bitcoin was born in 2008, the same year that lehman brothers declared bankruptcy. on October 31 of that year, a user identified as satoshi nakamoto posted on the “cryptography” mailing list a message that read: “i have been working on a new electronic money system that is fully peer-to-peer, with no third parties trustworthy”. In addition, it contained a link to the document hosted on the bitcoin.org site known as the “white paper” where the operation of the system was explained point by point. Actually, no one knows Nakamoto’s true identity.
Bitcoin was the first digital currency to modify the transfer of value between users without the need for a central authority to verify transactions. The idea, as simple as it sounds, gave rise to an unprecedented monetary revolution. On January 9, 2009, Nakamoto released version 0.1 of the Bitcoin client (today known as Bitcoin Core), an open source software that connected multiple computers to each other, and this gave rise to the network that would support the cryptocurrency. The network’s tasks were apparently simple: allow transactions between users, list all transactions, verify that the same currency is not spent twice, and issue new monetary units.
That same day, at 00:54, the first bitcoin block was mined and with it the first units were created. three days later, on january 12, 2009, hal finney, one of the most prominent members of the “cryptography” mailing list, received the first ever bitcoin transaction. On April 26, 2011, Nakamoto sent his last message and disappeared from public view. Three years later, on August 28, 2014, Finney died of advanced amyotrophic lateral sclerosis. his body is kept in a cryogenic state in the laboratories of the alcor life extension foundation.
along with nick szabo, finney is recognized as one of the pioneers of bitcoin and one of the main suspects of being satoshi nakamoto or, at least, of having had close contact with the anonymous character.
what is bitcoin?
Bitcoin, in addition to being the name of the currency, is the network that supports it: a peer-to-peer (p2p) network, without intermediaries, that allows value to be sent from one part of the planet to another without asking anyone for permission, a relatively low cost, semi-anonymously, quickly and totally irreversible. these characteristics allow bitcoin to be immune to censorship attempts by any nation, company or authority.
Users can transfer bitcoins over the network to do almost anything that can be done with conventional currencies, such as buying and selling goods and services or sending money to another person receiving, and some platforms even allow or grant credit using bitcoin. bitcoins can be bought, sold and exchanged for other currencies in specialized exchange houses. Unlike traditional currencies, bitcoin is totally virtual. there are no physical coins to represent it.
Network users have a series of keys (known as private keys) that allow them to prove ownership of bitcoin. With these keys, transactions can be made to other users of the network. the keys are stored in digital wallets, which can be on a personal computer, on the phone and even on specific hardware designed for that purpose. the private keys that allow transactions are the only prerequisite for sending bitcoins, thus leaving full control of their funds in the hands of users.
what is mining?
Each unit of bitcoin is created in a process called “mining.” Certain network nodes, called miners, compete to find the solution to a mathematical problem while bitcoin transactions are being processed. Any participant in the bitcoin network can become a miner, as long as they make their computer’s processing power available to verify and record transactions.
every ten minutes, on average, a bitcoin miner competes to validate all the transactions from the last ten minutes, and if he succeeds in validating them, he gets a reward in the form of bitcoins. this function is known as “proof of work”, or in English, proof of work.
Currently, the reward is 6.25 bitcoins per mined block, and every 210,000 blocks, the reward is halved. in this way bitcoin will reach a limit of units close to 21 million. this limit is deduced from the speed of issuance of new units of bitcoin, which is established in the software of the network. In addition, each unit of bitcoin can be divided into 100 million parts, that is, we can fractionate a bitcoin until we obtain 0.00000001 of each unit. that minimum unit is called a satoshi.
the bitcoin protocol includes algorithms that regulate the mining function in the network. the difficulty of solving the mathematical problem that allows mining a block is automatically adjusted so that the validation time between one block and another is ten minutes, regardless of the number of miners that are competing at that time. The number of bitcoins in circulation takes the shape of a predictable curve approaching 21 million by the year 2140. Since the rate of issuance is decreasing, in the long run bitcoin is deflationary. it cannot be inflated by “printing” new money beyond the expected rate of issue.
