Money acts as the foundation for all trade and savings, so the adoption of a superior form of money has tremendous multiplicative benefits to wealth creation for all members of a society. - Vijay Boyapati.
Money is the tool that makes it possible to transfer economic value through time and space, as well as to measure it.
The attributes that enable a good to perform these functions are listed below in order of relevance:
Those goods that have historically satisfied these properties evolved into money through the stages of collectible, store of value, medium of exchange and unit of account.
1. Collectible stage:
Humans, driven by genetically evolved instincts, enjoy collecting, displaying, storing,
and trading rare items.
50,000 years ago the Homo Sapiens took pleasure in collecting shells and animal teeth,
making jewellery out of them, showing them off and trading them; Neanderthals did not.
Beads made from ostrich eggshells dating back 45,000 years were found in Denisova Cave, Siberia. However, the nearest ostriches lived thousands of kilometers away in warmer regions.
Through his hobby, Homo sapiens inadvertently developed a proto-money, granting the ability to store and transfer wealth. This social coordination advantage contributed to their triumph over Neanderthals, despite Homo sapiens being physically weaker.
The cost of these collectibles could be quickly assessed at a glance.
Some simply consisted of mnemonics representing privileges.
Their scarcity was easily verifiable and would foreseeably remain so.
2. Store of Value stage:
Durable and easy to hide, these jewels protected value
against theft or loss. They were maintained throughout generations, being only
transferred in unique life events.
Their utilization helped temper aggression, as tribute proved more lucrative than continued violence against the
defeated in battle.
Furthermore, they facilitated reciprocity of favors, fostering increased food sharing—a pivotal step towards the
development of civilization.
3. Medium of Exchange stage:
During the Neolithic era (10,000 BC - 1,200 BC), money mostly consisted in collectibles made out of precious
metals but without an uniform value.
Small, high-value items, distributed widely enough to be fungible, served
as a means of exchange.
Metal assessment was costly, limited to large merchants. However, around 700 BC, the Lydians, residents
of a key trade hub in present-day Turkey, pioneered coinage. This innovation made it possible to entrust
verification to coin issuers, providing excellent fungibility and divisibility.
Lydian coin
4. Unit of Account stage:
Monetary metals gained saleability, fostering market development and price standardization, with gold and silver emerging as value standards.
Historically speaking gold seems to have served, firstly, as a commodity valuable for ornamental purposes; secondly, as stored wealth; thirdly, as a medium of exchange; and, lastly, as a measure of value. - William Stanley Jevons.
In various regions globally, non-coinage forms of money persisted.
In 7th-century China, merchants started issuing paper receipts for coins entrusted to them.
Over time, this system became more centralized and government-controlled.
By the 10th century, only authorized establishments could provide this service, and two centuries later,
the Song dynasty assumed direct control, issuing claims over nonexistent coins.
In the 13th century, exchanging paper claims for precious metals was prohibited.
Paper money from the 14th century
Printing abuse led to hyperinflation and the collapse of the system in 15th-century China.
Consequently, monetary metals regained prominence.
In the West, during the 16th century, paper receipts like bills of exchange and promissory notes
assumed monetary roles, facilitating trade across hostile lands.
By the 17th century, bank notes became prevalent as monetary receipts, representing specific amounts
of precious metals stored in vaults.
In the 18th century, technological advances of the industrial revolution led to widespread counterfeiting of coins.
Bank notes emerged as a solution due to their easily verifiable authenticity, causing monetary metals to flow
into bank vaults.
Improvements in communication and transportation, like the telegraph and trains, enhanced banks' transfer
capabilities. Ultimately, a few banks became major custodians of gold and silver.
Governments responded by initially restricting paper banknote issuers and eventually monopolizing the
activity.
Paper receipts brought divisibility to gold, diminishing silver's advantage as a medium of exchange.
In 1717, British officials, influenced by Isaac Newton, introduced the "gold standard", a model adopted
by around 50 countries by 1900.
At the start of World War I in 1914, major European powers, suspended the convertibility
of their notes for gold in order to finance their operations by printing unbacked bills.
By the war's end in 1918, most currencies had significantly depreciated.
