The Rise of Bitcoin and the Digital Currency Revolution
The central bank will essentially be ableto eliminate commercial banks that are currently the middlemanbetween the central bank and the citizens. For governments, it will simplify many things. If they decide to change interest rates,they will be able to act on it directly rather than waitthe several months needed for commercial banksto implement this in their systems. They will also be able to control directlythe interest rates based on a person’s profile or a business’s profile,and will be able to set expiry dates on people’s money,forcing them to spend and not allowing them to save. Raoul Pal describes this well.
You see, central banks want to be able to give people money directly. Direct monetization. They can’t do that right now. Right now, they print money, it goes into the banking system, the banks hoarde it because we’re going through a credit crunch. It’s also a way for them to kickstart universal basic incomebecause the central bank can underpinthe poorer parts of society by giving them money directly.
It doesn’t go on the government balance sheet. Now, central banks now believe they’re omnipotent,that they can continue to expand balance sheets forever. MMT seems to be the prevalent thought,and this is just an extension of this. This is kind of Keynesianism gone mad. Central banks can also change entirelythe structure of how money and monetary policy works and fiscal policybecause they can give it to different people in different ways.
So they can credit the restauranteur, but then penalizewith negative interest rates. The Baby Boomer Saver because they want to release theirmoney back into the economy. They can give students a positive interest rate to help them save. They can change everything. This is the rise of behavioral economics and incentive systems.
So, governments essentially using big datacan find who they need to stimulate at any time and adjust accordingly. They can do it dynamically. This is a structural, massive shift to everythingwe understand about economics, particularly macro-economics. Nobody’s prepared for this. None of us know what this means.
It means and it will be sold on a lot of good things. And I think there’s a lot of good things that come from this. I think it is an elegant solution to some of our problems. But elegant solutions in governments and central bankslead to unintended consequences. The issue is here, is to have this new system,you’re going to give up your freedom.
You are going to have every transaction you’ve ever done and ever will do recorded,There is no cash, there is no way of tipping the gardenerunless it goes by cash. It means that they can tax you at every transaction level. Now that’s great. We could get rid of the IRS and all of the tax collection agencies because it could be done directly. That’s good.
But again, you’ve lost your freedom to transact in anonymity that cash gives you. These central bank digital currencies, as I said, they’re not,they’re not an invention from governments and central banks. In fact, they’re inspired by other digital currencies like bitcoin being the original one. And other altcoins that have been created after that. In reality, they’re more similar to other altcoinssuch as Ethereum or others that simply allow the additionof programing that allows you to add functionality to them,whereas bitcoin is only there for these monetary transfers.
Bitcoin is a payment network, right?Where this is… think of it as a log of transactions,a transaction that I can do to you. The Bitcoin network will take some information. So my address, your address,the amount of bitcoin that I’m sending to you. And with this information it’s going to create a hash.
It just goes through a simple hashing algorithm that makes the code out of this information. And this is added to this log. Whatever amounts that happen within these ten minutes, it basically is considered a blockand there will be miners, so, computers, that are connectedto the network to verify these transactions. So they’re just going to be there really to confirm that I do have this bitcoin, and yes, I can send it to you. And then after that, I no longer have this bitcoin and you have the bitcoin.
So very simple kind of work. But all of these computers are connected to the networkand they’re in competition fighting for who confirms the blockbecause whoever confirms the block and verifies these transactionswill be rewarded in bitcoinfrom two sources,There will be a transaction cost;simply, if I send your bitcoin, then I pay a certain fee,to the network, this fee will be redistributed to miners. And also, right now there is an emission of new bitcoin. Today it’s at 6.25 bitcoins per block. And if I as a miner, I’m able to confirm this block,I will receive 6.25 bitcoins.
It won’t happen every time because there isa big competition of miners. 6.25 bitcoin per block every ten minutes. That’s quite a bit, especially if you think of the price of bitcoin today. Bitcoin is built in a way there is an entire incentive scheme that has been thought outby the creator of bitcoin that goes all the way to the year 2140 or so,which is that the amount of bitcoinsthat are produced will be divided every four years by two. So if I’m a miner today, I make 6.25 bitcoin per blockthat I confirm; four years from now after the next halving,it’ll be half that – so, 3.12 bitcoin.
This is an incentive for people to be as efficient as possiblewhen running their bitcoin mining business,and also an incentive for the price to stay above a certain certain level. Because miners simply will either run out of business if the price is too lowor will decide not to sell bitcoin because he’s not coveringfor his operating expenses. In the bitcoin protocol, changes can be made in two ways. There’s a simple way called a hard fork,where someone essentially makes a copy of bitcoin,makes changes to the protocol and releases it to the world. Miners need to connect to this new network and chooseto use this new network over the original Bitcoin network.
