1. The history of Money until now

History of money

In the time of our predecessors, commodity money was used because in addition to having a good value for itself as a commodity, it could also be used as a means of payment. Salt, agricultural products, etc. were used as payment. This was because they had the necessary characteristics to function as such, they were easily storable goods, objects capable of being transported without difficulty, divisible, unalterable and non-perishable.

Over time it was found that the assets that best met these requirements were precious metals. So people began using these metals as a means of usual payment.

Afterwards, paper money emerged and replaced the commodity money. The main reasons were because it is light, foldable, and takes less effort to make than many earlier systems. This kind of money started being used in the Middle Ages (5th to 15th century). Although paper was worth very little as a commodity, it was used as a means of payment since the issuer was trusted.

As of that moment they began to use these certificates instead of the commodity money in all type of transactions. These certificates had no material value, but they had a very important feature, the confidence that they could be converted to gold later.

In the 17th century banks began to keep gold in their safe boxes and issue their own bills. The holders of the paper (banknotes) could always go to the bank to exchange it for gold.

This is how the central banks were born, which would be the ones that would back paper money with deposits in gold and silver mainly. In turn, central banks guaranteed the full convertibility of paper with precious metals.

This way we reach a logical conclusion: the money supply depended on the reserves of precious metals.

Today, even though we cannot turn money into gold, in our current system we still rely on trust, like our ancestors did in the past.

Money in the actual economy works as a means of change, collection and payment, it is a unit of account and also a value deposit.

History of Cryptography

Bitcoin — the first cryptocurrency — and the technology that sustains it, Blockchain, did not emerge from scratch. They are the result of more than 40 years of research.

Before we begin, we have to mention that the objective of cryptography is to design, implement and to make use of cryptographic systems to provide some type of security. And the logical question is… why is cryptography relevant to a Blockchain? In what aspects does cryptography influence a Blockchain?

The answer is simple, cryptography is the key to solving the dilemma of the Byzantine Empire. The dilemma tries to find a technical solution that allows reaching an agreement between several parties that do not trust each other and without the need to resort to a central authority. The practical resolution of that dilemma for the first time in history is what has given rise to Blockchain technology.

In history there have been many examples of ways to encrypt messages such as the Spartan methods of 2,500 years ago, the encryption of Polybius of the Greeks, the cipher of Caesar belonging to the Romans, or as the most famous encryption machine of the History known as the Enigma machine.

During the Second World War, governments realized the relevance of cryptography for the encoding and decoding of information due to the well-known story of Alan Turing, considered the father of cryptography. He was the one who managed to decipher the codes of ‘Enigma’ — the machine used by the Germans for their communications in the Second World War — which was a huge advantage for the allies.

The logical question right now, would be… what do we mean when we say a coin is cryptographic? What this means is that said asset is inforgeable and secure, since cryptography is the art of being able to hide something from third parties, therefore, cryptocurrencies have that inviolability characteristic.

Evolution of Blockchain & Bitcoin

The history of Bitcoin and Blockchain began with the mortgage crisis of 2008, until then there was a multiplication of housing records that was based only on the original value of a property but whose duplication of mortgage procedures created a bubble raising prices of the market several times over the real value.

The seeds for bitcoin were already sown, in 1991 the first work of a secure Blockchain using cryptography appeared and it evolved until 1998, when Wei Dai described a decentralized solution for electronic payments based on public key cryptography.

This first work is evolved by other authors until 2008, somebody or some group of people with the pseudonym of Satoshi Nakamoto published the article that defines the mechanism to implement a digital currency: Bitcoin.

On 2008, Satoshi Nakamoto published the study he had been working on: Bitcoin P2P e-cash, a peer-to-peer electronic money system, independent of intermediaries, and in 2009 “he” launched the Bitcoin software, creating the network and the first units called bitcoins (BTCs) and the use of Blockchain technology.

