Bitcoin, the decentralised, mainly digital currency that is neither issued nor guaranteed by central banks, has always seemed like a magic trick. Rather than spinning straw into gold it transforms wasted computing power into money that people will actually accept as payment.
Radical libertarians have desperately wanted to believe in it because they hope it can resolve the following dilemma. They prefer markets to politics and they violently distrust states. But modern states in effect have a monopoly over the currencies that markets need in order to work.
Unfortunately, the magic is wearing off. Some of the technological innovations associated with bitcoin will stick around. The political project will not. Rather than overcoming conventional politics, bitcoin is succumbing to it.Bitcoin, if it became broadly accepted, would challenge states’ dominance of the economy. It is designed to prevent monopoly by states or other entities, building a new currency based on shared information and making it hard for any entity to gain control. Politics disappears and a combination of technology and cryptographic proofs is conjured up in its place.
The biggest fights are focused on the most innovative element of bitcoin: the “blockchain”. This is a decentralised ledger of transactions using bitcoin. Bitcoin “miners” compete with one another to solve computationally hard problems. The winner receives new bitcoin but also validates a “block” of queued transactions, which is then added to the ledger and shared with the community.
This system was designed to replace third-party regulation with decentralised authority. For technical reasons, it is starting to fail. Each block is small, meaning the system can handle only a few transactions at a time. As more people have started to use bitcoin, the system has grown more unreliable.
Read the full post at the Financial Times.