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Bitcoin and anonymous markets: the real revolution in market design

From Core Economics by Rabee Tourky:

Make no mistake we are witnessing a revolution in economics. Developments in market design are changing the way people interact in the presence of scarce resources and will undoubtably influence the way we think about economics. This is an economic revolution that has been directed by scholarly endeavours, is being driven by the revolutionary zeal of a large number of talented individuals, and has been sustained by the obvious propensity to decentralisation of novel economic systems that are unencumbered by traditional social stratification.

In this post I’ll talk about the implementation of the Bitcoin fiat-money and a challenge facing the emergence of  anonymous markets for real goods and services.

The development of crypto-currency and its implementation in Bitcoin can be traced to a number of working papers. The Bitcoin network is a distributed method for storing and verifying transaction history. Essentially it is a decentralised way for preventing double spending of currency by remembering certain details of transactions. In the same year (1998) that Narayana Kocherlakota published his economic theory paper “Money is Memory,”  Wei Dai described an anonymous electronic cash system that he called “b-money,” and Nick Szabo developed his bit-gold system. Both of the latter proposals influenced the theoretical design of Bitcoin, which in a sense implements Kocherlakota’s ideas regarding money. Obviously motivated by the financial crises (indeed the Chancellor of the Exchequer’s  response to the collapse of banks)  the anonymous, now probably very rich, Satoshi Nakamoto published his working paper “A Peer-to-Peer Electronic Cash System” which was rapidly coded in January 2009.  One Bitcoin today is worth around $520 USD:

 

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The main innovation in the Bitcoin decentralised currency system is the network of miners. This is a robust mechanism for governing the Bitcoin network. The mining network plays the role of a decentralised “central” bank, public record keeper, and may eventually have a regulatory role. The network of miners is setup with the idea that anyone can be a miner, but mining is costly, and you get as many votes on the mining “board” as the  amount [of CPU power] that you have invested into mining.

 

One role of mining in the network is to record transactions between Bitcoin users. Mining is the decentralised memory mechanism for Bitcoins. Transactions between individual Btcoin users are broadcast to the all the network. The broadcasts are recorded by the miners who must solve a computationally difficult problem, with easily verifiable solution, to be able to add records to Bitcoin’s public ledger of transactions (block chain). The successful miner is paid a transaction fee for recording transactions.

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