Bitcoin is Not Backed by Nothing

Contrary to popular belief, bitcoin is in fact backed by something. It is backed by the only thing that backs any form of money: the credibility of its monetary properties. Money is not a collective hallucination nor merely a belief system. Over the course of history, various mediums have emerged as money, and each time, it has not just been by coincidence. Goods that emerge as money possess unique properties that differentiate them from other market goods. While The Bitcoin Standard provides a more full discussion, monetary goods possess unique properties that make them particularly useful as a means of exchange; these properties include scarcity, durability, divisibility, fungibility and portability, among others. With each emergent money, inherent properties of one medium improve upon and obsolete the monetary properties inherent in a pre-existing form of money, and every time a good has monetized, another has demonetized. Essentially, the relative strengths of one monetary medium out-compete that of another, and bitcoin is no different. It represents a technological advancement in the global competition for money; it is the superior successor to gold and the fiat money systems that leveraged gold’s monetary properties.

Bitcoin is out-competing its analog predecessors on the basis of its monetary properties. Bitcoin is finitely scarce, and it is more easily divisible and more easily transferable than its incumbent competitors. It is also more decentralized, and as a derivative, more resistant to censorship or corruption. There will only ever be 21 million bitcoin, and each bitcoin is divisible to eight decimal points (1 one-hundred millionth).  Value can be transferred to anyone and anywhere in the world on a permissionless basis, and final settlement does not rely on any third-party. In aggregate, its monetary properties are vastly superior to any other form of money used today. And, these properties do not exist by chance, nor do they exist in a vacuum. The emergent monetary properties in bitcoin are secured and reinforced through a combination of cryptography, a network of decentralized nodes enforcing a common set of consensus rules, and a robust mining network ensuring the integrity and immutability of bitcoin’s transaction ledger. The currency itself is the keystone which binds the system together, creating economic incentives that allow the security columns to function as a whole.  But even still, bitcoin’s monetary properties are not absolute; instead, these properties are evaluated by the market relative to the properties inherent in other monetary systems.

Coinbase Pro: bitcoin exchange rate for dollars over the last six months (as of September 27, 2019).

Recognize that every time a dollar is sold for bitcoin, the exact same number of dollars and bitcoin exist in the world. All that changes is the relative preference of holding one currency versus another. As the value of bitcoin rises, it is an indication that market participants increasingly prefer holding bitcoin over dollars. A higher price of bitcoin (in dollar terms) means more dollars must be sold to acquire an equivalent amount of bitcoin. In aggregate, it is an evaluation by the market of the relative strength of monetary properties. Price is the output. Monetary properties are the input. As individuals evaluate the monetary properties of bitcoin, the natural question becomes: which possesses more credible monetary properties? Bitcoin or the dollar? Well, what backs the dollar (or euro or yen, etc.) in the first place? When attempting to answer this question, the retort is most often that the dollar is backed by the government, the military (guys with guns), or taxes. However, the dollar is backed by none of these. Not the government, not the military and not taxes. Governments tax what is valuable; a good is not valuable because it is taxed. Similarly, militaries secure what is valuable, not the other way around. And a government cannot dictate the value of its currency; it can only dictate the supply of its currency.

Venezuela, Argentina, and Turkey all have governments, militaries and the authority to tax, yet the currencies of each have deteriorated significantly over the past five years. While it’s not sufficient to prove the counterfactual, each is an example that contradicts the idea that a currency derives its value as a function of government. Each and every episode of hyperinflation should be evidence enough of the inherent flaws in fiat monetary systems, but unfortunately it is not. Rather than understanding hyperinflation as the logical end game of all fiat systems, most simply believe hyperinflation to be evidence of monetary mismanagement. This simplistic view ignores first principles, as well as the dynamics which ensure monetary debasement in fiat systems. While the dollar is structurally more resilient as the global reserve currency, the underpinning of all fiat money is functionally the same, and the dollar is merely the strongest of a weak lot. Once the mechanism(s) that back the dollar (and all fiat systems) is better understood, it provides a baseline to then evaluate the mechanisms that back bitcoin.

Why does the dollar have value?

The value of the dollar did not emerge on the free market. Instead, it emerged as a fractional representation of gold (and silver initially). Essentially, the dollar was a solution to the inherent limitations in the convertibility and transferability of gold; its inception was dependent on the monetary properties of base metals, rather than properties inherent in the dollar itself. It was also initially a system based on trust: accept dollars and trust that it could be converted back to gold at a fixed amount in the future. Gold’s limitation and ultimate failure as money is the dollar system, and without gold, the dollar would have never existed in its current construct. For a quick review of the dollar’s history with gold:

1900 Gold Standard Act of 1900 established that gold was the only metal convertible to the dollar; gold convertible to dollars at $20.67/oz.
1913 The Federal Reserve was created as part of the Federal Reserve Act of 1913.
1933 President Roosevelt banned the hoarding (saving) of gold via Executive Order 6102, requiring citizens to convert gold to dollars at $20.67 per ounce or face a penalty in the form of a fine up to $10,000 and/or up to 5 to 10 years imprisonment.
1934 President Roosevelt signed the Gold Reserve Act, devaluing the dollar by approximately 40% to $35 per ounce of gold.
1944 Bretton Woods agreement formalized ability of foreign governments and central banks to convert gold to dollars (and vice versa) at $35/oz and established fixed exchange ratios between dollars and other foreign currencies.
1971 President Nixon officially ended all convertibility of dollars to gold, effectively ending the Bretton Woods system. The value of dollar was changed to $38/oz of gold.
1973 The U.S. government repriced gold to $42 per ounce.
1976 The U.S. government then decoupled the value of the dollar from gold altogether in 1976.

Over the course of the twentieth century, the dollar transitioned from a reserve-backed currency to a debt-backed currency. While most people never stop to consider why the dollar has value in the post gold era, the most common explanation remains that it is either a collective hallucination (i.e. the dollar has value simply because we all believe it does), or that it is a function of the government, the military, and taxes. Neither explanation has any basis in first principles, nor is it the fundamental reason why the dollar retains value. Instead, today, the dollar maintains its value as a function of debt and the relative scarcity of dollars to dollar-denominated debt. In the dollar world, everything is a function of the credit system. Nominal GDP is functionally dependent on the size, and growth of the credit system, and taxes are a derivative of nominal GDP. The mechanisms that fund the government (taxes and deficit spending) are both dependent on the credit system, and it is the credit system that allows the dollar to function in its current construct.

The size of the credit system is several times larger than nominal GDP. Because the credit system is also orders of magnitude larger than the base money supply, economic activity is largely coordinated by the allocation and expansion of credit. However, the growth of the credit system has far outpaced the growth of GDP over the course of the last three decades. The chart below indexes the rate of change of the credit system compared to the rate of change of both nominal GDP and federal tax receipts (from 1987 to today). In the Fed’s system, credit expansion drives nominal GDP which ultimately dictates the nominal level of federal tax receipts.

Today, there is $73 trillion of debt (fixed maturity / fixed liability) in the U.S. credit system according to the Federal Reserve (z.1 report), but there are only $1.6 trillion actual dollars in the banking system. This is how the Fed manages the relative stability of the dollar. Debt creates future demand for dollars. In the Fed’s system, each dollar is leveraged approximately 40:1. If you borrow dollars today, you need to acquire dollars in the future to repay that debt, and currently, each dollar in the banking system is owed 40 times over. The relationship between the size of the credit system relative to the amount of dollars gives the dollar relative scarcity and stability. In aggregate, everyone needs dollars to repay dollar denominated credit.

