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October 15, 2021, 07:48:41 PM |
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here's the first section
What is Bitcoin?
Before we start analyzing Bitcoin and its growing
prevalence as a currency we look at two things. The first is
the concept of currency. Also, it is necessary and interesting
to complement the new economic evolutionary step with the
context of history. Now we will touch on these subjects very
briefly.
What is Currency?
Money satisfies general human demands. It is used as
exchange for goods and services. Money has specific uses that
qualify it as money and there are three that will be
considered here.
A medium of exchange is something used for buying and
selling goods and services. Labor is something that is sold and
productive work is the foundation for a good economic system.
When you work you do something valuable. You can supply a
service such as dentistry, clerical work at a retail outlet or act
as a mover. Or you can produce a good that can be put into a
market and sold, such as this book. In any case, you work and
are supplied something valuable for your time.
If you work for a fast food outlet, say, you do not want to be
given cooked food as compensation. You want something that
can be used to satisfy desires for other goods and services at
your discretion. Thus, you are given currency and this
currency yields and represents the value of the labor you sold
and allows you to buy something else you find valuable.
Therefore currency acts as a medium of exchange.
Money is used as a unit of account as well. A dollar,
although just a piece of paper, gives individuals a relative
measure of worth. If you go to a store with a dollar and look
for things to buy you get an idea of the worth of everything in
dollars. If you are offered three-hundred dollars for a weeks
worth of work you then judge your willingness to do that work
based on the unit of account by gauging it from the reference
point that money provides.
One more thing to discuss here is how money acts as a store
of value. If you are given a hundred dollar bill, throw it in a
safe and keep it there for a week the money will still be worth
a hundred dollars. The value of that hundred dollar bill
retains its value for future spending allowing individuals to
save the value.
The value of a dollar bill alters with time through
alterations in purchasing power and government action.
Governments can easily increase the money supply.
Expanding the money supply will reduce the value stored in
all units but will provide governments with money that is not
based around original production and value offered. This
notion is important later on to understand why e-currencies
like Bitcoin grow in popularity.
1 Currency acts as a medium of exchange, unit of account
and store of value
2 Money satisfies the human demand for these qualities
Advancement of Currency
Currency has advanced through many stages and here we
will recognize four of them. The first stage was that of
commodity money. This type of currency had an intrinsic
store of value based on demand for it. Gold and silver are rare
precious metals that are good examples of commodity money.
These metals are scarce and look interesting and these
reasons among others created a large demand but a small
supply. Because there was consensus about the demand it
was easy to start trading the material for more goods and
services. These qualities satisfied conditions for currency.
The next stage was a further advancement in convenience
which was the currency phase of representational money. In
this system commodities were stored in secure facilities
(banks). The banks gave certificates to depositors of
commodities and soon enough the certificates were traded. No
longer did you have to accept the physical gold coin for
something you sold, or in exchange for your labor. You could
accept a representation of the commodity. You could trade the
bank back the certificate for the gold or, as was just as good
but more convenient, you could trade the certificate that was
just as valuable as the commodity it represented.
Now comes the stage of currency that marks the turn from
free market oriented approaches to currency to government
managed currency. Since this stage is the current it should be
viewed as an experimental direction in the evolution of
economics and money, not the conclusive next stage to be
built upon.
Fiat currency systems are the consequence of government
monopolized banking systems of a particular country, or
group of countries such as the EU. Since economies based on
the representational money system were filled with many
banks, and many certificates, governments created central
banks that standardized the certificates. These central banks
became the bank of banks and with government permission
were able to remove the need for their currency to be backed
by gold and silver among other things. This effectively meant
that dollars could not be redeemed for commodities. Today
this is the system we have.
Fiat currency allows governments to print off money at will.
There can be little stability because of mistakes by central
banks that effect entire nations, or continents. From this
point a new economic phenomenon is occurring. We now reach
the next possible evolutionary stage of money and the subject
of this book, digital currency.
Digital currency is any form of money that is exchanged
electronically. A very popular means for transferring money
digitally is a debit or credit card. Scrip is the term used to
describe currency that is not considered legal tender. After
the fall of the Soviet Union many Russians used cigarettes as
a currency. Cigarettes satisfied qualifications for currency but
were not legal tender so were considered scrip. There are
centralized and decentralized currency systems. Centralized
currency systems rely on some kind of central user, such as a
bank, that mints the currency. Centralized currency systems
rely on some institution to print, monitor and distribute the
currency. This leads to a single institution holding
responsibility for the medium of exchange used by millions of
people.
A decentralized currency is money that is directly
transferred from the sending party to the receiving party
without any one, bank-like entity needed to verify the
transaction and control counterfeiting. This currency does not
have a single creator and monitor but many creators and
monitors. This concept poses new problems. Without a
centralized regulator how is the currency going to get created?
