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22-31MR53

22-31MR53

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Published by overqualified

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Published by: overqualified on Feb 02, 2012
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22
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
TodayTechies,TomorrowtheWorld?
bitcoin
 
bitcoin
 
w
hereas gold miners compete in finding, extracting andextraordinarily difficult puzzle every 10 minutes around
24
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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