The system as a whole owes far more dollars than exist, creating an environment where on net there is a very high present demand for dollars. If consumers did not pay debt, their homes would be foreclosed upon, or their cars would be repossessed. If a corporation did not pay debt, company assets would be forfeited to creditors via a bankruptcy process, and equity could be entirely wiped out. If a government did not pay debt, basic government functions would be shut down due to lack of funding. In most cases, the consequence of not securing the future dollars necessary to repay debt means losing the shirt on your back. Debt creates the ultimate incentive to demand dollars. So long as dollars are scarce relative to the amount of outstanding debt, the dollar remains relatively stable. This is how the Fed’s economy works, incentivize credit creation and you create the source of future demand for the underlying currency.  In a sense, it’s kind of like a drug dealer. Get an addict hooked on your drug and he will keep coming back for more. In this case, the drug is debt, and it forces everyone, on net, to stay on the dollar hamster wheel.

The problem for the Fed’s economy (and the dollar) is that it depends on the functioning of a highly leveraged credit system. And in order to sustain it, the Fed must increase the amount of base dollars. This is what quantitative easing is and why it exists. In order to sustain the amount of debt in the system, the Fed has to systematically increase the supply of actual dollars, otherwise the credit system would collapse. Increasing the amount of base dollars has the immediate effect of deleveraging the credit system, but it has the longer-term effect of inducing more credit. It also has the effect of devaluing the dollar gradually over time. This is all by design. Credit is ultimately what backs the dollar because what the credit actually represents is claims on real assets, and consequently, people’s livelihoods. Come with dollars in the future or risk losing your house is an incredible incentive to work for dollars.

The relationship between dollars and dollar credit keeps the Fed’s game in play, and central bankers believe this can go on forever. Create more dollars; create more debt. Too much debt? Create more dollars, and so on. Ultimately, in the Fed’s (or any central bank’s) system, the currency is the release valve. Because there is $73 trillion of debt and only $1.6 trillion dollars in the U.S. banking system, more dollars will have to be added to the system to support the debt. The scarcity of dollars relative to the demand for dollars is what gives the dollar its value. Nothing more, nothing less. Nothing else backs the dollar. And while the dynamics of the credit system create relative scarcity of the dollar, it is also what ensures dollars will become less and less scarce on an absolute basis.

Too much debt → Create more money → More debt → Too much debt

As is the case with any monetary asset, scarcity is the monetary property that backs the dollar, but the dollar is only scarce relative to the amount of dollar-denominated debt that exists. And it now has real competition in the form of bitcoin. The dollar system and its lack of inherent monetary properties provides a stark contrast to the monetary properties emergent and inherent in bitcoin. Dollar scarcity is relative; bitcoin scarcity is absolute. The dollar system is based on trust; bitcoin is not. The dollar’s supply is governed by a central bank, whereas bitcoin’s supply is governed by a consensus of market participants. The supply of dollars will always be wed to the size of its credit system, whereas the supply of bitcoin is entirely divorced from the function of credit. And, the cost to create dollars is marginally zero, whereas the cost to create bitcoin is tangible and ever increasing. Ultimately, bitcoin’s monetary properties are emergent and increasingly unmanipulable, whereas the dollar is inherently and increasingly manipulable.

Money and digital scarcity

The hardest mental hurdle to overcome, when evaluating bitcoin as money, is often that it is digital. Bitcoin is not tangible, and on the surface, it is not intuitive. How could something entirely digital be money? While the dollar is mostly digital, it remains far more tangible than bitcoin in the mind of most. While the digital dollar emerged from its paper predecessor and physical dollars remain in circulation, bitcoin is natively digital. With the dollar, there is a physical representation that anchors our mental models in the tangible world; with bitcoin, there is not. While bitcoin possesses far more credible monetary properties than the dollar, the dollar has always been money (for most of us), and as a consequence, its digital representation is seemingly a more intuitive extension from the physical to the digital world. While the dollar’s basis as money is anchored in time and while its digital nature may seem more tangible, bitcoin represents finite scarcity. The supply of the dollar on the other hand has no limits.

Remember that the dollar does not have any inherent monetary properties. It leveraged the monetary properties of gold in its ascent to global reserve status, but in itself, there are no unique properties that ground the dollar as a stable form of money, other than its relative scarcity in the construct of its credit-linked monetary system. When evaluating bitcoin, the first principle question to consider is whether something digital could share the quintessential properties that made gold a store of value (and a form of money). Did gold emerge as money because it was physical or because it possessed transcendent properties beyond being physical? Of all the physical objects in the world, why gold? Gold emerged as money not because it was physical, but instead because its aggregate properties were unique. Most importantly, gold is scarce, fungible and highly durable. While gold possessed many properties which made it superior to any money that came before it, its fatal flaw was that it was difficult to transport and susceptible to centralization, which is ultimately why the dollar emerged as its transactional counterpart.

“As a thought experiment, imagine there was a base metal as scarce as gold but with the following properties: – boring grey in colour – not a good conductor of electricity – not particularly strong, but not ductile or easily malleable either – not useful for any practical or ornamental purpose and one special, magical property: – can be transported over a communications channel”
– Satoshi Nakamoto (August 27, 2010)

Bitcoin shares the monetary properties that caused gold to emerge as a monetary medium, but it also improves upon gold’s flaws. While gold is relatively scarce, bitcoin is finitely scarce and both are extremely durable. While gold is fungible, it is difficult to assay; bitcoin is fungible and easy to assay. Gold is difficult to transfer and highly centralized. Bitcoin is easy to transfer and highly decentralized. Essentially, bitcoin possesses all of the desirable traits of both physical gold and the digital dollar combined in one, but without the critical flaws of either. When evaluating monetary mediums, first principles are fundamental. Ignore the conclusion or end point, and start by asking yourself: if bitcoin were actually scarce and finite, ignoring that it is digital, could that be an effective measure of value and ultimately a store of value? Is scarcity a sufficiently powerful property that bitcoin could emerge as money, regardless of whether the form of that scarcity is digital?

While money may be an intangible concept, so long as there are benefits from trade and specialization, there is real demand and utility in money. Money is the tool we use to be the arbiter in determining relative value among more abundant consumption goods and capital goods. It is the good that coordinates all other economic activity. The absolute quantity of money is less important than its properties of being scarce and measurable. Scarcity is money’s most important property. If supply of the unit of measure were constantly and unpredictably changing, it would be very difficult to measure the value of goods relative to it, which is why scarcity, on its own, is an incredibly valuable property. While the value of the underlying measurement unit may fluctuate relative to goods and services, stability in the supply of money results in the least amount of noise in the relative price signal of other goods.

Despite being digital, bitcoin is designed to provide absolute scarcity, which is why it has the potential to be such an effective form of money (and measure of value). There will only ever be 21 million bitcoin, and 21 million is a scarily small number in relative and absolute terms. The Fed created $100 billion dollars just last week, with the click of a button. That is approximately $5,000 per bitcoin that will ever exist, created in just a week (and by only one central bank). To provide broader context, the Federal Reserve, the Bank of Japan and the European Central bank have collectively created $10 trillion dollars-worth of new money since the financial crisis, the equivalent of approximately $500,000 per bitcoin. Despite dollars, euro, yen and bitcoin all being digital, bitcoin is the only medium that is tangibly scarce and the only one with inherent monetary properties.

