IT’S NOT ONLY THE CURRENCY, IT’S THE TECHNOLOGY
Transfer of value has traditionally been a slow and highly manual process. In essence, Bitcoin is a protocol to create distributed consensus. This protocol allows transferring value securely in a trust-less way: it is an open platform for money.
But it is not only restricted to money: Bitcoin and similar protocols can transfer any digital asset. The technology is cheaper and faster than most of the alternatives, creating opportunities for new applications. The digital transfer of value enables the adoption of smart contracts.
Smart contracts are contracts that do not require human interpretation or intervention to complete. Their settlement is done entirely by running a computer program. Smart contracts are mathbased contracts, as opposed to law-based contracts.
A trust-less digital transfer of value opens the door to new applications that make use of smart contracts.
Bitcoin is an API (Application Programming Interface) for money and bitcoin the currency is just the first application.
Bitcoin could be used as an open platform for the exchange of value in much the same way that the internet is an open platform for the exchange of information. It can be used as a protocol on top of which applications can be built, much like email, web browsing, or voice-over-IP are built on top of the TCP/IP protocol. This is where most of the excitement around Bitcoin and related technologies comes from. Regardless of whether bitcoins have a future as currency, the technology has shown that many applications are now possible and innovators will continue to push forward with new ideas.
Bitcoin could become a platform for financial innovation. One of Ronald Coase’s most important economic insights in The Nature of the Firm (Coase, 1937) was that one factor that contributed to the creation of firms was high transaction costs. If there were no transaction costs, an entrepreneur could contract any good she needs in the open market, and this would be efficient, as an efficient market would always achieve the best price for that good.
However, transaction costs, such as information gathering, bargaining, policing the contract, keeping secrets and so on, can be a significant portion of the total cost of contracting out to the market. For this reason, it might be cheaper for an entrepreneur to hire some employees to produce the goods internally, thus starting a corporation.
Transaction costs are also at the root of public goods and government action. Bitcoin’s technological breakthrough creates an opportunity to lower the costs of entering and upholding contracts, say through smart contracts. More efficient contracts thus have the potential to change corporations and government action.
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