The Internet of Money

1. What Is Bitcoin?

Bitcoin is a technology, it is a currency, and it is an international network of payments and exchange that is completely decentralized. It doesn’t rely on banks. It doesn’t rely on governments.

1.2. Money of the People

Six and a half billion people on this planet have no connection to the world of money. They operate in cash-based societies with very little access to international resources. They don’t need banks. Two billion of these people are already on the internet. With a simple application download, they can immediately become participants in an international economy, using an international currency that can be transmitted anywhere with no fees and no government controls. They can connect to a world of international finance that is completely peer-to-peer. Bitcoin is the money of the people. At its center are simple mathematical rules that everyone agrees on and no one controls.

1.6. Programmable Money for All of Us

Bitcoin is the internet of money. Currency is only the first application. If you grasp that, you can look beyond the price, you can look beyond the volatility, you can look beyond the fad. At its core, bitcoin is a revolutionary technology that will change the world forever.

2. Peer-to-Peer Money

2.1. How Old Is Money?

One thing that surprises people is that money is older than writing. We know this because when we look at archeological discoveries of writing, we find hieroglyphics and we find cuneiform. When we look at all of these ancient forms of writing, guess what they’re writing about. Money. They’re writing ledgers. All of the ancient writing we find, the first forms of writing, are ledgers. They are writing about money. Because money is older than writing.

I think the important insight into the nature of money is that 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.

We use money to communicate value to each other, to express to each other how much we value a product, a service, a gesture.

2.2.1. Barter to Precious Metals

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.

2.3. Moving to a Network-Centric, Protocol-Based Era

Bitcoin is the first network-centric, protocol-based form of money. That means it exists without reference to an institutional or platform context.

2.3.2. Client-Server Architecture

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.

3. Privacy, Identity, Surveillance and Money

3.4. New Architecture, New Access

Imagine a world where every person has the ability not only to execute transactions but also to create complex financial systems and instruments without asking for anyone’s permission. Simply by connecting to the network, anyone can start a new application.

3.6. Network-Centric Money

Bitcoin isn’t a digital currency. It’s a cryptocurrency. It’s a network-centric money. I really like the idea of a network-centric money. A network that allows you to replace trust in institutions, trust in hierarchies, with trust on the network. The network acting as a massively diffuse arbiter of truth, resolving any disagreements about transactions and security in a way where no one has control.

3.8. Sousveillance, Not Surveillance

What is the difference between privacy and secrecy? Ultimately, and practically in today’s vocabulary, privacy is the right of billions of individuals to not be surveilled. Secrecy is the power of the very few to escape accountability, to have no transparency.

We live in a world where every individual transaction you do through the financial system is cataloged, analyzed, and transmitted to intelligence services all around the world that collaborate, and yet we have no idea what our governments do with money. The financial systems of the powerful are completely opaque. Our transactions are completely visible through this system of surveillance. This world is upside down. Bitcoin rights it.

We need to live in a world where secrecy is fickle and easily pierced, where power has to face accountability because they are under the spotlight of transparency.

4. Innovators, Disruptors, Misfits, and Bitcoin

4.3. Incumbent Reactions to Innovation

In a world of tinkers, of experimenters, of makers, open wins. The reason it wins is that it allows innovation to flourish at the edges.

4.4. Open Innovation and Opt-In Systems

Bitcoin is different. The reason it’s different is not because we’ve suddenly found the most honest people in the world. Or because there are no quirks in bitcoin. Or because the network doesn’t get attacked. Bitcoin is different because there are plenty of crooks in bitcoin —the network gets attacked all the time —but it doesn’t depend on access control to remain secure. It depends on a simple mathematical formula of incentives and rewards. In order to participate in the bitcoin network and secure the network as a miner, which is a special function in bitcoin, you have to use a lot of computing power and spend a lot of electricity. If you win that competition, you get bitcoin as a reward. That simple equation creates a system of incentives where it’s far better to play with the rules than against the rules. It’s game theory. It’s like a giant game of Sudoku.