How is the currency going to be verified as authentic and not
counterfeit? On that note, we move to the more recent history
of decentralized electronic currency and Bitcoin.
The first digital cash system set up was created by David
Chaum with the founding of DigiCash in 1990. The
innovation involved was the use of cryptographic protocols
that allowed privacy with transactions. Chaum invented
among many other things important signature systems and
anonymous transaction protocols that would be important for
the foundations on which Bitcoin rests. DigiCash went
bankrupt in 1998. The assets of DigiCash were sold to Ecash
in 1998.
Also, Wei Dai with his digital cash system called b-money
and Nick Szabo with his concept bit gold enhanced
understanding of digital currency. These two systems also
had large impacts on the emergence of Bitcoin. The idea of
having users compete to solve proof-of-work problems was
outlined by Szabo. In the next section this will be described
further with a description of mining.
1 Currency has evolved over time from commodity money to
representational money to todays fiat currency
2 Digital currency is currency that is exchanged
electronically while scrip is something that acts as currency
but is not considered legal tender
3 Centralized currency has a controller that handles
counterfeiting and minting while decentralized currency has
no direct manager
4 David Chaum, Wei Dai and Nick Szabo all influenced
Bitcoin by pioneering technology and innovations that had
direct contributions to the Bitcoin network
6
History of Bitcoin
Who is Satoshi Nakamoto? Satoshi Nakamoto is the creator
of Bitcoin. Besides his attachment to Bitcoin there is no trace
of him anywhere else. Satoshi Nakamoto is the pseudonym of
the creator of Bitcoin.
This individual, or possibly group of individuals, is
shrouded in mystery. Many think he is a genius, an innovator
of our time and someone who has initiated the next
evolutionary step in currency. But there are many more that
think opposite. Others think he is a crook, the evil genius that
is hiding away from the public guilty of making the biggest
Ponzi scheme of our time. There are no middle ground
opinions on Satoshi Nakamoto, just praise or hatred.
We do not know who or where Satoshi Nakamoto is but we
can get a sense of the ingenuity he possesses through his
online posts and management of the Bitcoin protocol. This
elusive image captures the imagination of maybe some
scoundrel; maybe someone who felt he had to hide from the
world for his conceived future impact on currency and
government central banks or maybe just someone who did not
want too much attention from the world. In any case we have
his invention and a massive tribute must be paid to this
brilliant creative force that has captured imagination,
granted never-experienced shock to economists and given
hope to the ultimate separation of state and economics.
In talking about his intentions, Nakamoto wrote the
following from Bitcoin: A peer-to-peer Electronic Cash
System now known as The White Papers published in 2008:
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 a financial institution. Digital
signatures provide part of the solution, but the main benefits
are lost if a trusted third party is still required to prevent
double-spending. We propose a solution to the doublespending problem using a peer-to-peer network.
We will see that the intention behind Bitcoin is exactly what
it has so far achieved.
1 Satoshi Nakamoto is the pseudonym for the individual
that created and initiated the start of the Bitcoin protocol
2 There are wide differences of opinion on Satoshi Nakamoto
3 Satoshi Nakamoto wrote Bitcoin: Peer-to-Peer Electronic
Cash System now known as The White Papers
4 Through The White Papers Nakamoto outlined the
Bitcoin protocol
What makes Bitcoin attractive?
The most notable reason for the growth of Bitcoin usage and
the willingness to take the risk with using the new digital
currency is the failure of large banks and distrust for the
predominance of central banks. These large banks hold
complete control of the money supply and the largest bank is
the central bank. Mainly, it is the idea of separation of state
and economics that makes Bitcoin attractive. The currency
allows many that have lost faith in the fiat currencys store of
value property. Bitcoin competes with fiat currency and
satisfies demands for a good currency better than fiat
currency in many ways. This is one reason digital currency
can be determined to be an evolutionary economic
advancement towards a better currency.
The store of value is not the only aspect. Digital currency
also provides a better distributed medium of exchange by
allowing easy world-wide transactions. Bitcoin is considered
as the ultimate replacement of the medium through which the
medium of exchange of fiat currency is handled.
Privacy is another valuable thing offered. A user can have
an address for storing Bitcoins that is very difficult to trace
back to the name of the address owner. Unlike a bank
account, Bitcoin provides an anonymous way to receive or
make payment for some value offered.
The recession-proof nature allows those that have seen
government distributed currency decrease in value the option
of getting protection for their money. Individuals work hard
for their money and rely on money as a modern survival
mechanism and it is terrifying to imagine all your hours at
work wasted by economic irresponsibility and idiocy on the
part of government. This very rational fear drives pioneers in
the Bitcoin community.
With these reasons we see why there is a demand for an
alternative currency. Now with an analysis we will see why
there is a growing demand for Bitcoin.
This is all currently in rewrite.
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