However, it is insufficient to simply claim that bitcoin is finitely scarce; nor should anyone simply accept this as fact. It is important to understand how and why that is the case. Why can’t more than 21 million bitcoin be created and why can’t it be copied? Why is bitcoin secure and why can’t it be manipulated? While there are countless building blocks that collectively allow bitcoin to function with a reliably fixed supply, there are three key columns of security within the bitcoin network which are woven together and reinforced by the economic incentives of the currency itself:

  • Network Consensus & Full Nodes: enforce common set of governing rules
  • Mining & Proof-of-Work: validate transaction history, anchor bitcoin security in the physical world
  • Private Keys: secures the unit of value, ensures ownership is independent from validation

What Secures Bitcoin – Network Consensus & Full Nodes

21 million is not just a number guaranteed by software. Instead, bitcoin’s fixed 21 million supply is governed by a consensus mechanism, and all market participants have an economic incentive to enforce the rules of the bitcoin network. While a consensus of the bitcoin network could theoretically determine to increase the supply of bitcoin such that it exceeds 21 million, an overwhelming majority of bitcoin users would have to collectively agree to debase their own currency in order to do so. In practice, a global and decentralized network of rational economic actors, operating within a voluntary, opt-in currency system would not collectively and overwhelmingly form a consensus to debase the currency which they have all independently and voluntarily determined to use as a store of wealth. This reality then underpins and reinforces bitcoin’s economic incentives, technical architecture and network effect.

In bitcoin, a full node is a computer or server that maintains a full version of the bitcoin blockchain. Full nodes independently aggregate a version of the blockchain based on a common set of network consensus rules. While not everyone that holds bitcoin runs a full node, everyone is able to do so, and each node validates all transactions and all blocks. By running a full node, anyone can access the bitcoin network and broadcast transactions (or blocks) on a permissionless basis. And nodes do not trust any other nodes. Instead, each node independently verifies the complete history of bitcoin transactions based on a common set of rules, allowing the network to converge on a consistent and accurate version of history on a trustless basis.

This is the mechanism by which the bitcoin network removes trust in any centralized third-party and hardens the credibility of its fixed supply. All nodes maintain a history of all transactions, allowing each node to determine whether any future transaction is valid. In aggregate, bitcoin represents the most secure computing network in the world because anyone can access it and no one trusts anyone. The network is decentralized and there are no single points of failure. Every node represents a check and balance on the rest of the network, and without a central source of truth, the network is resistant to attack and corruption. Any node could fail or could become corrupted, and the rest of the network would remain unimpacted. The more nodes that exists, the more decentralized bitcoin becomes, which increases redundancy, making the network harder and harder to corrupt or censor.

Each full node enforces the consensus rules of the network, a critical element of which is the currency’s fixed supply. Each bitcoin block includes a pre-defined number of bitcoin to be issued and each bitcoin transaction must have originated from a previously valid block in order to be valid. Every 210,000 blocks, the bitcoin issued in each valid block is cut in half until the amount of bitcoin issued ultimately reaches zero in approximately 2140, creating an asymptotic, capped supply schedule. Because each node independently validates every transaction and each block, the network collectively enforces the fixed 21 million supply. If any node broadcasts an invalid transaction or block, the rest of the network would reject it and that node would fall out of consensus. Essentially, any node could attempt to create excess bitcoin, but every other node has an interest in ensuring the supply of bitcoin is consistent with the pre-defined fixed limit, otherwise the currency would be arbitrarily debased at the direct expense of the rest of the network.

Separately, anyone within or outside the network could copy bitcoin’s software to create a new version of bitcoin, but any units created by such a copy would be considered invalid by the nodes operating within the bitcoin network. Any subsequent copies or units would not be considered valid, nor would anyone accept the currency as bitcoin. Each bitcoin node independently validates whether a bitcoin is a bitcoin, and any copy of bitcoin would be invalid, as it would not have originated from a previously valid bitcoin block. It would be like trying to pass off monopoly money as dollars. You can wish it to be money all you want, but no one would accept it as bitcoin, nor would it share the emergent properties of the bitcoin network. Running a bitcoin full node allows anyone to instantly assay whether a bitcoin is valid, and any copy of bitcoin would be immediately identified as counterfeit. The consensus of nodes determines the valid state of the network within a closed-loop system; anything that occurs beyond its walls is as if it never happened.

What Secures Bitcoin – Mining and Proof of Work

As part of the consensus mechanism, certain nodes (referred to as miners) perform bitcoin’s proof of work function to add new bitcoin blocks to the blockchain. This function validates the complete history of transactions and clears pending transactions. The process of mining is ultimately what anchors bitcoin security in the physical world. In order to solve blocks, miners must perform trillions of cryptographic computations, which require expending significant energy resources. Once a block is solved, it is proposed to the rest of the network for validation. All nodes (including other miners) verify whether a block is valid based on a common set of network consensus rules discussed previously. If any transaction in the block is invalid, the entire block is invalid. Separately, if a proposed block does not build on the latest valid block (i.e. the longest version of the block chain), the block is also invalid.

For context, at 90 exahashes per second, the bitcoin network currently consumes approximately 9 gigawatts of power, which translates to ~$11 million per day (or ~$4 billion per year) of energy at a marginal cost of 5 cents per kWh (rough estimates). Blocks are solved on average every ten minutes, which translates to approximately 144 blocks per day. Across the network, each block costs approximately $75,000 to solve, and the reward per block is approximately $100,000 (12.5 new bitcoin x $8,000 per bitcoin, excluding transaction fees). The higher the cost to solve a block, the more costly the network is to attack. The cost to solve a block represents the tangible resources it requires to write history to the bitcoin transaction ledger. As the network grows, the network becomes more fragmented, and the economic value compensated to miners in aggregate increases. From a game theory perspective, more competition and greater opportunity cost makes it harder to collude, and all network nodes validate the work performed by miners, which serves as a constant check and balance.

And recall that a pre-defined number of bitcoin are issued in each valid block (that is, until the 21 million limit is reached). The bitcoin issued in each block combined with network transaction fees represent the compensation to miners for performing the proof-of-work function. The miners are paid in bitcoin to secure the network. As part of the block construction and proposal process, miners include the pre-defined number of bitcoin to be issued as compensation for expending tangible, real world resources to secure the network. If a miner were to include an amount of bitcoin inconsistent with the pre-defined supply schedule as compensation, the rest of the network would reject the block as invalid. As part of the security function, miners must validate and enforce the fixed supply of the currency in order to be compensated. Miners have material skin-in-the-game in the form of upfront capital costs (and energy expenditure), and invalid work is not rewarded.

For a technical example, the valid reward paid to miners is halved every 210,000 blocks with the next halvening (a “technical” term) scheduled to occur at block 630,000 (or approximately in May 2020). At the time and scheduled block of the next halvening, the valid reward will be reduced from 12.5 bitcoin to 6.25 bitcoin per block. Thereafter, if any miner includes an invalid reward (an amount other than 6.25 bitcoin), the rest of the network will reject it as invalid. The halvening is important not just because the supply of newly issued bitcoin is reduced, but also because it demonstrates that the economic incentives of the network continue to effectively coordinate and enforce the fixed supply of the currency on an entirely decentralized basis. If any miner attempts to cheat, it will be maximally penalized by the rest of the network. Nothing other than the economic incentives of the network coordinate this behavior; that it occurs on a decentralized basis without the coordination of any central authority reinforces the security of the network.

