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


Finally, digital money. We have come to the point where Saifedean Ammous is talking about Bitcoin. So far, “The Bitcoin Standard” has given us lessons in history, economics, and philosophy. Now is the time for technology. For Bitcoin experts, this chapter might be a little too basic. For those new to space, the following material will be crucial for their understanding. The author explains each of the moving parts that make up the Bitcoin network in easy-to-understand language.

However, before getting to the heart of the matter …

About the coolest book club in the world

The Bitcoinist Book Club has two different use cases:

1.- For the fleeing superstar-executive-investor, we’re going to round up the must-read books for cryptocurrency enthusiasts. One by one. Chapter by chapter. We read them so you don’t have to and only give you the meaty pieces.

2.- For the meditative bookworm who is here for research, we will provide accompanying notes to accompany your reading. Once our book club is done with the book, you can always come back to brush up on concepts and find crucial quotes.

Everybody wins.

So far we’ve covered:

  • Prologue and Chapter 1
  • Primitive currencies (Chapter 2)
  • Why gold? (chapter 3, Part 1)
  • Story (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)
  • Unhealthy money (Chapter 6, Part 2)
  • Economic thinking (Chapter 7, part 1)
  • Inflation (Chapter 7, part 2)

And now back to the Bitcoin standard: “Chapter 8: Digital Money”

Simply put, Bitcoin is the first successful form of digital currency. It solves all the problems that money as a concept presents. And, ahead of Bitcoin, all of our ancient forms of money “seem strange anachronisms in our modern world – abacuses next to our modern computers.” Today we are over twelve years in Bitcoin. When Saifedean Ammous wrote the book, however, he said:

“Bitcoin has operated virtually without failure for the past 9 years, and if it continues to operate that way for the next 90 years, it will be a compelling solution to the money problem, providing individuals with sovereignty over money that withstands unexpected inflation. while being highly salable in space, scale and time.

Historically, technological innovations “shaped the monetary standards that people employed.” Bitcoin is the latest incarnation of this and the first born of the digital age. It uses “several technological innovations that have been developed over the past decades and which build on numerous attempts to produce digital money to deliver something that was almost unimaginable before its invention.”

Digital money takes shape

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

The second problem Nakamoto tackled was the double-spending problem. With cash, if you pay someone with an invoice, you will no longer be able to spend that invoice. The other person has it and you don’t. With digital currency, on the other hand, “there was no way to guarantee that the payer was honest with their funds and didn’t use them more than once, unless there was a trusted third party. supervising the account and able to verify its integrity. payments made. A third was out of the question, hence the problem.

“Third parties are, by their very nature, an additional security weakness. Involving an additional party in your transaction inherently presents a risk, as it opens up new possibilities for theft or technical failure. In addition, payment through intermediaries makes parties vulnerable to surveillance and prohibitions by political authorities. “

There will only be 21 million Bitcoin. This makes it “the first digital object whose rarity is verifiable”. Additionally, Bitcoin does not need a third party to verify transactions. An ever-increasing number of miners around the world, involved in a race to solve a mathematical puzzle, are doing so. More on that later. The system gives Bitcoin owners full control over their money. “Sovereign currency contains within it all the authorizations necessary 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

Get away from gold

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

“Nakamoto has removed the need to trust a third party by building Bitcoin on a very thorough, rock-solid evidence and verification base. It is fair to say that the central operational characteristic of Bitcoin is verification, and it is only because of this that Bitcoin can completely remove the need for trust. Each transaction must be recorded by each member of the network so that they all share a common book of balances and transactions.

Remember the math problems minors solve every ten minutes? Well, their main characteristic is that they are “difficult to solve, but the correct solution is easy to verify.” This is the Proof of Work (PoW) system, and only with a correct solution can a block be validated and verified by all network members. The PoW system is crucial because it allows “verification nodes to spend processing power that would be wasted if they included fraudulent transactions.”

“Crucially, the node that commits a valid block of transactions on the network receives a block reward consisting of new bitcoins added to the offering along with any transaction fees paid by the people who complete the transaction.”

Tick ​​tock, next block

Regardless of the number of miners supporting the network at any given time, Bitcoin produces a new block “about every ten minutes, and for each block to contain a reward of 50 coins during the first four years of operation of Bitcoin, which will then be halved to 25 “. coins, and further halved every four years. The name of this mechanism is “halving” and it triggers a deflationary process. One of the many causes that drive up the price of Bitcoin.

“The amount of bitcoin created is pre-programmed and cannot be changed no matter how much effort and energy is put into 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 and more people choose to own Bitcoin, it increases the market value of Bitcoin and makes mining new coins more profitable, leading more miners to spend more resources on solving proof of work issues.

The reason for adjusting the difficulty is to “ensure that the blocks will continue to take about ten minutes to be produced”. Unlike gold, “more effort to produce bitcoins does not lead to the production of more bitcoins. Instead, it simply leads to an increase in the processing power required to validate valid transactions on the market. Bitcoin network, which only serves to make the network more secure and difficult to compromise. ”

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

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