This past weekend I attended the Bitcoin 2013 conference in San Jose, where over one thousand enthusiasts, developers, entrepreneurs, venture capitalists, and, yes, lawyers gathered to chart the future of the virtual currency. Here are the top three things I learned at the conference.
Bitcoin is about more than payments
Bitcoin is an even bigger deal than I thought. While the currency is best known as a censorship-resistant and somewhat-anonymous payments system, it has the potential to be so much more.
“Ultimately bitcoins are data, and you can use a data transit protocol to transit information other than just ‘I’m sending you bitcoins.’ It could be ‘I’m sending you a stock,’ or it could be ‘I’m sending you a bet,’” says Jeff Garzik, one of the six Bitcoin core developers.
Thought of this way, the Bitcoin network is a platform on top of which other layers of functionality can run, much like the Web or e-mail are protocols that run on top of the Internet’s foundational TCP/IP protocol. Bitcoin therefore has the potential to spawn any number of other services that are decentralized, and thus difficult to regulate or control.
One application for such an extension to Bitcoin would be decentralized electronic markets—whether for futures contracts, sports betting, or anything else.
J.R. Willett, author of a white paper proposing such a system, explains with a thought experiment: Suppose two parties, A and B, want to bet on the future price of Google stock, and there is a third party, C, that publishes the price on the network every few minutes. A thinks the price of Google will go up and publishes a message to that effect, while B thinks it will go down and publishes a message accepting the bet.
“Now, they’re interacting on a protocol layer above bitcoin; they’re using a currency that’s on top of bitcoin that recognizes these kinds of messages,” says Willett. “So they’ve actually both committed and there’s an agreement that everybody in the world can see.”
Others on the distributed network don’t know the identities of who placed the bet, but they can see that A said it would go up, and that B said it would go down, and they can see C publish the price of Google in the future.
“If the price goes up, then the whole protocol recognizes that A won that bet; the whole protocol recognizes that A now owns B’s coins,” says Willett.
And voila, welcome to a world of decentralized electronic futures markets. The predictions market Intrade, a darling of academic economists and political scientists, recently ceased operations after it was sued by the CFTC. Yet such a predictions market built as a peer-to-peer network on top of Bitcoin could not be easily shut down, nor would there be an operator that could run away with user’s funds, as it’s also alleged of Intrade.
And it’s not just markets. Treating Bitcoin as a protocol would allow for a vast number of other decentralized applications, including communications messaging and broadcasting, a decentralized domain name system, and much more.
The hobbyists give way to the pros
Bitcoin to date has been the domain of geeks, gold bugs, and cypherpunks, but sensing its disruptive (and profitable) potential, entrepreneurs and venture capitalists are pouring into the space.
Peter Thiel’s Founders Fund last week made a $2 million investment in merchant services firm BitPay, Google Ventures recently backed bitcoin exchange Ripple, and Fred Wilson’s Union Square Ventures has invested $5 million in the transactions platform Coinbase.