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
Rub GRbRG is a frst-year law clerk at a lawfrm in ew York City. He is a recent gradate o Yale LawSchool, and has oth achelor’s and master’s degreesin compter science. Some o the analysis in this articlereects 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 oten 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 sotware 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 dierences. 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 eective attacks by hackers, be-cause penetrating even a large number o Bit-coin programs would have little eect 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-