Because mining is decentralized and because all miners are constantly competing with all other miners, it is not practical for miners to collude. Separately, all nodes validate the work performed by miners, instantly and at practically no cost, which creates a very powerful check and balance that is divorced from the mining function itself. Blocks are costly to solve but easy to validate; in aggregate, this is a fundamental differentiator between bitcoin and the monetary systems with which bitcoin competes, whether gold or the dollar. And the compensation paid to miners for securing the network and enforcing the network’s fixed supply is exclusively in the form of bitcoin. The economic incentives of the currency (compensation) is so strong and the penalty is both so severe and so easily enforced that miners are maximally incentivized to cooperate and perform valid work. By introducing tangible cost to the mining process, by incorporating the supply schedule in the validation process (which all nodes verify), and by divorcing the mining function from ownership of the network, the network as a whole reliably and perpetually enforces the fixed supply (21 million) of the currency on a trustless basis, while also able to reach consensus on a decentralized basis. 

What Secures Bitcoin – Private Keys and Equal Rights

While miners construct, solve and propose blocks and while nodes check and validate work performed by miners, private keys control access to the unit of value itself. Private keys control the rights to the 21 million bitcoin (technically only 18.0 million have been mined to date). In bitcoin, there are no identities; bitcoin knows nothing of the outside world. The bitcoin network validates signatures and keys. That is all. Only someone in control of a private key can create a valid bitcoin transaction by creating a valid signature. Valid transactions are included in blocks, which are solved by miners and validated by each node, but only those in possession of private keys can produce valid transactions.

When a valid transaction is broadcast, bitcoin are spent (or transferred) to specific bitcoin public addresses. Public addresses are derived from public keys, which are derived from private keys. Public keys and public addresses can be calculated using a private key, but a private key cannot be calculated from a public key or public address. It is a one-way function secured by strong cryptography. Public keys and public addresses can be shared without revealing anything about the private keys. When a bitcoin is spent to a public address, it is essentially locked in a safe, and in order to unlock the safe to spend the bitcoin, a valid signature must be produced by the corresponding private key (every public key and address has a unique private key). The owner of the private key produces a unique signature, without actually revealing the secret itself. The rest of the network can verify that the holder of the private key produced a valid signature, without actually knowing any details of the private key itself. Public and private key pairs are the foundation of bitcoin. And ultimately, private keys are what control access rights to the economic value of the network.

It doesn’t matter whether someone has one-tenth of a bitcoin or ten thousand bitcoin. Either and each are secured and validated by the same mechanism and by the same rules. Everyone has equal rights. Regardless of the economic value, each bitcoin (and bitcoin address) is treated identically within the bitcoin network. If a valid signature is produced, the transaction is valid and it will be added to the blockchain (if a transaction fee is paid). If an invalid signature is produced, the network will reject it as invalid. It does not matter how powerful or how weak any particular participant may be. Bitcoin is apolitical. All it validates is keys and signatures. Someone with more bitcoin may be able to pay a higher fee to have a transaction prioritized, but all transactions are validated based on the same set of consensus rules. Miners prioritize transactions based on value and profitability, nothing else. If a transaction is equally valuable, it will be prioritized based on a time sequence. But importantly, the mining function, which clears transactions, is divorced from ownership. Bitcoin is not a democracy; ownership is controlled by keys and every bitcoin transaction is evaluated based on the same criteria within the network. It is either valid or it is not. And every bitcoin must have originated within a block consistent with the 21 million supply schedule in order to be valid.

This is why users controlling keys is such a significant ethos in bitcoin. Bitcoin are extremely scarce, and private keys are the gatekeeper to the transfer of every bitcoin. The saying goes: not your keys, not your bitcoin. If a third-party party controls your keys, such as a bank, that entity is in control of your access to the bitcoin network, and it would be very easy to restrict access or seize funds in such a scenario. While many people choose to trust a bank-like entity, the security model of bitcoin is unique; not only can each user control their own private keys, but each user can also access the network on a permissionless basis and transfer funds to anyone anywhere in the world. This is only possible if a user is in control of a private key. In aggregate, users controlling private keys decentralize the control of the network’s economic value, which increases the security of the network as a whole. The more distributed access is to the network, the more challenging it becomes to corrupt or co-opt the network. Separately, by holding a private key, it becomes extremely difficult for anyone to restrict access or seize funds held by any individual. Every bitcoin in circulation is secured by a private key; miners and nodes may enforce that 21 million bitcoin will ever exist, but the valid bitcoin that do exist are ultimately controlled and secured by a private key.

Bitcoin versus.

In summary, the supply of bitcoin is governed by a network consensus mechanism, and miners perform a proof-of-work function that grounds bitcoin’s security in the physical world. As part of the security function, miners get paid in bitcoin to solve blocks, which validate history and clear pending bitcoin transactions. If a miner attempts to compensate themselves in an amount inconsistent with bitcoin’s fixed supply, the rest of the network will reject the miner’s work as invalid. The supply of the currency is integrated into bitcoin’s security model, and real world energy resources must be expended in order for miners to be compensated. Still yet, every node within the network validates the work performed by all miners, such that no one can cheat without a material risk of penalty. Bitcoin’s consensus mechanism and validation process ultimately governs the transfer of ownership of the network, but ownership of the network is controlled and protected by individual private keys held by users of the network.

Set aside any preconceived notions of what money is, and imagine a currency system that has an enforceably scarce and fixed supply. Anyone in the world can connect to the network on a permissionless basis and anyone can send transactions to anyone anywhere in the world; everyone can also independently and easily validate the supply of the currency as well as ownership across the network. Imagine a global economy where billions of people, disparately located throughout the world, can transact across one common decentralized network, and everyone can arrive at the same consensus of the ownership of the network, without the coordination of any central party. How valuable would that network be? Bitcoin is valuable because it is finite, and it is finite because it is valuable. The economic incentives and governance model of the network reinforce each other; the cumulative effect is a decentralized and trustless monetary system with a fixed supply that is global in reach and accessible by anyone.

Because bitcoin has inherent and emergent monetary properties, it is distinct from all other digital monies. While the supply of bitcoin remains fixed and finitely scarce, central banks will be forced to expand the monetary base in order to sustain the legacy system. Bitcoin will become a more and more attractive option, as more market participants figure out that future rounds of quantitative easing are not just a central bank tool but a necessary function to sustain the alternate and inferior option. Before bitcoin, everyone was forced to opt in to this system by default. Now that bitcoin exists, there is a viable alternative. Each time the Fed returns with more quantitative easing to sustain the credit system, more and more individuals will discover that the monetary properties of bitcoin are vastly superior to the legacy system, whether the dollar, euro or yen. Is A better than B? That is the test. In the global competition for money, bitcoin has inherent monetary properties that the fiat monetary system lacks. Ultimately, bitcoin is backed by something, and it’s the only thing that backs any money: the credibility of its monetary properties.

But how does bitcoin actually work? (2017)

The math behind cryptocurrencies.
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Here are a few other resources I’d recommend:

Original Bitcoin paper:

Block explorer:

Blog post by Michael Nielsen:
(This is particularly good for understanding the details of what transactions look like, which is something this video did not cover)

Video by CuriousInventor:

Video by Anders Brownworth:

Ethereum white paper:


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this was awesome! I was having trouble on understanding the nodes vs. miners as well as the random number / difficulty adjustment but this totally cleared it up!
It’s an extremely information dense lecture. You have to watch portions of it again and again to grasp the underlying concepts. But once you’ve finished it, you feel so damn confident.
5 years later and I still comeback to this Blockchain explanation to check if my understanding, love it
You have no idea how much I’ve tried to find an article or video actually explaining how cryptocurrencies work. Everyone else just goes around with analogies. They probably don’t understand fully themselves. Thanks man.


