The gist of it is cypher solid peer-to-peer electronic cash system. The creation of money is fixed in its algorithm and is fixed to 21 million units in time. It has grown in visibility of late and the economy it represents is on the order of 6.5 million USD. It seems it used for 'official' purposes (mostly development) and of course many illicit activities such as the drug trade.
Peer-to-peer, CPU creation
The creation of money happens in random places by just 'running' your computer. yeah, it is 'free' money. However the algo is such that a regular computer will take a couple of years to create a unit, so the gold rush is passed essentially.
The peer to peer feature means there is no clearance, no banks, just a trusted network. The original paper by nakamoto is interesting in that it predicts that the system cannot be hacked unless 'a majority of CPUs' is in the hands of a malicious entity, making it, on the surface of things and for the time being, quite robust to hacking.
Fixed money amount: deflation
From an economic standpoint, the main feature of the system is that the amount of unit this system can create is capped at 21million units. This means that as the economy it represents grows, the nominal prices will go down. Kind of like a gold system. This is an NO-GO crippling feature as it induces deflation.
Deflation is bad mkey?
Deflation is bad, because it induces hoarding. Hoarding is simply, not buying things today because the things tomorrow will cost less in cash. This slows down economic activity. Inflation (when it is mild) has the opposite effect, people need to move their cash today as it will be worth less in real good tomorrow. This stimulates the economy and is the basis for most QE approaches. The deflation spiral is well documented from the great depression for example. The purpose of money is not money in and on itself but rather to get 'people working' so this is a monstrosity from a strict monetary standpoint and confines bitcoin to "nice toy model to learn from regarding features of electronic money".
More precisely, this means bitcoin, will thrive as a parallel system but cannot be the basis for a global system with the basic algo. There is always the possibility that the algo is changed I guess.
Debt-Deflation is worse
Of course this money is not born as debt, but rather as free lottery. Money as debt has many irking features, such as the fact that the banking system leverages a tax on money it creates out of thin air. However a debt deflation is worse because the burden of the debt, the debt payments, stay at a nominal value fixed in time while your income in real terms decreases. This is a double whammy that our system of 'fiat money as debt" have (ours). This system does not suffer from that.
Ponzi nature a plus for adoption
The ponzi nature of this scheme is evident: the early adopters will see the value of their 'cash' increase by doing nothing but recruiting other people into the network. The interesting bit is that it turns said early adopters into rabid evangelists as they are quite literally talking their wallet up. Many e-cash schemes suffer from a chicken and egg problem of getting the currency in usage in the first place. Governments collect taxes and that bypasses the problem. Here illicit activity, that wants to escape scrutiny, and the zeal of the early adopters help the promotion and distribution of this money.
Thoughts on QE
Here is the bit that tickles my fancy this morning. Why did they create a fixed amount in the first place. One can argue that the 'marketing' and adoption is working because of that. At the same time that 'fixed' feature is also what destroys the economic value of this system in the mid/short term. It will remain niche (and probably survive and thrive in that niche).
However the way money is created, as pointed out, is by wasting CPU cycles doing nothing. In a way this is VERY close to QE, where money is not created as debt by the banking system for the real economy but created by the FED as "free money".
Of course the discussion there can quickly become emotional. Essentially either you trust your government and you are of the view that this money was created for the good of everyone, reflecting the thought that a government is by and for the people. Or, as certain conservative fringes see it, the government is your enemy and the FED a cabal by private interest and therefore QE is theft.
In reality QE was applied to stabilize prices during crisis (QE1) and avoid the deadly deflation spiral from which bitcoin suffers so much. QE2 is more arguable (I do argue it) and can be seen in various lights, but its 'stimulus' component is evident.
Growing amount aka cypher QE
But the idea that money would be dropped into the system at random times is embraced by most modern economists. It is the 'helicopter' theory. Which was understood quite literally. This is a way to implement such thing. If the amount of money was proportional somehow to the economic activity it represents you would create price stability, a necessary component of a mass money system if it is to stimulate the economy as a whole. But the point remains, that some folks would argue that 'random' distribution of money (or in this case linked to your ability to run computers) is in fact more fair that traditional QE.
Conclusion: more than a nice hack with potential?
All in all I have mixed feelings about this thing. The genius is of course the marketing of it (smart money news flash: CURRENCY APPRECIATES 200,000%) so most people WANT IN. FREE MONEY. Its fixed nature is also its downfall, as a "mass" currency it will induce deflation in its economy which is sustainable as long as the system is niche and parasitical. By parasitical I mean that the activity in it is at the expense of the real economy by avoiding taxes.
Of course there is NO VALUE creation in creating bits of money, running computers is in fact a waste of energy, but that is another topic. I see a nice 'niche/cult' status for such a currency. The capped amount being both its strength and weakness.
Open Source implementation
As an OSS software developer I find the community aspect fascinating, for the good and wrong reasons. That a group of hackers would create such a system under OSS licenses (MIT license in this case) is a testimony to the hacker/cypher world creativity. The greed in the adoption scheme, resembling a ponzi can be a turn off.
I may want to reach out to these kids and see if they have any plan going forward and whether there system is set in stone. Heck! I may want to invest. A new model with monetary base growth, now that the chicken and egg problem has been solved, would go a long way. Very interesting to say the least, it may remain as a 'thought experiment' with real world applications and warrants study as is.