This was done by projects such as Bitcoin Cashand Bitcoin Satoshi Vision. That were trying to solve what the founders thought to be problems in the bitcoin network. But there was a scaling attempt to allow bitcoin to continue to be money for the world. And it was called the SegWit2x agreement, where SegWit,which is if you’re deep into crypto, you already know what that is,if not, don’t worry about it. And the block size were going to be upgradedfrom one megabyte to two megabytes, which would, if you do both those things you’re going to get more than double as many transactions available on the Bitcoin network.
If you do just the 1 megabyte to 2 megabyte, you double. At SegWit t’s a little bit more on top of that anyhow. For whatever reason, the SegWit portion of that agreement was activated first. When that 2 megabyte upgrade eventually was aborted,I had to look around the world and say, OK, well, if I want a toolthat can enable every human being on the planet to be able to sendand receive any amount of money with any other human being on the planet,bitcoin can’t do that. It’s not going to do that with one megabyte blocks.
It’s impossible for bitcoin to do that. So there’s a whole bunch of other cryptocurrencies out there. Which one do I think is the most likely to bring the most economic freedom to the most peoplearound the world in the shortest amount of time? And I looked at all the different cryptocurrencies out there, and Bitcoin Cash was the one that was at the top of my list. Since their launch, these projects have failed compared to bitcoinlosing value against the first cryptocurrencybecause the people that are positioned in bitcoin didn’t want to transition. This reluctance was mostly due to one reason – decentralization.
Decentralization in bitcoin is the fact that no one controls the network. It is an open, secure network,controlled and improved by every participant. In projects like Bitcoin Cash, the number of participants being much lower than in bitcoin lowered the security. Bitcoin satoshi vision is a great example, as it was the victim of a 51% attack in 2021. A miners performance is based on the amountof computational power they have, and this is usually referred to as hash rate or hashing power.
The mining power is distributed over different nodes across the world,which means it is not in the hands of a single entity. At least it is not supposed to be. But what happens when the hashrate is no longer distributed well enough?What happens if one single entity is able to obtain more than 50% of the hashing power?One possible consequence of that is what we call a 51% attack. Also known as a majority attack, a 51% attack is a potential attack on a blockchain networkwhere a single entity or organization is able to control the majorityof the hash rate, potentially causing a network disruption. In such a scenario, the attacker would have enough mining powerto intentionally exclude or modify the ordering of transactions.
They could also reverse transactions they made while being in control,leading to a double spending problem. A successful majority attack could also allow the attackerto prevent some or all transactions from being confirmed or to preventminers from mining, resulting in what is known as mining monopoly. The second method to make changes is called a soft fork. In a soft fork, changes are made to the protocol and need to be acceptedby the majority of miners. To do so, miners simply decide whether they want to upgradeto the new protocol and update their machines,and eventually, if approved by the majority of minersat a predetermined block number, the changes will be made official.
And this is how miners will verify blocks from that point on. Unlike many other protocols, every changethat is made to the bitcoin network needs to be backwards compatible. This means that if someone holds bitcoin, their bitcoin will still be valid after the changes. Other networks may be easier to change, but won’t be backwards compatible and will often require holders of the coin to transfer their coins to platforms that will accept the changesbefore a certain date or risk losing everything. There will be a maximum and this is hardcoded, a maximum of 21 million bitcoinproduced by the year 2140,and there will never be more of it.
So we can’t afford to lose some bitcoin simply based on a bug fix,functionality implementation, it’s just something that cannot work. Therefore, every change has to be backwards compatible,and this makes it so much more difficult to changeas opposed to other projects that don’t care muchbecause they have a management team that is there that will decidewhat new vision they have for this coinand will make updates regardless of what the community thinks,because they think it’s what’s in the best interest of the community. The fact bitcoin is so difficult to changeis one of the reasons that make it a great asset for the long run. Buyers know what they’re buying, and they know that the asset willremain the same. No other assets in the world provides this level of security.
Other cryptocurrencies have been created,but were created by a group of people that still controlthe network and will make changes to profit themselves. Ethereum, for example, the second biggest cryptocurrencyby market cap, is still controlled by the same team that created it. These people control the network and promote the networkin order to bring inexperienced and non-technical investorsthat don’t understand what a lack of decentralization meansfor the future of cryptocurrencies. The Ethereum network aims to change the way the protocol works. These changes will allow miners to mineonly if they have logged 32 ether beforehand.
Anyone can mine bitcoin, but to mine ethereumyou will soon need to be part of the few in the world that can afford to buy 32 ether. This will make Ethereum just as good a currency as a fiat currencybecause the decisions of the few will impact the masses. If you think of bitcoin, the asset and the network as the layer one,the other layers that are being built around it,they’re called layer two’s and also layer three’s. But the the fastest growing layer to for bitcoin is called the Lightning Networkand it’s a different payment systemthat to use it, basically, I need to take some of my bitcoin and,you know, actually put it on to the Lightning Networkand I need to open channels. If I open a tunnel with you, for example, it means I can transfer money to you.
