I have to admit – I was a total bitcoin skeptic. But after spending several months learning about cryptocurrencies I have come to believe that bitcoin is the financial singularity – the most disruptive technology of our present day beyond whose event-horizon human affairs as we know them – be it financial or otherwise, will be fundamentally transformed.
Why I was a skeptic
“Bitcoin is fake money used only by criminals, libertarians and anarchists” – reported the media.
“Bitcoin Is Evil” – opined Nobel-prize winning economist Paul Krugman.
“I want Bitcoin to die in a fire: this is a start, but it’s not sufficient” – finished it off Charlie Stross.
So how can anyone not be a skeptic?!
And so I was – the media reported it, the experts condemned it, one of my favorite science fiction writers wanted it dead – case closed!
Or is it?
Let me share with you why I believe bitcoin is the financial singularity. And then judge for yourself.
What is Bitcoin?
The most fundamental document about bitcoin is Satoshi Nakamoto’s break-through white paper Bitcoin: A Peer-to-Peer Electronic Cash System.
After we lay out the technical foundation it is important to recognize and differentiate between bitcoin – the currency, and bitcoin – the technology.
Bitcoin – the currency, is simply cash for the internet. It does not have any intrinsic value of its own and is not backed by a government. [Like AI, it is backed by silicon ;-]
It is technocratic, predictable, scientific, non-reversible, mathematical currency, traded via a decentralized trust network of payments, and using distributed “proof of work” report, stored in a database called the “blockchain.”
Notably, as far as currencies go, bitcoin is arguably the most successful i.e. the most valuable currency because, at the moment I am writing this article, 1 bitcoin is traded for over 640 US dollars. [And I don’t know of any other currency that is as highly valued as that.]
But bitcoin – the currency, works because of bitcoin – the technology. And the technology has three main features:
1. It is decentralized – no single person, organization or government does or can control it.
2. It is pseudonymous – transactions are conducted under a pseudonym i.e. a fake name. [As opposed to anonymous – without any name.]
3. It has near zero transaction cost and it doesn’t matter whether you send a penny or a billion, the transfer fee is the same.
Libertarians, anarchists and criminals are allegedly the groups most concerned with the first two features. Most people, however, don’t really care about those. But everyone cares about the last one – near zero transaction cost. Whether you are a private individual sending money to your parents, a not-for-profit NGO collecting donations, or a multi-national corporation – everyone wants to diminish transaction fees as much as possible. And so, it is the third killer-feature that arguably is and will continue pushing bitcoin – both as currency and as technology, from the extreme into the mainstream.
I also need to stress that other cryptocurrencies can be built upon and use, in part or in whole, the bitcoin technology – as they have been. Those are usually referred to as altcoins. [e.g. NXT.]
It is for that and other such reasons that Andreas Antonopoulos often says that “Bitcoin is not currency; it’s the internet of money!”
What are the problems that Bitcoin solves?
Bitcoin solves 3 major problems:
The first one is the so called double-spending problem. Put simply “double-spending” results from the fact that, in contrast to physical goods, digital files can be copied infinitely. This means that if I get a single digital coin there is nothing preventing me from copying and spending it a million times. Traditionally this issue is resolved by trusted third parties such as government institutions but bitcoin does it via “an electronic payment system based on cryptographic proof instead of trust.”
The second problem that bitcoin solves is getting a bunch of people who don’t know and don’t trust each other to agree on a transaction. Mathematicians refer to this as The Byzantine Generals’ Problem. [Imagine a group of generals of the Byzantine army camped with their troops around an enemy city. Communicating only by messenger, the generals must agree upon a common battle plan. However, one or more of them may be traitors who will try to confuse the others. The problem is to find an algorithm to ensure that the loyal generals will reach agreement.]
The last one is the traditional transaction cost problem. Unless you are a mathematician or a cryptographer, you may fail to appreciate the elegance in Satoshi Nakamoto’s first and second solution. But his mathematical and cryptographic break-throughs result in the resolution of the problem we all care about – near zero transaction cost.