This is the clearest video I’ve ever seen, and I still don’t get it.
10:00 “The history of transactions is the currency” interesting Edit: 17:30 I love how I now know what a block chain is, and it wasn’t as mind blowing as people on the internet made it seem. And I’m pretty sure blockchains are done in introductory coding courses. (Though not as complex). Edit 2: 18:25 so THAT’S why mining is profitable. I get it now. That circles back to the claim made ~10 mins in. Edit 3: 21:15 So, bitcoin ‘authority’, in essence, is computing power, and bitcoin ‘identity’ is the a blockchain made by the original owner? Great video. As you can see I am still shaky on complete understanding, BUT this was the only useful explaination of Bitcoin and crypto I’ve seen so far (for me). So I am greatful. and maybe this will lead me to understanding others.
Prior to watching this I didn’t really understand the link between mining and validating the transactions. Its quite interesting how the system can self-adjust to make sure that mining\validating is always profitable, and therefore even if there is a big crash in mining profitability it should just result in a slowdown of transactions until the system balances. I guess the issue is that there is a big problem if the coin is used for real large scale commerce\business that rely on guaranteed volume. If a large enough proportion of bitcoin transactions were for real vital goods and services, then a crash in mining profitability could drive he value to zero since the value would be much more tied to the amount of volume the system can handle. Lack of trust could continually inflate it, which would then continually make it harder to restore validation capacity. Volatility is an issue for real world business even if the overall trend is continually upwards. If I am correct, then it would suggest that bitcoin will remain a speculation asset and a store of value rather than a replacement for sovereign currencies?
at around 20:30, theyre discussing how it isnt viable for Alice to try to commit fraud because she cant out-compute the other miners on the network all by herself. could someone explain what would happen if a group of miners (that formed the majority of the network) decide to commit fraud together?
>>  It’s 100% possible. And in fact, the top 4 miners of bitcoin have more than 50% of the network’s total hashing power. However, if you have 50% of the total mining network’s computation, you’re probably better off using it to make ~$2.2 Million a day with honest mining than you to defraud a single individual.


>> the specific name for this scenario is a “50% attack”



Bitcoin Explainer

Jack Dorsey is trying to save the world. Literally.

Jack Dorsey, born November 19, 1976, is the founder of Twitter, Square (now named Block), and CashApp. Even though he’s a billionaire, Jack never really gave a shit about making money. At least it hasn’t been his top priority. Jack likes to create things. He’s an artist, and his medium is technology businesses.

He was CEO of Twitter, twice. Recently he resigned, but it seems he was more likely forced out. Why? Because he wasn’t greedy enough. He was forced out for the same reason Larry Page and Sergey Brin were forced out of Google—they were busy innovating, and short sighted, greedy shareholders got impatient, wanting more profits—now.

They didn’t have to push very hard, because Jack had lost interest in running Twitter for awhile. He was more focused on his second job—running Square (Block). Jack has said that Bitcoin has the ability to change the world—and he is right. He also said that if Block didn’t need him more, he would quit working there and focus solely on Bitcoin.

He personally donated $1.8 billion of his own money to start a foundation to promote Bitcoin. The purpose of the foundation was to help the unbanked in the Third World using Bitcoin. It is also supposed to be a viable alternative to Web 3.0 as envisioned by venture capitalists.

Jack is opposed to centralization and the control via money of Web 3.0. Why? Because he lived through Web 2.0, founding Twitter. He saw how the Web, meant to connect the world as a global village, instead became a corporate walled garden, in which centralized control wielded by oligarchs became the exact opposite of what the World Wide Web was meant to be.

Bitcoin was created by the anonymous “Satoshi Nakamoto,” after the 2008 U.S. financial crisis in which Wall Street and the Big Banks required bailouts after making knowingly bad subprime mortgage loans. Bitcoin is a decentralized cryptocurrency, which solves the Double Spending Problem and the Byzantine General’s Problem.

Money and the Byzantine Generals Problem

Money is a prime example of the Byzantine Generals Problem. How should a society establish a money that all members of a society can trust and agree upon? For much of history, societies have selected precious metals or other rare goods, such as shells or glass beads, as money. In some ways, gold solved the Byzantine Generals Problem: it was trusted and recognized across decentralized systems, such as international trade. However, its weight and purity remained unreliable, and still does to this day. The failure of gold to completely solve the Byzantine Generals Problem resulted in trusted central parties, usually governments, taking over the establishment and issuance of money. Governments monopolized mints in order to inspire trust in the weight and purity of the money. Centralized systems obviously did not solve the Byzantine Generals Problem. Governments, the trusted central authorities for money, constantly violated that trust by seizing, debasing, or changing the money.

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.

In order for a money to solve the Byzantine Generals Problem, it would have to be verifiable, counterfeit-resistant, and trustless. It was not until the invention of Bitcoin that this feat was achieved.

How Bitcoin Solves the Byzantine Generals Problem

Bitcoin was the first realized solution to the Byzantine Generals Problem with respect to money. Many proposals and projects preceding Bitcoin had attempted to create money separate from the government, but all had failed in one way or another.

Blockchain Solves the Double Spend Problem

As a monetary system, Bitcoin needed a way to manage ownership and prevent double spends. To achieve this in a trustless manner, Bitcoin uses a blockchain, a public, distributed ledger which stores a history of all transactions. In the Byzantine Generals analogy, the truth that all parties must agree to is the blockchain.

If all members of the Bitcoin network, called nodes, could agree on which transactions occurred and in what order, they could verify ownership of bitcoin and establish a functioning, trustless money without a centralized authority

Proof-of-Work Solves the Byzantine Generals Problem

Bitcoin managed to solve the Byzantine Generals Problem by using a Proof-of-Work mechanism in order to establish a clear, objective ruleset for the blockchain. In order to add information, called blocks, to the blockchain, a member of the network must publish proof that they invested considerable work into creating the block. This work imposes large costs on the creator, and thus incentivizes them to publish honest information.

Because the rules are objective, there can be no disagreement or meddling with the information on the Bitcoin network. The ruleset governing which transactions are valid and which are invalid is also objective, as is the system for determining who can mint new bitcoin. Additionally, once a block has been added to the blockchain, it is extremely difficult to remove, making Bitcoin’s past immutable.

Thus, at all times, members of the Bitcoin network can agree on the state of the blockchain and all transactions therein. Each node verifies for itself whether blocks are valid based on the Proof-of-Work requirement and whether transactions are valid based on other requirements.

If any member of the network attempts to broadcast false information, all nodes on the network will immediately recognize it as objectively invalid and ignore it. Because each node can verify all information on the Bitcoin network itself, there is no need to trust other members of the network, making Bitcoin a trustless system.[1]

The Second Problem: Double Spending

In digital cash systems, double spending involves the same funds being sent to two recipients at the same time. Double spending is possible because it is almost impossible for a recipient to tell whether funds being spent have already been spent without the involvement of a third-party verification service.

