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Bitcoin and the paradigm shift


“Bitcoin is a superior form of money”

Fidelity, Bitcoin first, 2022, 26





Bitcoin is a disruptive technology with the potential to transform the traditional monetary system and provide financial freedom, trust and security for users within a decentralized global monetary network.



What is Bitcoin?


Bitcoin is a form of peer-to-peer electronic money that allows parties to send online payments to each other directly without having to go through a financial institution. It is a software program containing a cryptographic protocol created from digital signatures that runs in a blockchain, which is a data structure system that allows transactions to be transparently and immutably recorded. Bitcoin is a historic first, in that this type of money is created, distributed and safeguarded in a decentralized network that is open to everyone and does not rely on trusted third parties or central institutions.


Bitcoin technology constitutes a new class of digital asset. Moreover, with 21 million units, it is the first example of a scarce digital good, as it cannot be reproduced indefinitely. No one can create more Bitcoins than the protocol has provided for. For all its intrinsic features and what it represents, Bitcoin is the classic paradigm shift that Thomas Kuhn describes in his famous work The Structure of Scientific Revolutions (1962); it is a superior form of money, the nature of which has not yet been fully grasped.


Bitcoin, how it works


Bitcoin was created in late 2008 by Satoshi Nakamoto, the pseudonym used by the person or group of people who launched the protocol onto the network in 2009. Here is how it functions: New transactions are transmitted to the nodes, or points of connection to the distribution network. Each new node that joins the network is synchronized in a coordinated and distributive manner, as a decentralized system, where anyone can connect via the software program, Bitcoin Core.


There are many types of nodes. Their primary function is to store and update the database, but some also do mining. Miners are the nodes that create new blocks and validate and confirm transactions. Each node collects all the transactions in a block, and some specific nodes handle the resolution of a working algorithm known as Proof-of-Work, a cryptographic test that requires a processing capability whose difficulty depends on the nodes connected in the network; the more connections there are, the more energy required for computing power, and the more secure the network becomes against malicious attacks.


Once a node has resolved the problem, the others accept the block, if all the transactions it includes are valid and have not been previously spent. This validates a block. A new block is created in the chain every ten minutes. This validation requires computational power with a capacity that is dependent on the connected nodes. Each new block is joined to the previous block by a unique identifier, the hash, which is a number that joins two blocks — the last block and the new block. This procedure involves network consensus, a protocol whereby all nodes accept the resolved block as valid within the chain.


Each time a mining node resolves the Proof-of-Work Test, it is rewarded. This reward began at 50 bitcoins per block and is halved every 210,000 blocks (approximately every four years) until the 21 million bitcoins established by the protocol have been mined, which will occur in 2140. This progressive decrease is known as halving; approximately 19 million bitcoins have been mined to date, and we are in the fourth halving, where the reward is 6.25 bitcoins, a figure that will be halved in 2024, and so on every four years. So far, the impact of digital scarcity on Bitcoin's price has been positive.



Running Bitcoin


Satoshi Nakamoto published the white paper or founding document, Bitcoin P2P e-cash paper, in late 2008 on a cryptography mailing list known as Metzdown.com. In this paper, Nakamoto proposed a solution to the principal problem of decentralized digital money — double spending. This problem arises when there is no trusted third party; how can we ensure that the money in a decentralized network is spent only once? The solution that Nakamoto applied was the blockchain.


This is how the blockchain works. A data structure system facilitates the recording of a public ledger that is verified over a distributed network. The ledger is secure, public, and immutable, and therefore transactions cannot be reversed. The blockchain brings about a revolutionary change, as it does not require a trusted third party to make transactions, and its offer cannot be altered by any other party. This effectively eliminates the central or regulatory institution which is replaced by a distributed network. There is no person or thing that can alter the record or prevent the transfer of value.


