“Q/A about Bitcoin: exploring the book”
In the Bitcoin whitepaper[i], the document explaining the main features of this system, we read:
“Bitcoin: A Peer-to-Peer Electronic Cash System”
“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through financial institution(…)”
In a few lines many fundamental concepts are introduced:
· Electronic money, which actually means electronic cash here
· Peer-to-Peer (P2P)
· Disintermediation
We will see what these terms mean in due course.
People approaching Bitcoin for the first time are typically frightened by similar concepts, which may sound overly technical, or consider Bitcoin a speculative tool, a financial bubble, a pyramid scheme, and so on.
Confusion reigns supreme.
So what is Bitcoin?
Bitcoin is essentially a monetary system based on mathematics, whose rules (protocols) have been written, in the phase of creation, on the basis of mathematical constants and are not redefined midway based on political choices, as is the case for legal tender money.
To make a simple parallelism, the basic Bitcoin rules are like those of a card game; we cannot change the rules while playing!
Bitcoin is decentralization and disintermediation
This system does not need intermediaries to manage its transactions.
Before Bitcoin all digital transactions, from the wire transfer to payments through PayPal, were made possible thanks to the existence of an intermediary. Take for example Alice and Bob We assume that Alice is a customer and Bob a seller: she wants to send him money via the Internet in exchange for a product or a service.
How can they realize this exchange of value?
If Alice decides to pay Bob by bank transfer, she will go to the web page of her online bank (or use the appropriate app), she will ask her bank to make the payment to Bob and the bank will authorize the payment if certain conditions are met: above all, obviously, the availability of money in the account and the absence of double spending, that is the attempt to carry out a transaction with the same amount of money twice.
So we have a centralized type system in which two actors (Bob and Alice) turn to a “reliable third party” (the bank) to carry out a transaction which, outside of the digital realm, would instead be direct. With cash, Alice would have given Bob the money in exchange for his goods or services.
Basically, when we make a transaction via the Internet, we simply ask the bank, PayPal or any other payment processor to update its records by removing part of our balance and adding it to that of the recipient.
There is no direct exchange of money between Alice and Bob.
With Bitcoin, for the first time in the history of the Internet it has been possible to remove these third entities or “middle men” from transactions and Alice and Bob have again been allowed to exchange money directly.
We will see in this book how Bitcoin makes this possible, what are the critical points of the previous system that led to the realization of this new system and how the currency that is part of this new system is created.
We will therefore see why we can say with conviction that “Bitcoin is individual monetary sovereignty”.
Bitcoin is digital scarcity
Before the creation of Bitcoin, the words “scarcity” and “digital” poorly bound, indeed, were essentially an oxymoron.
In addition to the ability to execute transactions without a third party that authorizes them, thanks to Bitcoin the concept of scarcity in the digital realm has been introduced for the first time.
Digital goods traveling in the network (bitcoins) are limited like precious materials (e.g. gold) and cannot be counterfeited. Moreover, they cannot be stopped or seized, because they travel within a decentralized network that has no leaders or single point of failure.
Satoshi Nakamoto, the creator of the Bitcoin Protocol, at a time when the currency of the system had not yet found its price, gave us an idea of the concept of digital scarcity, associating the individual BTCs with the precious metals:
“As a thought experiment, imagine there was a base metal as scarce as gold but with the following properties:
– boring grey in colour
– not a good conductor of electricity
– not particularly strong, but not ductile or easily malleable either
– not useful for any practical or ornamental purpose
and one special, magical property:
– can be transported over a communications channelIf it somehow acquired any value at all for whatever reason, then anyone wanting to transfer wealth over a long distance could buy some, transmit it, and have the recipient sell it.(…)”
But what exactly do we mean by the term digital scarcity?
And why didn’t it exist before?
The Internet is a tool that allows us to communicate with other users and/or institutions wherever we are in the world thanks to a free exchange of information: when we want to transmit messages and multimedia content to other users, we simply exchange information packets (data).
Even when governments impose censorship on information, there are systems to circumvent this censorship and communicate directly with anyone with an Internet connection.
What happens when we share data, such as multimedia content, on the Internet?
We answer this question with an example.
Let’s assume that Alice wants to send a photo to Bob using a messaging system operating on the Internet (for example WhatsApp or Telegram).
Alice’s device divides the photo into many small packets of information that are sent via a communication channel via the Internet using a set of protocols and communication rules called the TCP/IP suite.
Once they have arrived on Bob’s device, they are rebuilt to create Alice’s picture.
In short, Alice does nothing but copy her picture and send this copy to Bob, a bit like faxing.
Before this communication Alice’s photo was unique, because it was taken with her device and stored only there, now there are multiple copies.
Alice’s photo is not a scarce commodity because it is infinitely replicable: Alice has not signed over ownership of that file but has only sent her a clone.
Thus, before Bitcoin, the concept of scarcity in the digital world did not exist.
Even when, instead of multimedia contents, you wanted to exchange value, you necessarily had to resort to a reliable third party that “kept the accounts” and that, artificially, created a sort of scarcity of resources (digital money) available to the individual user.
Bitcoin, with its rules and protocols, has introduced another way consisting of:
· a decentralized system
· a scarce digital asset
Two antithetical characteristics to the previous system which is instead:
· centralized (controlled by “reliable” third parties)
· with infinite commodities and digital assets (there is no limit to the money that can be printed by central banks, as well as the files that can be created).
[i] S. Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, 2008.
Published at Sat, 01 Feb 2020 13:54:35 +0000
{flickr|100|campaign}
