Cryptoassets Summary — a Book by Chris Burniske and Jack Tatar
Learn how Bitcoin can change the way we think about money.
Bitcoin is a user-created and controlled virtual currency. Bitcoin fundamentally limits the power of governments and banks through its unbreakable cryptography and decentralized organization, empowering individuals to send money around the world anonymously, safely, and quickly.
Humans have used the physical entity of money as a means of exchange for thousands of years. We continue to accept these small valuable objects as payment for almost anything we want to do today. But, in today’s highly technological and digital age, have you considered whether this system is actually severely outdated?
Some people certainly believe it is, which is why the cryptocurrency Bitcoin was created.
Bitcoin is a new type of currency that users create, hold, and transfer.
On January 9, 2009, a mysterious internet user going by the name Satoshi Nakamoto proposed a proposal that would permanently revolutionize the financial world: Bitcoin.
Bitcoin is a digital currency that is unlike any other form of payment. To begin with, anyone can participate by simply downloading the open-source code.
Anyone can look at the code, see what’s going on under the hood, and even contribute to changes. This is in contrast to traditional software applications such as Photoshop or Microsoft Office, which are developed by a small group of developers who can only see and alter the code.
Another feature that distinguishes Bitcoin from traditional currencies is the complete lack of a centralized authority.
Unlike a bank, where each user’s holdings and transfers are kept private, Bitcoin uses a public blockchain database that everyone can view. The blockchain functions as a massive public ledger that keeps track of all bitcoins in existence as well as every transaction ever done. Instead of being stored in a single location, this record is distributed to every computer in the Bitcoin network using a cleverly engineered method.
As a result, Bitcoin is not as secure as the international banking system, where your finances are accessible only by you and your bank. A user’s ability to own an unlimited number of Bitcoin accounts, or wallets, is similarly unrestricted. And, unlike a bank, all you need to open a new wallet is an e-mail address, so anyone can do it, and Bitcoin can be used completely anonymously.
Bitcoin also modernizes old currencies by incorporating sophisticated encryption mechanisms into its foundation. While many cash withdrawals still utilize simple PIN digits, Bitcoin employs strong public-key cryptography that even the most powerful supercomputers cannot decipher.
A private and a public key are the two components of public-key cryptography. When a Bitcoin transaction occurs, the public key is stored in the blockchain for all to see. However, only the individuals who initiated the transaction have access to the private keys required to decrypt the transaction and access the funds. Bitcoin is able to avoid centralized security mechanisms such as banks by employing encryption in this manner.
Bitcoin represents a new approach of dealing with money in a group setting.
Following the 2008 financial crisis, individuals all around the world began to consider new methods of handling money. The concept of communal administration became crucial to Bitcoin.
In fact, two critical Bitcoin structures — blockchain maintenance and system updates — are both managed communally.
The blockchain is updated on a regular basis with new transactions in the form of blocks. Blocks are produced every 10 minutes in such a way that everyone, no matter where they are in the globe, ends up with the same blockchain.
This is an important step since the blockchain keeps track of which transactions occurred and who owns which bitcoins. Bitcoin protects itself from hackers who would try to inject fake information and produce money out of thin air by building a communal record of the system.
The same common management approach is also utilized to update the entire system.
To update the Bitcoin protocol, a majority of its users must agree to the proposed change, no matter how minor. This implies that no one person can manipulate the system to their benefit, and modifications are only implemented after lengthy arguments on Bitcoin forums.
This is not to claim that Bitcoin is invincible: if a hacker acquired control of 51 percent of the entire network — extremely unlikely, especially as the system grows in popularity — they might change the protocol and take control of the blockchain.
Even so, they would be unable to spend the bitcoins of others. Because the encryption is so strong, the hacker could only reverse his own transactions while preventing others from doing the same.
The drug sale on the clandestine website Silk Road was responsible for Bitcoin’s initial surge in popularity.
We’ve all heard of the world’s underground black markets, where shady vendors offer a variety of illegal commodities. But did you realize there’s an internet-based similar illicit market?
The Silk Road bazaar, which was originally hidden deep in the Darknet, a portion of the internet only accessible with anonymizing software like TOR, once allowed buyers to purchase narcotics and have them delivered to the address of their choice.
Bitcoin was the ideal complement to Silk Road’s anonymity; dealers were relieved that Bitcoin transfers could not be reversed, while customers felt more secure purchasing narcotics without needing to meet in person. In fact, Bitcoin became so beneficial to Silk Road’s lucrative criminal market that it became the primary source of all Bitcoin transfers. The value and appeal of bitcoins increased in tandem with the growth of Silk Road.
When Silk Road was founded in February 2011, one bitcoin was worth about $1. It was already valued at roughly $10 by mid-May of the following year. And by June 2011, after a legislator campaigned for the abolition of Bitcoin, branding it as a type of online money laundering, its value had risen to $30 in two days.
Silk Road became a libertarian’s dream thanks to Bitcoin: a highly organized marketplace that was self-regulated, anonymous, decentralized, and outside government control.
Silk Road has 10,000 registered clients by March 2012, spending $35,000 each day on merchandise from vendors in at least eleven countries. On the forums, security moderators taught the ins and outs of Bitcoin security, and doctors counseled on how to effectively swallow each prescription.
