Finally, digital money. We got to the part when Saifedean Ammous talked about Bitcoin. So far, the “Bitcoin Standard” has taught us lessons in history, economics, and philosophy. It’s technology time. For bitcoin experts, this chapter can be a little basic. For newcomers to space, the following materials will be crucial to their understanding. The author explains each of the moving parts that make up the Bitcoin network in language that is easy to understand.
However, before we get into it…
About the coolest book club on earth
The Bitcoinist Book Club has two different use cases:
1.- For the runaway super-executive-investor, we are going to summarize the must-read books for cryptocurrency enthusiasts. one after another. chapter by chapter. We read it so you don’t have to, and only give you the meaty parts.
2.- For the reflective educator who is here for research, we will provide written notes to accompany your reading. After our book club has finished reading the book, you can always come back to refresh concepts and find important quotes.
Now, let’s go back to the Bitcoin benchmark: “Chapter Eight: Digital Money”
Simply put, Bitcoin is the first successful form of digital money. It solves all the problems that money poses as a concept. And in front of Bitcoin, all previous forms of money “look strange anachronisms in our modern world – counters next to our modern computers.” At present, we are more than twelve years in Bitcoin. When Seif El-Din Amous wrote the book he said:
“Bitcoin has worked practically without fail over the past nine years, and if it continues to do so for the next ninety years, it will be a compelling solution to the money problem, giving individuals sovereignty over money that resists unexpected inflation while also being sold massively across place, size, and time.”
Historically, technological innovations have shaped the “monetary standards that people use”. Bitcoin is the latest incarnation of that and the first to be born in the digital age. It uses “many technological innovations developed over the past few decades and building on many attempts to produce digital money to deliver something that was almost unimaginable before it was invented.”
Digital money is formed
The first problem that Satoshi Nakamoto solved was digital scarcity. “The nature of digital things, since the advent of computers, is that they are not scarce. They can be reproduced infinitely, and therefore it was impossible to make a currency out of them, because sending them would only duplicate them.”
The second issue that Nakamoto addressed was the problem of double spending. With cash, if you pay someone with a bill, there’s no way you can ever spend that bill again. The other person owns it and you don’t. With digital money, on the other hand, “there was no way to ensure that the payer was honest with their money, and not to use it more than once, unless there was a trusted third party overseeing the account and able to verify the integrity of the payments made.” A third party was out of the question, hence the problem.
Third parties by their very nature pose an additional security weakness. Involving an additional party in your transaction is inherently risky, as it opens up new possibilities for theft or technical failure. Moreover, payment through intermediaries leaves the parties vulnerable to monitoring and bans by political authorities.”
There will only be 21 million bitcoins. This makes it the “first rare digital item”. In addition, Bitcoin does not need a third party to verify transactions. An ever-increasing number of miners scattered around the world, are involved in a race to solve a mathematical, do-it-yourself puzzle. More on that later. The system gives Bitcoin owners complete control over their funds. “Sovereign money contains within it all the necessary permission to spend it; the desire of others to keep it outweighs the ability of others to impose controls on it.”
BTC price chart for 11/26/2021 on OkCoin | Source: BTC/USD on TradingView.com
stay away from gold
Gold is praised by the author throughout the book. Gold is money that no one can print. With humanity turned away, “the control of the central bank left them powerless 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 this.
“Nakamoto removed the need for third-party trust by building Bitcoin on the basis of very rigorous proof and verification. It is fair to say that the central operational advantage of Bitcoin is verification, and only because of that Bitcoin can completely remove the need for trust. Every member of the network must register every transaction so that they all share one common ledger of balances and transactions.”
Remember the math problems miners solve every ten minutes? Well, their main feature is that “it is difficult to solve but easy to verify correct solution. This is a Proof of Work (PoW) system, and the block can only be committed and verified by correct solution of all network members”. The PoW system is critical because it creates “verification nodes to expend processing power that would otherwise be wasted if they involved fraudulent transactions.”
“Crucially, a node that commits a valid set of transactions to the network receives a block reward consisting of completely new bitcoins added to the supply along with all transaction fees paid by the transacting people.”
Tuk Tok, Next Block
No matter how many miners back the network at any given time, Bitcoin generates a new block “about every ten minutes, and for each block containing a reward of 50 coins in the first four years of Bitcoin’s operation, it is then halved to 25 coins, halved again every four years. The name of this mechanism is “halving” and it triggers the contraction process. One of the many reasons why the price of Bitcoin is going up.
“The amount of bitcoins generated is pre-programmed and cannot be changed no matter how much effort and energy is put into the proof-of-work. This is achieved through a process called difficulty adjustment, which is perhaps the most creative aspect of bitcoin design. As more and more people choose to keep With Bitcoin, this increases the market value of Bitcoin and makes mining new coins more profitable, prompting more miners to spend more resources on solving Proof of Work problems.”
The reason for the difficulty of modification is to “ensure that the blocks will take about ten minutes to be produced”. Unlike gold, “doing more effort to produce bitcoins does not produce more bitcoins. Instead, it only increases the processing power needed to link valid transactions to the Bitcoin network, which only serves to make the network more secure and more difficult to settle.” .
As you can see, the system is too beautiful to describe in words. We have just started. Join us next time, as we continue to explore its intricacies.
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