4.6. Remittances, Impacting Lives around the World

Every day, an immigrant somewhere cashes their paycheck and stands in line to wire 50 percent of that paycheck back to their home country to feed their extended family. Here in the US, 60 million people have no bank accounts, yet they cash their paychecks and send them abroad. Overall in the world, $ 550 billion is transmitted every year as remittances from first-world countries. Much of that money is sent to five major destinations: Mexico, India, the Philippines, Indonesia, and China. In some of these places, remittances represent up to 40 percent of the local economy. Sitting on top of that flow of $ 550 billion are companies like Western Union, and they take, on average, a cut of 9 percent of every single one of these transactions out of the pockets of the poorest people of the world. Imagine what happens when one day one of these immigrants figures out they can do the same thing with bitcoin —not for 15 percent, not 10 percent, not 5 percent, but for 5 cents. Not a percentage; a flat fee. What happens when they can do that? They can, right now. There is a startup company that is handling remittances between the US and the Philippines. They’re doing a few million dollars right now, but they’re going to start growing. There’s $ 500 billion sitting behind that dam. When you’re an immigrant and you can change your financial future by not paying 9 percent to send money home, imagine what happens if every month, instead of sending 91 dollars home, you send 100 dollars home. That makes a difference. There are a billion people, right now, with access to the internet and feature phones who could use bitcoin as an international wire-transfer service.

5. Dumb Networks, Innovations, and the Festival of Commons

5.4. Accelerating Innovation

That’s why I’m excited to be in the bitcoin space: a dumb network that puts all of the intelligence and innovation at the edge so that we can innovate without asking anyone’s permission, and we can participate in this incredible festival of the commons.

6. Infrastructure Inversion

6.1.1. Infrastructure for Horses

Looking at that history, one of the really interesting things to me is that in the beginning, the disruptive technology has to live in a world created for the technology it’s replacing. When you first ride your brand new automobile in a city, you are riding on roads used by horses with infrastructure designed and used for horses.

6.1.2. From Horses to Vehicles

That’s an infrastructure inversion. You start with the new technology living on the old infrastructure and then, it flips. You build infrastructure and then the old infrastructure rides on top, on the infrastructure designed for the new technology.

7. Currency as a Language

7.2. Currency as a Means of Expression

You see, money, at the very root of it, is a language. It’s a language we use to express value to each other. When I give you a dollar bill, I am saying that I want to hand you the equivalent value. I’m communicating my desire to exchange value with you, because I appreciate something you can do or something you can give to me. I’m using money as a token of language.

7.5.1. Multiple Currencies Coexist

Currency as a means of expression, currency as a tool of language, is no longer up to the issuer. It is up to us as individuals making a choice to use that currency, and we give it value through our use. We give it value through adoption. We will be surprised by some of the currencies that will emerge from a fad, a joke, perhaps even a sick joke, and will explode into viral consciousness on the internet and then become real monetary powers in use across a broad population.

8. Bitcoin Design Principles

Bitcoin is digital money. But that doesn’t really capture it. It’s more like the internet of money. But really it’s a consensus decentralized network based on blockchain technology and a proof-of-work algorithm that allows a digital token to act as a reward system for a game-theoretical competition between decentralized miners who validate.

8.2. Characteristics of Money

Money itself is an abstraction. If it’s not an abstraction, then it’s not money—it’s barter. If I give you bananas for your goat, that’s not money. Bananas are not money because you eat them. You don’t use them to do further exchanges. Therefore, that’s barter. You’re exchanging one commodity for another. If it’s abstract—if it doesn’t have any practical use in itself—then as an abstraction of money it represents something else, some shared value.

8.2.1. Just Another Abstraction of Money

You ask people about bitcoin, and one of the first things I hear from most people is that it’s not real money because it’s not backed by gold like the US dollar—which I find astonishing. The dollar hasn’t been backed by gold since 1936.

8.3.1. Wallets Aren’t Wallets

A wallet is something that stores money. Not in bitcoin it isn’t. The money isn’t in the wallet; the money is on the network. The wallet contains keys. So, it’s not a wallet; it’s a keychain. How can you tell it’s not a wallet? Can you copy a wallet? No. But you can copy a key. A keychain is a far better metaphor. If I have a keychain—imagine a big ring of keys like a janitor or a custodian—I have a bunch of keys, and I can go into a shop and have all of those keys duplicated and create a second keychain. Both of those keychains will work interchangeably in all of the locks that the original keychain worked. That’s how a keychain works. If you understand what a keychain does, then you will understand how a bitcoin wallet works. You can copy it, you can make copies of the keys. If you give someone a copy of the key, they can open the door. They don’t need your permission anymore to open the door.

