What is Bitcoin and Blockchain?
This story will be a simplified explanation of what Bitcoin and Blockchain are about. How did it originate and what drove the innovators behind this project to develop this creative system? It is an attempt to educate the reader about Bitcoin and Blockchain. We get a lot of questions about cryptocurrencies and Blockchain, with this blog article we try to motivate the reader to learn more about these topics. They are fascinating topics and will be part of everyone’s daily activities, consciously or subconsciously.
Auteur: YS Koen, Klaten, 17 March 2021
How it all started
2009 Bitcoin was created – by Satoshi Nakamoto.
What is money?
- Unit of Account – What if we do not have the ability to measure prices? A concept of standardization. A tool for price discovery, we can put value to goods and services.
- Means of Exchange – 2 or more parties want to conduct commercial activity with each other, all have different goods, and because money is also a Unit of Account, money in means of Exchange can put a price to each other’s goods and services, Money will be in this the perfect arbitrary tool.
- Store of Value – Assets can be stored in: a house, financial instruments such as stocks and bonds, goods such as gold and silver, but can also be held as cash value.
Level 2. Quality of Money
Quality – easy to move/transportability, durability, Fungibility – you cannot distinguish between 2 units of a currency, divisibility
Inflation, Deflation, Credit/Debt, Supply
Trade with party B
Bank or exchange: Credit/Debit Card payment, Payment processors etc.
Trade with party A
Existing model what should have to change
Person A wants to sell a product or service to person B, to complete the transaction, they depend on middlemen this can be 1 or more middleman and is expensive. In addition to the transaction costs, it are the middlemen who determine the terms of the transaction. Even if the transaction is made in cash, it is the central bank that controls the value of the money.
Original Experiment of Bitcoin
Can they create an online currency, an online unit of account, that replicates the utility and function of cash but does not require a central issuer or central bank, yet still people will accept it for products and services? It required the invention of a lot of unique technology, for example proof-of-work and blockchain and a clever application of cryptography. At its core it was an experiment of passion and frustration, the passion was can they create this new type of money that follows the concept of decentralization, it allows person A and B to have a direct relationship with each other and get rid of any central Authority, it is online by default and it is built in a way that people have enough faith in it that it is to stay, it will work and cannot be hacked and it does not need a central authority to give it credibility.
Bitcoin was created out of frustration
The current monetary system is not working well for the public. Historically, all fiat currencies tend to deteriorate and collapse eventually, due to the political and moral temptations to lower them for short-term gains at the expense of long-term gains. There have been many cases of hyperinflation over the years, for example in countries like Venezuela, Argentina, Zimbabwe, and the Weimar Republic in Germany. Many people are concerned about the massive money expansions that we have seen over the past 15 years, especially as a direct result of the 2008 financial crisis. Most recently the Covid funding that took place for 9 trillion dollar in the US alone and certainly much more in the rest of the world.
With the above in mind, frustrations grew so much that in 2009 Satoshi Nakamoto, et al. had a desire to create a new system. They started to wonder if it was possible to get the people out of this process so that we have some more objective predictability. That objective predictability means knowing the supply ahead of time and the rules by which the supply will change so that we better understand monetary policy. To make sure there will be no dramatic changes in the qualitative aspects of the system.
A new system with no hidden end-user license agreement, without bureaucrats who can manipulate the system for their own benefit. That is where it all started in 2009, a passionate idea of money with a philosophy behind it to decentralize everything we can. By decentralization we mean that people can do business with each other individually without the intervention of middlemen and they can do that natively online, no central authority is required to make those transactions work and they will be so confident that the system is self-sufficient, sustainable and will also have value. Now in 2021 we can say that the mission has been accomplished.
Not only has bitcoin grown from a small network that was unstable and unsustainable, it has also grown to a point where it has become a global network worth more than a trillion dollars. You can buy literally anything you want and get any service you want, using a bitcoin. It is truly an extraordinary experiment from that particular perspective and all people involved in the bitcoin industry are frankly impressed by just the durability, resilience and remarkable growth of the underlying technology. There are only a few examples in the history of mankind where something has gone from a small group of people to more than millions and millions of users, in every country in the world, and had such a profound impact on the law, regulation and innovation of the industry, like bitcoin is doing now. In fact, it has significantly outpaced the growth of the Internet.
a general description of the following terms:
Token: notes or coins for which the value written on them is greater than the value of the materials they are made from.
Ledger: A distributed ledger is a database that is consensually shared and synchronized across multiple sites, institutions, or geographies, accessible by multiple people. It allows transactions to have public “witnesses”. The participant at each node of the network can access the recordings shared across that network and can own an identical copy of it. Any changes or additions made to the ledger are reflected and copied to all participants in a matter of seconds or minutes.
