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11.7 Digital and Virtual Currencies 355

instance, if money is held in a digital file, what prevents a • Verifiable (Non-counterfeitable)—Means that it is not
clever user from simply duplicating the file and using it again easily counterfeited, and if it is, it’s easily detected. This
for a purchase or investment. In most systems this is handled is one of the key characteristics and strengths of a crypto-
by having a central (automated) authority review transac- currency like bitcoins. Before any bitcoins are accepted
tions before they are committed. In Bitcoin there is no cen- for payment, there is a strong vetting process to ensure its
tral authority. Instead, it relies on an innovative proof-of-work authenticity.
scheme that uses consensus among peer-to-peer nodes to
verify transactions and to protect against assaults like How Does Bitcoin Work?
double-spending.
When we talk about the Bitcoin ecosystem, the term is At its foundation, the Bitcoin currency is nothing more than
capitalized. When we speak about the unit of currency in this a public ledger. Essentially, it is a digital file tracking every
system it is designated in small letters (bitcoin) which in Bitcoin transaction—time, date, participants, amount, and
abbreviated form is designated as BTC (similar to USD). transfer of ownership of bitcoins—that has ever occurred
There is an upper limit on the number of bitcoins that will since the first bitcoin was issued. It’s much like a company’s
can be produced (21 million BTC), a governor on the num- general ledger that provides a complete record of all the
ber of bitcoins that are produced on the average every 10 min transactions that have occurred over the life of the company
(i.e., 1 block), and an end date for their production (2040). except in this case the company consists of everyone world-
Like the dollar or any other currency, a bitcoin is a unit of wide who has ever owned some fraction of a bitcoin. At the
account that possesses a number of the key characteristics present time, the ledger file is about 20GB.
(Tomaino 2015): The Bitcoin ledger is called the blockchain. As the name
suggests, it is a collection of blocks each containing a group-
• Durable—This means that it retains its shape, form, and ing of bitcoin transactions that occurred around the same
substance over an extended period of time, so that in the time, much like a single page in a ledger. These blocks are
future it will still work as a medium of exchange. While linked or chained together in the order in which they
bitcoins have only been around for 7 years, they are occurred.
widely accepted at merchants, traded on currency Unlike a company ledger, the Bitcoin blockchain is pub-
exchanges, recognized (or tolerated) by many countries, lic, as opposed to private or secret. This means that anyone
and owned by sizeable numbers of individuals. There’s no can view it. In fact there are websites (e.g., blockchain.info)
assurance about its future, but it has lasted longer that vir- where you can watch the transactions in action. Also, unlike
tually all of its digital predecessors. a company ledger, there is no central body (like the finance
• Divisible—This characteristic means that a currency can department) or trusted third party that is in charge of the led-
be divided into smaller increments so that the sum of the ger or central place where the official copy is held. Instead
increments equal the original value. In this way bitcoins there is one digital file that is fully distributed across Bitcoins
can be used to purchase products and services of varying decentralized peer-to-peer network. Each node or computer
value. The smallest unit of the bitcoin is .00000001BTC on the network has a full-copy of the file. Using complex
(that’s 1 hundred millionth). This unit is called a Satoshi. mathematical computations, the transactions are verified by
It serves the same role as $.01 or a penny in USD. bitcoin miners (computers and computer programs) that
• Countable—This implies that the units are subject to the maintain the ledger. The computations also ensure that there
rules of mathematics so they can be added, subtracted, is agreement among all the nodes on the network about the
multiplied, and divided. In accounting terms it means we current state of the blockchain and every transaction in it. If
can employ these operations to measure profit, loss, an attempt is made to corrupt a transaction within a block,
income, expenses, debt, and wealth and determine the net then the nodes will fail to reach consensus and the transac-
worth of an entity possessing units. tion and the associated block will not be verified.
• Transportable—Currency needs to be easily support With the right equipment and software anyone can run a
transactions and exchanges across the world. Because bit- node on the network and can be a bitcoin miner. The incen-
coins run on the Internet in a decentralized fashion, they tive for doing so is that miners can earn bitcoins for their
are more transportable than most fiat currencies. “verification” efforts. Crudely put, verification is a bit like a
• Fungible—This means that one unit of a currency is inter- “hackathon” or coding contest. There are very specific math-
changeable with all others regardless of when or where it ematical criteria and hurdles that are required to combine
was obtained. For example, in the corn commodities mar- transactions into a block. The miner who does it first while
ket, all No. 2 corn has the same value regardless of where it adhering to criteria receives 25 new bitcoins. Doesn’t sound
was grown. Similarly, one bit coin is the same as any other like much, but remember there are a lot of transactions in a
bitcoin regardless of how it was produced or who holds it. day (ergo a number of blocks created), and each bitcoin is