Is Bitcoin Really the Next Internet?

Ariel Deschapell | Published on April 27, 2014 at 12:10 BST | Analysis, Bitcoin protocol, Blockchain, News, Technology

Everyone who encounters bitcoin for the first time grapples with how it works, and what it means. The former is relatively easy enough to learn, the latter however is something that everyone seems to have a different opinion on. ‘Is bitcoin the next Internet?’ seems to be the question behind many news articles and passionate debates alike.

Entrepreneur and bitcoin advocate Marc Andreessen has most visibly made comparisons between the two, while CNBC reported that many more venture capitalists thought bitcoin could be ‘as big as the Internet’.

Despite the comparisons’ obvious buzz appeal, it’s a serious question with profound implications. How alike are bitcoin and the Internet, and what conclusions can we draw from the comparison?

A natural metaphor

Within the world of monetary theory and finance, bitcoin is unprecedented. It is such a radical concept that most in the field are sceptical that the kind of decentralized technology bitcoin represents is even compatible with the modern economy.

The Internet thus provides an obvious reference point for a technology that seems utterly similar in its decentralization, open-source code, state of development, and most importantly its potential to disrupt on a global scale.

Indeed, if nothing else, the comparison can help effectively communicate the magnitude of bitcoin’s technological achievement.

Chris Ellis, the co-founder of feathercoin, captures this sentiment eloquently:

“The first thing that humanity has built that humanity doesn’t understand, the largest experiment in anarchy that we have ever had.”

That’s actually a quote from Eric Schmidt, and he’s talking about the Internet or the ‘network of networks’. Every network it touches it liberates. Already we’ve seen publishing, education, retail, and most famously music and film be disrupted in ways we could not have imagined. Does bitcoin represent just such a moment for banking and finance?

Given the fact that bitcoin cannot be centrally regulated, ‘an experiment in anarchy’ seems like an apt description. However for any bitcoin/Internet comparison to be truly useful and tell us where bitcoin can go from here, we need to compare their characteristics in much closer detail.

Core difference

Bitcoin and the Internet are indeed both decentralized, but both serve rather distinct purposes.
The Internet evolved as the general purpose infrastructure for a limitless amount of applications and traffic, such as email. Bitcoin on the other hand has a very specific core purpose, a ‘peer-to-peer electronic cash system’ as described in the very title of Satoshi’s original white paper.

Ultimately most services built on top of bitcoin are meant to help it to more effectively achieve its primary goal as a medium of exchange in one way or another. It exceeds this function by leaps and bounds, accomplishing what the current financial infrastructure can never do.

However as a general platform for new applications to run on, bitcoin currently has severe limitations. Mastercoin, Counterparty, and others have attempted to build additional functionality on top of the Bitcoin protocol with limited success.

While the bitcoin block chain does contain properties that allow it to be used for third-party purposes, the resources are limited and have led to conflict in the past. Bitcoin simply isn’t designed to function as the flexible infrastructure for a wide range of applications like the Internet is.

Block chain potential

However, the potential exists to use the fundamental technology underlying bitcoin, the decentralised block chain, to build numerous decentralized applications.
Decentralized applications have been getting much media attention as of late as the true revolution behind bitcoin, and where we’ll see the most groundbreaking innovation. It opens the doors to decentralized email, domain names, smart contracts, and even Decentralized Autonomous Corporations. As David Jonston, Executive Director of BitAngels, put it:

“[Decentralized applications or DAs] have the potential to become self-sustaining because they empower their stakeholders to invest in the development of the DA. Because of that, it is conceivable that DAs for payments, social networking, and cloud computing may one day surpass the valuation of multinational corporations like Western Union, Visa, Facebook, Google, and Amazon that are are currently active in the space.”

Even Goldman Sachs remarked that the underlying technology behind bitcoin holds promise. Systems designed with the bitcoin blueprint can be extremely specific in nature, or instead provide a backbone that can support as many programs and applications as human creativity can generate – much like the Internet and web. Ethereum is currently being built on that very premise.

Bitcoin itself however remains first and foremost a means of exchanging value. While its block chain technology holds the potential to create a new platform of permissionless innovation, this platform has until recently seemed destined to be divorced from the main bitcoin chain and functionality.

Enter side chains

In the context of the Internet comparison debate, new side chain proposals have great significance.
If implemented into the bitcoin core code by the open-source community, it would enable anyone to create a side chain that can interact with the bitcoin block chain via two-way pegging. Coins can be moved from one chain to the other, allowing decentralized systems to be built that are interoperable with bitcoin.

“Rather than the next Internet, bitcoin can become the next killer app for the Internet, much like the web before it”

This means that new decentralized applications won’t require their own native unit of exchange and thus can avoid a new ‘race for scarcity’, as well as the extreme volatility that comes with a new, small market cap currency.

Instead such systems can utilize the rapidly maturing and more widely accepted bitcoin as their native means of exchange and operation. In turn, the utility of such systems will directly add to the value and staying power of the bitcoin network.

The implications of this are huge, as side chains will allow the general purpose infrastructure needed to allow the permissionless innovation the Internet and web are famous for. All tied in the end, to bitcoin.

