More on this book
Community
Kindle Notes & Highlights
by
Antony Lewis
Read between
May 23 - June 6, 2021
Your account with a third party is a record of an agreement of trust between you: simultaneously how much you have with them, and how much they owe you.
Unlike cash, which settles using the transfer of physical tokens, digital money settles by increasing and decreasing balances in accounts held by trusted intermediaries.
Cash is an anonymous bearer asset which does not record or contain identity information, unlike many forms of digital money that by law require personal identification.
The generally accepted academic definition of money usually says that money needs to fulfil three functions: A medium of exchange, a store of value, and a unit of account.
it doesn’t need to be universally accepted (nothing is), but it should be widely accepted in the particular context for which it is being used.
Unit of account means it is something that you can use to compare the value of two items, or to count up the total value of your assets.
But how has it fared as a store of value? According to the St Louis Fed, the purchasing power of the USD from a consumer’s perspective has fallen by over 96% since the Federal Reserve System was created in 1913.
the dollar, as with almost all government currencies, consistently loses value by design, driven by policy. We can predict, more or less, that the USD will lose its purchasing power by a few percentage points each year. This is known as price inflation (as opposed to currency inflation which is an increase in the number of dollars in circulation).
policymakers are not beyond employing various tricks with that basket to bend the rate of inflation to figures they find more convenient
Bitcoin is the very first digital asset of value that can be transferred over the internet without any specific third party having to approve the transaction or being able to deny it.
Stability is determined more by the liquidity of a market (how many people are willing to buy and sell at any price point), than the price of an asset.
New forms of money could be disruptive and destabilise economies, which, from a central banker’s point of view is not a good thing. So you wouldn’t expect central bankers to warmly embrace new forms of money that are not under their control.
underlying factors must create demand for the item.
The two underlying factors in Bitcoin that create demand are: 1.It is the most recognised instrument of value that can be transmitted across the internet without needing permission from specific intermediaries. 2.It is censorship resistant.
They are declared by law as legal tender, meaning that in that legal jurisdiction it must be accepted as valid payment for a debt. Therefore people use it. 2.Governments accept only their own fiat for tax payments. This gives fiat currencies a fundamental usefulness, as everyone needs to pay tax
banking jargon some banks call this a ‘book transfer’ as it is just a transfer from one account to another and no money moves into, or out of, the bank.
the money in customer accounts is a liability of the banks:
There are two main ways a bank can digitally pay another bank: by using correspondent bank accounts; or by using a central bank payment system.
Correspondent bank accounts are industry jargon for the bank accounts that banks open with other banks. These are also called ‘nostros’ (nostro
Correspondent banking describes activities related to the use of these accounts.
small banks and financial institutions in less stable regions are practically excluded from the major financial system, and this is detrimental to their growth and the growth of their customers’ businesses and other economic activity within their local economies.
Vast swathes of legitimate financial transactions will be cut off if you punish banks for dealing with people who deal with people who deal with people who commit crimes.
Reality is always more complicated than theory,
‘fountain pen money’ because bankers used to approve loans by signing a document with a fountain pen. If you take out an unsecured loan from a bank, the bank adds deposits to your account (increasing their total liabilities) and adds a loan to their balance sheet (increasing their total assets).
Sterling is a completely different asset from US dollars, and assets and currencies cannot, and do not, magically morph from one type to another.
You always need a third party who is prepared to accept one currency and give you the other.
pre-paid airtime, a different type of digital currency.
In most jurisdictions, licensees are usually forbidden to write loans or create money, a privilege granted to lenders and banks.
Using asymmetric cryptography, if you want to receive encrypted messages you create two mathematically linked keys: a public key and a private key. Together they are called a key pair. You can share your public key with the world, and anyone can use it to encrypt messages for you. You use your private key, known only to you, to decrypt those messages. Anyone who sends you encrypted messages using your public key knows that only you can decrypt them.
Bitcoin uses a different scheme called ‘ECDSA’—Elliptic Curve Digital Signature Algorithm.
A hash function is a series of mathematical steps or algorithms that you can perform on some input data, resulting in a fingerprint, or digest, or simply, a hash. There are basic hash functions (not used in blockchains) and cryptographic hash functions (used in blockchains).
Hash functions are deterministic because the output is determined by the input. If a function is deterministic, it always produces the same output for any given input.
Hash functions can be used for proving that two things are the same without revealing the two things.
Digital signatures are used in blockchain transactions because they prove account ownership, and the validity of a digital signature can be proven mathematically and offline, without asking any other party.
In a blockchain system, where there is deliberately no organisation to provide or maintain accounts for you, your digital signatures are the critical piece of evidence that entitle you to make transactions.
So it is inaccurate and therefore unhelpful to generalise and say ‘cryptocurrencies’ or ‘blockchains’ are energy intensive.
Bitcoin’s blockchain. Transactions that record transfer of ownership of those coins are created and validated according to a protocol—a list of rules that define how things work and which therefore govern updates to the ledger. The protocol is implemented by software—an app—that participants run on their computers. The machines running the apps are called ‘nodes’ of the network. Each node independently validates all pending transactions wherever they arise, and updates its own record of the ledger with validated blocks of confirmed transactions. Specialist nodes, called miners, bundle together
...more
Bitcoin’s blockchain is not encrypted.
we have a system that can send value from A to B, without the physical movement of items or using specific third-party intermediaries.
chain of blocks was not the purpose of Bitcoin, it is just the design that was developed to achieve the objective—the solution to the business problem.
The system therefore needs to be able to be operated by anyone, without any need to identify themselves or gain permission from a gatekeeper.
a public key is derived from a private key, which is a number picked at random.
In Bitcoin and most other cryptocurrencies, account numbers are mathematically derived from public keys (not public keys themselves), and are called addresses.
You can also create as many addresses as you want and your wallet software will manage all of them for you.
As a theme, whether we consider money (e-Gold, Liberty Reserve, Bitcoin etc), or data (Napster, BitTorrent, etc), the evidence shows that decentralised protocols are more resilient to being shut down than services with a central point of control or failure. I expect the trend of decentralisation to continue in the future, driven in part by concerns that authorities are overextending their reach into private social matters.
The website bitcoin.org was registered using anonymousspeech.com, a broker that registers domains on behalf of customers who can choose to remain anonymous. This shows how important privacy was to the person or group involved in Bitcoin.
If you cloned your wallet, you would be cloning your private keys, not doubling your bitcoins.
Satoshi’s real-world identity matters because, if the real person or group of people were discovered, their views and voice could dominate the future of Bitcoin. However, this centralisation is what they are trying to avoid.
It is never a good idea for people to know (or even believe) that you have significant amounts of wealth, especially in cryptocurrency.
The vision of Ethereum is to create an unstoppable, censorship resistant, self-sustaining, decentralised, world computer.
