Few take the time to understand how money is created, as the majority trade finite years for it to aid their survival and fulfil their dreams and desires. The education system, media, and general characteristics of human nature mask us from appreciating the implications of central banks, centralised power, and the debt-driven Keynesian models of economics by which they operate, and how their monetary policy affects our experience of life. I highly recommend watching this video before continuing the read. It highlights the history and implications of ‘fiat’ money. Money that is derived from debt and created by central banks.
Fiat money is a control mechanism of the world. If you control money you can incentivise others to give their capital, resources, time, or labour in exchange. Through government ‘Legal Tender’ laws a legal and psychological monopoly belongs to the Central Bank to decide who gets money from the money printing machine. Who gets the power to incentivise behaviour.
“Give me control of a nation’s money and I care not who makes the laws.”
The US Dollar supply has been drastically increased, due to COVID-19, to the point of discontinuation of its measurement by the Federal Reserve. The 2008 M1 looks like a mere blip. Ever since the United States Dollar was detached from the Gold exchange Standard in 1971, central banks have had the power to create money out of thin air whenever they see fit. Economic policy is a cover for mass control and asset inflation forces most to work past the age of 40.
WTF happened in 1971 shows the implication of fiat money being freely printed at will by central banks, and how the money printing itself may be an enabler of the boom-bust cycles we experience in the economy, demonstrating the opposite of Nixon's justification for suspending the convertibility of dollars for gold in the first place.
Before central banks and global money controllers such as the IMF (International Monetary Fund), the groups that had similar influence over people’s choices were the nation-state religions. In some regions, this is still the case. However, the rise of secularism and the separation of church and state, sparked by the advent of the Gutenberg printing press and the democratization of knowledge; reduced the Churches scope of power and control over people’s choices, enabling a renaissance of art, music, science, philosophy, industry and multi-faith societies. The individual’s freedom to think, say, love act, and believe according to their internal compass began to grow over the orders of centralised ‘divine’ authority derived from generations past.
Thanks to the Internet and cryptography, a new renaissance of money is brewing as we head deeper into the information age.
Bitcoin as the first step: Reclaiming monetary policy
In 2008, as the global financial system fell like dominoes started by illiquid mortgage bonds, an unknown programmer by the alias Satoshi Nakamoto got to work on a new type of deflationary money. Before going deeper into Bitcoin, it’s useful to understand the political/economical climate at the time of its creation. Here’s a clip from the movie, The Big Short, that explains the initial cause of the 2008 crisis.
The damage control of 2008 was put on taxpayers through bailouts of the centralised financial institutions that caused the damage in the first place. Remember money can only be created by a central bank, but it is created by debt issued on the government (us). The justification for the bailouts was that the banking system was too big to fail. We had no alternative system, we required 3rd party institutions.
Bitcoin was released anonymously to the public in January 2009 as the financial system lay in tatters.
Satoshi made their motivation for creating Bitcoin clear by leaving a message in the genesis block of the Bitcoin Blockchain; a fact often neglected in mainstream media coverage of Bitcoin. The media attempt to paint Bitcoin as a speculative investment frenzy, not as a natural free-market response to the 2008 crash. The Bitcoin blockchain is the database that stores all bitcoin transactions. The transactions are stored and chained in cryptographically linked ‘blocks’. Back in 2009 when Satoshi settled the first block in the chain, he left the following message.
“Chancellor on brink of second bailout for banks”
Refering to an article published by The Times on January 3rd, 2009, when the chancellor of the U.K treasury, Alistair Darling, was about to get the Bank of England to print money to rescue banks from their own bad investments.
At the current time of writing, 12 years after Satoshi mined the genesis block, 672,000 blocks have been added to the Bitcoin blockchain, representing over 1 billion Bitcoin transactions. Bitcoin has attracted so much adoption not just because it represents money that is not under the control of a central bank or government, but because of the specific properties that make it a store of value relative to fiat money. Where the Bank of England or the Federal Reserve can create more £ and $ by updating their own balance sheets, it’s not possible for any centralised authority to adjust the issuance of Bitcoin.
The issuance of new Bitcoin occurs roughly every 10 minutes and is known as a ‘block reward’, and this quantity of newly minted Bitcoin halves every 210,000 blocks (roughly every 4 years). The block reward is received by the miners who use their computing power to verify Bitcoin transactions.
The Bitcoin Core Source code is open for anyone to view, meaning we do not need to trust Bitcoins inflation policy, we can verify it.
The value of the open-source, code-based monetary policy of Bitcoin cannot be understated as it is unlike anything human beings have had before. This open, predictable, and deflationary style of supply is in contrast to the spontaneous and inflationary nature of traditional fiat money imposed behind closed doors by central bankers. New Bitcoin goes to those who dedicate their electricity to securing all Bitcoin transactions, whereas new money issued by central banks typically goes to the richest 1%.
After we earn ‘money’ through labour, good fortune, or inheritance, pay off any debts, and build an emergency fund, our next challenge is to find a store of value so that our excess money maintains or grows in purchasing power for the future due to inflation. It’s becoming less and less of a secret to more people that inflation reduces purchasing power. So rather than seeing Bitcoin as a speculative investment, the Bitcoin community considers it a long-term (multi-decade) savings vehicle.
Bitcoin Layer 2
The Bitcoin blockchain can be considered layer 1. It is the source of truth for Bitcoin ownership and transaction records. It’s effectively a publicly distributed database of Bitcoin spending rights. Naturally to write to this distributed database requires consensus. New records are appended when new blocks are added to the blockchain which occurs roughly every 10 minutes and requires proof of work computation mining to achieve consensus amongst 10s of thousands of nodes. This puts the TPS rate (transactions per second) at around 5–10 per second.
In order to make Bitcoin payments instant at scale the blockchain would need to be able to handle tens of thousands of transactions per second. This rate of data appending would centralise consensus. The size of the blockchain would grow exponentially and the decentralised nature of Bitcoin would be no more. See the Blocksize wars for more info on this.
To bring Bitcoin into applications and increase bandwidth, a layer 2 solution exists called The Lightning Network (LN). LN creates a second layer of Bitcoin nodes that open channels with each other that allow Bitcoin to be sent instantly with low to 0 fees. Consider it like a highway network like the internet itself, pegged to the Bitcoin blockchain itself.
At Codeonomics we believe the Lightning Network represents a true monetary revolution. It is the way money over the internet is supposed to work. Small amounts of Bitcoin can be streamed in micropayments and merchants can accept Bitcoin and achieve instant settlement. Our work focuses on introducing the Lightning Network into applications as an incentive layer.
Bitcoin represents the peoples money and competition to central banks. We look forward to exploring opportunities in this space.