(Originally published on Bitcoin Magazine)
Welcome to the introduction to a series of seven articles, entitled “Discovering Bitcoin: A Brief Overview From Cavemen to the Lightning Network.”
“Did You Just Say Seven?”
I know what you are thinking, dear reader: Seven articles outlining the history of Bitcoin is too much for your busy schedule and too little to do justice to such an ambitious subtitle.
As for your schedule, just relax: Today is Monday and, before next Sunday, you have exactly seven days, one for each article. Bitcoin Magazine suggested that I keep each article at around 1,200 words: Based on the average reading speed of an adult (265 words per minute), that’s less than five minutes per day! You can find them, believe me. Also, by the end of this introduction, you will have already read 1,200 words, which aren’t even included in the total count, since this is just the introduction. Yes, I scammed you. SFYL.
As for the pretentious subtitle, I believe that these seven brief articles will be enough to develop — if not a deep knowledge of Bitcoin (an intricate maze of distributed systems engineering, open source development, applied cryptography, Austrian economics, information security and more) — at least a very high-level overview of the purposes it was designed to fulfill and of the reasons why it is structured the way it is.
I chose this title not only because I intend to present the subject as a process of discovery but also because many of the best Bitcoin books and conferences are titled with a gerund (Mastering Bitcoin, Programming Bitcoin, Grokking Bitcoin, Inventing Bitcoin, Understanding Bitcoin, Scaling Bitcoin, Breaking Bitcoin, etc), so I wanted to respect the tradition.
Original Vision: The “Five Ws”
One of the challenges in trying to explain Bitcoin — its purpose, its structure and how the former conditions the latter — is deciding where to start. Allow me to bore you with some personal background here to justify my choice. The first few times I had to select some conceptual map, back in 2014, I opted for the famous “Five Ws,” an established information-structuring technique that Wikipedia tells me dates back to Aristotle himself!
I decided to put the “When?” part first, to frame the actual necessity for a so-called “blockchain” (the ugly but also popular word sometimes used to label Bitcoin’s “timechain”): Basically just a time-related tool needed to establish a canonical ordering and to enforce a unique history in the absence of any central coordinator. Since the term had, by then, already become an abused buzzword, I considered it important to stress that everything a “blockchain” does is to answer questions based on “when” (specifically: “When can I reasonably consider this transaction as practically irreversible?” and “When was this unit of value added to the ledger relative to others?”). Bitcoin only needs a “blockchain” to prevent double-spending of valid transactions and to keep the supply growth rate under control in a decentralized setting.
But what are those “valid transactions”? In order to explain the ownership scheme in Bitcoin and the role of digital signatures, I introduced the “Who?” part, trying to provide my clients with an introduction to public key cryptography and to some general cybersecurity practices.
In order to clarify concepts like “proof of work,” algorithmic difficulty adjustment and finite total supply of virtual “units,” I introduced the “What?” part, trying to deliver a basic introduction to client-puzzle functions and to some theory of value, as well as to answer questions like how the supply growth could be algorithmically controlled?
But why bother with “decentralized settings” anyway? Since there are central “coordinators” in most architectures, it would be reasonable to leverage them to provide a relative and unique chronology (no inefficient “blockchain” needed), to manage identities (no need for digital signatures, with all of their UX and security challenges), or to issue digital receipts for physically scarce goods (no need for a slow and painful price-discovery process to assign some value to intrinsically digital scarcity). The “Where?” part was used to clarify that our assumption was a system with no single point of failure, designed to avoid the fate of political censorship which affected centralized predecessors of Bitcoin, like E-gold.
