Friday, April 4, 2014

Crypto Currency: Solution to Creating Currency

In a previous post I discussed one of the problems with digital dollars being that it's difficult to monitor currency creation. Here is an explanation of the crypto currency solution to this problem.

The obvious solution is to have some governing body monitor currency and it's creation, similar to how we do now with having certain facilities that can create paper money. But let's not be too hasty in our conclusions. Digital money brings a fundamental shift because digital money can be copied very easily. Instead of creating the money physical money you have to keep track of the money that is spent.

In order to truly monitor what money is available for spending and to whom it is available a governing body would have to validate every transaction.

Let's say we star the system with $1,000. Payer Inc pays me $200 and the governing body validates the transaction. When I try to go buy a car for $400, the dealership asks the governing body if I have the money and it says no, I'm then denied. But if I try to go buy $50 worth of groceries, the governing body validates the transaction because I have $200 total. Once I've purchased the groceries, the governing body changes my account value to have $150.

The government may be the obvious solution may be to have the government perform this action but with certain recent revelations about the governments investment in monitoring and mining internet data I doubt many would be comfortable handing their checkbooks over to the federal government for balancing.

So, what can we do?

Here's a novel idea: what if we make every user of the system a validator of transactions?

Now every user has a ledger (or "general ledger") that has a record of every transaction ever done in the system. So when I want to buy my groceries, I forward my transaction request to the group. When I have my validation, I can by my groceries.

Now our issue of Bank Connman or Bank Eville Guys creating their own currency goes away because they would have to request validation from every other user of the system and the fraud would be detected.

"But doesn't that mean all of my spending is now public knowledge?" Good question! And yes, it might. And there is some risk that this ledger could be used for data mining to track individuals and activity. The solution to that issue has been to change the payer and payee from being identified people to being anonymous numbers. Similar to how you know your credit card number but someone knowing your card number may not be able to track you.

This is a simplified explanation of a very involved concept. We need some way of validating transactions, but it would be preferable not to have the government be the sole keeper of that process.