On 2009 mining began, some realized that they could get rich if they started early. Hal Finney was one of the early adopters and saw the advantage of getting some coins in exchange for computing. Finney mined for a few days but ended up closing the program because it warmed up his computer. On January 12 of 2009, the “first transaction” is made when Satoshi sends bitcoins to Finney.

On 2010, a person with the acronym of “laszlo” published in the Bitcoin forum that offered 10,000 tokens to whom he bought two pizzas and sent them to his home. By that time the exchange of the 10,000 coins was being valued at approximately 41 USD$.

That transaction is known as the first official transaction of the cryptocurrency and has been the genesis of all this controversial new economy and in constant debate about its future and reliability. As of December 11, 2017, those 10,000 BTC have a value above approximately 165 million dollars

On December 12, 2010, Satoshi Nakamoto published his last message in the Bitcoin Forum. After a few months he stopped contributing and Andressen took the lead. Nakamoto’s identity remains a mystery.

On 2015, after several prototypes, the first version of the Ethereum platform is launched with an evolution plan to provide it with all the planned functionalities.

On August 2017 Bitcoin was forked. After a sequence of historical climbs, some miners and startups decide to separate themselves from the original developers creating what is called a hard fork, because of this, Bitcoin Cash was born.

Today Bitcoin exceeds $ 9,000 dollars and it is believed by some that its price would be in the future of hundreds of thousands of dollars per BTC.

Cryptocurrencies vs FIAT

Because the FIAT currencies (USD, EUR, GBP, JPY, etc.) aren’t as scarce or limited as gold, central banks have much more control over their supply. This gives them the power to control economic variables such as the supply of credit, liquidity, interest rates, etc.

One of the characteristics of fiduciary money is that these government entities have the ability to print additional FIAT currency ‘out of the blue’. It is evident that this increases the total supply of money, thus all the money in circulation decreases its value.

Bitcoin, the most popular decentralized currency in the world at this time, has a finite production of 21 million units or currencies. Not a single other currency can be produced, giving this a form of value to all the Bitcoin in circulation at any time, with the potential to increase its value over time.

This is the main difference, nobody can determine the production of these virtual currencies, or use them illegally or abusively. In the majority, their number is known publicly from the beginning, which does not happen with the money generated by banks.

Bitcoin is more like the times of the gold, that at the current times (in which the currencies were backed by this mineral): it is based on a resource, in this case, limited cryptography.

Recalling the principle of this article “… that were easily storable goods, objects capable of being transported without difficulty, divisible, unalterable and non-perishable”, this are the most important characteristics of the means of payment from our ancestors.

Well, do cryptocurrencies fit with these descriptions?

The answer in short would be yes, Bitcoin is very easy to store, is portable, is divisible, unalterable and non-perishable. While gold for example, it is certainly heavy and takes up a lot of physical space to load it. It is also limited, since behind the digital currency there is no central bank with “unlimited” capacity to generate new currency.

It is clear that Bitcoin cannot be destroyed or damaged, because it is virtual. We have also made it clear that its falsification or duplication is impossible thanks to its sophisticated cryptographic system.

The fundamental of this type of assets is that they establish a series of rules that guarantee the integrity of the data exchanged by the parties, without having to go through a third party to secure the transaction.

Just as at some point in history gold and paper money were used as a symbol of exchange, bitcoin is a currency that allows the exchange of values ​​without the need for intermediaries and that unlike gold or paper, is digital and “decentralized”

In other words… yes, cryptocurrencies could be the future substitute of FIAT if worldwide adoption ends happening.

The benefits of cryptocurrencies are revolutionary and play a very important role in the fintech ecosystem because they represent the future of finance, among other no less important cases that we will deal with in the following posts.

Predicting the future is complicated. Could anyone predict the arrival of social networks? Who would have guessed that clicking on the faces of our friends would replace the time spent in front of the television? But the sense of scale within the Blockchain industry is such that the changes that are coming will be “just as big as the original invention of the internet”