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This is from dylanmodesitt.com

Tim Berners-Lee, a lead scientist at Cern, created the World Wide Web in 1989 as a simple way to share data among scientists. Today, more than 2 billion individuals use it regularly, Google indexes more than a trillion URLs, 500 million tweets are sent out daily, one million babies have been born from people who met on Match.com, Apple is the world's most valuable company, and it is overwhelmingly apparent how the internet has fundamentally changed the way human beings interact.

The major divisions in the history of economics can be made at several notable junctures, the creation of currency and the rise of capitalism among them. However, nothing has impacted the way wealth changes hands so quickly, so holistically, and so pervasively than the Internet. Thus far, the Internet has accommodated the standing economic systems, but what about replacing them? Technology and its property of exponential advancement will soon not accommodate, but rather entirely replace the economic institutions that guide world transactions. Online ‘cryptocurrencies’ uses peer-to-peer technology to operate with no central authority or banks, manage transactions, and reward that management financially. They are entirely decentralized, fiat, digital, and open-source. Some, like bitcoin, are also commonly accepted worldwide. Sure, the currencies have their flaws. Most notably, the fluctuation of its value; however, that is not to say that the technology will never be refined or even perfected. Capital, usually monopolized by governments and banks, is taking on a new form in the way of digital, encrypted, and decentralized currencies that will result in the degradation of governmental powers and a massive increase in individual liberty.

The internet, created for scientists to share data in leading laboratories worldwide, is now one of the single biggest revolutions in the history of mankind. Few things have been so inescapable and influential as a common network that links all human beings through time and space regardless of location. Not only has this invention revolutionized social interaction, it has also impacted the workings of the world economies. Across the G20, it already amounted to 4.1 percent of GDP, or $2.3 trillion, in 2010, surpassing the economies of Italy and Brazil (Dean); furthermore it amounts to 4.7 percent of America’s GDP (Internet Accounts for 4.7%). The Internet is contributing up to 8 percent of GDP in some economies, powering growth and creating jobs. Furthermore, the Internet is worth more to the global economy than more traditional industries such as agriculture or energy (The Hyperconnected Economy). Agriculture is tens of thousands of years old, petroleum has been used for all the centuries following the industrial revolution and yet, the internet, only several decades in age, is changing the way money flows. What makes the internet different is ease and access. The phenomena of clicking buttons to transfer capital and commodities without ever seeing the currency move is surely a revolution in the way the world operates. Like credit cards, the internet is a faceless way to exchange, and this property, combined with its popularity and ease of use, are key factors in constructing the internet economy. Ponder about how popular amazon.com is, and the scramble for large retailers to create their biggest store: the one online and inside nearly every American home. The internet so far has only contributed to the standing economic systems, adapting to fit the economic models of the world. However, this is beginning to change in a very meaningful way.

Take a far older institution than the internet, currency, and it becomes apparent the many dynamic changes that it has gone through in its existence. The invention of money is among the greatest of man’s achievements. First in its evolution was the use of precious metals that can be traced back nearly 5,000 years ago to the river societies of Mesopotamia. Coins themselves were used as early as the seventh century B.C (Robbins 5). This so called “commodity money” has exchange value given the value of the commodity it is comprised of. Coins by way of their physical inefficiency yielded to paper currencies first used in China in the twelfth century, and became common through the rest of Europe in the centuries later (Robbins 60). These paper currencies, however, were still backed with the fundamental promise of rare metals. As the economic system of the world defined by Adam Smith in An Inquiry to the Causes and Nature of the Wealth of Nations became further shifted toward the lending and borrowing of capital, the systems of finance and banking arose to address the fundamental needs of the modern economy. A revolution in financial ideology known as fractional reserve banking was founded on the ideal that private financial intuitions can create money out of thin air based on the mathematical probability it did not have to be backed up by any valuable metal because it need not be requested all at any given time. Commodity money has limitations by way of its basis in physical objects, and thus, capital became Fiat, defined only by central institution powers like governments and banks (Robbins 7). Paper money was backed by nothing but the promise of its popularity, acceptance, and the citizen’s good faith in the government. Currency is the axiom of economic transactions, and it’s principles combined with other economic institutions have become more entangled with the online world.

Until very recently, currency has been centralized, controlled by governments and single administrators alone. This makes currency what is known as a centralized institution, used by many, but controlled by a ‘central’ authority. However, Centralization is being challenged in a meaningful way. These changes in the currency are in their infancy; thus, examples may be sparse but the ideas are far larger than the products and holistically applicable. New currencies, with the advent of a networking system like the interest are being created without the central authority of a government or bank. Instead of a central authority, they are governed by a computer protocol and a community that grows by the day. “Instead of serving one country or group of countries, it serves the whole world (Jeffries ).” Bitcoin and its numerous spin-offs and iterations are notably innovative. For example, digital currencies are peer-to-peer. The currencies don’t go through a bank or clearing house, avoiding unnecessary fees, arbitrary limits, and granting complete economic freedom (Bitcoin - Open Source P2P Money). Digital currencies grow in supply while simultaneously being secured more through a system known as mining. Cryptocurrencies and the technologies involved are admittedly complicated, and not without issues. However, the success of bitcoin proves that money doesn’t need a centralized body to function as a stable store of value.

