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Berentsen and Schär
digital property rights of a monetary unit without a central authority. They solved this challenge
by inventing the Bitcoin Blockchain. This novel technology allows us to store and transfer a
monetary unit without the need for a central authority, similar to cash.
Price volatility and scaling issues frequently raise concerns about the suitability of Bitcoin
as a payment instrument. As an asset, however, Bitcoin and alternative blockchain-based
tokens should not be neglected. The innovation makes it possible to represent digital property
without the need for a central authority. This can lead to the creation of a new asset class that
can mature into a valuable portfolio diversification instrument. Moreover, blockchain tech-
nology provides an infrastructure that enables numerous applications. Promising applications
include using colored coins, smart contracts, and the possibility of using fingerprints to secure
the integrity of data files in a blockchain, which may bring change to the world of finance
and to many other sectors. n
NOTES
1 An initial attempt was DigiCash in the 1990s; however, it was not able to establish itself.
2 See Furness (1910) who describes the Island of Stone Money.
3 Strictly speaking, Bitcoins are not “traveling” on the Bitcoin network. A Bitcoin payment is simply a message that
is broadcasted to the network to communicate a change in ownership of the respective Bitcoin units.
4 In practice, a split in the Blockchain may occur if the network participants do not agree about changes in the
Bitcoin protocol (i.e., the rule set). This issue is discussed further in this article.
5 See Kiyotaki and Wright (1993) for a search theoretic approach to money, Berentsen (1998) for a study of the
acceptability of digital money, and Nosal and Rocheteau (2011) for a comprehensive introduction into the search
theoretic approach to monetary economics.
6 Similar technologies are also used in traditional electronic payment systems and in many other fields, such as
with online banking and shopping.
7 In fact, a public key is usually used to derive a so-called Bitcoin address. This address is then used as a pseudonym.
We ignored this additional step to keep things as simple as possible. Both operations—that is, private key to public
key and public key to Bitcoin address—are one-way functions. There is no known way to reverse these operations,
so it is not feasible to obtain a private key from a corresponding pseudonym.
8 For an introduction to smart contracts and potential business applications, see Schär and Langer (2017).
REFERENCES
Berentsen, Aleksander. “Monetary Policy Implications of Digital Money.” Kyklos (International Review of Social Sciences),
1998, 51(1), pp. 89-117; https://doi.org/10.1111/1467-6435.00039.
Berentsen, Aleksander and Schär, Fabian. Bitcoin, Blockchain und Kryptoassets: Eine umfassende Einführung. Books
on Demand, Norderstedt, 2017.
Furness, William H. The Island of Stone Money: Uap of the Carolines. Philadelphia: J. B. Lippincott, 1910.
Kiyotaki, Nobuhiro and Wright, Randall. “A Search-Theoretic Approach to Monetary Economics.” American Economic
Review, 1993, 83(1), pp. 63–77.
Nakamoto, Satoshi. “Bitcoin: A Peer-to-Peer Electronic Cash System.” 2008; https://bitcoin.org/bitcoin.pdf.
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