And what about the reasons for such political censorship? I moved then to the “Why?” part, where I tried to give a quick overview (more logical than historical) of the evolution of money: from stored consumption goods, to barter, to commodity-money, to free-banking representative money to monopolistic “fiat” money. The lessons were usually arranged more or less like this (the arrows represent a logical dependency, “We need the thing on the left because of the right”):
Upgrade: Four Ws, Two Plans
There were two problems with this model, the first being ordering: Each step was presented as necessary to “fix” the next one, in a sort of reversed causal chain, but the full picture became clear only at the end. It would have been more natural to flip it, starting from some monetary history in “Why?,” going through failed attempts at building centralized alternatives to fiat money in “Where?,” introducing decentralized value issuance in “What?” and decentralized ownership transfer in “Who?,” and finally ending with decentralized unique chronology in “When?”
The second problem was the amount of information packed inside the “Why?” part. A lot of possible subsections, ironically, fitted quite well in the four remaining “Ws”: discussions about saving and investment fit pretty well in a “When?” section, discussions about exchange and specialization in a “Who?” section, discussions about convergence and liquidity in a “What?” section and discussions about virtualization of value by trusted central parties in a “Where?” section.
Solving these problems would have required my audience to remain open-minded and focused while I ranged from cavemen to central banks. I couldn’t afford, back then, to keep them waiting for the “blockchain” meme for so long. But now I can. I guess that means, dear reader, that you will endure four (pseudo)historical articles before I even introduce the very first bit of cryptography! Stay strong!
I labeled the first part of this series, ranging from fish-eating cavemen to modern monetary systems, “Plan A,” since it represents the first attempt at developing a monetary technology, characterized by a progressive centralization and by a very unhappy ending: fiat money.
The second part is labeled “Plan ₿” (yes, you guessed it: the “₿” stands for Bitcoin): It starts from the messy situation that Plan A got us stuck in, approaching state-of-the-art Bitcoin development. The “Where?” part is the conjunction (and turning point) between the two plans. Something like this:
In this series, I will often prioritize conceptual symmetry over economic rigor and technical accuracy. I will privilege logical connections over real-world chronological sequences, both in relation to monetary history and to technological development. I will commit terminological abuses that would make most economists and developers cringe, particularly when I discuss money attributes (where I will use an almost-made-up word: “scaleness”) and implementation paradigms (where I will abuse the term “CoinJoin” to address Bitcoin’s UTXO-model in general). No spoilers, but the overall map of logical connections should look something like this:
All the articles will include beautiful illustrations by @CryptoScamHub, of Bitcoin Twitter fame, in his signature “toxic” style.
As anticipated in the introduction to this series, we will start exploring the period of monetary (pseudo)history prior to fiat money, which we call “Plan A,” focusing on the topic of time and on the question “When?” There won’t be much cryptography or computer science in what follows: It will all sound very simple, even … primitive! Indeed, I would ask you, dear reader, to try to forget your advanced education and your civilized manners, and pretend, just for a few minutes, to be a fish-eating caveman.
From Immediate Consumption … to Storage
Image courtesy of CryptoScamHub
Your caveman life is based on immediate consumption: You use your bare hands and a pointy stick to catch two fish every day, then you go back to the cave and you eat them immediately. One fish would be enough to survive, two are enough to feel “Thanksgiving full.” Every day you catch and eat two. You don’t save. It’s always the same. Your “utility function” (this is what a fancy economist would call it) is constant with respect to time.
Image courtesy of CryptoScamHub
But let’s try to think about the future for a bit! What if, instead of eating both fish, you eat just one and save the second (alive in a jar, for example)? Do it for two days in a row, and on the third day you will be able to eat your fill without even going out to fish! I will admit this is not a great improvement yet: You just give up some pleasure today and tomorrow, in order to get some rest on the third day. Not impressed.
… to Investment!
But what about spending that third day building a fishing rod (“capital good”), which would enable you to catch four fish instead of two, every day, forever? That’s called investment: You give up some pleasure for a while, but in return you get some productive and durable results. Congratulations, dear reader: You are a “low-time-preference capitalist caveman” now! With your brand new fishing rod, you can eat two fish every day and rest every two days!
But why stop here? You could invest some of your day off in building a large fishing net, which you could use to get eight fish a day! By saving and investing, you can get more fish, thus have more time to build something more efficient, as long as there are improvements to achieve. The more time you spend saving and investing, the wealthier you get.
