Bitcoin

What is money? From David Graeber’s book Debt.

“But if [Adam] Smith was right, and gold and silver became money through the natural workings of the market completely independently of governments, then wouldn’t the obvious thing be [for an ancient king] to just grab control of the gold and silver mines? Then the king would have all the money he could possibly need . In fact, this is what ancient kings would normally do. If there were gold and silver mines in their territory, they would usually take control of them. So what exactly was the point of extracting the gold, stamping one’s picture on it, causing it to circulate among one’s subjects-and then demanding that those same subjects give it back again ?

This does seem a bit of a puzzle. But if money and markets do not emerge spontaneously, it actually makes perfect sense.

Because this is the simplest and most efficient way to bring markets into being. Let us take a hypothetical example. Say a king wishes to support a standing army of fifty thousand men. Under ancient or medieval conditions, feeding such a force was an enormous problem-unless they were on the march, one would need to employ almost as many men and ani­mals just to locate, acquire, and transport the necessary provisions . On the other hand, if one simply hands out coins to the soldiers and then demands that every family in the kingdom was obliged to pay one of those coins back to you, one would, in one blow, turn one’s entire national economy into a vast machine for the provisioning of soldiers, since now every family, in order to get their hands on the coins, must find some way to contribute to the general effort to provide soldiers with things they want. Markets are brought into existence as a side effect.

Ancient king takes over mines, makes money, employs army, gives the army the coins, demands taxes from populace using that same money. Army is fed in the process. Key points, people should want the money, and not everyone should be able to “make” it.”

Then the key points are 1) money needs to be based on something scarce, like rare stones that you can get to through laborious mining 2) there is network effect of money - the more people use it the more others will want it (which kings can bootstrap). 

Then, if we create scarcity digitally (mining is digital, some work needs to be done, work gets harder and harder), and bootstrap the network effect ideologically (money needs to be digital, I want digital money), then we can have digital, distributed currency. This is Bitcoin.

Anyone who wants to dedicate some or all of their processing power to this digital mining, can create Bitcoins. It is getting harder and harder lately, in that case, you join one of the mining pools.

The Bitcoin mechanism does one other thing: mining -> money is the sweetener to “borrow” processing / storage from the population in order to power / maintain its second feature, the blockchain. The blockchain is a distributed ledger that records / tracks all transactions, each miner in a way has a piece of this huge database that is replicated throughout the Internet.

Bitcoin network cannot be fooled with false transactions as long as more than 50% of mining  machines are legit.

Inventor

Bitcoin was invented by Satoshi Nakamoto - a mysterious programmer who stayed at large for a long time. Who is Satoshi? Recent investigations pointed to someone named Craig Wright. There was some contraversy around this, CW could not reproduce some keys to prove he was Satoshi, but maybe he lost them. He came across sort of forgetful / mad-scientist throughout this ordeal, and one looks at Satoshi’s writings, he is a very deliberate, careful person. Lately it also surfaced that CW does not own any BTC that Satoshi owns either, so chances that he is the real Satoshi is becoming very slim. But if we follow enough threads we land on Hal Finney who was the “number two” in Bitcoin land whose “Running bitcoin [for the first time]” tweet is still around today. Finney had a next door neighbor whose name was Satoshi Nakamoto who was burned by the 2008 crisis.

Alternatives

One viable alternative to Bitcoin is Nano which does not require mining and does not require off-chain solutions to make transactions cheap and fast. Coupled with the fact that Bitcoin mining is incredibly wasteful, it is looking like the future lies in one of the challenger coins which are green and fast out-of-the-box.

Deflation

Sadly all limited supply fiat currencies run the rish of being deflationary (eg gold). That cld look fine to some, bcz deflation is “prices going down”, but that is not necessarily a good thing. Let me share this tidbit from Prof. Werner,

“@scientificecon

Deflation is worse than inflation: modest inflation is manageable for everyone, but deflation happens when nominal GDP shrinks. That means large numbers of corporate bankruptcies. While the economists rejoice that things are cheaper for ‘consumers’, they can’t buy as unemployed”