8.3.2. No Coins in Bitcoin

Here’s a little secret: there are no coins in bitcoin. When miners mine, they don’t create coins; they create ledger entries. Those ledger entries do not enumerate coins. They have outputs—transaction outputs—which are chunks of value that are infinitely divisible and recombinable.

8.4.1. Predicting the Future

They couldn’t possibly predict the outcomes we saw on the internet, because most of the interesting things were not incremental improvements or extensions of the things before. They were radical departures from the past, because they created the conditions for things that were not possible before.

Today, there are 3 billion people with no banking facilities whatsoever. Three billion more people—“ underbanked,” as we call them—without any access to international credit or finance. You or I can go to a brokerage website right now and within 24 hours have a US-dollar-denominated account that can trade on the Tokyo stock exchange. That is privilege. That is a facility afforded to less than a billion people in the world. One out of seven. The other 6 billion? They barely have basic checking, if that. A lot of them live in cash-or barter-based societies. So, the question you then have to ask is what happens when a farmer in Kenya who has a Nokia 1000 text-messaging phone, and suddenly that phone is a Bloomberg terminal, a loan-origination terminal, a Western Union remittance-termination terminal, a stock market, is a bank—not a terminal to a bank, but a bank, on the phone? And what happens when that is afforded to the other 6 billion all over the world.

8.5. Interstitial Innovation

Here’s a little thought experiment: Let’s take three radically disruptive technologies and mash them together. Bitcoin. Uber. Self-driving cars. What happens when you mash the three together? The self-owning car. A car that pays for its Toyota lease, its insurance, and its gas, by giving people rides. A car that is not owned by a corporation. A car that is a corporation. A car that is a shareholder and owner of its own corporation. A car that exists as an autonomous financial entity with no human ownership. This has never happened before, and that’s just the beginning.

9. Money as a Content Type

One of the magic things about bitcoin is that the transaction doesn’t incorporate security mechanisms itself. The security is in the proof of work provided by the miners, and the digital signature on the transaction is put there by end users with keys that they store. There’s nothing sensitive or secret in the bitcoin transaction.

9.2. Bitcoin Transactions: Secure by Design

Bitcoin is fundamentally different. What I’m transmitting is not the key, but simply a signed message. It is an authorization. That authorization has two external references: (1) to where the money’s coming from by referencing an unspent output on the blockchain, and (2) a reference to where I want to send the money —by creating a new encumbrance, a new limitation on who can spend the money, usually a public key or bitcoin address. That transaction contains no sensitive data. If you steal the information in the transaction, all you know is which address the money came from, which address the money’s going to, and how much. That’s it. The signature reveals nothing. The addresses reveal nothing. There are no identifiers. You could take the transaction and print it out. You could post it on a billboard. You could shout it from the rooftop. A bitcoin transaction can be transmitted over completely unsecured Wi-Fi. By smoke signal. By light signal. With carrier pigeons. It doesn’t matter. Nothing in that message can be compromised.

9.3. Money as a Content Type

Most people don’t realize what it means to convert money into a content type. We’ve taken the transaction, which is just 250 bytes, and we’ve separated it from the transport medium, so it doesn’t depend on any underlying security. We’ve made it stand alone so that it can be independently verified by any node that has a full copy of the blockchain. Independently verified as spendable, authentic, and properly signed by any system that has a full copy of the blockchain—in fact, even by systems that only have a partial copy of the blockchain. That transaction can be verified in seconds. All it has to do is reach one node in the network that can talk to miners. That’s it. Once it’s injected into the bitcoin network and once it propagates, you can be almost certain that the transaction will be included eventually and will become valid. If I look at any transaction, I can calculate if it has sufficient fees, and then I can make certain assumptions about how miners are going to treat that transaction because I know the rules by which they operate on a consensus network. I know that once the transaction is propagated enough, it will appear in a block near you, soon.

9.5. Separating the Medium and the Message

Because they mocked it. They made the mistaken assumption that if the cost of production is zero, the value of the message is zero. They confused the medium for the message. They made the mistaken assumption that their control over the medium was the source of quality. And long after quality disappeared, they clung to control and thought that control was the only way to achieve quality, and if you removed control, you removed quality. That is stinky, unabashed elitism at its absolute worst. It assumes that the gatekeepers are the source of quality, when all they are is gatekeepers. They assume that the fact that they have the expensive medium means that the message is worth listening to.