Note: While reading a book whenever I come across something interesting, I highlight it on my Kindle. Later I turn those highlights into a blogpost. It is not a complete summary of the book. These are my notes which I intend to go back to later. Let’s start!
If you think about starting up a business in an international environment, there are two primary barriers to becoming a global business. The first barrier is that it is difficult to transport products and services across borders. With the internet, we solved that. We can now create products and services that are virtual, ones that we can sell anywhere in the world. So, we can deliver the product, but we still have one big problem: How do we get paid? Bitcoin solves that part. It allows us to receive payments from anywhere in the world, instantaneously. The bitcoin network allows any individual to send an amount that is as small as 100-millionth of a bitcoin, which in today’s terms is a very tiny amount of money. You can’t do that with today’s money and payment systems. Credit cards were made in the 1950s, and they were most certainly not made for an internet age. Bitcoin is made for the internet age. So, if you can suddenly send payments that are one-hundredth of a euro, or one-thousandth of a euro, you can sell content. You can do microtransactions. You can collect payments from millions of people in tiny amounts and make them, in aggregate, be worth something. On the same network where you can send one-thousandth of a euro or one-millionth of a euro, you can send a billion euros or a trillion euros. The fee will be exactly the same, because fees depend on the size of the transaction in kilobytes, not on the amount or content.
Bitcoin is neutral to the sender, the recipient, and the value of the transaction. That means it gives every citizen, every user of bitcoin, the ability to innovate in terms of financial instruments, payment systems, and banking. You can operate on the same level as Citibank. That is truly revolutionary.
It takes a hierarchical system of international finance and turns it on its head. Up to now, that hierarchical system has achieved security by limiting access, because that is the main method of trust in our payment systems—you can’t get in unless you’re vetted. Bitcoin creates a completely flat and decentralized network where every node is equal, where the protocol is neutral to the transactions, and it pushes innovations to the edge of the network, allowing exactly the same phenomenon we saw on the internet: innovation without permission. You don’t need to ask anyone if your application can be published on the internet. You don’t need to ask anyone to completely subvert a new industry with your information technology. On bitcoin, you don’t need to ask anyone to invent a new financial instrument, a new payment system, a new service. You can just do it. You can just write the code, and you are now part of an international financial network that can run that code and put you in contact with millions of consumers.
If you understand that bitcoin is a technology and not just a currency, you can truly grasp the importance it has. Again, it’s not about us. It is about the other 6 1/2 billion. It is about the ability to bring to the world a level of financial integration that the world has never seen before. From our perspective in the privileged world, it is a great technology. We can do some disruptive innovation. We can build some interesting services. But if you’re a Kenyan farmer who’s trying to raise money in order to buy seed, and now you can do decentralized peer-to-peer lending and reach out to lenders from all across the globe, this is not just a technology—this is truly life-changing.
The vast majority of the world lives under repressive and corrupt regimes with central banks that impose hyper-inflation at 30 percent a month. It’s much more important to see how bitcoin can affect all of those people.
At the end of the day, bitcoin is programmable money. When you have programmable money, the possibilities are truly endless. We can take many of the basic concepts of the current system that depend on legal contracts, and we can convert these into algorithmic contracts, into mathematical transactions that can be enforced on the bitcoin network. As I’ve said, there is no third party, there is no counterparty. If I choose to send value from one part of the network to another, it is peer-to-peer with no one in between. If I invent a new form of money, I can deploy it to the entire world and invite others to come and join me.
Money is a form of communication. At its very basic level, money isn’t value. Money represents an abstraction of value; it’s a way of communicating value. It’s a language. Therefore, money is as old as language because the ability to communicate value is as old as language and money. In many ways, it has characteristics that make it a linguistic construct. It’s a form of communication. How often has the technology of money been transformed by invention? How many different forms of money have existed? At a very basic level, a way to communicate value is to exchange things that we consider of equal value. “Here is a goat. I will take 20 bananas for my goat.” That’s not really money because it’s a barter transaction, but it’s the first form of communication about value. Then, we start seeing abstract forms of money. The first major technological evolution is to start exchanging something that you can’t eat—a feather, a bead, a string with knots on it, a colorful something that can be used for aesthetic purposes. That’s when money takes an abstract form. The first major transformational technology moment for money was when money stopped being about the tangible consumption of intrinsic value, but became something that referred to value, as an abstraction. One of the most popular forms of these abstractions was to use precious metals to express value. Precious metals combine some of the most important characteristics of money: hard to find (scarce); easily transportable (at least when compared to a giant rock or a whole barrel of feathers); easy to divide (you can cut a gold coin into pieces and subdivide the pieces); and universally valued for aesthetic purposes. That’s the second major transformation in money technology. It took hundreds of thousands of years before we saw the introduction of precious metals. Historically, we start seeing precious metals in the beginning of the agrarian civilizations in the Fertile Crescent area in the Middle East. The Babylonians, the Egyptians, and the Greeks developed these precious metals. Two major technological evolutions and then nothing for a few thousand years. Then someone came up with a brilliant idea: If I deposit gold with someone trustworthy, they can give me a piece of paper that says that I have gold in this trustworthy vault. Then I could trade the paper instead of the gold. It’s easier to carry. As long as I can trust that my money is in the vault, then I’ve got a new form of money.With every technological evolution in money, there is skepticism. But I think this might be the moment of the greatest amount of skepticism in human civilization. For a lot of people, this new invention of money as paper was somewhat controversial. You think people are freaking out about bitcoin? Imagine how much they freaked out when you told them that now, instead of trading in gold, they would trade in pieces of paper. For a lot of people, this was unthinkable. I mean, after all, clearly this paper does not have any real value. It took about 400 years for paper, as money, to become accepted broadly. It was a big aberration. Then, about 60 years ago, we saw a new form of money in the form of plastic cards. In fact, the first cards were paper again. In the United States, Diners Club was the first to create a credit card, which was a form of traveler’s cheque. Then, people took that and they said, “This isn’t money. Why don’t you give me some of the good old paper money that I know?” That was another big transformation in money.
