THE YEAR IS 2050: WE RECOVERED FROM AN ECONOMIC COLLAPSE AND THE WORLD IS NOW BETTER — PART 2

(this is the second part of the article. If you missed the first part, click here)

TRANSITIONING FROM FIAT MONEY

By Mirai Nakamoto

- Kiddo, the collapse of the fiat and fractional reserve financial system did not happen overnight. It took many decades. Fortunately, when the system failed, we already had an alternative free-market financial system running in parallel. It was based on computer cryptography and was known as the crypto-economy.

Also, the global collapse of the fiat-based economy forced governments to rebuild their systems. And surprisingly, most governments did a very good job over these last couple of decades. As you know, today both financial systems — the crypto economy and the government financial systems — co-exist peacefully and people can seamlessly transact between them.

- Wow, grandpa. This is so interesting. So how did the crypto-economy begin?

- It all started in the financial crisis of 2008, when Bitcoin was created. Bitcoin was a digital currency that nobody controlled, not even its creator. It was based on computer cryptography; it was hyper-secure and impossible to tamper. It was also just a piece of software, which made it impossible to kill or to change it. This protocol was running decentralized on thousands of computers all over the globe. As long as there was internet, there would be Bitcoin.

Furthermore, there was, by design, a fixed supply of only 21 million coins, so the monetary policy was transparent and immutable. All these properties made Bitcoin censorship resistant, meaning it was free from the interference of external agents, including banks and governments.

- Grandpa, this sounds very similar to several currencies that we have today in 2050.

- Yes, it does. Bitcoin was the first currency with these properties. Ironically, at the time, people received Bitcoin with extreme skepticism, especially in the first few years. Most people just could not see how math embedded in computer code could be “superior and more trustable” than a currency issued by a central entity, i.e. governments. It was a huge mindset shift and that is why it was so slow and painful.

- Wow, this is fascinating. Tell me more, grandpa.

- The technology behind Bitcoin is known as the blockchain. It is very ingenious and, as you know, it is one of the most important inventions of mankind, along with the automobile, airplanes, internet, computers, electricity and so on. The blockchain allowed us to create “digital scarcity”. You see, back in the day, any digital file could be copied numerous times. Bitcoin created digital assets that were unique, not replicable. That artificial scarcity finally gave value to digital assets.

It also created the most secure system to store data: once a piece of information was recorded on the blockchain, it was protected by layers and layers of new information recorded on top of it. In order to change a piece of data, one would have to attack every single piece of data that was recorded after it. It was like peeling an onion, changing the center of the onion, and then reconstructing the onion again, layer by layer.

With Bitcoin, you did not need to trust a central entity. You could just verify yourself all the transactions that ever happened in the blockchain network. Bitcoin also gave us the gift of being able to transact with anyone on the planet, almost instantly and with little cost. As long as the person or company had access to a computer or smartphone, we could transact with them directly, with no intermediaries along the way. It was permission-less, meaning one does not need approval from anyone to use the bitcoin network. Bitcoin does not care if your counterparty was a person, a company, a robot, a child, or a dog. Compare that to opening a bank account and going through an endless bureaucratic process.

Bitcoin was inclusive. It was permission-less, anyone could participate. It removed banks and intermediaries from transactions. It created a parallel financial system. It was also voluntary. Everybody is welcome, but nobody is forced to use it. You could transact any time of day or night, weekdays or weekends — the network was always on.

Now compare that to the financial system of yore, which was dominated by banks. Governments forced you to use their national currency. It excluded billions of people around the world from financial services, since these people were not profitable for banks to serve. It was slow with international transactions taking days, if not weeks to clear. It was limited in the sense that banks would only open five days a week for some hours during the day. It would charge unbelievable high fees for simple transactions. And it was full of paperwork and bureaucracy. Bitcoin presented a solution to many of these problems and it exposed the flaws of the existing financial system.

- I get it, grandpa. Bitcoin seemed superior in many aspects. But how do you evaluate “moneyness”? In other words, what makes money great at being “money”?

- Let’s see, kiddo. Traditional money must serve three purposes.

(1) Store of value: It had to serve as a store of wealth. If I wanted to save, I could use money to store my savings.

(2) Means of exchange: it had to serve as a currency, so we other people would take it in exchange for goods and services.

(3) Unit of account: it also had to serve to denominate prices. For instance, a certain good or service was valued at X units of money.

