Fraud cost U.S. online retailers $3.5 billion in 2012.

Much of the early media attention on Bitcoin focused on Silk Road, an online black market – known as the “Amazon.com of illegal drugs” according to NPR – where users could anonymously buy drugs using Bitcoin.

While Bitcoin were used to purchase illegal drugs on Silk Road, focusing solely on this use of the currency is missing the larger technological point – the underlying innovation behind Bitcoin is the creation of a peer-to-peer consensus system to confirm and verify transactions, eliminating the need for trust in an arbitrary fiat currency.

Coinbase is an international digital wallet that allows

Users [to] … buy & sell bitcoin, send Bitcoin just like you would send an e-mail, and merchants can easily set up their businesses to accept bitcoin and connect to the world.

As early as 2009, Satoshi Nakamoto – the creator/creators of Bitcoin – speculated as to the possibility of applications in this non-trust-based system.

Colored Coins is a project to “color” a set of bitcoins to distinguish it from the rest. These bitcoins can then have special properties supported by either an issuing agent or by public agreement, and have value independent of the face value of the underlying bitcoins. Such colored bitcoins can be used for alternative currencies, commodity certificates, smart property, and other financial instruments such as stocks and bonds.

http://www.youtube.com/watch?v=fmFjmvwPGKU

Naval Ravikant, CEO of AngelList, believes that Bitcoin will eventually be recognized as a platform for building new financial services.

For Ravikant, Bitcoin encapsulates four fundamental technologies:

• Digital Signatures – these can’t be forged and allow one party to securely verify a transaction with another.

• Peer-to-Peer networks, like BitTorrent or TCP/IP – difficult to take down and no central trust
  required.

• Proof-of-Work prevents users from spending the same money twice, without needing a central authority to distinguish valid from invalid transactions. Bitcoin creates an incentive for miners, who run powerful computers in the network, to validate transactions and to secure them from future tampering. The miners are paid by “discovering” new coins, and anyone with computational resources can anonymously and democratically become a miner.

• Distributed Ledger – Bitcoin puts a history of each and every transaction into every wallet. This “block chain” means that anyone can validate that a given transaction was performed.

Albert Wenger of Union Square Ventures, the firm which co-lead the Series B Financing Round in Coinbase with Andreessen Horowitz, writes that:

We owe many of the innovations that we use every day – from our favorite longstanding websites to the latest mobile applications – to the existence of underlying highly technical protocols.

With regard to Bitcoin, Wagner argues:

In the debate about bitcoin it is critical to understand that bitcoin has the potential to be such a protocol that enables a lot of new innovation to take place … there is no other widely used protocol in the world … with bitcoin anyone can make a statement (a transaction) and have this be recorded in a globally visible and fixed ledger.

Well, it’s a long, long journey,

To the capital city!

http://www.youtube.com/watch?v=tyeJ55o3El0