The interesting thing about the change between a platform and a protocol is, when you have a protocol there is no central appeal. TCP/IP doesn’t work in reference to a service provider. TCP/IP works without context everywhere in the world. You don’t have to sign up for an account to use TCP/IP; you just have to use the language. Once you move from a platform to a language, it opens up all of these possibilities.Bitcoin is the first network-centric, protocol-based form of money. That means it exists without reference to an institutional or platform context. I’ll get back to that in a second, this is a really important point.
The architecture of bitcoin is peer-to-peer because every participant in the network speaks the bitcoin protocol on an equal level. There are no special bitcoin nodes; all nodes are the same.Peer-to-peer means that when you send out a transaction to the network, every peer treats it the same. It has no context inside the peer’s system other than what it gets from the network. An interesting issue in distributed systems is this issue of context and state. If you log in to Facebook and you have an account with Facebook, you’re not using a protocol. All of the state is controlled by Facebook. You have a login session and all of the data is held by them. We call that architecture client-server. Bitcoin is different because it’s peer-to-peer, just like email or TCP/IP.
Before bitcoin, the previous iteration of money — when money started being issued in exchange for precious metals stored in a vault — what that represented was a form of debt.
How many of you have money in a bank? None of you has money in a bank. Do you store physical money in a safe deposit box? If so, maybe then you could say you have money in a bank. The rest of you have loaned your money to a bank. For the privilege of loaning your money to a bank, you will be paid the amazing interest rate of 0.00001 percent per year. Your bank will take that money, turn around, and loan it to the people standing next to you for 24.99 percent APR.
This is a client-server relationship. Because that money only exists as a form of debt in a ledger that you do not control. A ledger that is stored by a server, and you are simply a client. In fact, you have no control over it at all. You don’t even have basic interfaces to that money unless that interface is mediated by the server. That’s what a client-server architecture does.
You are the client. You are not the server. The server doesn’t really serve you; they serve themselves because they’re the master. That is the architecture of money we live in. That is the architecture of money we use in our civilization: an architecture of money where you have no control; an architecture of money where every interaction is mediated by a third party that has absolute control over that money.
Today, if you go to an ATM machine and you put in your card, the bank may decide to give you your money. One day—as the people of Cyprus, Greece, Venezuela, Argentina, Bolivia, Brazil, and a list of hundreds of countries over the last several decades and even centuries have discovered—one day, you go to the bank and the bank does not want to give you the money, because they don’t have to. That’s the essence of a master-slave relationship.
Bitcoin is fundamentally different because in bitcoin, you don’t owe anyone anything and no one owes you anything. It’s not a system based on debt. It’s a system based on ownership of this abstract token. Absolute ownership. We have an expression in the United States, which is “possession is nine-tenths of the law.” In bitcoin, possession is ten-tenths of the law. If you control the bitcoin keys, it’s your bitcoin. If you don’t control the bitcoin keys, it’s not your bitcoin. You’re back to a master-slave relationship.
Bitcoin represents a fundamental transformation of money. An invention that changes the oldest technology we have in civilization. That changes it radically and disruptively by changing the fundamental architecture into one where every participant is equal. Where transaction has no state or context other than obeying the consensus rules of the network that no one controls. Where your money is yours. You control it absolutely through the application of digital signatures, and no one can censor it, no one can seize it, no one can freeze it. No one can tell you what to do or what not to do with your money.It is a system of money that is simultaneously, absolutely transnational and borderless. We’ve never had a system of money like that. It’s a system of money that transmits at the speed of light, one that anyone in the world can participate in with a device as simple as a text-messaging phone.