If you’re going to create a digital token, you need to have a ledger somewhere. That ledger is really just some kind of database that stores the payment history, transaction history, a database of facts. From the current system, when party A and party B want to do business online with each other, they will use an intermediary such as PayPal or something similar. There are many things that go into this transaction before it even happens. Party A must prove that they have the money they claim to pay for Party B. There has to be some sort of address, some way to send that value to party B. The whole point of intermediaries like PayPal or other payment processors, money service companies, is to basically act as a trustee to fix all those things. But the moment you lose them, you remove them from this process, you are left with this question: how does party A prove they have the money they claim to have and how do they actually send it to party B and how party B then knows when they have actually received it, that it is actually in their account and cannot be taken back?
So where is party B going and who do they trust, that was a very difficult problem and that is the core innovation of bitcoin. It was to build a system in 2009, basically a blockchain to solve this problem. Succinctly, a blockchain is just a ledger and it stores transactions, and those transactions allow Party B to verify claims, or someone else, like I have so many units of Bitcoin, 2 Bitcoin for example, that Party B can actually verify. This is a process called inclusive accountability. Basically, we can all check each other’s homework, we can all see the record. There is a database in the cloud and party B can look at it and if party A tries to send the transaction to party B, party B can actually verify that it is the correct amount and that it really exists. Then Party B is able to confirm that when Party A initiated that transaction, the network itself received it, processed it and party B received it. How that is done is by using something that is called cryptography, it uses a mechanism of consensus called Proof of Work and a litany of other complex things. It is basically math and computer science what is used to create some sort of database in the cloud to ledger and we call that database a blockchain. Because once a record has been written it is a fact and you can never change that, no matter how much you would want to or desire to, it is just something that happened, it is a record of history. It is a very particular type of blockchain that is immutable, meaning you cannot change records inside of it. Because it has this property called inclusive accountability it means that anyone in the world can actually verify that these transactions in these records happened. If you assert you have something and you are trying to spend it, everybody in the world who has this protocol can run it, check it and that math and crypto actually allows them to verify that it is right. This was a revolutionary concept because every attempt to do this previously required some trusted third party to maintain the ledger. Bitcoin was the first example that was released that did not require a trusted third party, the network by its very mere operation would be able to simulate that.
Voting – People want to be able to verify that their vote has been counted and that the counting is done accurately. So they want to know that when they have the right to vote, it has been recorded correctly and knowing that for every other person their vote is recorded correctly. They don’t want to have to rely on a third party to count those votes for them. They don’t want to trust a third party to handle that system for them because it’s a vector of attacks. When people make life-and-death decisions and decide who will be president and how the economy is going to run, they need to have a lot of confidence in the system and in the process of voting.
Property – Currently, ownership is managed by some form of registration, so if you have title or land, someone needs to maintain that database. But what happens if someone can manipulate or edit that database or what happens if the government changes? Like when a government is overthrown by an authoritarian ruler, they can go and just decide to change history. Then, after things return to normal, it becomes very difficult to decide who actually owned what and where. What were the versions of history and in many cases, because it is too expensive to maintain these systems, millions of people around the world live on unregistered land.
Decentralized Finance – Bitcoin was focused on money and it’s still a big debate whether bitcoin is good money or not, it’s a good debate about what money is in general. But we have other things like stocks and debt instruments like bonds, representations of things like tokens representing gold or commodities like oil. Are there different ways we can represent these things using the same systems that Bitcoin uses to represent a bitcoin and do not require trusted third parties to operate these systems? The answer is yes, a lot of people look at that.
Supply Chains – For example, we have a pandemic right now, what about global supply chains for personal protective equipment or vaccines and medicines? Many different actors touch things, many claims about things and people make life-and-death decisions based on the stability of these supply chains and the fidelity of the information in them. As it turns out, blockchain technology is actually good for this because you don’t have to trust a central authority or a trusted third party or federation of third parties to make sure the records are accurate. You can do it in a completely decentralized way.
Identity – Identity is a person’s most important asset, you have a passport and driver’s license, birth certificate, credit score. Things like this, who are you and statements and claims about your reputation. This is also increasingly linked to personally identifiable information, your data that Facebook and google and other people mind. How you manage identity, at the moment it is given to you by trusted third parties, you get a passport, you get a driver’s license, you get some form of ID through a private entity or government agency. Then statements and claims are made about that identity by credit agencies and perhaps, for example, governments with a social credit. You do not actually own that, and you have no control over it, and your identities are much controlled by intermediaries and third parties, who can manipulate the data at any time against your best interest, if it is in their best interest.
The whole point of the blockchain industry is to look at that same core principle of decentralization, getting rid of the middlemen, the keyword is disintermediation. Introducing inclusive accountability for all of these different topics. In essence, the idea is that you can verify the integrity of the records in these systems are as accurate as people claim they are and that you know that no one has tampered with the records. They are timestamped, they are immutable, they are verifiable,.