In digital-cash systems, ensuring that funds are not duplicated is of paramount importance. Digital cash systems will not work if X receives ten units but copies and pastes them ten times to create a total of 100 units. Digital cash systems will also not work if X sends the same ten units to Y and Z simultaneously. In other words, there must be a mechanism that ensures that funds in the system are not being double spent. Two approaches can be used to prevent double spending: the centralized approach and the decentralized approach.[2]

Bitcoin is a technology which follows Roger’s Adoption Curve

We are currently at “The Chasm,” or “The Peak of Inflated Expectation.” Like the Dot Com bubble, the current crypto bubble and stock market bubbles will crash. This will happen this year.

Bitcoin has the ability to free the developing world from control under the World Bank and IMF. In the developed world, it can be the source of true democracy, because it gives power back to the people.

If you cannot control your money, you cannot control your life. The digital transformation of money from analogue to programmable, digital money is a radical transformation for the world. Bitcoin means you no longer need permission from bankers to use your money. You can send a billion dollars from London to Cape Town at 2 am on a Saturday morning for a few dollars. The transaction is irreversible, private (although the government can trace it with some effort and subpoenas), and you can trust it.

Bitcoin is not political. Steve Wozniak described it as “mathematical elegance.” The Bitcoin network is so secure it has never been hacked. It would require a quantum computer to crack it.

The widespread adoption of Bitcoin would mean a world in which a group of political and banking elites control the world. Fiat money is mined with aircraft carriers, boots, and blood.

Fiat money mining equipment

Bitcoin is The Only Way Out: The Jack Dorsey Interview

Alex Gladstein: Hello Miami! And welcome Jack. We have 12,000 Bitcoiners here.

Jack Dorsey: [To the audience] You’re incredible.

A: And I think there’s 20,000 out there listening. We are happy to see this phenomenon grow. I wanted to start with the big question that most people are probably asking: Why are you on stage with a human rights activist? What does Bitcoin have anything to do with human rights? Isn’t it just about investment?

J: Not for me. For me Bitcoin changes absolutely everything. What I’m drawn to the most about it is the ethos, is what it represents, are the conditions that created it, which are so rare and so special and so precious. I don’t think there’s anything more important in my lifetime to work on and I don’t think there’s anything more enabling for people around the world.

A: We often hear in our community this mantra that Bitcoin is for everybody. That it’s non-discriminatory, that it’s open and opening for many people around the world who are walled off from transactions, saving, connecting with the world. What is your perspective on this idea that Bitcoin is for everybody?

J: That’s what I’m focused on making sure that I help with. Whatever I can do, whatever my companies can do to make Bitcoin accessible to everyone is how I’m going to spend the rest of my life. If I were not at Square or Twitter, I’d be working on Bitcoin. If it needed more help than Square and Twitter, I would leave them for Bitcoin. But I believe both companies have a role to play and I think anything we can do as companies to help find the right intersection between a corporate narrative and a community open narrative is for the best.

A: The theme for today is banking the unbanked. As you all probably know, there are billions of people around the world who are completely unbanked, or they are underbanked. Yet, the mobile phone is growing at a remarkable pace. Even in countries like Ethiopia and Sudan, you now have 20 or 25% of the population with a mobile phone, and in the next five years that’s going to pass 50%. So we are now in a position where the increase of technology is going to allow more people to come online and with Bitcoin it doesn’t matter what passport you have, or what nationality you are, or what ethnicity you are, or what you believe in, you can connect to this network. So when we think about banking the unbanked, what’s your vision for what is most important for helping onboard people into this new system?

J: Well, we don’t need the banks anymore. There’s so much work to do around accessibility, there’s so much work to do around education so that people can own the idea themselves. And I want to thank you by the way — I appreciate you so much for all the work you do to take away a bunch of the myths that people have in their head and give a strong case for why Bitcoin can be used by everyone — but we don’t need the financial institutions that we have today. We have one that is thriving, that is sound, that is owned by the community, that is driven by the community, and that has this incredible and amazing consensus that always manages to do the right thing over time. It’s noble. And it’s so rare and so unique. So anything we can do to build it and protect it, we’re down to do.

A: You recently personally launched a new fund with Jay-Z, where you guys dedicated 500 BTC to help the Bitcoin ecosystem in Africa and India. Can you talk a little bit more about the vision for that fund and what you all hope to do over the coming years?

J: I spent November of 2019 roaming around the continent of Africa, I went to Nigeria, I went to Ethiopia, I went to Ghana. And I saw that the number one problem that entrepreneurs were working on there — and I only met the entrepreneurs, I didn’t meet anyone in the government or the media — they are all working on payments and the most interesting of them were working on Bitcoin. And when I saw the reports of Nigeria considering banning Bitcoin, when I saw the reports of India considering banning Bitcoin, it was a reminder that we could use a lot more help developing around the world. Finding developers on the continent on Africa, enabling them to do their work without having to think about taking another job, is important. So, I talked to Jay about it. Jay loves Bitcoin, he goes very deep in what he loves, he believes in it, and he also believes in this idea of making sure that if we’re going to create a money for the world, it has to be developed around the world. And anywhere there are gaps, we should try to fill. So, right now we’re trying to find the right board for it. It’s going to be a completely separate entity. I have no control or say or direction over it. Once we find that board, we’ll hire a lead, and they’ll start making grants denominated in bitcoin.

A: So Jay might have 99 problems but being his own bank won’t be one.

J: [Laughs] He’s more than a bank.

A: Let’s speak a little more about that. Nigeria is a country of more than 200 million people. They have a 15% inflation rate. They are in many ways closed off from the outside world in terms of fintech and payments. How has traveling the world and going to different countries like this opened your eyes to the global impact of Bitcoin that maybe people in Wall Street or in Silicon Valley or in London may not be seeing? What are people missing when they say there is no social value to Bitcoin?

J: I mean they are missing everything. They’re not getting out of New York. Go to Nigeria for one day and see the struggle that people have to put up with, with their government and with their money. And go to Ghana that has a bunch of transplants from all over the continent and you witness the same thing every single day. Go to India and you see the same.

A: My advice is that they should try living on the Sudanese pound for six months and then come back and tell us that Bitcoin is not useful. And I think they’ll get a little reality check there. Today we’ve got maybe — and estimates vary — anywhere from 150 million to 200 million people have used Bitcoin in some way. So we’re at maybe 2% or 2.5% of the world population. I believe we’re going to a billion people by 2025, certainly by the end of the decade. When you have so many more people on-ramping into this system, we’re probably going to have a situation where fees on the main chain are going to get pretty high in fiat terms. So can you talk about — for people who like in Nigeria or Sudan who are going to need micropayments, who are going to want to send $5 or $10, can you talk a little bit about your commitment at Square to Lightning, how you understood how Bitcoin will scale in layers perhaps instead of on the main chain, and why you are so committed to Lighting in a time where we are going to get a lot more users?

J: That’s why I’m committed to Lightning, because this is going to be used by more and more people. My belief in bitcoin is that it’s an amazing asset, but my belief is that the internet needs a native currency, and we need to be able to transact with this every single day. And everyone around the world needs to transact with it every single day. So the only reason Square got into Bitcoin is to that end. It’s not just to be an exchange. And that’s why we don’t deal with any other “currencies” or “coins” because we’re so focused on making bitcoin the native currency for the internet.

