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May 15 - June 21, 2020
Bitcoin was, very simply, a new way of creating, holding, and sending money. Bitcoins were not like dollars and euros, which are created by central banks and held and transferred by big, powerful financial institutions. This was a currency created and sustained by its users, with new money slowly distributed to the people who helped support the network.
The creator of Bitcoin, Satoshi, disappeared back in 2011, leaving behind open source software that the users of Bitcoin could update and improve. Five years later, it was estimated that only 15 percent of the basic Bitcoin computer code was the same as what Satoshi had written.
In the 1970s and 1980s, though, mathematicians at Stanford and MIT made a series of breakthroughs that made it possible, for the first time, for ordinary people to encrypt, or scramble, messages in a way that could be decrypted only by the intended recipient and not cracked even by the most powerful supercomputers.
As sociologist Nigel Dodd put it, good money is “able to convert qualitative differences between things into quantitative differences that enable them to be exchanged.”
The essential quality of successful money, through time, was not who issued it—or even how portable or durable it was—but rather the number of people willing to use it.
A computer had to perform lots of work to create each new unit of hashcash, earning the process the name “proof-of-work”—something that would later be a central innovation underpinning Bitcoin.
“What we want is fully anonymous, ultra low transaction cost, transferable units of exchange. If we get that going (and obviously there are some people trying DigiCash, and a couple of others), the banks will become the obsolete dinosaurs they deserve to become,”
Rather than relying on a central bank or company to issue and keep track of the money—as the existing financial system and Chaum’s DigiCash did—this system was set up so that every Bitcoin transaction, and the holdings of every user, would be tracked and recorded by the computers of all the people using the digital money, on a communally maintained database that would come to be known as the blockchain.
The reward of new coins helped encourage Bitcoin users to set their computers to partake in the communal work of recording transactions.
The software also mandated that the winner of each block would get fifty coins for the first four years, twenty-five coins for the next four years, and half as much again every four years until 21 million coins were released into the world, at which point new coin generation would stop.
By this measure, one dollar was worth around one thousand Bitcoins for most of October and November 2009.
Libertarianism and Bitcoin were alluring to Roger and Jesse for much the same reason, owing to the deceptively simple answers they promised for much bigger problems.
What’s more, at a time when ideology was a major national talking point, the principles that were becoming attached to Bitcoin were helping it to win public attention, as a symbol of the new politics taking root in America.
He saw that Bitcoin’s lack of any apparent intrinsic value didn’t matter when looked at against the history of money. The reason gold itself had been used as money was not that it was valuable; it had become valuable because it was used as money.
The only way to stabilise the system is to rid it of the “cheating incentive”—that being the incentive that encourages the “prisoner” to take the high-risk selfish strategy. Most of the time that depends on establishing a system of enforced protocols or regulations that penalise rulebreakers above and beyond the potential benefit of cheating.