Silk Road was taken down in September 2013 after its owner, Ross Ulbricht, divulged sensitive information to an undercover FBI agent. However, Bitcoin has never been stronger — at the time, one bitcoin was worth $140.
Wikileaks and Occupy Wall Street both emphasized Bitcoin’s ability to dethrone financial institutions.
What do cypherpunks, anarchists, and Tea Party followers have in common?
They are all vehemently opposed to government meddling in society.
This fear of authority can be justified at times, such as when governments use their influence to cut off funding to dissident political organizations.
Consider the situation of Wikileaks. Wikileaks published the largest collection of confidential documents ever made public in September 2011: 250,000 diplomatic cables delivered to the US Department of State from all around the world, providing top-secret assessments of other countries and their diplomats. The purpose of Wikileaks was to expose the true face of American power, which was disguised beneath handshakes and big business grins.
However, the US government retaliated. They got around US regulations by forcing Visa, PayPal, and Western Union to cease taking Wikileaks donations, removing 95 percent of the organization’s funding.
Some have recommended that Wikileaks accept Bitcoin as a form of payment. Bitcoin developers debated the subject in their forums for a long time before concluding that it would be too hazardous. The ensuing government scrutiny may hinder their still-young code from reaching its full potential.
However, individuals all around the world had witnessed the malevolent power of government inaction — and recognized the potential of decentralized money.
In September 2011, Wikileaks was not the only challenge to the US government. The anti-capitalist Occupy Wall Street Movement took control of Zuccotti Park in Manhattan, New York. And where there was a war for liberty, there was Bitcoin.
The Occupy movement was inspired by anti-austerity demonstrations in Spain, which contested the government’s bailouts of the banks rather than the people. They were interested in Bitcoin as a mechanism to receive donations that could not be frozen by any central authority, as well as a place to hold private cash that would not be jeopardized by the fluctuations of the stock market.
The movement learned a lot about Bitcoin at the concurrent Bitcoin Meetup in New York when Bitcoiners from all over the world discussed the prospect of developing a different, more free method of organizing the economy.
Argentina’s financial woes have demonstrated how Bitcoin might shift power away from governments and toward the poor.
Argentina’s population are all too accustomed with financial experimentation. The country’s history is littered with financial crises and severe inflation, as well as numerous failed attempts to alleviate them. As a result, at the second official Bitcoin event in Argentina, many individuals were enthused about the new currency’s potential. Bitcoin would soon dismantle many of the official restrictions designed to keep the value of the Argentine peso under control.
For example, exchange rates for the US dollar were artificially raised, all PayPal transactions were prohibited, and economists who criticized the policy were penalized. And if you wanted to use a credit card to buy something overseas, you had to deal with lengthy delays.
The Bitcoin meeting’s organizers have firsthand knowledge of this. If they wanted to sell a $100 ticket, they would receive 595 pesos and the transaction would take 14 days; however, if they utilized Bitcoin, they might collect 920 pesos in only two days.
Bitcoin also became a means of shielding funds from government tampering. People in Argentina often held their money in cash since, like in many underdeveloped nations, opening a bank account — and getting a credit card — was difficult.
However, Argentinians had grown to distrust the government’s currency management after witnessing their money become worthless due to fast inflation on several occasions in the past. So, when Bitcoin appeared, they saw it as a safe, reliable way to deposit their money, even though they couldn’t spend it in Argentina immediately.
Indeed, since early 2013, the Argentine peso has fallen by a further 25% against the US dollar, while Bitcoin has soared by an astounding 860%.
Beyond storing and transmitting money, the Bitcoin system has other advantages over traditional currencies.
In the same way that the internet freed information and communication from the constraints imposed by postal services and large media firms, some believe Bitcoin will release money from the constraints imposed by banks.
And they could be correct.
One significant benefit Bitcoin has over banks is its ability to transmit money instantly.
We live in a world where it is normal to send gigabytes over the internet in seconds or to phone a buddy on the other side of the planet in HD, but a bank transfer still takes several days.
During the financial crisis, this archaic structure was brought to light. JP Morgan Chase, a big bank, was on the verge of failure and desperately needed funding from a Japanese bank. However, the incident occurred on a weekend, and the following Monday was a bank holiday. So, in order to save the bank, they were compelled to write a $9 billion paper check and mail it!
It would have taken milliseconds with Bitcoin.
But Bitcoin outperforms banks in another way: its digital character makes it perfectly adapted to the internet’s emerging economy.
Because of Bitcoin’s universality, money can transcend borders without incurring international transaction costs. Furthermore, because digital currency can be easily broken into extremely small amounts, online services might charge minuscule fees, such as 0.01 cents to read one page of a book or 0.02 cents to avoid an ad.
However, Bitcoin is not only altering the world of money; its distinctive structure has a wide range of other applications.
Take, for example, blockchain technology, which is at the heart of Bitcoin. Its comprehensive verification mechanism allows people to build confidence in a variety of situations. Because anybody can read the blockchain but no one can edit it, this concept has the potential to replace existing legal systems of trust, such as when a contract or will requires the signature of a witness. Previously, an official such as a notary or solicitor had to be present, but now that the contract is public, everyone can see that it was carried out.
Bitcoin has the ability to fundamentally change the way we use money. The most exciting Bitcoin applications, on the other hand, have yet to be discovered.