The growth is not even linear: Every improvement can build on top of the previous one! Soon enough, you will be “Captain Caveman”: commanding a huge fleet of wonderful fishing boats, getting 1,000 fish a day!
It’s easy to underestimate the deep implications of this process. Predisposition to invest (after having saved, delaying consumption) is linked to something economists call “low temporal preference,” which is, in turn, connected to very important effects on the well-being of people and of entire civilizations!
A very good account of the significance of these topics and of their relationship with monetary technologies and practices is given in the book The Bitcoin Standard by Saifedean Ammous. Read it, if you haven’t. Another great reference is the essay “Money, Bitcoin and Time” by Robert Breedlove.
In order to be useful for this kind of process, a good must possess a good “hardness”: Any unit of said good should not significantly lose its ability to provide utility if stored over some period of time. (This means the good does not easily decompose, deteriorate or degrade, or it does so comparatively less than other goods.)
Other common terms for this attribute are “durability” and “salability across time.” (In the context of your currently solitary condition, you should interpret the “sale” part as “you selling something to your future self.”)
In all of the cases above, the expressions are often used beyond the physical scope to include the social and institutional attributes of goods as well. Since you are a lonely caveman, and there is no society or institution around you yet, we employ the term “hardness” only in the narrower sense of physical resistance to deterioration of the units of good, delegating other aspects to Part 3 (coming soon).
The good we chose as our first example, fish, is not very “hard,” comparatively, at least not if you don’t perform some specific actions as soon as you bring it back to your cave. A trivial action would be to keep it alive in a jar, as mentioned. Without additional treatments, a fish kept alive is more durable than a dead one. A smoked or salted fish, though, would be even more durable than one kept alive.
A New Attribute: “Scaleness”
Even dismissing social considerations, there is another reason for which unitary physical durability doesn’t really cover, alone, the broader concept of scalability across time. The fact is that the ability to store arbitrary quantities of a good is not dependant only on its unitary attributes!
At the beginning of your virtuous cycle of saving and investment, you decided to eat one fish and to store the other alive. How convenient that, in order to survive, you needed to eat exactly one fish and not, for example, one and a half fish, leaving you with half a fish to store!
Indeed, a live fish isn’t great for divisibility. Smoked, salted or refrigerated fish would fare way better. On the other hand, considering that by the time you appointed yourself “Captain Caveman” you started storing 1,000 fish every day, keeping them alive in jars must be quite challenging. Again: Conserved fish would be way easier to store than living specimens.
In these examples, the discriminant is not how well any unit of good maintains its value across time, but rather how well the overall good maintains it across “scale”: when you store smaller fractions of it vs. when you store larger multiples.
The former case is usually addressed in monetary theory with the term “divisibility,” the latter with the term “portability” (which often carries some movement-across-space connotations, but ultimately boils down to the fact that a portable good must possess high value in small bulk).
The composite attribute is sometimes called “salability across scale,” which, just like “salability across time,” is actually pretty neat. Since I like shorter terms, I will use the (almost made-up) word “scaleness” instead (I guess this is a case of terminology choice which would deserve a Trigger Warning as I described in my introduction). This attribute has more to do with the “What?” column than with the “When?” one, to be fair.
It’s interesting to note the nice link with the word “scalability,” which usually means something else entirely (it refers to the property of a system to handle a growing amount of work by means of additional resources). Within the context of Bitcoin, however, it has been used to address the technical limitations on the number of settlement transactions per unit of time and cost (related to the fact that blocks are limited in size and frequency). In this very specific meaning, the “salability problem” could be reduced to a divisibility one (basically, it doesn’t make economic sense to transfer amounts that are less valuable than the transfer costs), thus the conceptual link is justified.
So far, you’ve learned:
- to store your wealth, sacrificing immediate consumption
- to invest your stored wealth, increasing your productivity
- to focus on goods that show good physical “hardness” and good “scaleness.”