Like all great experiments, Bitcoin basically launched an entire movement of millions of people in just a short period of time, from 2009 to 2021. The underlying heart of the system inspired many technologists and entrepreneurs to launch a new industry called the blockchain industry and to start constructing all kinds of protocols and new ideas to revolutionize the way that society and commerce works. In many ways this is one of the most significant human experiment ever conducted. Because as we enter the 21st century, it is becoming increasingly clear that globalization is fundamentally changing how the entire world operates. We are moving from siloed economies to economies that are closely interrelated and intrinsically transnational. In many ways, our laws, how we live, how we act, how we think are as much connected to the affairs of other states as to our own backyard. There is a very difficult meta question to answer, namely, who is in charge?
Who is in charge? - No one!!
As we go through the 21st century it is not really clear how to answer that question. Historically how we have answered that question is through might, might makes right. An empire will form, subjugate all others and then the Empire will standardize everything and then we just follow it by convention and consensus and then that is that. But as we move to a global world where we do not really want to have a world war or centralized power around one of the authorities. We are trying to manage for the first time in human history a way of doing this without might, a way of doing this through diplomacy and reason and trade. The problem is that this is an inexact science and unfortunately the better angels of our nature sometimes get consumed by the worst angels, the worst demons of our nature. The entire point of the blockchain industry is basically trust regulation.
The entire point of the blockchain industry is basically trust regulation. The idea is that people should work together who don’t really trust each other. They need to find a way to do this for the common good, to solve a common problem, either to trade, either to preserve the resources and value we have, to pursue sustainability and environmental policies, to solve things as global pandemics.
Unfortunately, the old systems, upon which we must rely on regulation, were established through domination and hierarchies. The whole point of the blockchain industry is that we can achieve this trust regulation by answering the question of who is in charge? No one, you don’t need anyone in charge. Conceptually, if something as complicated as the world financial system can run on it and party A and party B can pay each other without using an intermediary or middleman, then all of a sudden you can do things like democracy, property rights, fin tech, supply chains and identity in the same type of structure. Then we could be our own bank at the end of the day.
We are self-sovereign, we are in charge of our own future, and we will have much better ways to deal with the global markets, with the terms and conditions set up front. You will have immutable and predictable in the way the rules are executed. There is really no difference between saying we want our money to be objective and predictable and saying we want our democracy and our trade regulations to be objective and predictable, the way we finance things to be objective and predictable. This is in ways the reasons why people are so fanatic about Bitcoin in the blockchain industry.
Since it’s not really about making money, it’s not really about building a better business or making something more efficient or paying a little faster. If it were, there would certainly be a lot of people working in the industry, but it would just be a job for them. This is more about answering that fundamental question of who is in charge of the 21st century. We have one or two answers: either it has to be a transnational group of people that no one knows much about, we have not chosen, and we just have to accept the edicts and mandates they have issued. Like the totality of human history, there have always been kings and popes and emperors and rulers who have done that. Or we can try something fundamentally different that has never really worked, but we now get as a result of technology on the Internet where we can try to build a world where no one is in control.
That is what the blockchain industry at its heart is really about. Trust regulation so that we can build systems where no one is in charge and those systems have inclusive accountability, meaning we can all verify that they are working properly, not just that trusted few, there are objective and predictable rules that apply to everybody, the least amongst us play by the same rules as the best amongst us. The richest and poorest are the same in that respect and they spread and propagate by their edges and not by centralized efforts. There was no marketing committee to spread bitcoin, there was no central authority to get bitcoin mining power to where it is at. It went from just a few computers in 2009 to giant warehouses of miners in places like Mongolia and Georgia and so forth. It all grew from the bottom up; it is a very different way of thinking about the world but in many ways, it is a much more natural way because ultimately it puts you in charge.
That is what bitcoin is in a nutshell, it was an experiment. The point of the experiment was kind of two-faced, one was a passion and the other was a frustration. The passion was trying to solve a very old problem of allowing people to do business with each other without middlemen. The frustration was doing so with principles because the principles have been violated in the past and the killer app of its spreading was trying to create a better form of money. It is certainly debatable what is good money, it is a nice conversation to have. But the real value of bitcoin, the real experiment leveraged and turned into an entire industry, the blockchain industry and that blockchain industry is about trust regulation with inclusive accountability, so that we can get to a world where no one is in charge except you, for your own life.
When no one is in charge, everyone can be in charge, for your own good.
A publication of:
P.T. Emas Cemerlang Bersama
Axa Tower Lt.45, Jalan Prof. Dr. Satrio 18,
Karet Kuningan, Setiabudi, 12940, Jakarta Selatan,
DKI Jakarta, INDONESIA