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What is money? Many people do not even consider this question because they don’t need to in their daily lives. In their experience, money is something they receive in exchange for their labor and give to others in exchange for theirs. They use it without considering what it really is or why it has value.
If you find someone willing to answer the question «What is money?» you’ll discover many people still believe in myths of the past; they believe money is backed by gold held in underground vaults, carefully guarded by government agents. This mythological answer is comforting because it relates the value of money to some other thing (gold, oil, trade goods) that has «intrinsic» value. But what is intrinsic value? What gives something intrinsic value? If you explore these questions, you’ll enter the realm of circular logic. Who created the creator?
What gives intrinsic value to intrinsic value?
Economists might answer the question with a complex review of the mechanics of modern monetary systems: Money is the symbolic «unit of account» in a system of multilateral trade flows between sovereign states, calibrated against domestic fluctuations in supply and demand. The technical answer is about the mechanisms of money creation and use but doesn’t really explain what money is. It satisfies an economist but doesn’t offer an intuitive understanding.
I prefer a simpler answer: Money is a language, an abstraction that humans created to communicate value to each other. Money is also the technology used to speak this language of value: the coins, paper notes and digital recordings of value. In fact, money is an ancient technology, thousands of years old and older than writing. It is perhaps one of the motivations for the development of writing. If you understand money as a language, then a few things become much more clear.
Like a language, it grows out of necessity and gains value because it is used by people, regardless of whether or not it’s created by a government. Money’s representations, whether tangible (coins) or intangible (spreadsheets) are not “valuable” themselves. The value is in the things you can exchange money for. In the past, physical representations of this value have been important – metal, paper, now plastic. But in the Internet era, tangibility is neither necessary nor useful. Tangibility is a barrier to use. But given this understanding of money, as a language of value, what is Bitcoin?
Bitcoin is a new form of money, a new way to express and exchange value over the Internet. It has value because it is useful and used, on the Internet. Bitcoin is purely digital and it is not created or issued by a government. But Bitcoin is so much more.
Bitcoin is a system of software that enforces a known set of rules. Anyone can participate in Bitcoin and everyone who participates enforces the rules of this money, creating a predictable and equitable platform of money for everyone. Bitcoin is not a company or organization. It doesn’t have a central actor, agency or director – it is managed and maintained by all the participants without any power center – it is, in a word «decentralized».
Most importantly, Bitcoin in its pure abstract, intangible and decentralized form is a radical departure from traditional centralized forms of money, because it is a completely open and participatory system that was and is entirely global from the moment of its inception in 2009. Bitcoin’s decentralized nature creates several important emergent characteristics that cannot be found in any traditional system of money. Bitcoin is open, collaborative, borderless, neutral, immutable, scarce, predictable, permissionless and uncensorable. Many of these properties are completely novel (never seen before) in money and some may even believe them to be undesirable. Yet, Bitcoin already is, and cannot be undone – it exists, it has been invented and can be endlessly re-invented. It will not go away, because it is a purely mathematical system of money that makes money into a pure digital language.
Let’s examine each of the emergent characteristics of pure digital and mathematical money, as they are represented by Bitcoin:
Open – Bitcoin is open. Bitcoin doesn’t demand ID, doesn’t require an «account» or «registration». No one can be prevented from participating. Therefore it is inherently egalitarian: open to all, regardless of nationality, religion, race, sex or location. Anyone can participate in the system, by using any software that can «speak» the language (protocol) of Bitcoin. Since anyone can write such software, there can be no gatekeepers in the system. If you can get software that speaks Bitcoin, or write it, you can join the system. No ID is required, in fact not even personhood is required. Even a machine can own money without a human owner.
Collaborative – Bitcoin runs on a set of software rules that are enforced by every single participant in the system. No one can cheat because everyone is verifying and enforcing the rules. Bitcoin’s properties emerge from the collaboration of millions of people acting through software. The basis of this collaboration is a Peer To Peer (P2P) network, where participants (acting through software agents) are all peers of each other – on an equal basis. While there are very strict rules that everyone enforces, there are no rulers. Thus, what emerges is a system of rules without rulers.
Borderless – Bitcoin, like the Internet, does not have borders. It does not see nations as distinct entities. It does not differentiate between local and global. Like the Internet, people can attempt to erect borders, barriers and firewalls. But these are bypassed easily, especially when determined users are motivated by necessity. All that can be removed is a country’s influence through participation. As I like to say «You can take your country out of Bitcoin but you can’t take Bitcoin out of your country.» A world without borders is also a world of economic opportunity for all.
Neutral – You’ve probably heard of «Net Neutrality», which is a principle of the Internet, where Internet data is routed without consideration for the source, destination, application or purpose. This principle has led to a flourishing of independently run systems that have equal access to the Internet and the global audience. Bitcoin is a neutral payment platform that processes transactions regardless of source, destination, application or purpose.
