Bitcoin: How Can a Virtual Currency Attain Real Market Value

Bitcoin script could be harnessed to accommodate P2P lending, perhaps based on a peer consensus for approval, on a case-by-case basis (credit worthiness could be cribbed from other platforms, such as eBay); a signature would release payment under certain conditions of protocol, with a contract being programmed to satisfy requisites. This would provide genuine alternatives to the current borrowing options and ignite healthy competition.

“a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency”.

To summarise: There is a social demand, even pressure, for a medium of exchange whose use value is not that it can be planted and harvested, milked or consumed, but rather that it acts as a kind of buffer against the complication of wants remaining unsatisfied due to a mistiming in the availability of such goods to be exchanged. The medium of exchange isn’t completely arbitrary, it has to have certain key properties in order to be fit for purpose, and it may be that a change in the marketplace transforms the medium of exchange into something more applicable. It may be that gold, for example, starts to lose its lustre as a convenient medium of exchange in favour of something more pragmatic and suited to a changing infrastructure.

A review of monetary principles (by no means the definitive analysis) reminds us that it has always been a system of deferred exchange, whereby suitably practical units, or tokens, are adopted and accepted as intermediary representatives of goods in absentia, to be acquired at a time when necessity dictates. This sensible form of exchange is a socially acceptable method that alleviates the coincidence of wants problem discussed earlier. The tokens require certain properties to be functional (for example they must compensate for the limitations of the goods they are agreed to represent)—they must be portable, imperishable, and so on; and it is in this capacity that they are also able to store value

As an aside, the growth of pools is currently weakening the prospects for solo mining and could have some bearing on the collegial nature of Bitcoin if the largest and most powerful pools act as a single entity to pressure change to gain some kind of advantage to the detriment of the ordinary bitcoin use

The way Bitcoin operates—the principle of reward offered for work undertaken like in real-world economics—is an easy analogy to grasp. The “work” itself may not be critical to survival in comparison to, say, agricultural activity, nor is it work in the physical sense of force x distance; rather, it is a simulation resembling the production and economic role of a fungible commodity (such as gold). Because of the similarities, Bitcoin is sometimes referred to as digital, or electronic, gold

If the hashcash proof-of-work protocol is incorporated to deter the nuisance of spam e-mail, then the proof-of-work protocol in Bitcoin ensures that multiple Bitcoin identities operated by a single entity cannot conceivably be made to confirm a fraudulent transaction without massive computational expenditure. From the merchant’s point of view, despite the inconvenience of waiting upon firm confirmation of a bitcoin payment, the irreversible nature of the transaction means the chances of being caught out by instances of a charge-back are unlikely (a risk that exists in more traditional methods of electronic transactions).

Cryptography is integral to Bitcoin protocol and necessary for preventing coins from being fraudulently added to the system, determining authentic ownership, and validating the authentic transferal of ownership of bitcoins within the transaction chain. It is also employed in the proof-of-work protocol to prevent double-spending; it is a necessary anti-counterfeiting measure in both cases.

Ten minutes is considered on average the minimum time required for a script validated transaction to be confirmed in one block; after six blocks, confirmation is considered safely secured by the client software. If, for example, a merchant who has been notified that a customer’s bitcoin is incoming doesn’t allow for the confirmation process to complete before exchanging the merchandise, he runs the risk of forfeiting those goods. A longer wait (more blocks added to the chain) strengthens the legitimacy of the transaction. However, assuming nothing untoward has occurred, bitcoin transactions are irreversible

Bitcoin software maintains the average block solution time, aiming for a consistency of ten minutes (six blocks per hour). In this respect (as well as most other aspects), Bitcoin is self-regulating and the adjustment of the difficulty of mining controls rampant inflation as the processing power brought to bear becomes ever more potent. In fact Bitcoin is often touted as being inherently deflationary.

Each block solved (“found”) is added to the previous block and the block chain grows. If two blocks are solved simultaneously, a fork develops in the chain. This poses a potential problem, as the network cannot be sure which branch tracks the correct flow of legitimate transactions. This is resolved when one of the branches grows longer than the other (that is, one branch attracts a greater percentage of processing power); the shorter one is then automatically abandoned in favour of building upon the longer branch in the chain, as it represents the greater proof of work.