Author’s note: at this point, political activist Laura Loomer came to the front of the stage and asked Dorsey how he could say this when Twitter is censoring users like her. She said “How can you say that bitcoin is a currency for everyone in the world, when you are the king of censorship? Bitcoin is about decentralization, and you have no right to be here today… censorship is a human rights violation.”

Dorsey responded by saying, “We’re working on that.” After a minute, Loomer was removed from the front stage area, and we continued the interview.

A: Why don’t we just go right to that issue? We hear a lot about censorship. Can social media be more like Bitcoin? Bitcoin is censorship resistant. Nobody controls it. What’s your thought on this? It’s a thorny problem.

J: Yes, I do believe it can. I know that there’s a lot of you out there who disagree with a lot of actions that Twitter has taken. I know there’s a lot of you out there who disagree with our policies and the way we have evolved them. I appreciate that and recognize it. I also recognize the fact that there is an incentive and a corporate incentive and a business incentive that is different than what might be needed for global communication and for a public conversation. And my goal in my life in this moment is to remove as much as I can the corporateness of our companies and find better intersections with the open-source community. Certainly, Bitcoin has taught me that with Square, and we’re doing everything in our power to do that. And we’re trying to do the same thing with Twitter, by creating a new platform, a new open-source standard called Blue Sky, we’re just starting it. And it will have none of the restrictions that you see on Twitter. Inspired entirely by Bitcoin. We want to do the same thing for social media. And again, I know you aren’t going to believe me. I know you’re saying “liar.” I’m going to prove it to you. And then we can have another conversation later.

A: When you look at something like Lightning, it’s not just a payments network, it can also be a censorship-resistant social media platform. There’s folks out there building stuff like Sphinx.

J: Sphinx is amazing.

A: Sphinx is really cool, basically what you can do is you can follow your favorite creators. Maybe your favorite podcast. Maybe you’re following what Marty and Matt are doing, and you can go into a “tribe” on Sphinx and you can stream them censorship-resistant private money on Lightning and nobody can stop you. And that’s happening. It’s inevitable. It’s coming. This vision to stream money to people that you care about, in a way that the government cannot stop, I know that’s what Laura wants, and that’s what you all want where you are upset with Twitter. Well guess what, it’s coming, and nobody can stop it. Maybe that’s a good segue to get back to the idea of Lightning and why you at Square and especially Square Crypto have focused so heavily on it as opposed to any number of other things. Why the focus on Lightning?

J: Again it goes back to the currency. Square Crypto and Steve and team and Matt have been focused on making sure that any wallet can easily turn on Lightning and to make this accessible to everyone. The more people we have considering using Bitcoin for payments, for tips, for streaming money, the stronger this ecosystem is and the more we achieve our goal.

A: We’re really building out a parallel economy here that is not controlled by governments or corporations. And I just wanted to show you how this works and then Jack and I can reflect on it. Our friend Jack Mallers has created a company called Strike, with a lot of help from a lot of other people — an amazing Bitcoin company — and he started a campaign recently to help Bitcoin development. So I’m on the Strike page right here. And I’m going to go ahead and donate $2 of bitcoin to Strike. I’m going to copy that Lightning invoice, I’m going to go to my Muun wallet — created by an awesome team in Argentina — and I’m going to send that Bitcoin right now and it’s going to go and it’s gone. That’s a bearer asset that has just moved instantly around the world. And I didn’t ask permission from anybody. So again we get back to this conflict about how are we going to build social media and communicate with each other without censorship and surveillance? It’s through Bitcoin. I just want to underline why I think Jack is so persistent in this. Because it must be such a struggle to watch the entire world criticize everything you do and I think that’s fair. We should do that and hold you to a higher standard.

J: You should definitely do that.

A: But this is not some magic fairy dust. This is real. Lightning is real. And I just sent a bearer asset around the world and nobody could stop me. I didn’t have to ask any permission, I didn’t have to prove my identification. This is an actual revolution. So when we talk about Bitcoin and Lightning, if we’re going to build it the right way, it has to be non-custodial. Now, minutes before you walked on stage, you announced something pretty big that you are going to do at Square. Do you want to talk about your vision for non-custodial Bitcoin use?

J: Yeah we’re considering building a non-custodial hardware wallet. The thing we want to do is make it completely in the open. From all of our software to all of our hardware design will be open source and will be on Github. We want to build it in collaboration with the community. So we started a thread today asking some questions about our design principles. We don’t want to compete with the hardware wallets out there. We just want to take it to the next level and take it to 100 million more people who have non-custodial solutions. And we’re likely to do it sometime very soon. But we wanted to make sure that we’re thinking about this in the correct way and that we’re reaching out to the right folks in the community to build it.

A: I think that non-custodial use of Bitcoin is so important. And Satoshi, the creator of Bitcoin, knew this. Satoshi chose his or her birthday as April 5. This was the day that the U.S. government basically banned private ownership of gold in 1933. So when Satoshi was designing Bitcoin he or she was thinking about how the U.S. government centralized and confiscated gold away from the people and how they could make a system that could prevent that. They chose the year for their birthday of 1973 which is when gold was made available for the American people again. So non-custodial use of Bitcoin is built into Satoshi’s vision for the project. So it’s really exciting to see Square support this. I think a lot of the custodians in the space won’t be very happy, but as you said earlier in your thread, as inspired by Isaiah, not your keys, not your cheese.

J: As a custodial exchange we need to push more companies like us to make sure that more people have non-custodial solutions. And we’re going to show up.

A: Earlier you brought up a point that you are Bitcoin only. Let’s talk a little bit more about that. There’s a lot of discussion about proof of stake and other coins. What are your thoughts on Bitcoin and its proof of work and full nodes model versus other models?

J: Again, the conditions that created Bitcoin — everything that went into it from the proof-of-work model to the development model — no single points of failure — everything about it is why we’re into it. There’s nothing else that compares to it. And we have no interest other than making sure that we are building a native currency for the internet and helping in every way that we can. So all the other coins to me don’t factor in at all.

A: Bitcoin is about user control. Users control the monetary policy. You control it, you control it, I control it. There’s not a small group of people controlling the monetary policy. And that’s really what we are here for. We’re here to create an alternative to the fiat system where a small group of people can basically determine the rules. I was in a meeting yesterday with an amazing guy named Fodé Diop from Senegal, and he’s telling me this story from the late 1990s. Where he is living in a country that uses the CFA. It’s a French colonial currency so the French in Paris control these people and they make decisions on behalf of them. His father had saved up all this money for him to go to college and the French just decided to devalue the currency overnight. And he could no longer pursue his dreams. That’s why when he saw Bitcoin later he was so open to it and excited and he said, this is my ticket out of here. At the end of the day the difference between Bitcoin and all the other coins is that with Bitcoin, we control the monetary policy, it’s not going to change, and with every single other coin, it’s up to some small group of people who are going to, best case, do their best.

J: Until they don’t. Until they get corrupted in some other way.

A: The track record for this globally is not so great. There’s always this temptation to print more to fix the problems. Well, you can’t do that with Bitcoin.

Now, when we talk about other digital currencies, there is a digital currency phenomenon that I did want to talk to you about and that’s central bank digital currencies. So it appears that around the world there’s this drive to move beyond paper cash and bring us to a system where citizens actually may have a liability of the central bank on their phone, as opposed to using paper money. This obviously presents a lot of civil liberties concerns. Even Christine Lagarde has said that the digital euro won’t really have full privacy. Obviously the Chinese government is pursuing an aggressive CBDC. These things are likely to lead to forced spending, negative interest rates, confiscation, blacklists. This is all happening, there’s this war on cash. What are your thoughts on this idea of financial freedom and privacy in a world that is moving beyond paper money?