But the fact that it is a virtual currency does not mean that there is no “materiality” behind it. mining bitcoins requires the use of electrical energy. With the current conditions where competition is widespread, bitcoin mining becomes profitable in regions that have some comparative advantage, such as very cheap electricity. The greater the computing power, the greater the probability of solving a block and, therefore, of obtaining the reward. that’s why “mining pools” were created to concentrate that firepower.
that is one of the reasons why paraguay, for example, became one of the places from where “mining bitcoins” is profitable. “in paraguay it is still profitable to mine bitcoins because we have the lowest cost of electricity in the region”, says luis pomata, CEO and co-founder of nano mining paraguay. «The normal cost is 5 cents of a dollar per kWh and can even reach 3 cents of a dollar per kWh. It is something that is only seen in Asian countries or in some places in North America.” and adds that the South American country also has “low technical labor costs and finally you can buy or rent warehouses / sheds to use them as data centers that meet the necessary requirements to house mining machines at a very affordable price ” .
how do you get your value?
One of the most frequently asked questions about bitcoin is “how does it get its value” or “what is backed by it”. In order to answer this, we must take a little historical detour. at the end of the second world war, the need to create an international trade system was imposed that would avoid the imbalances that had led to the first war, to the crash of the 30s, to the rise of fascism and, finally, once again to confrontation war and the holocaust.
United States, with the doctrine of liberal globalism at the forefront, supported the hypothesis that a world open to trade was a world of peace. Thus, at the Bretton Woods conferences, the US dollar became the guarantee of international trade and, therefore, of peace. Until then, the dollar had a fraction of gold that guaranteed its “value”. the dollars, in short, were convertible to a portion of gold. but in 1971 richard nixon decreed the exit of the united states from the gold standard and then the american currency ceased to be convertible to the precious metal. thus, no global currency could be converted, via the dollar, into gold. this type of money is known as fiat or trust money.
The “backing” of our currencies comes from the ability of states to force their use and declare all other currencies illegal. The radical change between the gold standard and fiduciary money (which comes from the Latin fides, that is, faith) is still today, almost half a century later, a fact unknown to a large portion of the public. our money has no support other than the credibility of who issues it and the agreement between the parties that use it. In short, the value of money is a social relationship and hence its inescapably political character.
the value of bitcoin, beyond its particular characteristics such as scarcity, security, resistance to censorship, immutability and trust, depends on the agreement of all users. in that sense, bitcoin is also, in a way, a form of faith. the only difference with the money printed by the state or a bank (as may be the case of hong kong) is that the value is not associated with trust in a certain government, but with trust placed in a cryptographic proof system.
this implies the destruction of the monopoly of money by banks and states, and the empirical demonstration that a group of people who do not know each other, who have no contact with each other and who do not even have the same interests or ideology can build consensus through sufficiently robust technology and properly aligned incentives.
Could a bitcoin “oligarchy” emerge?
Although bitcoin is a decentralized network, the fear of centralization always exists and it is a problem that has many things. In principle, it could be suspected that the developers who update, write and maintain the bitcoin code may have special power over the rest of the community. but the truth is that each change may or may not be accepted for this, since to apply it is necessary for each node to update the full version of the bitcoin core software. in that sense, a change that does not have sufficient network consensus can be rejected.
on the other hand, the greatest risk of concentration is on the side of the miners, since bitcoin can maintain its autonomy while all nodes maintain cooperation. there is a possibility that the network suffers a type of attack known as a “51% attack” in which someone who manages to concentrate half plus one of the hashpower of the network can rewrite the blockchain at will . the risk of a mining pool reaching that amount of hash power is real, although if it did, it would be attacking, and therefore destroying value, from part of the network in which it is invested. therefore, it would be a kind of self-destruction.