Bitcoin is disruptive
“Give me control of a nation’s money and I care not who makes it’s laws” said Rothschild.
The power to control the supply of money has been the prerogative of the state [or the sovereign of the realm] for thousands of years. Bitcoin stabs at the very heart of that center of power. Taxation and the maintenance of an army are derived from the ability to control money. Without taxation and/or an army the state cannot exist.
By decentralizing the ability to control money, bitcoin undermines the very foundation of the state as an institution. And, consequently, the whole concurrent international state system. It is for this reason that Charlie Stross wrote that “BitCoin looks like it was designed as a weapon intended to damage central banking and money issuing banks, with a Libertarian political agenda in mind—to damage states ability to collect tax and monitor their citizens financial transactions.”
Now, if you are an anarchist or libertarian the above agenda suits you just fine. But, if like Charlie Stross [or me] you are not, then you are likely to oppose bitcoin on ideological grounds. [Just like libertarians support it for their own ideological reasons.] Ideology aside, I think we can agree on the profound long-term effects that bitcoin is likely to have – not only on the state as an institution, but also on the whole international system.
Just like snail mail was disrupted by email, old-fashioned money will be disrupted by bitcoin.
But ask yourself what is more important in your life – money or email? If, as I suspect, it is money, then consider how the world has changed since the invention of the internet and email. Realize that bitcoin is both: as a currency bitcoin is the first app – just like email was the very first killer-app for the internet; as a technology bitcoin is a platform – just like the internet, its impact will span way beyond that of its first app i.e. email, in ways we cannot foresee from this side of the event horizon. Still, it is not too big of a stretch to guess that its impact will include, but will not be limited to, the current banking, payment, legal and voting systems. It will necessitate a total re-think of our whole concept of money and, consequently, the economy, governance, law and politics…
Bitcoin: the financial singularity is here
By now it should be clear that, after bitcoin, the world will never be the same. But, similarly to AI, it is hard to foresee whether bitcoin will be good/bad or the end/the beginning of civilization. Yes, you will find the full spectrum of ideological opinions on the topic. But the reality is that the proof is in the pudding and right now we simply don’t know; we can’t know. That is why it is a singularity.
Bitcoin may be the beginning of a new socio-economic system unlike anything we’ve seen so far – one that we can’t possibly imagine from this end of the black hole. Or it could simply be the end of the current system resulting in chaos and anarchy – a disturbing alternative not only for Charlie Stross and Paul Kurgman. The good news is that we are having a soft take-off of this financial singularity and the slower pace of change ought to give us a better chance to understand, steer and adapt to the bitcoin world. No, bitcoin is not perfect – it is hugely disruptive and will likely precipitate a crisis in most realms of our civilization. But our current economic and monetary system is very far from perfect either. And we know it is not going to change from the top down. That is why I prefer to focus on not wasting this opportunity to create a better future, rather than fight it. [After all, a crisis is a terrible thing to waste.]
To sum it all up, in my opinion bitcoin is here to stay – in what shape and form – I can’t really say. I am not sure if bitcoin – the currency, will survive. But I have no doubt that, in one form or another, bitcoin – the platform, will prosper. And thousands, perhaps millions of cryptocurrencies are going to be a major part of our future. [Maybe I will launch a singularity coin ;-]
Though it is unlikely to replace the American dollar any time soon, bitcoin may well end up replacing smaller, more volatile currencies such as the Argentinian pesso or the Zimbabwean dollar. Though it may not replace the banking system any time soon, it may provide a financial framework for the billions of people not able or eligible to use a bank. Thus bitcoin doesn’t have to replace entirely the current system to be successful. But it will make it less and less relevant.
It will take some time before the dust settles and we can start seeing what it all ads up to and begin weighing the consequences. But if bitcoin does not work – people will lose money. If it does work it will change the world as we know it.
I myself am convinced it is the latter. And whether that change is for the better is up to us. So let’s not stand as mere spectators while history is made in front of our eyes. Let us roll up our sleeves and build a better future, better you!