Shells, gold, fiat money, Bitcoin, all would serve these purposes. Let’s go through a quick comparison:

As a store of value, gold was scarce. It could only be mined in small quantities and at great cost. So it served as a great way to store wealth over the centuries. Fiat money was not so good. It was devalued by inflation, year after year, since the government was printing it so often. In fact, between 1915 and 2015, the US Dollar lost 98% of its value to inflation. In other words, the purchase power of USD 100 in 2010 was equal to the purchasing power of USD 2 just a century ago. Many other national currencies were much worse than the US Dollar — just ask a Venezuelan or Brazilian who lived during hyperinflation. Bitcoin exhibited the best characteristics to serve as a store of wealth since it was mathematically scarce by design. One bitcoin would always be equal to one bitcoin. And it was safe from the interference of external agents; no one could tamper with it. It is better than a Swiss bank account in your pocket.

As a means of exchange, gold was not very good. It was heavy and hard to transport. Fiat money was a lot more convenient. Bitcoin was also easy to exchange, but in the first decade or so, the network could get congested at times, harming the user experience with slow transactions and high fees. Fortunately, the Bitcoin network expanded its capacity exponentially before 2020 and solved this problem.

As a unit of account, paper money had an unfair advantage since governments mandated goods and services to be quoted in the national currency. But, the prices in fiat currency could easily and instantly be converted into Bitcoin.

So, Bitcoin was able to serve these three above purposes arguably better than gold or paper money. Let’s now see the attributes of money:

· Scarce (Limited in Supply): The supply of money in circulation ensures values remain relatively constant.

· Durable: An item must be able to withstand being used repeatedly.

· Divisible: Can be divided into smaller units of value.

· Acceptable: People must be able to use the money for transactions.

· Fungible: One unit is viewed as interchangeable with another (i.e one dollar is exactly as valuable as another dollar).

· Portable: Individuals can carry money with them and transfer it to others.

Again, Bitcoin was arguably way better money in these attributes than fiat money or gold. It was more scarce, durable, more divisible, and portable. However, it was a matter of mass perception, and it took quite some time for most people to warm up to the idea of adopting it as a new form of money.

- Got it, grandpa. Bitcoin sounds like a no-brainer, yet people were slow to adopt it. What hurdles did Bitcoin have to overcome?

- Kiddo, in the beginning, Bitcoin was not user friendly. It was hard to buy, hard to use, hard to store it safely. It also required a mindset shift. You see, people were used to just depositing their money at banks and forgetting about it. If something went wrong, they could talk to the bank and solve the problem. With Bitcoin, each person became their own bank. That means they were responsible for storing and using their funds properly. If they lost their passwords, for instance, they would lose their money. There was no company to call or to complain and this scared many people away. On the other hand, this also attracted some individuals who were looking to control their own sovereignty.

Another fact was that Bitcoin was confusing. Bitcoin was the currency and, at the same, the transaction network. At the time, people were used to having a currency — for instance, the US Dollar — and then a separate network for transactions — for instance, the Visa network, or PayPal, or using paper money, etc.

Bitcoin was also very hard to understand. To learn how it worked, you needed to develop some knowledge in computer science, networks, and cryptography. Most people simply did not want to go through this, so they failed to understand the technology.

Moreover, in order to fully grasp Bitcoin, learning the technology behind it was only half the battle. You also needed to be able to understand the implications of its existence to the world. And that required knowledge of several other disciplines, like economics, finance, psychology, game theory, sociology, philosophy, etc.

Fortunately, just like you did not need to be a mechanic to drive a car, you did not need to understand the entire minutia to use Bitcoin, so adoption grew steady but slowly.

- Got it, grandpa. You described some of the internal hurdles for Bitcoin adoption. What about external hurdles?

-Instead of being seen as an alternative to the existing financial system, Bitcoin was mistakenly seen a threat by many people. So it was repeatedly attacked in all possible fronts. Geeks tried to hack its code; the main stream media said it was a scan, banks and credit card companies would make it difficult to transfer money to buy Bitcoin; governments would threaten to ban it; there were countless scams involving crypto currencies, crypto exchanges (i.e. companies that would allow you to buy and sell cryptocurrencies; an example is Mt Gox) were hacked numerous times (Bitcoin itself was never hacked), and the community also had some toxic actors (just like any human environment) trying to influence the system. Hence, it was really hard to separate noise from signal! It was wild!

But if you look at the history of innovations, it was always turbulent. In the late 1800’s, the automobile was seen as something that would never work. It required gasoline, it was loud, it generated smoke, it needed roads, it was dangerous, the list of problems was endless. A horse was way better than an automobile. However, in a few decades, you had gas stations, you had roads, you had traffic signs, you had safe cars, they were fast, and they were reliable. People finally realized the automobile was better than a horse. But the shift in perception was slow and painful.

