Yes, I'm one of the guys who talks about this stuff.
I think I'll just start by saying cryptocurrencies are pretty cool. The idea, the design, the real world implications. They are essentially just digital forms of currency that live and die with the internet. Also, I'm new to the space. My interest started during the last bull run in 2017 and given that the first cryptocurrency network was revealed in 2008, I think I'm pretty young. The exciting thing though is that as far as adoption is concerned, I believe I'm pretty early and that is why I wanted to write about the subject.
At this point, I believe there are plenty of resources on the web about cryptocurrencies. You could do a handful of searches and get everything you need. But I wanted to share what excites me about the space. I hope that by providing a high level, basic understanding of cryptocurrencies, I peak your interest enough to want to learn more.
So, to begin, when I think of crypto, I think of decentralized, blockchain, medium of exchange... and of course Bitcoin. Decentralized is the biggest though. Up until this point, many, if not all, systems we have built have been centralized. There is a system in place with a central governing agency and that governing agency has a lot of control over how the system works. I think maybe one of the systems that comes closest to decentralization is democratic governments. The people of that government have certain powers, mostly through the vote, but there is still a hierarchical structure with individuals on top. I think we can all agree that politicians have more power than the every day people in that system. Cryptocurrencies on the other hand, and more specifically Bitcoin, were invented with the intention of decentralizing a particular system. The system of interest in this case is the monetary creation and distribution system.
Before Bitcoin, and I will focus solely on recent history, money was printed and created by central governments. This became the case, particularly within the U.S., when we were taken off the gold standard in 1976, by Nixon. This created a system where a central agency, the U.S. Federal Reserve in this case, has the power to control the money supply and print as much as it wants. On top of that, in order to move that money around, we already did and continue to rely on banks and transaction companies. These are all central organizations that we must trust in order for the system to work. Now, they all mostly work most of the time, but there have been times when those organizations have messed up and lost our trust. I'll leave it to you to find ways banks and payment groups have failed us.
With Bitcoin however, we have a completely decentralized system that does those things for us. With this system, money is created and moved around its network and no single entity has complete control over it. No single entity can crash the system all on its own. No single entity can change the characteristics of the system. No single entity can make the system work in its own selfish interests. That is huge. Do not underestimate how big that is. For the first time in history, we do not have to trust a central group of people to not screw things up. All we need to do is ask if we like the rules within the system, hope countless others agree with our assessment, and then let the system exist. Putting it that way identifies the complexity of it all, but it doesn't take away from its value. How is this achieved though?
This is where things can get very technical very quickly. I don't want to do that. For now, what I'll say is that the software that runs the Bitcoin network is installed on thousands, maybe millions of computers throughout the world and more can be added at any time. You could even add one yourself! In addition, that software has a very specific set of rules programmed into it. An example is that only 21 million bitcoin will ever be created. Then, all these computers compete with each other to move bitcoin from one person to another, thus enabling the transfer of value. All these transfers are recorded on a single ledger and that ledger is shared with every computer on the network. That's nuts. Now, if even one of the computers on the network wanted to change just one of the aforementioned rules, it would no longer be compatible with the rest of the network. It would have to separate and create its own network, leaving the other network humming along as usual.
To summarize, thousands of computers around the world, including those owned by everyday people, participate in the creation and transfer of bitcoin, but none of them can alter characteristics of the network without being kicked from it. Pretty crazy. This means the network of computers is completely decentralized meaning we do not need to trust any one entity. It does not mean there are not vulnerabilities within the system though; there certainly are. Instead, there is a new architecture out there, with certain advantageous characteristics, that is now at our disposal. And to me, that is the power of crypto. Pretty cool.
As I end, I want to mention that not all cryptocurrencies are fully decentralized. There are now some out there that do have central governing agencies. Also, there are some that are trying to address other aspects of the monetary system beyond money creation and distribution. Those are pretty cool too and usually have the word Decentralized Finance attached to them. Look up Ethereum and the tokens that run on top of it to find out more.
Lastly, I know this space is quite large and complex. I will probably write other posts about it addressing other aspects of crypto. In the meantime, I'll share some of the resources I've used to educate myself.
Debt: The First 5000 Years by David Graeber - Provides a much longer history of money. Details the debtor/creditor + bullion cycle we, as a species, have gone through multiple times. Will Bitcoin be at the core of the next bullion phase?
Bitcoin Whitepaper by Satoshi Nakamoto - The original whitepaper, detailing the design of Bitcoin. This brought cryptocurrencies to the world. Nobody knows who Satoshi Nakamoto is though.
But how does bitcoin actually work? - A YouTube video diving much further into how Bitcoin works. It addresses blockchain, one of the enabling technologies behind Bitcoin, as well as some mathematics.
As always, thank you for reading.
- Stephen Hunt
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