El Salvador became the first country to adopt Bitcoin as legal tender like the US Dollar despite voting against this decision. We will come back to this debate in future editions and it is up to us to talk about this revolutionary Bitcoin and also about the currency and the software that runs it, better known as Blockchain. According to specialists, Bitcoin is a virtual currency and to understand it you must therefore first understand currency: its history and how it works.
To keep it simple and short, exchanges were made through barter. Currency was introduced in Burundi by the German colonizers to replace barter. This was the medium of exchange everywhere before the invention of currency. For example, a horse was exchanged for two oxen. Or it took 3 bags of sorghum to swap with a hoe. Exchanging turned out to be very complicated. Heavy goods had to be transported to exchange it for an item, depending on and pending whether it is rare. The rarer it is, the more expensive it is. It is the eternal law of supply and demand. The other difficulty is to ask: what will the seller do who wants a single bag of sorghum? Trade with a third of his hoe?
Barter presented limitations and complications. And people have always used inventiveness to make their lives easier. It was therefore replaced by primitive currencies. The primitive coins were items such as animal teeth, knives, copper bars and bronze necklaces. The Roman soldiers were paid in salt, hence the word “salary” (= “salary”). Since gold was a rare metal, it was expensive. And it becomes currency because gold coins are made for trade. Besides the fact that it is valuable and so you have to guard it jealously, it is important not to lose this gold piece. This is where the goldsmith takes center stage. The silversmith soon becomes the gold vault for safety. In exchange for this gold deposit, the silversmith gives a certificate of deposit. It is therefore easy to walk around. Like gold investors, as we will see, the goldsmith is the ancestor of the banker.
Goldsmiths soon notice that gold depositors do not come to look for their gold. Deposit slips are passed between them as a means of exchanging goods. These certificates, a signed piece of paper, will be the banknotes we know today. So because they were very smart and wanted to win they started issuing more certificates of deposit than they have gold in deposit. For example, they could divide the triple the number of gold certificates they have in the stock. For 1,000 tons of gold, they were able to hand out more than 3,000 certificates of deposit. This worked then because the depositors did not come to ask for their gold at the same time. So that’s how the goldsmiths, from the ancestors of bankers, started lending money that they didn’t have. It’s a little crazy but that’s how it’s been working since the 17th century and that’s how it still works. Coins are used in the world, but they are no longer in gold. They are in a metal that does not represent too much value. The coin represents a certain amount of money like banknotes. Coins and notes are only valuable if we trust that they will bring us goods in return. That’s all. The entire banking or money system is based on trust. This is why we talk about fiat money.
On the other hand, and in a very succinct way let us not forget that until 1914 all currencies were valued by gold reserves in its possession. We are talking about the gold standard. Later in 1944, only the dollar monopolized convertibility into gold. In 1971, the Americans abandoned the gold unit to make the banknote printing machine work better. Currencies can be changed between themselves without relying on the value of gold. 1 Dollar can be exchanged for, for example, 1.30 Euro. And technically this is called: floating exchanges.
Lastly, there is actually no money in your account. When someone transfers a sum of money to your account, a bank adds it to a database on the bank’s computer system by means of a bank transfer. Banknotes or coins you carry in your pocket are valuable: Fiat money. The money in the database of the bank computer system corresponds to a promise by the bank that it will hold this amount. It’s scriptural money. Since the current economy is based on applying for a loan to buy a car for 15,000 euros, the bank adds the database for the benefit of your + 15,000 euros account. Banks create money by providing credit. What needs to be remembered is that banks remain essential intermediaries in the monetary operation.
We have just talked about the currency and its history and evolution. Likewise, to understand Blockchain and Bitcoin, one must first appreciate, understand and identify crypto anarchists. Who are they? It is these computer geniuses who know how the Internet works and who know how to protect information on networks. Like anarchists in politics who want to destroy the state, crypto-anarchists are allergic to the idea that their data could fall into the hands of others. Information is power. They don’t want to give access to their data to let it get out of hand.
It was in 2008 that a certain Satoshi Nakamoto published a 10-page document explaining how the Bitcoin works that he just discovered. If you imagine a ledger, it is a document that records a person’s expenses (money going out) and what they are paid (money coming in). On 29/11/2021 Charles Leon pays 300 euros and 30/11/2021 Leon pays John 50 euros, who pays Charles 30 euros on December 2, 2021 and so on. There is no such thing as a Bitcoin coin. Bitcoin is the big ledger that tells who paid to whom and when. This is not a paper book, but files called blocks. And like in a book the pages are limited because when they are full, we start on another and so on. In order not to lose them, we number them: book1, book2… and we also have to link the book to ensure a logical continuation between the books. So, each book will contain the summary of the previous book linking it to the next… and so on. As I mentioned before, Bitcoin are files called blocks. And blocks that are connected one after the other form a chain of blocks and this is called the Blockchain. So the summary of one block to connect it to the next is done by math functions that combine the numbers and letters, and this is called the Hash. In these computer files called blocks, the link between them is not made by word summaries but by this mathematical Hash function, in the virtual world of crypto-anarchists the rule of thumb and data protection. This Hash formula is nothing more than a language of data locking protection. So that’s how Bitcoin protects itself from people who want to hack the system to get rich.
The summary of the history of money has enabled you to understand how it works by having the bank as the essential intermediary for transactions. The Bitcoin is a protected currency whose transactions also remain between those who have the key. In our next edition we will discuss how Bitcoin works.