The internet in the late 1900’s was the same thing. Famous executives said that regular people would never need to use a computer. They said the internet was for pornography, it was only for nerds, it was too slow, it could not transmit sound, could not send pictures or videos…. Then, the technology behind it evolved exponentially and people finally ditched their fax machines.

So, with Bitcoin, it was the same. Its technology was still maturing, it needed to scale, and most people were not educated enough to fully grasp it. And, when one does not understand something, one tends to dismiss it.

All these attacks to Bitcoin were known as “FUD”, which meant fear, uncertainty and doubt. In fact, we had many famous bank executives, government officials, Nobel prize winners, and wealthy investors — people that were highly intelligent — predicting the Bitcoin was doomed. Today, we laugh at them, but at the time, their reasoning was understandable. Some of them just could not grasp Bitcoin’s complexity; others had self-interest to dismiss Bitcoin because they felt threatened by its existence. It was a very rational behavior.

Many people said something along “I like blockchain but not bitcoin” which in reality meant “I like to sound smart and open minded while also playing it safe, without taking the time to really understand those things very well”. And the media said numerous times that “bitcoin is used for crimes and speculation”; just like they said the internet would only be used for pornography. And never mentioning that there were way more crimes, scams and speculation happening in fiat currencies. They failed to see the potential transformation that was about to happen.

Although it is unfair to generalize, I perceived that older people tended to find it more difficult to grasp it. It was an enormous paradigm shift for them. How could they believe that something controlled by nobody, backed by decentralized mathematical code could have value? Explaining Bitcoin to government officials or to the media was like pulling teeth. Only a few would correctly understand it. Most of them would form an opinion without thorough understanding.

The average citizen was obviously influenced by these opinions. They did not know any better. They had no clue on how the current financial system worked and they certainly could not see how Bitcoin was different. In fact, for a long time, we thought holding Bitcoin was more speculative than holding fiat money. Again, today this sounds crazy, but it was rational then. It took time, a long time, for people to educate themselves.

- Grandpa, did banks and governments tried to stop this innovation?

- Well, kiddo. To be honest, I am not sure governments were so afraid. First of all, Bitcoin could not be stopped, it was like gravity. How do you fight gravity? Bitcoin was the equivalent of taking the genie out of the bottle — there is no going back. Money finally got free! Just like church and state separated at some point in history, now money and state would divorce. It was a natural unavoidable evolution.

Moreover, there was a game theory aspect at play. If governments tried to heavily fight bitcoin, there was a significant chance they would lose. And governments do not want to be perceived as weak. And, what if some governments banned Bitcoin while other governments embraced it? Which countries do you believe would be more successful?

Finally, Bitcoin offered governments an elegant way out from an economic mess that they created and could not solve. Thus, let’s not forget that Bitcoin was not the real enemy; the real enemy was the economic mess of unlimited debt.

- Interesting, Grandpa. Who were the first people to adopt Bitcoin?

In the very beginning, only nerds would get involved with Bitcoin. But the broader adoption of cryptocurrencies was primarily driven by the millennial generation. You see, millennials had a deep distrust in large institutions, especially government. After all, these institutions were far from working properly. Millennials realized that we were living in a financially sick world. It was not their fault, and yet millennials were been asked to foot the bill for the economic mess inherited from older generations. When millennials saw a way out, through a parallel and voluntary financial system where they would trust math and code — instead of corrupt bureaucrats — they jumped at it and never looked back. The Bitcoin adoption was primarily driven by a demographical phenomenon.

The way I see it, the Bitcoin price was just a symptom of how much people wanted out of the broken fiat system. The first adopters would see Bitcoin as an insurance policy against a potential failure of the establishment. Over decades, I witnessed the greatest wealth transfer in humankind’s history — nobody wanted fiat; everybody wanted crypto! People, especially millennials, would HODL (hold on for dear life) their coins and refuse to exchange their crypto for fiat.

Bitcoin was so resilient that it was considered anti-fragile. Antifragility is a property of systems that increase in capability, resilience, or robustness as a result of stressors, shocks, volatility, noise, mistakes, faults, attacks, or failures.

And, by the way, when I refer to Bitcoin in this story, I am referring to cryptocurrencies in general, not solely Bitcoin.

(this is the end of the second part of the article. For the third and final part, click here)