blockchain & bitcoin: a very simple intro to a very big deal
Money may predate human-kind. Animals use bartering. Some of the items bartered might arguably be a medium of exchange.
In any case, money is a technology that solves a problem in bartering. The problem is that if I have a chicken, and you have grapes, but you are a vegetarian, then we can’t trade. Also, you might not want a whole chicken, or not have enough grapes to make it worth my while to cut a leg for you. This is called the “double coincidence of wants”, because for us to trade, there needs to be both the coincidence that I want what you have, and vice-versa.
Money solves that problem, by introducing a medium of exchange. I can first sell my chicken to someone who wants it. I get “money” from him. For example, some coin, that everyone I care to trade with will be willing to accept as payment.
If you’ve sold your grapes for money as well, then now we can both buy other things easily with our money. I can buy some of your grapes, and you can buy some amount of my chicken.
That’s a pretty big upside for such a simple invention right? It is pretty simple technology. All it requires is for some market of traders to agree upon the value of something.
Money, however central to human and animal societies, has only had 6 technological innovations, from: 1) bartering 2) currency (sea shells, gold, etc) 3) paper notes 4) credit cards 5) payment gateways (e.g. paypal), and now 6) without any central issuer, but using a cryptographically-secured distributed public ledger (CDPL) technology such as blockchain cryptocurrencies, e.g., bitcoin.
Let’s look at how different money technologies solve what’s desired of them:
Ideally, for money to be good in the electronic age, it should be:
- General Acceptable
- Portabile
- Easily transferable/sendable
- Limited Supply
- Not seizable
- Indestructible
- Fungible (interchangeable)
- Divisible
- Recognizable
- Stable in Value
- Double-spending (being able to spend the same money more than once)
Let’s see how these criteria hold up with some historic uses of money:
Precious metal coins (gold, silver): these had the advantage of somewhat limited supply. It was hard to find more (you’d have to dig and mine them deep in the Earth. It’s not actually limited because virtually infinite gold exists in the asteroids and beyond. Gold is also not extremely portable and is not easily sendable, at least not securely. It can also be seized from you.
Paper money, issued by a central bank or government are not easily sendable. To send the paper is unsafe and slow, and to send it electronically you need some central body to approve you, and that can charge you big fees and long delays. It can also be seized from you. It can also be faked so is not perfectly recognizable.
Bitcoin, however, is infinitely portable and safely sendable, and relatively quickly for far distances. New advances are coming out to make sending much faster (~1 second). Bitcoin can’t be faked and has a mathematically limited supply. Although bitcoin prices aren’t stable, one can simply hold another crypto asset pegged to e.g. USD such as tether, if he want’s price stability. Also, bitcoin is becoming more stable as it’s market value grows. Bitcoin can’t be seized from you unless you decide to give it up. It’s essentially just a wallet address and password you store in your head or in a special hardware wallet, or a combination of those things.
So, bitcoin has a lot of advantages. Where did it come from? How does it do it?
Bitcoin was described in a whitepaper in 2009 under the pen name of Satoshi Nakamoto, who might be one person, or more. No one knows! The paper describes how computer programs called “miners” will verify transactions in the system, and be given a reward paid in bitcoins. The transactions are organized into a chain of blocks, where 1 block is mined every 10 minutes, and linked on a “blockchain”. It therefore created economic incentives for prevent “double spending” but in a decentralized way.
Bitcoin, like other cryptocurrencies and crypto assets, don’t need to be issued through some central body. They use what’s called a public distributed ledger to keep track of how much everyone has and sends to each other. This prevents a person from “double spending”. In an electronic system, what might prevent someone from sending 2 emails vouching to be paying the same $5 for 2 different happy meals? Without some central issues like a paypal in the middle, there was no way. Blockchain solved that problem.
Bitcoin uses a public ledger technology, called blockchain, to account for how much everyone has sent each other, everyone using bitcoin can know if a person has enough money to send some additional transaction. And, because bitcoin’s blockchain has a difficult mathematical cryptographic challenge (not discussed much here), it’s kept safe from people trying to alter history so that they can re-spend, or double-spend, bitcoins they’ve already spent.
Bitcoin also solves another problem. In 1971, the US president Richard Nixon removed the US and the world from the gold standard, so that governments could continue spending (like on wars) money that they didn’t have, that wasn’t backed by Gold.
The new type of money is called “fiat” money. Fiat means “an arbitrary order”. This means that the amount of government money can simply be decided on, by the government. This leads to inflation, where the government just creates new money, basically out of thin air, therefor lowering the value of everyone else’s money by making it less scarce, and breaking rule 4 above — limited supply.
Bitcoin is mathematically proven to only ever has at most 21 million coins, so it has true limited supply.
So, “will bitcoin go up?” I personally think it will continue to replace/augments other forms of savings, such as gold. If bitcoin reaches current gold market cap, it’s price will grow over 50x more, to $500,000 per bitcoin! As bitcoin continues to replace other forms of savings and payment, it can climb even much higher. This is not financial advice, and I’m not your financial advisor. It’s just my opinion on the topic of internet money. Do your own research and don’t risk more than you can stand to lose.
Ok, so that’s bitcoin. Now what is Ethereum, and others?
Bitcoin is just one application (money) whose state and activity can be stored across a distributed ledger. But, the blockchain can be a general purpose database, of sorts, that can run any application, or dApp — distributed application, that can’t be censored by any central government, and is resilient against database hackers and DDoS attacks.
Enter Ethereum, EOS, NEO, and many others that can run any dApp on a distributed ledger.
That is a really fascinating topic, involving 1000x gains in just 1–2 years, in several cases. You can read and learn more about that here:
https://medium.com/@garybernstein/analysis-on-blockchain-obsoleted-by-hashgraph-bitcoin-at-7k-segwit2x-what-happens-next-5c7a40c896d6
If you prefer a video, this gets more in depth: https://www.youtube.com/watch?v=mnwch7t7Uj8
Follow me to learn about the next big thing coming to blockchain. Big announcement coming very soon!
