“Bitcoin is almost to computers what quantum mechanics is to physics.” — Naval Ravikant.
I spoke about the evolutionary trend in every industry in my Crypto Series 02.
Theism which is a belief that that a higher power will solve our problem, to Humanism
which is a belief that humans will solve our problems, to Data-ism which is 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.
CRYPTO IS A NATURAL EVOLUTION OF MONEY
Human error, frailty and weakness will be the downfall of traditional
currency, and it has already begun.
WHY THE RISE OF CRYPTO IS INEVITABLE
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?
THE PHILOSOPHY OF CRYPTOCURRENCY
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.
WHY THE RISE OF CRYPTO IS INEVITABLE
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 transfers money to Joe, Joe receives it.
Decentralized: There are no geographic boundary limits 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
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 Series 04.
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.
You made a vital point in your post, where you gave an example of James sending money, Bitcoin or cryptosystem has been handling such issues now. Thanks
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STOPCoins mentioned in post:
Really nice round up of the key philosophies behind crypto and main problems with current monetary system.