Side chains could be the last piece of the puzzle that links together the bitcoin currency, to the limitless possibilities its block chain technology holds.

Brave new world

This would make bitcoin not ‘merely’ a new e-cash system that far outperforms the capabilities of modern financial infrastructure. It would make bitcoin the de-facto currency in a new decentralized online economy of unbound utility and possibility.
An economy of decentralized applications that can’t be shut down, regulated, or censored by governments or even traditional corporations. All exchanging a similarly decentralized transnational digital currency.
Thanks to side chains, bitcoin could become a frictionless global payment system, and a platform for decentralized innovation all in one.
‘Bitcoin is the next Internet’ has been a useful slogan to gain mainstream attention, and underscore bitcoin’s potential impact on the world. However when we take a more systematic view of bitcoin’s growing evolution as a whole, a more appropriate comparison becomes readily apparent.
Rather than the next Internet, bitcoin can become the next killer app for the Internet, much like the web before it. A massive network of decentralized applications run by instant microtransactions rather than the exploitation of users’ personal information and more. A new web with new rules, and new possibilities.
Bitcoin image via Shutterstock

How bitcoin is moving money in Africa

April Joyner, Ozy.com 12:23 p.m. EDT April 25, 2014

(Photo: ED SOQUI/CORBIS)

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It's OK to admit that you still don't know what bitcoin is — but you may now officially be behind the curve. Because all of Africa could soon be getting onboard.
The virtual currency — straight up: computer money — created by an anonymous hacker in 2009 has captured hard-core geeks' hearts. Its appeal? It enables bank-free (aka middleman-free) anonymous purchasing and, crucially, it's a global currency that's not tied to any central bank and not much different than a dollar or a euro. The key characteristics of this digital cash also happen to make it a great fit for people who aren't so down with advanced digital technology: the 326 million Africans who lack access to basic banking services.
This isn't such a crazy idea. Mobile payments that work on standard-feature phones have already made strong inroads in Africa, with 16 percent of Africans using the services. The largest provider of such payments, M-Pesa, already operates in Kenya, Tanzania and South Africa, as well as India and Afghanistan.
But if you were a member of the large and expanding African diaspora, and you wanted to send money home to grandma or the hubby left behind, you couldn't count on mobile payments. M-Pesa, for instance, lets foreign-dwelling folk send money through a partnership with Western Union — but the latter tends to charge onerous fees. Which makes bitcoin super-appealing, if you can get past the expensive exchange rate — as of publication, one bitcoin was worth nearly US$500.
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It'd be a huge loss for Western Union if bitcoin cut into its business: Africans throughout the diaspora send home $32 billion a year, according to the World Bank. Right now, they pay dearly for the privilege: 12 percent of each transaction, on average. Mobile money also doesn't much address larger economic woes back home, such as inflation and scarcity.
According to bitcoin advocates, the cryptocurrency could help solve both problems.
Companies like Kipochi and BitPesa have already begun to use bitcoin for those home-to-grandma payments, known as remittances. For now, bitcoin users need an Internet connection, but these companies are developing platforms for the standard-feature phones commonly used in Africa (rather than building apps for smartphones, which are more rare).
So far, bitcoin activity in Africa has picked up most among young tech-savvy men in urban centers such as Nairobi, says Pelle Braendgaard, the CEO of Kipochi. But it could be spreading. Lately, Braendgaard has seen an increase in exchanges among friends and family members.
His goal: to expand access to women managing household expenses. They're the most common recipients of remittances. "My goal is to make bitcoin usable by ordinary people all over the world, so that even my grandma can use it," he says.
Still, the challenge remains: There's no system to cash out bitcoins for government-issued currency. Unlike a euro or a dollar, you can't hold a bitcoin in your hand or pop it into your wallet to use at the local merchants. There's also still an unsettled debate about whether bitcoin is a currency or payment protocol — a crucial legal distinction that has made regulators especially wary, says Bill Maurer, director of the Institute for Money, Technology and Financial Inclusion at the University of California-Irvine. China, for instance, has barred its financial institutions from carrying out bitcoin transactions. African countries have also been hesitant, due to concerns about money laundering.
African banks have started warming up to Bitcoin — but they've stopped short of a full embrace. In February, South Africa's Standard Bank tested a bitcoin trading system, but hasn't yet offered the service to customers. Braendgaard, however, remains hopeful. He says he's in talks with several banks in African countries — including Kenya, Nigeria and Zimbabwe — to enable the conversion of bitcoin into local currencies using Kipochi's service. He expects to launch the first such partnership within six months.
One of bitcoin's strangest facets may be one of its biggest challenges on the continent: the way it's produced through a process called mining. Developers use computer clusters to solve complex mathematical equations and verify transactions, thereby earning, or "mining," bitcoin. But given the computer processing requirements, most people in Africa can't easily mine bitcoin — instead, they receive bitcoin from someone else, often from outside the continent. Receiving the currency from outside "creates dependency," says Will Ruddick, the co-founder of Koru, a nonprofit based in Mombasa, Kenya.
Yet it's tempting to think about the inflationary troubles bitcoin could solve. Specifically, a broader application of bitcoin — as a complementary currency — could appeal to African consumers who are leery of their country's inflationary troubles, which are a constant threat to economic stability. Hyperinflation in Zimbabwe once rendered the country's currency nearly worthless, halting commercial activity. By contrast, because the circulation of bitcoins is capped at 21 million, the cryptocurrency is — at least theoretically — inflation-proof. As a result, proponents argue, it could serve as a trustworthy store of value in periods of economic distress.
It's not the first time Africa's seen an alternate currency, and in the past, new currencies have managed to open up informal economies to broader markets. Take Koru, Ruddick's nonprofit, which developed Bangla-Pesa for a slum in Mombasa called Bangladesh. Small-scale business operators, such as fruit sellers and tailors, join the currency's network upon receiving endorsements from four current members, and then receive 200 Bangla-Pesa (equivalent to 200 Kenyan shillings). The members then use the currency to purchase goods from one another, while reserving shillings for commerce outside the community, such as paying school fees. It's an indirect barter system, says Ruddick. Bangla-Pesa allows economic activity to continue even in periods of scarcity. Using bitcoin could help by providing an easier way to execute and monitor transactions.
But getting to that sort of system would still be a challenge.
Convincing people to put their trust in new money systems takes significant effort. And bitcoin's emphasis on anonymity runs counter to traditional means of doing business in Africa, in which relationship-building is critical. "Bitcoin comes with this notion of pseudo-anonymity, but do people want that?" Maurer asks.
Still, if Africans can get past bitcoin's cloak-and-dagger, mask-and-cape front, the cryptocurrency could get its shot at making good on its promise.
Ozy.com is a USA TODAY content partner providing general news, commentary and coverage from around the Web. Its content is produced independently of USA TODAY.

