The secret of Satoshi Nakamoto and the evolution of Bitcoin
Bitcoin Insights #3
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Who is Satoshi Nakamoto?
This man, who leaves his home in Temple City, California (USA) in March 2014 and is harassed by journalists, is not the inventor of Bitcoin.
15 years after the launch of the Bitcoin network, Satoshi Nakamoto remains surprisingly unrecognized. At a time when almost everyone on the Internet is identifiable, this is nothing short of a miracle — just like the invention of Bitcoin itself.
It took around 35 years until various developments and inventions led Satoshi Nakamoto to combine various concepts into a functioning digital pseudonymous money system in the Bitcoin White Paper.
Bitcoin and inflation
Until January 3, 2009, it was not possible to transfer value quickly between distant parties without a trusted third party such as a bank. Satoshi Nakamoto succeeded for the first time in creating a digital good with inherent scarcity. There will never be (more than) 21 million Bitcoin.
Even though it is often claimed that Bitcoin is deflationary, this is not correct in the classical sense. Bitcoin has a calculable and very low inflation rate. The current inflation rate is around 0.8% per year. After the next halving in 2028, inflation will be around 0.4% and will continue to halve every four years until it reaches 0% in 2140. From then on, no more new Bitcoin will be mined and all Bitcoin will be in circulation.
In recent years, we have seen (once again) just how bad inflation can be. History is full of times of high inflation or even hyperinflation. Only when you experience it yourself can you really understand it. Both the ECB and the FED consider an average inflation rate of 2% per year to be ideal and are aiming for this. In fact, inflation has been significantly higher in recent years. A depreciation in the value of money of 2% p.a. means that €1,000 would only have a purchasing power of €820 after 10 years; the future price would then be €1,220. This means that money loses over 18% of its value in just 10 years.
Bitcoin and adoption
It is not difficult to understand why the scarcity and very low inflation of Bitcoin is affecting its price. The price, which traditionally results from supply and demand on the market, has shown a clear upward trend over the long term. The increased price and the high market capitalization (currently around 1.2 trillion US dollars) can also be seen as a sign that the adoption of Bitcoin is progressing.
Bitcoin adoption is progressing much faster than Internet adoption, apart from the early years and the year 2020. If you compare the two adoption rates, we are currently in the year 2000 for Bitcoin compared to the Internet. Back then, the dotcom bubble burst, but the Internet subsequently found its way into households and developed its own momentum in terms of distribution. The way was paved for the mass market.
Separation of money and state
Bitcoin’s strength lies not only in its scarcity, but also in its pseudonymity in the digital space. This enables a certain degree of privacy, albeit not complete anonymity. With the emergence of Central Bank Digital Currencies (CBDCs) such as the ECB’s digital euro, this is a key advantage. Even if the ECB wants to enable a certain degree of privacy in the digital euro, this requires a lot of trust that this will be maintained in the future. With the digital euro, there is a risk that citizens will become more and more transparent. All transactions could be viewed not only by banks, but also by central banks, over which governments have greater influence than over commercial banks.
What makes Bitcoin special is the separation of money and state. Like the separation of church and state, money should also be separate from the state. The state has enormous influence over the money moving in its territory (and beyond). With Bitcoin, however, a money has been created that is independent — independent of state control and the control of individuals. There is no single person who can decide how Bitcoin develops.
Changes to the Bitcoin protocol
In fact, the process of updates to Bitcoin is very complex and carefully thought out to ensure the security and stability of the network:
- Bitcoin Improvement Proposals (BIPs): Detailed proposals for improvements or changes to the Bitcoin network submitted by developers or community members.
- Consensus building: Only after extensive discussions is a broad consensus reached on the necessity and implementation of the change.
- Implementation and testing: After consensus is reached, the proposal is implemented and tested by developers.
- Soft forks: Usually the method of choice for Bitcoin updates, as they are backwards compatible. Older software versions can thus continue to interact with the network.
- Miner voting: In the case of major changes, Bitcoin miners usually vote by signaling their support in the blocks they mine.
- Activation: If there is sufficient support (often measured by the percentage of the mining hashrate), an activation time is set as the block height. From then on, the new rule comes into force.
- Gradual introduction: Changes are introduced gradually to ensure a smooth transition and to identify and resolve problems at an early stage.
- Continuous monitoring: Necessary to ensure that the changes work as expected and have no unintended consequences.
Changes to the Bitcoin protocol are rare and mostly limited to small technical improvements. The fact that changes are a rarity, unlike many other blockchains, shows how superior the Bitcoin protocol has been since its inception. This cautious and consensus-driven approach ensures that the core principles of Bitcoin — decentralization, security and stability — are maintained as it evolves to meet the needs of users.
With all these characteristics, Bitcoin is predestined to become the new global currency. Like gold in the 19th century, Bitcoin could become the standard of world currency and revitalize commerce like never before.
More on this in the next issue of ₿itcoin Insights…
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Philipp J.A. Hartmannsgruber holds a master’s degree in Finance & Accounting. He is a Board Member of the Blockchain Bundesverband (Bundesblock). In 2019 he founded PJAH Consulting, a bitcoin-consultancy.
