Monday, June 30, 2014

Bitcoin Core Ideas – Money As Idea





I found Bitcoin really obtuse even as I learned more and more about it. I understood bitcoin much more easily once I related each core idea to one which I already knew. Once I understood the core ideas underpinning Bitcoin, I realized this stuff will change the world.

Money as an Idea


I was first taught about money using metal coins and paper notes. Just like learning to count using rows of apples, using physical representations of money was an effective means for my brain to conceptualize the idea of money.

As an adult, the concept of money is most often disconnected from the traditional physical tokens. I my advancement of math usage, I left counting apples behind long. Similarly, in money and finance, I also left coins and paper notes behind long ago.

The dollars I am paid, I spend, I borrow, and I save do not actually exist as physical tokens.  For decades now, they have existed only as agreed upon notations in digital spreadsheets. These digital spread sheets, called ledgers, are maintained by large heavily regulated corporations including banks, investment houses, merchants, associations and of course tax authorities.

It has become clear to me that money is not a physical thing (a coin or paper note), but it is an agreed upon standard of account. Money is the agreement that when my company pays me they will lower their account by X dollars while the bank raises theirs the same x dollars. No physical exchange is made. Instead all ledger holders are expected to follow the rules of account set out by the governing authorities. In idea conditions, failure to comply with the rules results in severe penalties.



I explored this idea of a concept separate from the physical manifestations used to represent it when I wrote about Disney characters in 2013: The Philosophy of Characters - Inspired by Disney Fictions


Ideas: The Realm of Computers


Today’s dollars are noted on the secured and regulated ledgers maintained by thousands of companies and governments. The vast industry of digital finance is powered by countless data centers capturing, processing, securing, and outputting the world’s digital ledgers.

While online banking, direct deposit, and international money transfers look convenient, they are an automation of centuries old banking techniques. The use of computers has sped up the ages old methods for accounting, but the fundamental assumptions underlying today’s financial methodologies remain largely unquestioned.

Enter Bitcoin – Money Built for Computers


Like today’s digital dollars, bitcoins only exist in the digital world. Bitcoins are noted on a secured and regulated ledger.  Just as with digital dollars, no physical exchange is made when I spend bitcoins. Instead the digitally secured and regulated ledger is updated via agreed upon rules of account.

So in answer to the understandable question, “Is there an actual bit-coin?” no, bitcoins can never be physical, since they are only a digital notation on a secured ledger.

You will often see bitcoins represented as gold colored coins.  This is an attempt to reach out to newcomers using a metaphor they can understand.  Like counting apples to learn math, learning about Bitcoin with pictures of metal coins is a crutch which can drop away as the core ideas of Bitcoin take root in one’s head.


Bitcoin Core Ideas – Public Keys


I found Bitcoin really obtuse even as I learned more and more about it. I understood bitcoin much more easily once I related each core idea to one which I already knew. Once I understood the core ideas underpinning Bitcoin, I realized this stuff will change the world.

Account Numbers


I get account numbers. Each time I have an interaction with a bank, it is associated with an account number. Account numbers allow both myself and the bank to identify a block of financial information, and keep track of it over time. Account numbers also allow third parties to transfer money into a given account. Account numbers can also allow confirmation of funds availability.

Account Number
023452846
  • Identify Financial Data
  • Allow Deposits Into Data
  • Confirmation of Funds


Account numbers are used in place of my name because I may have more than one account with a given bank, in turn, the bank may have more than one customer with a given name. Account numbers allow flexibility for me to hold many accounts to track my various financial business such as savings, loans, checking, credit, etc.

In the United States, my accounts are linked directly to my personal or business identity. In Switzerland account numbers can be held in anonymity with no connection to a person or entity.

Knowledge of an account number does not allow spending or manipulation of a given account. In banking, passwords, PIN numbers, identification, and signatures provide the locking mechanism on the use of data in any given account.

Public Keys


In the world of Bitcoin, account numbers are called Public Keys. Just like with a bank, a public key identifies a block of financial information, allows third party deposits, and allows for confirmation of funds availability.

Public Key
1H7vmqxqA785FFH3H1FL8JH1bTi5xPDqVv
  • Identify Financial Data
  • Allow Deposits Into Data
  • Confirmation of Funds



Public keys are completely free to create and to keep. (I created the key above just for this example.) Like account numbers in Switzerland, Bitcoin public keys can be anonymous. In fact, since Bitcoin does not use a central bank, there is no list of who owns what public key.

Unique to Bitcoin public keys, all financial data of a given public key is completely transparent.  Anyone on earth can see the balance, and transaction activities of any given key. Anonymity is achieved by having every single key available at all times, yet no database to connect any given key to any specific user.

Similar to banking accounts, knowledge of a public key address does not allow spending or manipulation of a given account. With Bitcoin, private keys provide the locking mechanism on the use of data held by the public key. (Private keys is a core idea for another day.)