Xapo Launches Bitcoin Debit Card Accepted at All MasterCard Locations

Pete Rizzo (@pete_rizzo_) | Published on April 24, 2014 at 16:00 BST | News, Wallets

California-based bitcoin wallet provider Xapo has announced the launch of a bitcoin debit card – a new product it is lauding as the first to allow bitcoin users similar spending freedoms to traditional debit cards.
The Xapo Debit Card debits BTC directly from users’ hot wallets, and can be used anywhere MasterCard is accepted, both online and at physical locations, though it does not represent a partnership between the companies.
Xapo founder Wences Casares explained that the card is designed to appeal to Xapo users frustrated by the inability to spend their bitcoins at most locations, telling CoinDesk:

“You can use it anywhere you would pay with MasterCard, you can use it online, you can use physically at any place you can pay with MasterCard. It makes it very, very easy for you to access your coins.”

The offering is immediately available in both a digital and physical version to existing Xapo customers. The digital version of the card is free, while the physical version comes with a $15 one-time fee that the company indicates covers shipping and handling.
New Xapo customers can also sign up to take advantage of the release. Shipping for all physical cards is expected to begin in two months, the company said.

Customer demand

As of its launch, the Xapo Debit Card is limited to one card per wallet account.

Casares explained that Xapo added the product due to demand from current customers who have wanted a way to spend the roughly 10% of their funds (on average) they keep in the company’s hot wallets. The remainder is stored securely in cold storage.
Said Casares:

“I think that this product is for existing customers who are asking for it. I expect a lot of the current customers to be using it.”

Casares indicated that the ability for users to connect multiple cards to accounts may be added in the future, should customers request the feature.

How it works

Casares said that Xapo receives all transactions when they are initiated by card users at the point of sale.
From there, the company analyzes the account to determine whether there are enough funds to support the transaction. If so, the company authorizes the purchase immediately and sells the requisite amount of BTC via bitcoin exchange Bitstamp.

Merchants receive their payment in local currency and, to MasterCard, Casares said, the transaction appears just like any other local transaction.
Casares went on to explain that the offering is different than the available prepaid options from Coincard and Cryptex, which need to be preloaded with bitcoins and that, he said, require users to manually convert bitcoins to local currency before purchase.
Explained Casares:

“This one is just like a debit card, because it debits from the wallet directly. You don’t have to be thinking about funding it and how much and when the conversion happens.”

Xapo users, by comparison, only need to move bitcoin from their cold storage vaults to their company-issued hot wallets when more funds are required.

Consumer focus

Though best known for its secure bitcoin vault storage product, Casares told CoinDesk that the Xapo Debit Card is consistent with his company’s mission of becoming a viable, consumer-focused bitcoin bank.
Said Casares:

“We’re not a wallet company or a payment company. We are a bitcoin wallet, we are a bitcoin bank. Consumers need convenience and that’s why we provide our MasterCard debit card and why we will keep adding products based on our customers want.”

Casares went on to stress Xapo’s commitment to consumers, stating that the company will never have merchant customers or offer merchant services.
The launch follows Xapo’s 13th March announcement that it raised $20m in funding from Benchmark, Fortress Investment Group and Ribbit Capital.
Images via Joshua Alvarez of The Hatch Agency