“Bitcoin is almost to computers what quantum mechanics is to physics.”
I spoke about the evolutionary trend in every industry: theism (a belief that a higher power will solve our problems) to humanism (a belief that humans will solve our problems) to data-ism (a belief that data will solve our problems).
But now let’s look at the trends and problems in money. From barter to precious metals to government-controlled currencies to where we are now.
We will see that even in the history of money, and not just the evolution of every industry, the demand for a data-based currency solves critical problems that must be addressed in the decades and generations ahead.
Human error, frailty and weakness will be the downfall of traditional currency, and it has already begun.
Think about it this way:
James wants to send money to Joe.
Many things have to now happen.
James tells his local bank. They tell the local reserve bank. They tell the Federal Reserve (who quietly tells the IRS). The Federal Reserve tells the central bank of Joe’s country, who then tells Joe’s local bank. And finally Joe goes to his ATM and takes out the money.
Well, let’s break down what just happened:
A) Six discrete steps occurred. There was the possibility of human error at every step. There were also transaction costs at every step. These transaction costs are the built-in inflation of a centralized banking system.
B) James and Joe lost all rights to the privacy of the value they have spent their lives creating (note: IRS or NSA or FBI or CIA or DEA or DIA). Maybe it doesn’t matter to them. But sometimes it does.
C) Not only is human error a risk, but humans controlled the value they sent. Hidden transaction costs are baked into every step of the system. And there’s also the various “black boxes” inherent in centralized banking systems: For instance, how much new money is the Federal Reserve printing today?
We simply don’t know. They don’t tell us every way in which they create new money without permission.
Value is determined by supply and demand. What happens to the value of your hard-earned money if people you don’t know and have no faith in are completely deciding supply (and then value) without your knowledge or permission?
I'm not a money conspiracy theorist. These issues have always existed and they have toppled empires, but so far the United States has proven superior to the fallen and forgotten. Hopefully that will always be true.
But history says it won’t always be true. When and where and why and how is not known.
All we know is direction.
Direction is the philosophy of cryptocurrencies.
==> FIVE MAIN PHILOSOPHIES OF CRYPTO
With bitcoin, there are thousands of copies of the blockchain running all around the world. Anyone who has a copy of it can do a full validation of the transactions in the full chain.
Historically, it was the central bank that validated the transactions.
Now, blockchain allows everyone on the network to have a copy — and autonomously validates all of the transactions together.
You can see how this eliminates not only the need for a central bank — but also the need for human intermediaries at all.
Let’s look at the five main philosophies of a cryptocurrency:
Security: If James sends money to Joe, Joe gets it.
Decentralized: There are no geographic borders to the currency.
Anonymity: Nobody needs to know about my transaction.
Forgery: This is really the same as “A” but in some situations is slightly different: If James sends money to Joe and Joe sends money to Bob, Bob can trust that the money is not forged by someone along the way. There is no “duplicate money.”
Controlled supply: It should always be known by every party how much supply exists and under what conditions supply would stop and, in probably every case, whether supply has a maximum. For instance, the maximum number of bitcoins that will ever be mined is 21 million bitcoins.
==> DATA-ISM AND MONEY 2.0
There is another aspect of cryptocurrency that has never before been seen in civilization. This aspect exists only because of the rise of data.
You can make a currency that also has a function (much like an app on a phone).
I’m not going to get into the details of that right here because I want to stick to the basics. But I will talk about it in Crypto Corner.
I will say this…
Possible applications in the cryptocurrency space (meaning the functionality is built into the data itself) include data storage, the internet of things (IoT), digital health care, escrows and wills and on and on.
cryptocurrencies are just the natural evolution in money. And there are plenty of reasons to look forward to their rise.
Great as they are, they won’t solve all of our problems. They’ll just create new problems for us. And we’ll get smarter as a result. In this, we’ll look at the anatomy of cryptocurrencies. We’ll begin with a transaction, then look at the good, the bad and the ugly sides of cryptocurrencies. And why there’s a solution for every “bad.”
First, let’s take a look at what happens in a crypto transaction.
==> ANATOMY OF A CRYPTO TRANSACTION
Cryptocurrencies, as the name suggests, are protected by cryptography.
Historically, cryptography was the art of keeping secrets from your enemies using mathematics — or at least attempting to. Like the Enigma Machine. Except the Nazi’s cryptography was nothing like what we have today. It was weak.
Today, for the most part, the methods Alan Turing used to crack the Enigma are worthless. Our cryptography today is very strong.
The type of cryptography bitcoin uses (called “one-way hash function”) is like a one-way digital portal — or a digital trapdoor. You can put data through it and the cryptographic function (complex math formula) transforms it into something incredibly unfamiliar from its original state. So unfamiliar that it’s impossible to undo by working backwards.
It’s easy to get from A to B. But without the “key” to unlock the data (and solve the math problem), it’s very, very difficult to get from B to A. That’s what keeps your data safe.
==> WHAT A CRYPTOCURRENCY TRANSACTION LOOKS LIKE
• James wants to send money to Joe.
• He puts together a “transaction” on his computer that describes how much he wants to send.
• The transaction is added to a “block”
• The “block” is sent all over the network and the network “validates” the transaction by looking at all the prior transactions that led to James having enough validated currency.
• The currency is sent to Joe.
The transaction is now there in the block. And Joe is now in control of his own “private key” that controls the funds.
Cryptography protects Joe’s funds from A) being duplicated and B)being stolen from him. As long as Joe takes reasonable security measures his crypto will be safe.
Each new block created on this chain of blocks (hence, “blockchain”) adds yet another layer of difficulty, making it harder and harder to reverse each “one-way” cryptographic problem. Thus it becomes exponentially more difficult to change the validation of James’ transaction, the more blocks are added.
Famed cryptographer Nick Szabo likened this process to a fly getting trapped in amber. The more time passes by, the more the amber accumulates and the harder and harder it gets to remove the fly from the amber.
So a block can be likened to another thin layer of digital amber and the blockchain is the collective depth of the digital amber. Something like that.