We owe the origin of Bitcoin to Satoshi Nakamoto. However, Bitcoin did not appear out of nowhere. It was the culmination of a long process aimed at developing a digital monetary solution. The genesis block appeared on January 3, 2009. And once Bitcoin came out, there were some developers who worked on making improvements to the Bitcoin code until it eventually became what we know today. Eight days after the genesis block was created, a programmer named Hal Finney became interested in Bitcoin and made the first transaction in history with Nakamoto which he immortalized in a famous tweet: Running Bitcoin.


From then on, Bitcoin began to spread in cryptographic forums such as the Bitcointalk forum. However, Bitcoin was still worthless, and it would still be some time before the great milestone would be reached. On May 18, 2010, a Jacksonville (Florida) programmer named Laszlo Hanyecz made history by offering 10,000 Bitcoins for two pizzas in the Bitcointalk cryptographic forum. He specified that he wanted two large pizzas by the next day, and he gave the user the freedom to make them himself with the ingredients he suggested and have them delivered to his home or order them for him from a pizzeria with delivery. Actually, it was all the same to him, as what he wanted was to exchange bitcoins for food, so he didn't have to cook. The next day, after receiving some comments on the approximately 100-member forum from other users who did not live near his city, Hanyecz asked if he had offered enough bitcoins. Finally, on May 22, he announced that he had made the deal for two pizzas from Papa John's for $25, which means that the value of Bitcoin at that time had been established at $0.0025.


The pizza episode has become legendary in Bitcoin's history. Some people might think that Hanyecz was a fool; of course, hindsight is 20/20, but at that time, as he stated four years later, it was good business, as Bitcoin had no value, and almost no one thought it could take off like that. At any rate, this exchange marks the turning point at which Bitcoin started to have value. Since then, the price has grown exponentially with large spikes and dips but with a clear, long-term upward trend. By November 2010, Bitcoin's market capitalization, i.e. the value of all bitcoins in circulation, exceeded $1 million. At that time, it was listed at around $0.50. In February 2011, it managed to reach the price of one dollar for the first time and later peaked at $67,000 in 2021, with a market capitalization of more than $1 trillion.



Bitcoin today


Bitcoin’s story is a story of success. As professor and economist Saifedean Ammous explains in The Bitcoin Pattern, bitcoin represents the first truly digital solution to the money problem and offers a potential solution to the problems of sellability, solidity and sovereignty. Restrictions on its supply increase its demand as a store of value; its digital nature makes it easy to send around the world and makes it sellable in a way never before seen with other types of money, even on a small scale, due to the fact that it can be divided into 100 million satoshis. Moreover, the elimination of control by intermediaries, as well as the inability of any authority to degrade or confiscate it as long as it is in the blockchain, frees it from the primary drawbacks of the trust system.


Bitcoin has all the potential of becoming the first global digital monetary network whose value demonstrably appreciates year after year and is currently the cryptocurrency par excellence; it is the only truly decentralized cryptocurrency that has been fully developed and demonstrates the true significance of blockchains. Not only has Bitcoin become well established, but it has succeeded in solving one of the principal problems of post-pandemic Western society: inflation. Its intrinsic characteristics give it an unimaginable growth potential.


It is true that Bitcoin does pose some problems, such as scalability, which prevents instant transactions and the implementation of large volumes of transactions per seconds. In fact, there are cryptocurrencies that are technologically far superior to Bitcoin and offer efficient solutions to these problems; however, Bitcoin’s characteristics have firmly established it as a store of value with no close competitor. In a financial system where the depreciation of money is accelerating at an ever-increasing rate due to inflation and the excessive printing of money, Bitcoin offers the monetary solution for years to come. If we also take network security (now the most secure network in place) and portability (unlike gold) into account, we can understand why more and more institutions and investment funds are beginning to integrate it into their portfolios.


Bitcoin's acceptance has grown over the past few years, but it still has a long way to go. The Covid-19 pandemic has accelerated the digitization of the financial system which, under normal conditions, would still have been delayed by a few more years.


This has led to a conspicuous mass adoption of Bitcoin and blockchain technology. Financial digitization is imminent, and all institutions are integrating this technology by leaps and bounds. The change is almost upon us. Its potential is without limits. The new paradigm is already here.



 

Article available in English and Castilian (Spanish).


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