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Published by: overqualified on Feb 02, 2012
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The Milken Institute Review
The chances are pretty good that you’ve heard aboutBitcoin by now – and almost as good that you still don’tknow what it is or how it works. Perhaps this will help.Bitcoin is a brand new digital currency whose sup-porters argue is the uture o money because it allowsast, inexpensive and anonymous Internet-based nan-cial transactions, while eliminating the need or com-mercial intermediaries to dot the i’s and cross the t’s, oror government agencies to manage its stability. Detrac-tors call it a Ponzi scheme eeding the paranoia o con-spiracy theorists, as well as a tool or terrorists, drugtrackers and child pornographers – not to mentionan economic disaster waiting to happen.Bitcoin is a product o the Cypherpunk mailing list,a group o cryptographers with an outsize infuence onthe digital world. The group eectively won the en-cryption wars, allowing individuals access to technolo-gies like Skype that rely on unbreakable encryption, atechnology that the government wanted to ban. Some
by reubengrinberg
hereas gold miners compete in finding, extracting andextraordinarily difficult puzzle every 10 minutes around
The Milken Institute Review
   c   a   r   l   w   i   e   n   s
Rub GRbRG is a frst-year law clerk at a lawfrm in ew York City. He is a recent gradate o Yale LawSchool, and has oth achelor’s and master’s degreesin compter science. Some o the analysis in this articlereects research that is orthcoming in the
Hastings Scienceand Technology Law Journal 
o the alumni are notorious or using the In-ternet to attack government authority. Oneo them, Bram Cohen, invented BitTorrent,technology oten used to evade copyrightprotection; another, Julian Assange, startedWikiLeaks.In 1998, a cypherpunk named Wei Daiproposed a digital currency called “b-money”to acilitate commerce over the Internet thatcould not be traced or regulated by govern-ments. Ten years later, a programmer work-ing under the pseudonym Satoshi Nakamoto– it’s not even known whether he or she is Jap-anese – gured out how to implement Dai’sproposal, publishing a white paper on thetopic and releasing sotware or his “bitcoin”system.
how it works
In many ways, a Bitcoin account is like an on-line bank account. In both, deposits arestored in the orm o electronic ledger entries,and payments consist o orders to credit oneaccount at the expense o another.But there are crucial dierences. Bitcoinrelies on peer-to-peer networking. That is, in-stead o being linked through a central server,each Bitcoin program located on an individ-ual’s PC is linked to other Bitcoin programs,which in turn are linked to still other Bitcoinprograms. And each PC contains a copy o the account ledger that registers transactionsin the system.Cleared transactions are quickly and auto-matically communicated to other Bitcoinprograms. This decentralization helps thesystem evade eective attacks by hackers, be-cause penetrating even a large number o Bit-coin programs would have little eect on thenetwork as a whole. Note, moreover, that italso allows individuals to send money directly to one another without the help o a bank.A peer-to-peer nancial network is stillpotentially vulnerable to thieves and vandalswho transmit bogus transactions and boguscopies o the accounts. Nakamoto’s break-through was to gure out a way to mimicmany o the controls o a traditional nancialsystem without enlisting banks or govern-ment regulators. It’s built around “mining” –the process that creates and distributes newbitcoins. Anyone is ree to try to create bit-coins, in a way that is analogous to prospect-

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