J: I think all of the things that you mentioned in terms of what central banks are trying to do are just bumps in the road and they are bullshit. We have a much better alternative in Bitcoin. We have designs for that privacy and that freedom within it. The more that we — and especially our governments — can realize that and get in the boat sooner, the better we all are.

A: A lot of people say Bitcoin is just for bad people. It’s just for bad actors. What’s your response to that — that it’s just for criminals, the same sort of stuff that they said in the early ’90s about encryption. Right, they said it’s going to be for bad people, we don’t want Americans to have privacy. Well thankfully the cypherpunks make it possible for us to have tools like Signal. What is your response when you talk to regulators or government officials and when they say this is just too risky or it’s going to hurt people?

J: It feels like it’s a cover for something else going on. I don’t actually hear that a lot from regulators. Square was one of the first companies that was public that talked to the SEC [U.S. Securities and Exchange Commission] about Bitcoin and that never came up. So it feels like there’s probably something a little bit deeper when you’re hearing any of these excuses and it’s just about trying to understand what that really is. I think it’s just about losing power, effectively.

A: One of the interesting things about Bitcoin is how the incentives align. Recently there was a little bit of a controversy with some of the companies that are doing Bitcoin mining, and a software upgrade that’s going to bring new privacy to Bitcoin called Taproot, which is in the process of activating right now, which is very exciting, but one of these companies, they weren’t signaling for Taproot. And then there was this huge community backlash and the company was actually forced to come out with a video message and say ‘sorry, we’re definitely going to signal.’ They basically bent the knee to the community. Have you seen that unique phenomenon before?

J: It was awesome.

A: Where a corporation is virtue signaling for censorship-resistance and privacy? What do you see when you look at stuff like that?

J: It was awesome the community could change the path and the mindset. I think it’s incredible. I don’t know why it didn’t happen sooner but it’s just another lesson for any company trying to get into the space.

A: There’s a lot of people who say Wall Street’s just going to control Bitcoin. They are just going to make it a tool for themselves. This is a nice example of how that’s probably not the case.

J: It can’t and it never will, it never will. And the more companies, small, big, that try to demonstrate that and try to offset their corporateness by doing things that are more supportive of the community such as creating a Square Crypto-like thing, such as creating a [Cryptocurrency Open Patent Alliance] COPA-like thing to give up Bitcoin patents to protect the community, it becomes more and more resilient every single day.

A: I often think about how the world is focused on the micro-movements of the bitcoin exchange rate versus the dollar. And meanwhile this incredible foundational upgrade has essentially been transformed into reality by the users and nobody is paying attention to this. It’s kind of interesting, right, it’s almost like running interference for the real revolution.

J: It’s working, it’s incredible.

A: I wanted to hit another topic. We hear a lot about Bitcoin’s energy use. And you all at Square just put out a paper with Ark that described how actually, Bitcoin mining might incentivize the adoption of renewable energy and it may actually help unlock renewable sources that are stranded or otherwise unused around the world. Can you talk to us a little bit about why you have this belief or philosophy that Bitcoin mining is actually helpful for our species and our planet?

J: You just look at the economics of it and ultimately miners have to make a profit. And getting cheap renewable energy maximizes their potential for profit. It’s really that simple. And I thought I had an agreement with some notable figures out there, and that seemed to change in a matter of weeks and now it’s in a weird kind of place. But I believe fully that Bitcoin over time and today does incentivize more renewable energy. And I think it does incentivize more awareness around how we’re getting that power and gives people more freedom to convert unused, wasted power into something that provides value for billions of people around the world.

A: Just a couple facts I’d throw out to the audience. The U.S. government this year is decommissioning for political reasons more nuclear power than is necessary to essentially power the entire Bitcoin network. We need to think carefully about energy and waste and the environment but there’s more than meets the eye here and I’d encourage all of you to dig in and learn more about Bitcoin mining.

I also wanted to share briefly this example of how it could benefit people in emerging markets. So a lot of philanthropists and outside investors have been trying to help Virunga National Park in the DRC, in the Congo. And they’ve been building some hydro facilities there, they have this mighty river, and incredible natural resources, but the problem is when they build the dam it takes time to connect the transmission lines to the dam, so the project remains fairly inert for awhile, and it’s not that exciting of a development project for that reason. But about a year and half ago, the people who run the park — which, by the way, is an incredible park that supports an area of five million people and some of the most amazing wildlife on the planet — they decided to start Bitcoin mining. And it gave them a source of revenue that can allow them to bootstrap the rest of their operations. And more of this is coming online across the country. This is going to happen in so many countries that can start unlocking solar, wind, renewable, you name it. They are going to start realizing that this can help bootstrap them into some energy independence. I think that’s important for you to consider when you are reading these headlines about how Bitcoin is boiling the oceans, you need to think deeper.

J: 100%. Well said.

A: We’re going to wrap up. I have one more thing to say. 32 years ago today, these incredibly brave students in Tiananmen Square stood up for freedom. The Chinese people are still fighting that fight today, especially the Uyghur people, especially the Tibetan people, especially people in Hong Kong. We often hear that Bitcoin is a threat to America and is a threat to our values. But is it really? Isn’t Bitcoin’s free speech and property rights and sovereignty, don’t you think that vibes better with us than a closed, Communist police state? Don’t you think that we’re going to benefit a little more than some other countries? Could you even say that Bitcoin is patriotic?

J: 100%. But I think Bitcoin benefits the entire world. That’s what makes it incredible. Is that every single person in the world will benefit and get value from utilizing this. And the more accessible we can make it — just that realization that we finally have a currency that can be traded to any single point on the planet — is pretty incredible and what that enables going forward is mind-blowing. And I’m going to do everything in my power to make sure that happens.

A: This concept that Bitcoin is for everyone is I think what I want you to go home with. Bitcoin is non-discriminatory, it cannot choose who uses it, and none of you can block our access or her access, or his access, it is something that is open for all of us, and it’s open source, and as a human rights activist I am grateful that companies like Square are supporting the open-source side of Bitcoin, are supporting non-custodial use, are supporting Lightning — these are things that I don’t think may have been possible before Bitcoin’s incentive structure. So I really wanted to thank you Jack for coming out and sharing your thoughts. It’s obviously a tricky political situation out there but I think we agree that Bitcoin is the way forward.

J: 100%. It’s the only way out.[3]

Will Bitcoin replace the dollar?

If inflation continues as it is, yes. The purchasing power of the dollar has been reduced for decades. Workers who save are running on a treadmill which requires them to run faster and faster every year. They cannot run any faster. The stock market and real estate markets are bubbles, and when these crash, the effects will be far worse than the 1929 stock market crash which ushered in the Great Depression. This isn’t just my opinion. This is the opinion of the traders and economists who predicted the 2008 financial crisis—Michael Burry, Jeremy Grantham, and Ray Dalio. When this happens, there will be no choice but to turn to Bitcoin. Many nations are already moving in this direction, as inflation consumes their currencies. Like gold, Bitcoin is limited in supply, making it anti-inflationary. There will never be more than 21 million Bitcoin.

In a time of crisis, a Bitcoin standard would be a ready made solution. In fact, people will turn to it as the dollar becomes less relevant. It can save us from hyperinflation. If there is a civil war in the U.S., it may be the only viable currency.

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