Part 3: Understanding the Blockchain
Why did the creator of Bitcoin want decentralized, digital cash?
My previous two articles came at making digital cash from an objective perspective. I explained the need for decentralization and also the need for “proof-of-work” to safely record who has what. This article is going to take a step back and look at the Big Picture picture — Why decentralize cash in the first place? Money is an abstraction, so any redesign will unavoidably include a philosophical angle. I believe Bitmark’s new model of trust and privacy are the two important characteristics that make it unique in our world of government issued currencies. This article is about trust and how it connects (in my opinion of course) to why Satoshi Nakamoto, the creator of Bitcoin, wanted digital cash to exist.
To get started, I want to show you the very first block in the Bitcoin blockchain. What does a block actually look like? It’s raw data. Here is it:
This first block — known as the genesis block — technically could have been empty of transactions. But it was not. Along with the normal data necessary for the block structure, Satoshi manually inserted a single transaction. Here is that message:
The Times 03/Jan/2009 Chancellor on brink of second bailout for banks
This was probably intended as proof that the block was created on or after January 3, 2009. The message is a headline from this newspaper:
It’s obvious, but worth saying: Bitcoin emerged from a catastrophic financial crisis. The crisis was fundamentally a failure of trust. Satoshi programmed Bitcoin to have a radically different monetary policy, based on artificial scarcity and predictable issuance. In other words, it was based in mathematical trust.
The supply of Bitcoin is capped at 21 million. The protocol itself specifies that the reward for adding a block starts at 50 bitcoin and will be halved every 210,000 blocks. Each block is tuned to be found in roughly ten minutes. Thus, approximately every four years the block reward will drop in half. When the reward decrease to zero the process of record keeping will be rewarded by transaction fees alone.
What exactly motivated Satoshi to replace middlemen with math? I’ve read just about all of Satoshi’s public writings (thanks to Phil Champagne’s fantastic “The Book of Satoshi.”). I found this passage the most raw and revealing:
“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts.”
Satoshi wanted digital cash, based on cryptographic proof, because without the need to trust a third party middleman, “money can be secure and transactions effortless.”
Trust and control of money are absolutely intertwined. It’s important to always keep this in mind when thinking about digital cash. The blockchain wasn’t created as a way to make things faster. The real purpose was to remove censorship and central-control from money itself. Blockchain technology, properly understood, is a method to increase trust by removing central intermediaries and letting everyone, anywhere exchange value. And that is a radical idea whose time has come to reshape our world.