Last week, Dennis Rodman once again entered the media spotlight by taking a trip to North Korea. In spite of the media hullabaloo over the alleged purpose of Dennis Rodman’s latest round of basketball diplomacy, and apparent subsequent disappointment over the lack of controversy following the trip, the controversial star’s intent seems patently obvious: he is America’s cryptocurrency ambassador.
Media photographs of Rodman consistently pictured him decked out in gear emblazoned with the logo of his sponsor, PotCoin.com. Potcoin.com touts itself as “an ultra-secure digital cryptocurrency, network and banking solution for the $100 billion global legal marijuana industry,”—so Bitcoin, but marketed for pot entrepreneurs. The video embedded in the center of its homepage—which I could not help but to transcribe below—explains it all:
“Potcoins are digital coins you could send through the Internet. Potcoins have a number of advantages. Potcoins are transferred directly from person to person via the Net. This means that the fees are much lower. You can use them in every country. Your account cannot be frozen and there are no prerequisites or arbitrary limits [so you can pay for as much pot as you want in a single transaction].
“Let’s look at how it works. Your Potcoins are kept in your digital wallet on your computer or mobile device. Sending Potcoins is as simple as sending an e-mail and you can purchase anything with Potcoin [the possibilities!!!]. The Potcoin network is secured by thousands of computers using state of the art encryption. Anyone can join the Potcoin network and the software is completely open source so anyone can review the code. Potcoin opens up a whole new platform for innovation.
“Potcoin is changing finance the same way the Web changed publishing. When everyone has access to a global market, great ideas flourish [insert marijuana joke here]!”
In summary, because Potcoin appears to be Bitcoin for pot and also for things other than pot, it is effectively yet another cryptocurrency alternative to Bitcoin. Indeed, after watching this video, I found an eerily similar one on the homepage of bitcoin.org, with the word “pot” replaced by the word “bit.” In other words, the Potcoin video is a rehash (pun absolutely intended).
Earlier this month, I attended Northwestern University’s annual Internet Commerce and Innovation Conference, where Hanna Halaburda and Gur Huberman, economists who know quite a bit more than the average person on this topic, kindly explained how cryptocurrencies such as Bitcoin actually work.
I will keep the explanation at a bird’s eye view level, but a more in-depth discussion is available on Scott Driscoll’s blog post entitled, “How Bitcoin Works Under the Hood,” and the paper by Satoshi Nakamoto, “Bitcoin: A Peer-to-Peer Electronics Cash System,” available at bitcoin.org. Hanna Halaburda has also written a book on the topic: “Beyond Bitcoin: The Economics of Digital Currencies.”
Transactions: Suppose that a Bitcoin user, call him Scottie, in possession of a Michael Jordan Hand Signed 50th Anniversary Basketball, is willing to accept a single Bitcoin from existing Bitcoin user, Dennis, who happens to have precisely one Bitcoin (around $2,500 at the time of this writing) in his possession. Any cheaper than that and Dennis may as well steal the ball. As Bitcoin users, both Scottie and Dennis have installed Bitcoin wallet software that allows them to facilitate the transaction.
Upon first usage, the wallet software on both users’ devices downloads a record of every Bitcoin transaction by everyone ever made. This record, called the Blockchain, represents a complete history of incremental groups of completed transactions, referred to as blocks. The Blockchain takes the place of a public ledger for Bitcoin. To undertake the transaction, Dennis must provide a digital signature to authenticate that he is in possession of and can transact Bitcoins. In addition to having a private component only available to Dennis, it contains a public component that reveals that Dennis can undertake the transaction and allows him to have the transaction recorded in the Blockchain. Once the transaction is verified by other Bitcoin users (more on these below), it is added to the ever growing Blockchain.
Verification: Here is where it gets weird: groups of transactions directing transfers of Bitcoins entail a public broadcast of these transactions interlinked with a mathematical puzzle that is, as I understand it, too complex to solve by any means other than computer driven guess work. Users, called miners, compete against each other to solve problems associated with each transaction. The first miner to solve the puzzle associated with a group of transactions gets to add that group to the Blockchain, thus expanding the history of transactions and enabling the transfer of Bitcoins. The miner is rewarded with Bitcoins—which is how new Bitcoins come into being—and earns the right to charge a transaction fee for verifying a group of transactions (more on this in the abovementioned references). If the transaction between Scottie and Dennis belongs to that particular group, the financial component of their transaction is completed (with some caveats left out) and Scottie can ship the ball to Dennis. However, as I indicate below, Scottie might wish to smoke two joints while he waits for a few additional blocks to be added to the chain before shipping the ball (though I make no personal recommendation as to what Scottie should actually do with his time while he waits).
Fraud: As described, the transaction verification process does not involve a centralized authority such as a bank. This leaves potential room for fraud as follows. If Dennis were a character of ill repute, he might wish to set up an additional transaction sending his one Bitcoin to an alternative account that he possesses. If that transaction is verified prior to his transaction with Scottie, Scottie’s transaction is considered nullified, but this will not be discovered until an attempt is made to add the transaction to the Blockchain. If Scottie, worried that the ball would deflate if not sent in time, sends it before the transaction with Dennis is added to the Blockchain, he would have no recourse unless he personally knows Dennis and can verify the terms of the transaction to a centralized authority. Moreover, even if Scottie could verify these terms, he might learn that Dennis lives in some place like North Korea, which might not offer him any recourse.
Alternatively, Scottie might view a new block being added to the Blockchain as sufficient time before sending the basketball. But then he risks that Dennis might execute and verify (by mining) additional fraudulent transactions on top of his now fraudulent block to extend the fraudulent chain before others solve sufficient puzzles to extend the true chain sufficiently far to actuate public agreement stipulating that the true chain is indeed the correct representation of the full Blockchain. This is not particularly likely unless Dennis has sufficient computing power to outcompete all active miners until Scottie sends him the ball. Thus far, I have made a stab at explaining buyer side fraud, but sellers with no reputation may be fraudsters as well, and it is less clear to me how to resolve concerns over seller side fraud. I found a rather creative suggested solution on an archived Reddit post requiring a buyer to confirm receipt before a seller can access the Bitcoins sent by the buyer, but also preventing the buyer from any further access to the Bitcoins once she has undertaken the transaction (sent the Bitcoins).
Disclaimer: Here I have only touched upon the bare bones of Bitcoin, but missing from this blog post is a slew of mathematics, economics, and practicalities. For those interested, I advise you to consult one or more of the readings above or to talk to an actual expert on the subject. I do not condone the use of any illicit substance and do not recommend the abuse or misuse of any mind or mood altering drug, whether illicit or not. I am, however, a vocal advocate and frequent user of double entendre.