more than we need to understand the technicalities of optics and photochemistry to see the value of a camera. It’s enough to know that the moving parts simply do work how they’re supposed to.

Another new page of the Bitcoin ledger gets written every 10 minutes.

And everything else you hear about Bitcoin builds out from this core of ongoing, self-contained, self-sustaining (authority-less) ledger activity. The highly magnetic theatrics happen around it. All the drama is created as a result of the ways in which people interact with each other using this newfangled plaything that they’ve discovered.

The Real Magic of Bitcoin

Right, so what are (techy) people so pumped about?

While every bitcoin in existence remains unmoved, bitcoin-ownership moves around as freely (and directly) as a quarter in the street. But there’s a big difference: the transferability of bitcoin-ownership is much better than a quarter in the street.

You can directly transfer your quarter to someone else as far as you can both physically reach with your arms – or throw, I suppose.

But you can directly transfer your bitcoin-ownership to anyone, anywhere in the (internet-connected) world; as far and wide as you can send and receive your email.

So that’s Improvement #1.

Improvement #2: You don’t have to pay bankers to make the transfer for you. You can of course send money (quite) far and wide using the traditional banking network, and services like PayPal – but it costs you. Banks and payment handlers typically charge us a 3-10% fee for the privilege. There are fees in Bitcoin, but they are nowhere near 3-10%. You could send $10,000-worth of bitcoin anywhere in the world, and instead of the bankers’ $300-$1000 fee, it’ll probably cost you around a quarter.

Yeah. I know.

When you look at bitcoin-ownership alongside dollar-, pound-, euro-, and yuan-ownership, clearly it’s in a league of its own. It’s like comparing apples to… er, I dunno, some sort of 8ft unbelievably-juicy jumbo apple.

Compared to what we’re all using at the moment, the Bitcoin protocol has made money ultra-transferable. What Bitcoin now enables us to do is completely unheard-of: there has never been an agreed store of value which is transferable in the way bitcoin-ownership is transferable.

This ultra-transferability, and all the promise it holds – plus a few other (slightly more technical) things we won’t go into now – is what people are so pumped about.

The Real Magic of Bitcoin

Is it really that good?

Technologically? Yes. Practically? Not yet.

It works! It works great, in fact. Bitcoin-ownership is more readily transferable to far more people, throughout far more of the world, than any other money. And transferring ownership of bitcoin does cost far less than transferring ownership of dollars or euros. So what’s the hold up?

   1.  It’s not understood enough.
   2.  It’s not slick enough.

There’s a carnival of distracting nonsense at every turn with Bitcoin. And not enough people are seeing past the distraction.

Not enough people are focusing on the straightforward technological value which Bitcoin delivers to people – people who want to reach out and hand over their money directly to someone else further away than arm’s-reach.

Not enough people recognise the real magic of Bitcoin.

Simply put, the whole idea hasn’t been made approachable enough to be trustworthy, and the whole experience hasn’t been made painless enough to be useful…

…yet.

As is stands right now:

   1.  Understanding bitcoin is bewildering.
   2.  Getting bitcoin is complicated.
   3.  Securing bitcoin is unsettling.
   4.  Spending bitcoin is clunky.

We’re still working on unlocking the potential of the Bitcoin protocol. It’s still so young; things are just getting started. There are people doing highly valuable work which is improving all aspects of the experience for the end-user. I’m doing my best with these words to cut through the nonsense and the hype and improve on 1, which will help feed the development of 2, 3 and 4.

If it works, I might do more.

There’s more to the real magic of Bitcoin. Next up would probably be: wallets, keys, loss, theft, hacking, and meltdowns at Japanese bitcoin exchanges run by incapable children. Maybe we get to the real magic of mining, since there’s a lot of distraction around that too.

Tell me if you want it.

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2 Comments (thank you to all). thank you!

  1. Victoria  July 5, 2014 - 9:58 pm  

    Great work – I really enjoyed this read. “I want it!”

    • majc  July 6, 2014 - 7:48 am  

      Thank you! – that’s exactly what I was aiming for. :)

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