Few things have accelerated in sophistication at such a fast rate as the internet. The revolution has sparked some of the most brilliant ideological innovations in recent history, and this property is what will make the internet change the way human beings operate economically just as it has how they operate socially. Digital currencies operate from a decentralized perspective. Traditionally, a government dictates the amount of supply of a particular currency, manage its value through said supply, protect its acceptance through its broad control over its populous, and ensure its security (The Euro Becomes The Common Currency). Because these digital currencies are not created by an institution with the size or scope of a government, digital currency needed to solve this problem before they ever developed. Thus, the items became what is known as “cryptocurrencies,” addressing all of the concerns of a decentralized economic medium of exchange through one system: mining.

Bitcoin “mining” is the process given to the way the currency supply increases, is verified, and is secured. Hacking and the exploitation of online vulnerabilities has long been an unfortunate side-effect in need of management for any kind of sensitive data on the network. Economically speaking, Bitcoin mining guarantees a fixed rate of inflation that remains relative to itself. The value of a newly generated bitcoin is found in the effort required to solve a computer generated mathematical problem, while simultaneously the “decentralized proof-of-work consensus protocol guards against fraud and counterfeit that is characteristic to its online existence (Carmody).” This truly brilliant system has several integral parts.

It is critical to note that Bitcoins are not truly owned by any one person, by way of their digital nature. They exist only as a sort of record on a ledger of transactions known as the “blockchain,” Which also lives on numerous numbers of machines on the bitcoin network for the purposes of security. Ownership of a bitcoin is translated to the ability to transfer control of it to someone else by creating a record of that transfer in the block chain, secured by those numerous computers (How Bitcoin Mining Works). The granted privilege to transfer this control is a result of access to an Elliptic Curve Digital Signature Algorithm “key” pair. Elliptic Curve Digital Signature Algorithm, or ECDSA, is a cryptographic algorithm based on the higher mathematics of finite forms and elliptic curves used by Bitcoin and other digital currencies to ensure that funds can only be spent by their “owners” who poses the ECDSA key pair (Sullivan). Next, Bitcoin miners use advanced computer hardware ranging from cpus to gpus to even ASIC systems which is hardware dedicated to digital currency mining (ASIC Hardware and Software Updates). Every ten minutes, mining computers, the hardware dedicated to mining bitcoins collect a few hundred pending bitcoin transactions, known as a block, and turn the block into a mathematical puzzle (How Bitcoin Mining Works). Mining verifies the transactions of the transitioning of the ECDSA keys and solves a mathematical puzzle generated from the hashing of the block using the SHA256 algorithm that was developed by the National Security Agency of the United States of America. By solving this puzzle, the transactions are verified and new bitcoins are generated for the solving of the hashed numbers. The generation of new bitcoins, an essential lottery based on the amount of power one adds to the bitcoin network, entices individuals to take up mining in way of rational self-interest. It is comparable to the more hashes per second one adds to the network, the more lottery tickets are purchased, and the higher chance of being awarded a bitcoin. Furthermore, bitcoin inflation is fixed at one addition bitcoin every ten minutes. The more hardware on the bitcoin network, the harder the hashing algorithm becomes, ensuring that inflation does not run exponential with technological capacity. Thus, the currency becomes verified and increases in supply simultaneously.

Digital currencies improve upon the foundation of currency, adopting what work and rejecting what plainly doesn't make sense. “Transaction and exchange fees, taxes, and payment delays exist to provide short-term credit, guard against counterfeit, excessive withdrawals and other kinds of fraud, and to extract income (Carmody).” Bitcoin is designed to provide the same security guarantees and convenience of credit, while eliminating those fees, delays, and taxes through the decentralization of the cryptocurrency. Unlike a credit card exchange, where one’s credit card number and security information are handed over completely for a transaction of any kind regardless of its value, a transfer in digital currencies, like cash, is for the specific amount of the commodity that is being exchanged. This provides another layer of security in the transitioning of the ownership of capital. In principle, Bitcoin's independence from institutions makes it far more stable than traditional economic staples like the US Dollar or the Euro. This system creates a sort of invisible hand that simultaneously secures the currency, and increases its total value in the market. In the effort of perspective, Bitcoin and the ideologies behind it are as revolutionary to currency as The Wealth of Nations was to classical economics. Just as capitalism decentralized economic powers to markets, digital coins decentralize currency to the individual. Allowing for increased economic freedom and a lowered dependency on governmental institutions. These new currencies are able to remove the dependency for government to control the volatile creation that is currency and give that dependency to a self-guiding system that operates in a positive-feedback loop that increases the health of the currency at hand. It is important to note that these technologies are young, new, and dynamic. Bitcoin specifically might not be the final answer, but its founding ideologies will come to impact the world

