OPINION: What is Bitcoin?

Kyle Torpey
What is Bitcoin? Most people, even many who hold or trade the crypto asset, still don’t fully grasp what this new technology is all about.

The Bitcoin network launched way back in 2009. Most people — even many who hold or trade the crypto asset — still don’t fully grasp what this new financial technology is all about.

To understand Bitcoin, you must retrace history and look at the people (and technologies) that led to Satoshi Nakamoto’s eventual invention. 

Many claim that Bitcoin came out of nowhere. The reality is this revolution in monetary economics was decades in the making. 

In short, Bitcoin is the first working implementation of the cypherpunk vision of digital cash.

Bitcoin backs Bitcoin

When many hear “digital cash,” they immediately think of online payment systems that already existed before Bitcoin. 

But digital cash works quite differently from PayPal and credit cards. Digital cash is similar to physical cash in the real world; you can hand it to someone else without needing a third-party processor in the middle of the transaction. 

In other words, Bitcoin is a type of bearer asset. Individuals or entities hold the asset directly, rather than an intermediary bank or fintech company.

Digital cash systems enable features for online finance that are simply not possible with traditional banks, which are poorly suited for the digital realm due to their inherent centralization.

Cypherpunks originally took interest in digital cash as a hedge against a dystopian surveillance state, which has become less theoretical since Eric Hughes published A Cypherpunks’s Manifesto in March 1993.

“We must defend our own privacy if we expect to have any,” wrote Hughes. “We must come together and create systems which allow anonymous transactions to take place.”

“The root problem with conventional currency is all the trust that’s required to make it work,” wrote Satoshi Nakamoto in February 2009.

Satoshi also mentioned the traditional bank system’s problems with privacy in a post on the P2P Foundation forum shortly after the Bitcoin network went live. 

That said, the privacy-preserving properties of Bitcoin are still very much a work-in-progress.

Bitcoin is censorship resistance

At the base blockchain layer, Bitcoin’s value proposition is more about censorship resistance than privacy, as illustrated by the early use cases of darknet markets (Silk Road) and donations to WikiLeaks.

Efforts related to preserving financial privacy in a digital age have moved to secondary Bitcoin layers like the Lightning Network.

Satoshi also covered the large amount of trust involved in conventional currencies in that same P2P Foundation forum post. By replacing trust in third parties with cryptography, Bitcoin is able to operate as a permissionless and programmable money. 

This removes much of the friction and cost involved with online finance, as there’s no centralized entity with godlike control over the system — who could reverse transactions, seize assets, or face government regulation. 

“What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party,” wrote Satoshi in the introduction to the Bitcoin white paper.

Programmable money with no central controller makes new economic models possible on the internet. 

Twitter chief exec Jack Dorsey has discussed Bitcoin replacing the advertising-based model for online content monetization, while blockchain startup Impervious has built a key building block for a new, peer-to-peer internet resistant to censorship and surveillance.

Jack Dorsey has become one of Bitcoin’s most consistent proponents in recent years.

Read more: [Jack Dorsey’s Square doesn’t care who created Bitcoin — just who didn’t]

Many of these sorts of developments are taking place on the Lightning Network, which itself is built upon the programmability of the base Bitcoin blockchain via smart contracts.

But Bitcoin’s functionality as digital cash via the Lightning Network and other upper-layer payment protocols wouldn’t be possible without establishing the crypto asset (BTC) as digital gold. 

‘Digital gold’ enables ‘digital cash’

Prior to Bitcoin, many attempts at a workable digital cash system — from David Chaum’s DigiCash to Gold & Silver Reserve’s e-gold — failed due to the inability to peg value of digital currencies to US dollars, gold, or some other real-world asset without a centralized entity.

Centralized issuers were single points of failure for these systems. A new, digitally-native bearer asset was needed to make a sufficiently censorship-resistant digital cash system possible.

To quote another post by Satoshi on the P2P Foundation forum: “In this sense, [Bitcoin] is more typical of a precious metal. Instead of the supply changing to keep the value the same, the supply is predetermined and the value changes.”

Indeed, Satoshi in that thread mentioned the ability of central bankers to inflate the supply as another vector of centralized trust with conventional currencies. 

Gold solves this issue but it’s not suitable for the digital age. Storing gold bars in backyards isn’t feasible for the masses, which makes placeholder receipts necessary.

But receipts for gold require various forms of centralized trust in the issuer of the IOUs.

Read more: [Bitcoin is still running on Moscow Time — thanks to Dorsey’s Bitcoin clock]

Not to mention, backing a digital gold currency with physical assets creates risks around asset seizure, transaction censorship, and the continuation of the dystopian surveillance state that the cypherpunks wanted to avoid.

Bitcoin can be viewed as digital gold at the base blockchain layer (where everyone can verify the supply) and digital cash on secondary layers — where higher levels of privacy and lower levels of payment friction can be achieved. 

We’re still in the early days of Bitcoin’s development as a store of value, but as Satoshi once wrote: “It might make sense just to get some in case it catches on.”

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