An Explanation of Bitcoins, Part I (The Philosophy)

(Image Source: https://flic.kr/p/e9LG7B)

(This post is based in part on a paper published by Rostrum Law Review)

Most of the currencies in the world right now, and all the reserve currencies, are fiat currencies, declared to be currencies by a legal tender, and unsupported by any physical commodity, only the rules of supply and demand (Incidentally, the term ‘fiat’ is Latin for “let it be done” or “it shall be”). These currencies usually have a central regulatory body which issues them, and are consequently called ‘centralised’.

Satoshi Nakamoto (the name is a pseudonym), the creator of Bitcoins, had a problem with this centralisation of currency, responding to it in the following terms in one of his earlier worksThe 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. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micropayments impossible.

Thus, Nakamoto’s political ideologies in creating Bitcoins revolve around creating an open-source, decentralised currency, that was outside the control of any government. In fact, he introduced the currency just a few months after the global collapse of the banking sector, perhaps frustrated by the same.

The decentralisation of Bitcoins rests in the fact that it allows its users to send money over the internet directly to each other without an intermediary, and in the fact that no outside party can create them. This entirely cuts out the role of the central banks and governments in online transactions, creating a currency for which, as Nakamoto said, “everything is based on crypto proof instead of trust”. Furthermore, unlike the banks and governments who can print more or less money according to their requirements, the bots that are currently creating Bitcoins are programmed to stop making them in or around the year 2140. This would mean that unlike fiat currencies, whose value is derived through regulation or law and underwritten by the state, Bitcoins derive their value through the simple principles of supply and demand. They have no intrinsic value and no backing, their value depending entirely on what people are willing to trade for them.

Thus, Nakamoto had created the first working cryptocurrency, making it as different from the existing fiat currencies as possible. It was meant to be the birth of an alternative model of currency, a new method of transaction, entirely free of government control, and, perhaps a challenge to it. It was to challenge the governments, to make people rethink the existing economic systems, to question their faith in it.

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