Other possible candidates for “bitcoin oligarchs” are those users who mined or bought a lot of bitcoins when they were worth next to nothing. These users are known in the jargon as whales (whales) and for a long time, the movement of their funds caused great tensions in the price of bitcoin. As the network grows in users, the power of the whales decreases, but it is still a factor that must be taken into account. Although there is the possibility that a person or a group of people “seize” bitcoin, it is important to understand that the greatest asset of the network is the consensus, and anything that goes against the consensus of bitcoin will affect its price. therefore, all actors have a very strong incentive not to take actions that could destroy network trust.
What is the difference between other cryptocurrencies? Is there a competition between them?
Being the first cryptocurrency, bitcoin has a singular preponderance. It is the one that has been around the longest, the best known and the one that has overcome the most difficult moments. In addition, it has several elements that encourage its growth, among them, the price peak at 20,000 dollars, which could be exceeded. There are thousands of new cryptocurrencies, but there are few that really contribute something unique and significant to the space.
Ethereum, for example, is currently the platform of choice for developers interested in blockchain, since it is not just a cryptocurrency, but a decentralized computer with the ability to run immutable software known under the name of “smart contracts”. more than competition, the appearance of different bitcoin projects, with other scopes and goals, strengthens the space, provides alternatives and allows solutions to be found that may not be able to be executed so easily in bitcoin software.
What consequences can it have for the states?
At a minimum, states are going to have to learn to deal with these technologies and understand that their citizens are going to start using them in their daily lives. at most, the state would lose control of its monetary system. this perspective, encouraged by some libertarian utopias, is greatly exaggerated, because too many things could go right in the cryptocurrency ecosystem (and states can do nothing) for that situation to become real.
already today the measures required of crypto exchange houses (also known as exchanges or brokers), such as kyc (know your customer, «know your client») and aml ( anti money laudering, «anti good money laundering»), function as a tool to regulate trade between state money and crypto assets. the exchange of fiat money to crypto is the bottleneck in which the state can intervene and obtain some kind of benefit. the ban, instead, pushes users to deal entirely in the black market and in cash. With the appearance of the digital renmi, also known as “crypto yuan”, China is at the forefront of states seeking to create their own cryptocurrency to compete with, or cushion, the impact of this technology. currently 65% of bitcoin mining comes from china.
Why can’t it be used for current transactions?
This depends a lot on technology and price. while in its early days bitcoin was used as a means of payment, there were some issues that made it quite inconvenient. the point is that only one block is validated every ten minutes, and that the limit on the size of the block allows only three transactions per second, which limits the capacity of the system and makes it inefficient if we think of purchases or sales in places such as coffee shops , warehouses, greengrocers, etc. no one is going to be left waiting there for their transactions to be validated. In addition, the problem of commission for transactions is added.
Although in a transaction of, for example, two bitcoins the cost is negligible, for small transactions (remember that a bitcoin can be divided into up to 100 million units) the commission could exceed the value of the transactions. In that sense, there are several proposals to solve this and turn bitcoin back into a means of payment. The most interesting one, which uses the same bitcoin blockchain, is called lightning network and it is a protocol that works in a second layer of the blockchain and allows the creation of payment channels in which thousands of payments can be made in seconds and without cost the only payment would be made when the channel is closed and would be the equivalent of a normal network commission.
Are cryptocurrencies a kind of radical tax havens?
When we think of tax havens, we refer to a geographical location with a legal-administrative structure that allows companies, families, organizations or individuals to keep their capital out of the reach of the government of the country where that money will be lost. panama, malta, small islands, sometimes paradisiacal, and even us states like delaware or new mexico can fall into this category. in fact, the expression in English is refuge or tax hideout (tax haven) and not paradise (heaven).