Immutable – Bitcoin records transactions on a global distributed ledger, a database of transactions. This ledger is immutable, meaning that it becomes more and more difficult to change after some time has passed. Immutability is an emergent property of Bitcoin’s mechanism for global consensus, called Proof of Work, which requires the commitment of energy (electricity) to secure and underwrite the ledger of transactions. Over time, as the blocks accumulate, it requires an equal amount of energy to overwrite them as originally expended, making any effort to change the past unimaginably expensive. Humanity has never had a digital recording system that could not be changed. We still don’t know all the applications such a technology will enable. Perhaps one day we will not say «it is carved in stone», but «it is carved in the blockchain».
Scarce – One of Bitcoin’s most important rules, enforced by everyone, is scarcity. Bitcoin is issued at a predictable and diminishing rate, decreasing every 4 years until no more Bitcoin is created by the system. Bitcoin’s supply is restricted in the short term (marginal issuance) and in the long term (total supply). Unlike any other system where an increase in demand motivates increased «extraction» of a resource, Bitcoin’s supply is mathematically limited and only decreasing. Digital scarcity used to be an oxymoron before Bitcoin, now it has become reality.
Predictable – An extension of the scarcity characteristics of Bitcoin’s issuance is its predictability. As a monetary policy, Bitcoin is deterministic. The rules of its issuance were set in the beginning and cannot be changed. To change the issuance rules would only create another system, which would not be Bitcoin by definition, leaving the original Bitcoin unchanged. Predetermined supply is a surprising feature in a monetary system, similar only to gold with its extraction varying very little year to year. This has given Bitcoin the moniker «Digital Gold». But unlike gold, whose supply is affected by price and whose extraction can be accelerated, Bitcoin is truly inelastic. The algorithm of its supply means that the issuance rate of this monetary system is known forever in advance.
Permissionless – Bitcoin does not require permission to use or to exist. In fact, if permission had been sought, it would have been denied. Anyone can use it, there are no gatekeepers. Although some governments may try to make it illegal, it cannot effectively be rendered inaccessible. Those who want and need to use Bitcoin can do so, regardless of where they live.
Uncensorable – Bitcoin transactions cannot be censored. This is not a moral statement, but a practical one. Money is speech, not because it is morally equivalent but because now it is functionally equivalent. In Bitcoin, transacting is simply communicating data to someone connected to the Bitcoin network. As long as any form of symbolic communication is possible, the transmission of Bitcoin is possible.
An ancient idea in new forms
Bitcoin confounds many of our expectations of money, especially if our conception of money is mythological and simplistic. Money as a technology has existed for thousands of years and has undergone no more than four or five major changes. The latest and perhaps most radical is its elevation to a purely symbolic, intangible and mathematical form that exists outside of any center of power and control. Such a radical change in the technology of money will be met with fear and uncertainty by many.
But, a radically open system of money has existed before, in fact for thousands of years: cash in the form of metal coins. For millennia, anyone could participate in money by simply holding it. It is only in the last 30-50 years that money has been the subject of controls, creating more and more barriers to participation. Bitcoin reverses that trend, even in the face of the terrifyingly fascist «cashless society» trend. There can be no cashless society because Bitcoin is digital cash that is open to all.
Borderless money is also not new – precious metal coins were truly borderless money, accepted everywhere. But unlike these physical tokens, Bitcoin can be transmitted near-instantly across the planet and even into space (yes, there are satellites carrying Bitcoin messages). Such a completely global, instantaneous and unstoppable digital money has never existed before.
For some, Bitcoin’s limited supply and deflationary monetary policy is a problem – an economic unicorn that doesn’t fit the expectations of traditionalist economics. For others, it is precisely this unicorn, unique in a herd of monetary “donkeys” that makes it uniquely valuable. Regardless, it allows new experiments and outcomes in economics that have never been seen before.
Bitcoin’s neutrality is also highly controversial. In the past 50 years, money has increasingly been used as a system of control, attempting to «fight crime» by controlling the flow of money. But regulating the tools of crime instead of the criminal acts has horrific unintended consequences. Billions of people are denied access to the world economy, in order to «fight crime», despite plenty of evidence that criminals can easily bypass these controls. The side effect of gatekeeping money is condemning billions to a poverty trap that creates far more crime. Of course, dictators love this property of modern financial systems, as they can deem the opposition «criminal» and remove access to financial services. Whether you think neutral access to payments is a good thing or not, Bitcoin has democratized and open access to everyone. Yes, criminals will use it, just as they can use other technologies. But most importantly: every innocent can use it too, making moralistic economic exclusion of billions a short-lived political mistake of the past.
The existence of completely open, borderless, neutral and uncensorable money is challenging at many levels but it is also a fait accompli. For many, this is simply a technological realization of an inalienable human right – the right to express and exchange tokens of value with other humans.
Just as these properties of Bitcoin are scary to many people they also bring hope and optimism for billions of people for whom the status quo of money is a cruel system of control and exclusion. Whatever your opinion on Bitcoin, the world changed forever on January 3rd 2009, when one of humanity’s oldest technologies, money, was changed in a way no one expected.