Governments and banks, and thus currencies, are greatly affected by the externalities of the world, a characteristic that leads to the capricious nature of centralized currency. Take decimated Germany just after the last shots were fired in the First World War. Shortly after the war, it was estimated that the cost of those several bloody years was over $337 billion (Conclusion: The Costs of War). The Allies, through the Treaty of Versailles, demanded that Germany pay billions in reparations to the allies for the costs of the war (Tousignant). Mass poverty among all classes resulted in rapid inflation, leading to vast political distress that would inspire the fascist rise of the NAZI party (Conclusion: The Costs of War). Hitler, by extension, came to power because German inflation impoverished so many that his radical promises of a better economic tomorrow appealed to Germany’s poor. What if, however, the currency used by the Germans had no tie to the German government? It could be that a decentralized currency would have solved the problems of German impoverishment and even possible prevented the Second World War, as many lay blame to the rise of the fascist movement entirely on Germany’s poor economic conditions (Conclusion: The Costs of War). A currency that has no ties to the nation state has no ties to the affairs of the nation state. Thus, citizens have no ties to the externalities and the downfall of nation states, and economics can continue to prosper in the wake of world tragedies. Decentralization is an extension of the economy that removes the liability of nation-states, allowing an economy to remain united with the burdens of the world.The segregation of currency and world institutions is a powerful tool in the sustained economic growth so craved by the world today.

The principles for cryptocurrency’s stable future relies on a large, respected, and commonplace user-base. Instead, stigma and skepticism plaque the name of Bitcoin for several notable reasons. First, crime, especially digital crime, has become to be associated with online cryptocurrencies. Notably, websites like the Silk Road, accessed through a secure networking protocol known as TOR, have used Bitcoin proprietary due to the fact that limited user information is shared in the process of transactions (Weiser). Furthermore, bitcoin not only is not motivated to reveal user information to governments and businesses, the technology forbids it in the name of privacy. The Silk Road is a dark corner of the internet where one can purchase black-tar heroin, a contract killer, poached rhinoceros horns, or any illegal substance of one’s choosing. However, it should be examined the reasons for cryptocurrencies appeal to the criminal population: decreased dependence on governments and banks. The only reason that bitcoin has become associated with illegal activities is no other medium offers the security or speed of the peer-to-peer cryptocurrency. Credit cards are traceable resulting in the vulnerability of the user, and cash has the terrible quality of existing in physical space. Digitally encrypted currencies are a sort of third iteration in the evolution of money, acting as the next logical step in the transaction of value. Its positive qualities appeal greatly to the digital black-market, and thus, criminals have become some of the early adopters of these new currencies. It should be noted though that only 0.5% of bitcoin transactions take place on the black-market, leaving claims of a bitcoin being only a criminal’s currency unjustified and inaccurate (Lords). Digital currencies need a change in perception and an increase in popularity that can only come with time. It is inevitable that currency, already virtual in the vast amount of transactions, will only become more so as we shift deeper into a digital economy. However, the stability or standardization are simply not present yet. From November 2012 to November 2013 the price of bitcoin went from $12 to $1145. Today, it sits at around $200. There is no getting around it, bitcoin is too volatile, and until that changes it will receive criticism by economists, investors, and users (Jeffries). "It’s something economists had never had to think about until this was developed, and we're just beginning to think through all the implications of it," declares Steve Horwitz, an economist at St. Lawrence University (Jeffries). The technology is so new and so different in the way it approaches currency, that the principles that should grant bitcoin stability in principle, in actuality cause skepticism, perceived risk, and volatile prices. It will take people thinking about how much their lunch will cost in Bitcoin and not Dollars to change the world in the ways described; that is a monumental undertaking that may be decades away.

Over the course of recorded history, the powers of government have, in general, lessened. The individual has gained rights and liberties never imagined in centuries prior, and human beings are becoming independent from governing institution. Monarchs have become democracies; mercantile imperialists have been replaced with laissez-faire capitalists; similarity, the dollar controlled by the Fed will be replaced by an autonomous network of peers that wish to remain independent from institutions that time and time again are responsible for the worst occurrences of humanity. Bitcoin can indeed be a revolutionary event, not just in economics, but in the landscape of world politics. Imagining a world where government is stripped of its sole right to currency opens up incredible possibilities to the future of the economy. Independence from large, corrupt institutions means the extensions of personal liberties. This is the next logical move in the transitioning of power in the world. The tie between a nation and its economic measurements is a tie made generally along the line of independent currencies. This is liberty. Government would vast amounts of power if it’s currency became unstandardized. It would be laughable if the Chinese government had to pay Chinese government employees in United States Dollars. Similarly, the overbearing institution of government would be degraded by its limited control on the economy. Federal banks should tremble at the idea of a currency that devalues what they have to offer.

Furthermore, currency and exchange is only an additional barrier that draws along racial lines and further alienates different parts of the world. Language is how people exchange ideas, and currency is how those same people exchange the product of their ideas. It is governments and their ideologies, not people, responsible for the atrocities the world witnesses today. It is the violation of human liberties that spur brilliant thinkers to architecture systems as expansive as currency.