August 20, 2020

Bitcoin, the origin of the decentralized economy. Part 1.

The easiest way to understand Bitcoin is by comparing it to traditional money.

The only problem is that, although we use money every day, very few people understand how it really works, and one of the advantages of Bitcoin is that it makes its users question about money and economics. Something that is not taught in schools, but is used daily.

Those who work for a salary are actually trading their time and effort for money, without really knowing how the economy works. We will agree that a bill is a piece of paper to which we assign value, but at heart it is just a piece of paper.

So: Why is money accepted as a means of payment? To explain this we have to go into the origin of money.

In the beginning, before the money appeared, everything was done by exchange (barter) but some exchanges were complex. How many chickens were worth a cow? I have a potato field and it is not yet harvest time, but I still need to eat. How can I exchange a product that I do not yet have?

Naturally, commodity money appeared to solve this kind of problem. So: What is money? It is a language that allows to have a way of accounting and to facilitate the exchanges and in order to be accepted as a currency it must have some basic characteristics. Easily transportable, scarce and divisible.

Each culture used different methods that were accepted as commodity money. To give a couple of examples, some used cocoa, others used salt (hence the word salary).

Therefore, money, in itself, can be anything that we agree has the same value for everyone and serves for exchange and accounting.

Later on, commodity money was replaced by coins and each culture made them out of a different material, but mostly out of a scarce material. Along with coins, the first taxes appeared, basically to finance wars. As a curiosity, the first method of collecting taxes was by cutting out a part of the coins and that is the reason why many coins today have ribbed edges. At the same time that the coins appeared, so did the first bankers because it was very heavy to transport all the gold coins and if you always went with all your money on you risked being robbed and you could lose everything. The banker would write down the amount deposited on a piece of paper that would be used to claim back the deposited gold and this is how paper money was born.

Finally it turned out that people didn’t want their gold, they just needed the paper that said they had that gold in storage, so the bankers seeing that the reserves were accumulating and that people practically never withdrew all the money, started lending money from one person to another, and that’s how the figure of the banks was born, intermediaries that made the money move from one place to another and therefore they earned commissions, an additional commission to the one they earned for keeping the depositors’ money.

After many decades in which the economy of humanity has been sustained on the basis of third parties, of different crises that have led to real financial bankruptcies for thousands of people, and of working on the basis of a centralized system that has demonstrated its shortcomings time after time, only 11 years ago (2008), what, for many, is the greatest economic-financial revolution since the birth of paper money appeared: Bitcoin.

An anonymous person or a group of people (still unknown), under the pseudonym of Satohi Nakamoto, after the financial crisis of 2008 proposed a system to create digital money, a currency that does not exist in physical form, a currency created for the internet, the money of people and for people, based on mathematics and autonomous machines that eliminate the need for intermediary banks and governments. A currency that is geographically unlimited, decentralized, censorship-resistant and totally inclusive so that anyone with a computer or mobile phone and an internet connection can access it.

The main reason that inspired Satoshi was the scandal of the banks with their subprime mortgages. It was not possible for the banks to privatise profits and make their debts public and in the end it was the taxpayers who took on the irresponsible banking. Satoshi drew inspiration from several ideas of the 1990s to create the masterpiece that would change the world, a currency unattached to banks and states. He developed it in secret because of the possible consequences of that great feat and had help developing the software. Once he left it running it disappeared forever without a trace, leaving us a gift to humanity since he had managed to create the first 100% functional decentralized digital currency.

Satoshi presented a document called White Paper detailing the operation of the entire system and months later provided the necessary software. He created a system capable of operating autonomously and transferring value without the need to rely on a third party, impossible to corrupt and open source that the community has continued to improve since its inception.

Anyone with knowledge can contribute ideas for improvement and if the community agrees, the improvement will be implemented, making it democratic. So Satoshi planted the seed and the community has continued to improve its creation in an altruistic way without charging for it. Something very similar to the world’s largest encyclopedia, Wikipedia, a great joint effort without direct financial compensation.

Thus, bitcoin opens the door to a new collaborative world, where it rewards inclusiveness, decentralization and usability over the profit of a few.

Learn more about Bitcoin in the next post, Bitcoin, the origin of the decentralized economy. Part 2.