What you think money is?

Money is just an accounting system, a way of recording who owns what, who has what, who owes what to whom. In this system you need a third part that stand and guarantee that the money was real. For thousands of years, that figure was the government. Bitcoin is just another accounting system, a way of recording transactions, recording value, and it does it digitally, so you and I can send it to each other directly, and everything is recorded in the open ledger.

By monitoring and updating that ledger, in a collective, consensus-based system, you do away with the need for somebody in the middle having to be the that sort of repository of all the information. And that’s what gets away from the fees, the inefficiencies and ultimately the potential of corruption. -Micheal Casey

This system was launched just a few weeks after the collapse of Lehman Brothers and the near collapse of the system. The problems that cropped up in the crisis were very much a part of the writings of Satoshi Nakamoto.

The system isn’t working, and people are hungry for alternatives. -Nathaniel Popper (reporter, New York Times)

I’ve been working on a new electronic cash system that is fully peer to peer, with no trusted third party -Satoshi Nakamoto

Bitcoins aren’t controlled by governments, they can’t be shutdown. The more and more their values grows, the more uses people will find out for it. The beauty is, they are easily transferable and anonymous. By 2040 there will be only there’s gonna be 21 million, and that’s the cap. There’s only x amount of gold, there’s only x amount of bitcoin.

How does the system has born?

Bitcoin system (net) avoids the need for an intermediary system when you send something of value across rthe internet: it puts the control back in the hands of everybody who’s participating in the bitcoin system. Its origins can be found in the cypherpunks (secret messages+fringe subculture) movement, growing out of a kind of  love of the internet and its possibilities: that world lives outside the government and thus outside the hierarchies it needs. It was a movement very concerned of personal privacy and freedom, and many cryptocurrencies came close to exist. The one that probably came the closest was digicash from David Chaum.

Privacy of payments is actually essential to democracy. The reason is not because you need to be able to make private payments in order to express yourself, but rather that in order to inform yourself, you may need to purchase information and that’s the thing that allows you to have opinions worth expressing. -David Chaum

In the late 90s he was really close to have this to happen, but nobody was really prepared outside of the cypherpunk movement. But since David talked to banks and government to make his project happen, they abandoned the concept. After David, the conversation around this really died down. After the financial crisis, it came up to life: there were different experiments, such as:

  • Hal Finney, rpow
  • Nick Szabo, bit gold
  • Adam Back, hashcash
  • Wei Dai, b money

So what Satoshi did in 2008, he took a lot of these ideas and made them work. He created an encryption based protocol (not really a currency) utilizing a ledger called the blockchain, allowing for many kinds of transactions to occur. It does this in a system of consensus building where multiple computers all participate in the management of the blockchain ledger, a kind of digital document, if you will, that keeps track of all the payments. The key point is that this is a distributed ledger, ther is no central ledger: all the others ledger that we have (banking, company ones) sit and reside inside that company, which means they have one point of attack: they can be hacked, as JP morgan had been. The bitcoin ledger resides in thousands of computers, you can’t hack that.

How does the system work?

Every single transaction is recorded, and once it is recorded in the blockchain, it is permanently there. It cannot be altered, cannot be changed, so that you can read it. The identities of the people are encrypted, the wallets are encrypted, so you don’t know who is spending the money, but you know that every single bitcoin out there has a history: you know where it’s been, you know the different addresses it’s gone between. The most important pieces of the bitcoin infrastructure are the miners: these computers that are tasked with maintaining the ledger of the blockchain (verify info, update, to make sure that it’s trustworthy). How we do incentivize them to do so? As they are going to the process of confirming transactions, they are simultaneously being subjected to a very, very difficult computing test. The bitcoin core protocol is forcing them to look for a number. All these miners are ultimately competing to be the one that receives that payout every ten minutes, but really that’s the secondary component. They really being rewarded with bitcoin, but what is the more important task is the validation and verification of transactions and the maintaining of the ledger.

Bit coin is the first to achieve this holy grail of decentralized value exchange, that transfers that process of trust to a collective agreement around a body of independent computers who are compelled by an incentive system to maintain that consensus and affirm the information to be correct. It is incredibly liberating because we can do without intermediaries. The most important factor of bit coin is not the currency, is the blockchain. 

Bitcoin is cash with wings, is the ability to be able to take a local transaction and do it globally, and that’s why bitcoin is gonna overturn the financial infrastructure. Bitcoin is like the largest socioeconomic experiment the world has ever seen. – Charlie Shrem, creator of Bit-Instant 

Source: The documentary “Banking on Bitcoin“, that can be found on Netflix, and explain very well the origins of and how this invention works.

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3 thoughts on “Bitcoins: how do they work?

    1. Yes, in fact there is a debate around the role of regulation and innovation. I think it has been proposed a license for the Bitcoin, but in this way you limit the market…

      Liked by 1 person

      1. The reality is that the market can be manipulated right now with $$ by big players, just like the OTC market and the penny stocks, it’s a dangerous field that if left un-regulated will be like the wild wild west, dont you think?

        Like

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