In this sense, cryptocurrencies work in a similar way. one can keep one’s purchasing power out of the control of states, although this has some slightly stronger implications. First of all, money kept in a tax haven is fiduciary money; On the other hand, those who access this type of jurisdiction have a legal and economic structure of a certain scope to achieve it. Although the states say they are against it, the largest tax havens on the planet are jurisdictions of the European Union, the United States and the United Kingdom. which does not stop attracting attention. In the case of cryptocurrencies, these are open to any citizen, whether or not they have a legal legal structure, whether or not they are part of the rich who tend to flee their money to tax havens. and on the other hand, the purchasing power stored in cryptocurrencies is not in money printed by the state and never was. In that sense, it is very similar to buying gold: gold is scarce, its quantity is not controlled by the state, it cannot be issued at will and pleasure, it resists the passage of time, etc.
what bitcoin allows, for example, is to obtain the same characteristics of a store of value such as gold but with some advantages: it is easier to transport, it does not require physical interaction with anyone and it is resistant to any type of attack. state “censorship.” In this sense, bitcoin represents the possibility of completely leaving the economic scheme controlled by the state, politics and banks. it is a total “outside” of the banking and state system. and can be accessed from a computer or cell phone that you keep in your pocket.
In short, it is much more than a tax haven, it is even outside the power relations between banks and states. it is in some way a total democratization of banking, since the need for an intermediary to transfer value to any part of the world is completely eliminated. one could say that it is a radical form of money controlled by its users.
What consequences could it have for democracy due to the complexity of its use?
The main affront that bitcoin and any cryptocurrency represents, as we said above, is the threat to the monopoly of money issuance that states have today. as was made clear in the 2008 crisis and now with the pandemic, wall street, the other banks and financial institutions are too big to fail [too big to fail]. the fall of the banking system would also be the fall of the governments in power and a turning point for any democracy.
Those of us who lived through the 2001 crisis in Argentina could see it. the support of the current banking system implies increasing the circulation of money, in the form of printing, credit, bonds, etc. The only way for ordinary people to protect themselves against these increases in currency is by buying gold, cryptocurrencies or other types of objects. In this sense, for the first time in years, ordinary people have a tool to protect themselves from bad economic policy decisions on the one hand, and from challenging the financial status quo on the other. in the case of failed economies like venezuela, for example, the powerful bitcoin almost like an oasis for those who could access the cryptocurrency through shipments from abroad.
In this sense, bitcoin could require a radical version of the system of independent central banks, in line with what milton friedman proposed, where the amount of money is completely separated from political needs. It remains to be seen whether a system of these characteristics allows the economies of peripheral countries to grow. In principle, there would be nothing structural to prevent democratic governments from existing without full or partial control of their monetary policy.
Regarding the issue of usage, today bitcoin is still at a fairly early stage. If we think about the transition that the Internet underwent from being just a system for programmers at universities in the United States to being the largest global communication platform in just 40 years, we can take the dimension of the process that cryptocurrencies must go through. today, any boy or girl who can’t read picks up a phone and can open youtube with no problem. Although parents attribute this to a special intelligence of their daughters and sons, in reality the one who perfected it is the interface designer. By this I mean that as a technology evolves, so does its interface, which becomes increasingly simpler. you don’t need to know how the internet works to use it, or know the bit rate to watch a movie on netflix, or know the ins and outs of the tcp/ip protocol to send an email. this is so, precisely, because of the evolution in what is now called «user interface» and «user experience» (in English ux/ui).
what bitcoin really needs to become even more “democratic” is to eliminate, as far as possible, the level of knowledge necessary to operate on the platform. As of today, while there are very simple bitcoin wallets for smartphones, the process of converting bitcoins to fiat currencies and vice versa is still quite frictionless.
but this problem will probably be eliminated, and the importance of cryptocurrencies will become even more prominent when most of the world’s money goes digital. when almost the entire population replaces cash with digital money (fiat, state and centralized), the adoption of bitcoins will be much easier and, in addition, many will prefer to have anonymous digital money.
The now so popular payments with qr codes, which require almost no understanding of any user regarding the technology behind it, were born with bitcoin wallets. anyone can send and receive bitcoins from any phone using qr codes. in that sense, what remains to be polished is the friction to acquire new units. something that, little by little, begins to happen on a global scale. In October 2020, the digital payment company PayPal announced that it will soon integrate Bitcoin into its wallet. Since the end of 2018, the Cash App (a kind of US payment market owned by Jack Dorsey, CEO of Twitter) allows you to operate in Bitcoins.