The fuss over fake internet money

Preston Sledge
Sep 2, 2018 · 7 min read

I won’t exhaust you with the nitty gritty of what Bitcoin is… partly because we’re still figuring that out. Instead, let’s try to see why it all matters.

1. Electronic Cash

Better money.

You use money to communicate value. It’s a common language used by the entire world. So, let’s talk money.

Why do you want money? For the things money can buy; to get what you actually want —

So are some forms of money better than others?

Money, as a tool, has advanced over time. Bartering is great. But unfortunately, not everyone that has what you want — wants what you have *sighs deeply*. Instead of always having to sort out conflicting wants, you could just use widely desired items to exchange with. Hey, lots of people seem to like fish, so I’ll stock up on fish. That way, as a local shepherd, I don’t have to convince the lactose-intolerant barber to accept my goat milk when I need a haircut.

These highly demanded items for exchange spread like a wildfire. The invention of money sparked a frenzy to speculate on and acquire the best kind of money. “With this, I can get anything from anybody I want.” Some items became more desirable than others as a tool for exchange.

For example, maybe I just want a hair cut, not the rest of them. Then I’d slice off a bit of fish to pay for the cut. But at that point, there is no guarantee that that piece of fish has retained its proportional value. What am I supposed to do with chunks of rotting fish or half a house? This makes smaller transactions totally infeasible. So, good money is divisible — or retains value when divided into smaller pieces. Dollars are able to split value down to a hundredth of a unit, or 2 decimal places. Bitcoin measures value with 8 decimal places worth of precision (or more).

It’s easy to transact when each piece is equivalent in value — that’s fungibility. A freshly minted C-note carries more value than a ripped or stained $100 bill and it sells at a premium in other countries. With electronic cash, every unit is virtually identical. In Bitcoin however, the ledger is public. Since the history of a coin is traceable to its origin, certain coins can be valued differently based on their past.

You also want to move your money around easily and carry it with you. You need your money portable. Now, rather than a sack of smelly fish or heavy gold, I just carry some paper dollars or a plastic card instead. And what’s better than low weight? No weight. In fact, most dollars you spend today are probably digital. In China, paying with cash or card is socially barbaric. It’s QR code or GTFO. Electronic cash is weightless and supremely portable.

Finally, the shelf life of items make it impossible to accumulate wealth. You couldn’t pay me to accept a week-old fish. Money shouldn’t “spoil”, it should retain its value over time. Money should be durable. Paper is good enough, gold is better, electronic cash is virtually untouchable. E-dollars are stored in a massive database center, protected by the competence and integrity of banks and corporations like Paypal or Venmo. On the other hand, Bitcoin’s ledger is public and maintained by tens of thousands of computers around the world. Either way, bits of data should be easier to preserve than physical items.

Electronic cash makes it easier to get what we want.

2. Digital Scarcity

There ain’t many of ‘em!

Sure, Bitcoin can’t be deleted or changed because cryptography. But what’s really cool is that bitcoins can’t be copied. Bitcoin’s primary achievement is decentralized digital scarcity.

Counterfeit is illegal because it would unfairly steal wealth from you and me. Increasing the supply of anything makes it less valuable. We know that from economics class. So if you expect something to preserve its value over time, it should be hard to produce. Plenty of metals are tough and shiny. But, gold demonetized all other metals to become the ultimate reserve currency, since it’s the least produced annually — the rarest. Only 1.5% of gold’s circulating supply is mined each year!

On the other hand, hyperinflation can occur when governments print so much money that citizens begin to lose trust in the national currency. Sometimes, national currencies are diluted by 100% of their supply (or more). Prices rise uncontrollably, as nobody wants to hold cash and lose wealth. People begin to hoard commodities. This is when you see pictures of people pushing wheelbarrows full of trillion dollar bills.

CHART TIME!!!

Money supply has a strong inverse relationship with buying power.
Bitcoin’s supply grows slower over time — this is called disinflation. The rate decreases towards 0%, with its supply increasing towards a cap of 21 million. Bitcoin gets harder to mine as demand grows.

People trust things like gold and land to store their value, since “they ain’t making any more of it!” Scarce commodities also provide a hedge against inflation. Citizens of corrupt governments — with national economies prone to rapid currency devaluation — can find freedom in a portable, scarce resource like Bitcoin. The popularity of smartphones in these developing countries can help facilitate an alternative economy by allowing people to easily store and transfer digital assets.

So yeah, fractional reserve banking and copy+paste make it hard to create a successful digital asset. It’s not really an asset if I can copy and distribute it at will. That’s how Napster and that sketchy website you use to watch movies undermined the music and film industry. Digital bits are infinitely copyable.

With Bitcoin, each coin is verified to be worth at least a miner’s cost in electricity. To earn coins, a miner proves to everyone they expended energy to solve a puzzle (proof-of-work). Coins are unforgeably costly, and their supply is limited.

Miners would stop mining if it wasn’t “worth” it. But, the scale of mining and liquidity of exchanges provide a healthy market for Bitcoin.

Digital scarcity allows us to have auditable digital assets with real value, primarily as money.

3. Decentralized Governance & P2P Transactions

Nobody controls it.

How do we allocate this digital scarcity fairly? And how do we settle transactions in a digital system, anyway? What’s stopping me from sending the same coin to two people?

The traditional solution is to introduce a trusted third party that mediates transactions. Indeed, there are scarce digital items like WoW gold and Fortnite skins, but they are controlled by a single entity. These items are controlled by their parent corporation and can be modified or deleted on a whim. In the same way, banks can spend or loan out my money however they like. Bitcoin seeks to achieve decentralized digital scarcity, where nobody can censor transactions or control the means of production, like gold.

To get what I want, I need as many people as possible to want my money, right? I want dollars because I need them to pay the US Government in taxes or suffer incarceration — a compelling reason to accept dollars. Banks serve people based on citizenship and credit score. Banks manually verify every transaction and prevent fraud. Also, my dollars might be vulnerable to hacks or corruption, but I trust the government to take it easy on banks and restore my funds if they do screw up. It’s not like they have a problem with printing more money.

Bitcoin has proved its merit on the open market. It has gained the trust of thousands of people from around the world by settling transactions for over 10 years. The ledger is public too, so anyone with an internet connection can use the network. It may have been ugly at times, but hey, the coins get from point A to point B. They don’t go through multiple intermediaries with arbitrary fees and a 5–7 business day delay. Here in 2018, someone sent $300 million with Bitcoin and paid a fee of only 4 cents. That ability alone should disrupt global finance.

The balance in my Bitcoin wallet is “real” in that thousands of people around the world maintain a copy and unceasingly agree on my balance in a shared ledger. Kinda like an append-only Google Doc — with incentives to update it and have everyone else agree with your updated version. Bitcoin’s settlement process has more people with skin in the game. As a payment system Bitcoin allows me to trust cryptography to manage my money, instead of a bank or corporation.

Bitcoin is peer-to-peer money, not client-server. It’s a protocol, not a platform.

Bitcoin trades convenience for security. Your money is untouchable without the password. But, if you lose that password, your bitcoin will be lost in cyberspace forever. People like me have learned this the hard way: No chargebacks, No password recovery, No bailouts. Financial freedom requires financial responsibility.

Some people are happy to sacrifice comfort and convenience for the security and performance of Bitcoin.

It’s a matter of us having that option in the first place; that’s what Bitcoin is all about.

Learn more

txblockchain

A group dedicated to the research, development, and education of blockchain technology at The University of Texas at Austin.

Preston Sledge

Written by

txblockchain

A group dedicated to the research, development, and education of blockchain technology at The University of Texas at Austin.

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