Finally digital money. We came to the part where Saifedean Ammous talks about Bitcoin. So far, “The Bitcoin Standard” has given us history, economics, and philosophy lessons. It’s time for technology. For Bitcoin experts, this chapter may be a little too basic. For newcomers to the room, the following material will be crucial to their understanding. The author explains each of the moving parts that make up the Bitcoin network in a language that is easy to understand.
But before we go into that …
About the Earth’s coolest book club
Bitcoinist Book Club has two different uses:
1.- For the superstar-executive-investor on the run, we will summarize the books to be read for cryptocurrency enthusiasts. One by one. Chapter by chapter. We read them so you do not need it, and give you just the meaty chunks.
2.- For the meditative bookworm that is here for the research, we will provide liner notes to accompany your reading. After our book club finishes the book, you can always return to refresh the concepts and find crucial quotes.
So far we have covered:
- Prologue and Chapter 1
- Primitive money (Chapter 2)
- Why gold? (Chapter 3, Part 1)
- History (Chapter 3, Part 2)
- Gold standards (Chapter 4, Part 1)
- public money (Chapter 4, Part 2)
- Money and hyperinflation (Chapter 4, part 3)
- Time preference (Chapter 5, Part 1)
- Capital accumulation (Chapter 5, Part 2)
- Price (Chapter 6, Part 1)
- Unhealthy money (Chapter 6, Part 2)
- Economic Thought (Chapter 7, part 1)
- Inflation (Chapter 7, part 2)
And now let’s go back to the Bitcoin Standard: “Chapter 8: Digital Money”
In short, Bitcoin is the first successful form of digital money. It solves all the problems that money as a concept presents. And ahead of Bitcoin, “all of our former forms of money appear as distinctive anachronisms in our modern world – the abacus next to our modern computers.” Today we are more than twelve years in Bitcoin. However, when Saifedean Ammous wrote the book, he said:
“Bitcoin has worked virtually flawlessly for the last 9 years, and if it continues to work this way for the next 90 years, it will be a compelling solution to the money problem that offers individuals sovereignty over money that is resistant to unexpected inflation while being highly marketable across space, scale and time. “
Historically, technological innovations have “shaped the monetary standards that people applied.” Bitcoin is the latest incarnation of it and the first born out of the digital age. It uses “several technological innovations that have been developed over the last few decades and builds on many attempts to produce digital money to deliver something that was almost unthinkable before it was invented.”
Digital money is taking shape
The first problem Satoshi Nakamoto solved was digital scarcity. “The map of digital objects, since the inception of computers, is that they are not sparse. They can be reproduced indefinitely, and as such it was impossible to make a currency out of them because sending them will only duplicate them. “
The second problem Nakamoto addressed was the issue of double spending. With cash, if you pay someone through a bill, there is no way you can use that bill again. The other person has it and you do not have it. With digital money, on the other hand, “there was no way to guarantee that the payer was honest with his funds and did not use them more than once unless there was a trusted third party who monitored the account and was able to verify the integrity of the payments made. ” A third party was excluded, hence the problem.
“Third parties are inherently an additional security vulnerability. Involving an additional party in your transaction naturally entails a risk because it opens up new possibilities for theft or technical errors. Furthermore, payment through intermediaries makes the parties vulnerable to surveillance and bans from political authorities. “
There will only be 21 million Bitcoin. That makes it “the first digital object that is demonstrably scarce.” In addition, Bitcoin does not need a third party to verify transactions. An ever-increasing number of miners scattered around the world, involved in a race to solve a mathematical puzzle, are doing just that. More on that later. The system gives Bitcoin owners total control over their money. “Sovereign money contains all the permission needed to use it; the desire for others to keep it exceeds the ability of others to impose control on it.”
BTC price chart for 11/26/2021 on OkCoin | Source: BTC/USD on TradingView.com
Moving away from gold
The author praised gold throughout the book. Gold is money that no one can print. As humanity moved away from it, central bank control left them “helpless in the face of the slow erosion of the value of their money as central banks inflated the money supply to fund government operations.” Satoshi Nakamoto created Bitcoin to save us from it.
“Nakamoto removed the need for trust in a third party by building Bitcoin on the basis of very thorough and iron-clad evidence and verification. It is fair to say that the key operational feature of Bitcoin is verification, and only because of that can Bitcoin completely eliminate the need for trust. Each transaction must be recorded by each member of the network so that they all share a common ledger of balances and transactions. “
Do you remember the math problems the miners solve every ten minutes? Well, their main characteristic is that they are “difficult to solve, but if the right solution is easy to verify. This is the proof-of-work (PoW) system, and only with a correct solution can a blockage be committed and verified by all network members. ” The PoW system is crucial because it creates “affirmative nodes to use processing power that would be wasted if they included fraudulent transactions.”
“It is crucial that the node that commits a valid block of transactions to the network receives a block reward consisting of brand new bitcoins added to the supply along with all the transaction fees paid by the people who trade.”
Tick Tock, next block
No matter how many miners support the network at any given time, Bitcoin produces a new block “approximately every ten minutes, and for each block must include a reward of 50 coins in the first four years of Bitcoin’s operation, which must subsequently be halved to 25 . coins and further halved every four years. ” The name of that mechanism is “halving”, and it sets in motion a deflationary process. One of the many reasons that causes the price of Bitcoin to rise.
“The amount of bitcoins created is pre-programmed and can not be changed, no matter how much power and energy is spent on proof-of-work. This is achieved through a process called difficulty adjustment, which is perhaps the most ingenious aspect of Bitcoins design. “More people are choosing to keep Bitcoin, this increases the market value of Bitcoin and makes mining new coins more profitable, leading more miners to spend more resources on solving work-proof issues.”
The reason for the difficulty adjustment is to “ensure that blocks will continue to take about ten minutes to be produced.” Unlike gold, “more effort to produce bitcoins does not lead to the production of more bitcoins. Instead, it simply leads to an increase in the processing power required to commit valid transactions to the Bitcoin network, which only serves to make the network more safe and difficult to compromise. “
As you can see, the system is too beautiful to put into words. And we have just begun. Join us next time as we continue to explore its intricacies.
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