Bitcoin: A technological and economic game changer?

-December 03, 2013

This article is part of EDN’s Hot Technologies: Looking ahead to 2014 feature, where EDN editors examine some of the hot trends and technologies in 2013 that promise to shape technology news in 2014 and beyond.

It's not a technology that you'll find designed into the latest gadget, but it's a technology that might help you buy that latest gadget. It's Bitcoin, and it's hot. To see how hot, just check out the chart below:

The value of a bitcoin versus the U.S. dollar has skyrocketed this year as interest has increased in the digital currency.

So what exactly is Bitcoin? It's been described in many ways - "open-source P2P money," "digital money," "crypto-currency," and even "gold 2.0." And it is all of those - an open-source peer-to-peer electronic money and payment network that uses cryptographic technology for both "frictionless" secure transaction processing and the "mining" of bitcoins themselves (see the short video (1:44) below for a quick overview).

On the transaction processing side, users transfer payments between Bitcoin "wallets," which store cryptographically generated addresses. A private key is used to digitally sign transactions and confirm that the transaction is coming from the owner of the wallet as well as help secure a transaction from being tampered with after the fact. Every transaction is broadcast and validated by other computers on the network.

"Mining" is the activity by which bitcoins are created, and is intentionally designed to require significant computer processing resources to solve algorithms resulting in the creation of new blocks in a block chain. This process is designed to maintain a consistent block creation rate and thus control the increase in supply of bitcoins. (The rate of Bitcoin creation is designed to halve every four years, until a total of 21 million bitcoins have been created.)

Originally, bitcoin mining was performed on standard CPUs until it was found that high-end graphics cards were more efficient given the massive parallel architecture of some graphical processing units. Later this evolved to FPGA-based bitcoin mining hardware, which used devices like Xilinx' Spartan-6 and Altera's Stratix III FPGAs. More recently, dedicated-ASIC-based bitcoin mining hardware (such as the Monarch 600-GigaHash Bitcoin Mining Card) have become the norm, and are much more efficient for the power they consume. And here power efficiency is key - the more efficient a device the more profitable.

As bitcoin mining has become more competitive - with more miners competing for a limited supply of blocks - it is now an activity that is only feasible for mining pools. Here, multiple users join together to mine bitcoins, then split the block reward based on the contributed processing power. For more on Bitcoin, see the original paper - "Bitcoin: A Peer-to-Peer Electronic Cash System" (PDF) - or visit the Bitcoin wiki.

Bitcoin: The bigger picture

When most people think of "money," they can't imagine anything other than the official currencies created and maintained by the central banks of governments around the world. Yet private currencies - i.e., currencies issued by private organizations - are not new at all. In fact, according to Wikipedia, over 4,000 such currencies currently exist in more than 35 countries.

Bitcoin is just another example of an alternative to government-issued currencies; but rather than a private alternative it's an open source one. Proponents claim that its open-source, decentralized nature is an inherent advantage over previous currency alternatives, while detractors suggest that Bitcoin is doomed to fail since anyone can create their own competing open-source algorithm-based currency.

Ultimately the value of any currency is based on the extent of its use as a medium of exchange and perceived store of value. And while Bitcoin use and acceptance is currently growing - fast - it certainly could very well fall by the wayside to a competitor.

And it is unclear how governments may react if Bitcoin - or an alternative - were to grow too popular. After all, a central bank relies on its monopoly power over a country's currency to both (attempt to) manipulate the economy and - as with the case with almost all "fiat" currencies throughout history - inflate (and devalue) its currency over time.

Currently no one is predicting that Bitcoin - or an open-source (or other) alternative - will soon be a significant competitor to any of the world's existing government-backed currencies. And if it were to become one, it's unclear if governments would be able to prevent it. And the larger question may be whether or not that would be a good thing?

Some economists suggest that the rise of a global alternative currency could promote economic growth and present a game-changing global economic breakthrough. Right now, for many observers, Bitcoin is starting to look like it has that potential.

Also watching:

  • Wearable technology: The promise of wearable electronics continues to grow, with recent examples being Google Glass and the introduction of various smart watches. One of the most exciting applications for this technology is in the health/fitness field. While personal fitness devices like the Fitbit that track general activity have been available for a while, the really exciting developments that lie ahead promise more sophisticated sensing of real health metrics like heart rate, blood chemistry and blood pressure. This could have profound implications for both personal preventative health monitoring as well as in mobile medical applications in general.
  • Drones: It wasn't that long ago that the term "drone" conjured up visions of worker bees or remotely controlled sci-fi-like cyborgs. Today, of course, it usually only means one thing - a remotely controlled unmanned aerial system. Once limited to military and civil use, the technology has now become available to virtually anyone, and can come in almost any size. Applications can range from surveillance and inspection of commercial installations, material transport, remote sensing, and even aerial camera shots by filmmakers. The latest news is Amazon's recent announcement that it is researching the use of drones for one-day package delivery. Of course this faces all sorts of challenges - both technological, logistical and regulatory - but it would probably not be wise to bet against it, or the potential for unmanned aerial "drones" going forward.

Read more of EDN's Hot Technologies: Looking ahead to 2014:

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