Bitcoinist Book Club: “The Bitcoin Standard” (Chapter 8, Part 1: Digital Money)

Finally, digital money. We got to the part when Saifedean Ammous talks about Bitcoin.  So far, “The Bitcoin Standard” has given us history, economy, and philosophy lessons. It’s time for technology. For Bitcoin experts, this chapter might be a little too basic. For newcomers to the space, the following material will be crucial in their understanding. The author explains each of the moving parts that comprise the Bitcoin network in a language that’s easy to understand. 

However, before we get into it… 

About The Coolest Book Club On Earth

The Bitcoinist Book Club has two different use cases: 

1.- For the superstar-executive-investor on the run, we’ll summarize the must-read books for cryptocurrency enthusiasts. One by one. Chapter by chapter. We read them so you don’t have to, and give you just the meaty bits. 

2.- For the meditative bookworm who’s here for the research, we’ll provide liner notes to accompany your reading. After our book club finishes with the book, you can always come back to refresh the concepts and find crucial quotes. 

Everybody wins.

So far, we’ve covered:

• Prologue and Chapter 1
• Primitive Moneys (Chapter 2)
• Why Gold? (Chapter 3, Part 1) 
• History (Chapter 3, Part 2) 
• Gold Standard (Chapter 4, Part 1) 
• Government Money (Chapter 4, Part 2) 
• Money and Hyperinflation (Chapter 4, Part 3)
• Time Preference (Chapter 5, Part 1) 
• Capital Accumulation (Chapter 5, Part 2)
• Price (Chapter 6, Part 1)
• Unsound Money (Chapter 6, Part 2)
• Economic Thought (Chapter 7, Part 1)
• Inflation (Chapter 7, Part 2)

And now, let’s go back to, The Bitcoin Standard: “Chapter 8: Digital Money”

Put simply, Bitcoin is the first successful form of digital money. It solves all the problems that money as a concept presents. And, in front of Bitcoin, all of our previous forms of money “appear quaint anachronisms in our modern world—abacuses next to our modern computers.” Nowadays, we’re more than twelve years into Bitcoin. When Saifedean Ammous wrote the book, however, he said:

“Bitcoin has operated with practically no failure for the past 9 years, and if it continues to operate like this for the next 90, it will be a compelling solution to the problem of money, offering individuals sovereignty over money that is resistant to unexpected inflation while also being highly salable across space, scale, and time.”

Historically, technological innovations “shaped the monetary standards that people employed.” Bitcoin is the latest incarnation of that and the first one born out of the digital age. It uses “several technological innovations that were developed over the past few decades and building on many attempts at producing digital money to deliver something which was almost unimaginable before it was invented.”

Digital Money Takes Shape

The first problem Satoshi Nakamoto solved was digital scarcity. “The nature of digital objects, since the inception of computers, is that they are not scarce. They can be reproduced endlessly, and as such it was impossible to make a currency out of them, because sending them will only duplicate them.”

The second issue Nakamoto tackled was the double-spending problem. With cash, if you pay someone through a bill, there’s no way you can spend that bill again. The other person has it and you don’t. With digital money, on the other hand, “there was no way of guaranteeing that the payer was being honest with his funds, and not using them more than once, unless there was a trusted third party overseeing the account and able to verify the integrity of the payments carried out.” A third party was out of the question, hence the problem. 

“Third parties are by their very nature an added security weakness. Involving an extra party in your transaction inherently introduces risk, because it opens up new possibilities for theft or technical failure. Further, payment through intermediaries leaves the parties vulnerable to surveillance and bans by political authorities.”

There will only be 21 million Bitcoin. That makes it “the first digital object that is verifiably scarce.” Plus, Bitcoin doesn’t need a third party to verify transactions. An ever-increasing number of miners spread around the world, involved in a race to solve a mathematical puzzle, do that. More on that later. The system gives Bitcoin owners total control over their money. “Sovereign money contains within it all the permission needed to spend it; the desire for others to hold it exceeds the ability of others to impose controls on it.”

BTC price chart for 11/26/2021 on OkCoin | Source: BTC/USD on TradingView.com

Moving Away From Gold

The author praised gold all throughout the book. Gold is money that no one can print. As humanity moved away from it, central bank control “left them helpless in the face of the slow erosion of the value of their money as central banks inflated the money supply to fund government operation.” Satoshi Nakamoto created Bitcoin to save us from that.

“Nakamoto removed the need for trust in a third party by building Bitcoin on a foundation of very thorough and ironclad proof and verification. It is fair to say that the central operational feature of Bitcoin is verification, and only because of that can Bitcoin remove the need for trust completely. Every transaction has to be recorded by every member of the network so that they all share one common ledger of balances and transactions.”

Remember the mathematical problems the miners solve every ten minutes? Well, their main characteristic is that they’re “hard to solve but whose correct solution is easy to verify. This is the proof-of-work (PoW) system, and only with a correct solution can a block be committed and verified by all network members.” The PoW system is crucial because it makes “verifying nodes to expend processing power which would be wasted if they included fraudulent transactions.”

“Crucially, the node that commits a valid block of transactions to the network receives a block reward consisting of brand new bitcoins added to the supply along with all the transaction fees paid by the people who are transacting.”

Tick Tock, Next Block

Regardless of how many miners support the network at any given time, Bitcoin produces a new block “roughly every ten minutes, and for each block to contain a reward of 50 coins in the first four years of Bitcoin’s operation, to be halved afterwards to 25 coins, and further halved every four years.” The name of that mechanism is “the halving” and it sets in motion a deflationary process. One of the many causes that make Bitcoin’s price increase.

“The quantity of bitcoins created is preprogrammed and cannot be altered no matter how much effort and energy is expended on proof-of-work. This is achieved through a process called difficulty adjustment, which is perhaps the most ingenious aspect of Bitcoin’s design. As more people choose to hold Bitcoin, this drives up the market value of Bitcoin and makes mining new coins more profitable, which drives more miners to expend more resources on solving proof-of-work problems.”

The reason for the difficulty adjustment is to “ensure blocks will continue to take around ten minutes to be produced.” Unlike gold, “more effort to produce bitcoins does not lead to the production of more bitcoins. Instead, it just leads to an increase in the processing power necessary to commit valid transactions to the Bitcoin network, which only serves to make the network more secure and difficult to compromise.”

As you can see, the system is too beautiful to put into words. And we’re just beginning. Join us next time, as we continue to explore its intricacies.

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