The US dollar was pegged to gold at $20 an ounce, but the issuance of unbacked dollars prevented the
Federal Reserve from fulfilling this exchange promise. In 1933, President Franklin Roosevelt,
via Executive Order 6102, confiscated private gold, depreciating the dollar to a new exchange rate of
$35 per ounce of gold.
Executive Order 6102
During World War II (1939-1945), the continental United States became the most secure location for gold
custody, so they came to hold most of the world's gold reserves.
In 1944, the victors established the
Bretton Woods system, pegging currencies to the US dollar, which, in turn, was pegged to gold.
Abuse of printing presses led to currency devaluation against the US dollar. In 1971, President Nixon
announced the end of the gold convertibility of the US dollar.
Since then, Central Banks print pure fiat money.
Explain to me how an increase in paper pieces can possibly make a society richer. If that is the case, why is there still poverty in the world? - Hans-Hermann Hoppe.
Fiat Money is the currency exclusively issued by political authorities.
Its monetary units are created through a Central Bank controlled by a state or a group of states.
The plan for assigning newly created fiat units is known as monetary policy.
Physical fiat units include coins and bills, while digital units are represented by Central Bank's
accounting notes known as Commercial Banks Reserves. The sum of both forms constitutes base
money.
Individuals can only possess physical units. Exposure to digital units occurs indirectly through
intermediaries like Commercial Banks, which issue promises in the form of checking accounts.
These accounts, also called demand deposits, represent claims on a specific amount of money,
ostensibly redeemable on demand.
If banks held the full deposit amount as a reserve, accounts would be termed money-certificates.
However, banks typically keep only a fraction in reserve and invest the rest, resulting in multiple
liquid claims for each actual unit. The aggregate of these claims is referred to as bank
money.
Cash plus bank money is widely considered as the current available monetary value. Consequently,
"consumer prices" are more responsive to changes in these amounts than to alterations in the monetary base.
This recognition prompted the study of money aggregates like M2, also known as money
supply or broad money.
Money aggregates represent the accounting aggregation of various types of monetary claims to cash.
The money multiplier concept posits that bank money is determined by dividing base money by the average reserve ratio, where the reserve ratio is defined as demand deposits divided by bank reserves.
In the short term, Central Banks influence the quantity of bank money by manipulating
the rates at which commercial banks lend reserves to each other.
Lowering these interest rates increases incentives to borrow from banks, leading to
the creation of bank money; while raising interest rates has the opposite effect.
This manipulation is achieved through the creation or withdrawal of bank reserves.
The digital age saw a progressive restriction on the use of cash, accompanied by expanding
regulations that led to extensive bureaucracy and censorship.
Capital controls were implemented under the guise of Anti-Money Laundering (AML) laws,
and Know Your Customer (KYC) requirements compelled financial services to collect
and disclose user information
that will eventually be publicly exposed.
Trusted third parties are security holes.
People gather your data on the promise that they will never share it, when in fact they cannot, and
will not retain control of it for long. - Nick Szabo.
Financial assets became concentrated in the custody of a few entities under government control,
who transformed them into tools for surveillance.
The true owners are simply granted access to software displaying accounting entries, subject to permission.
Don't put most of your family's wealth in assets that some stranger can turn on and off like a switch. - Nick Szabo.
Nevertheless, every time a money becomes more of a Medium of Censorship, it becomes less of a Medium of Exchange; and the need for a superior form of money arises:
I don't believe we shall ever have a good money again before we take the thing out of the hands of government; that is, we can't take it violently out of the hands of government, all we can do is by some sly roundabout way introduce something that they can't stop. — F.A. Hayek, 1984.
In the 1980s, a group known as cypherpunks emerged, dedicated to preserving privacy in communications
through the development of encrypted systems.
The intersection of their ideas with those of libertarian futurists gave rise to dreams of depoliticizing money.
The computer can be used as a tool to liberate and protect people, rather than to control them. (...) It's going to have to be a grass-roots activity, one in which individuals first learn of how much power they can have, and then demand it. — Hal Finney (1992).
Privacy is necessary for an open society in the electronic age. - A Cypherpunk's Manifesto by Eric Hughes (1993).
Early attempts like Hashcash by Adam Back (1997), B-Money by Wei Dai (1998), Reusable Proof of Work
by Hal Finney (2004), and Bit Gold by Nick Szabo (2005) failed due to lack of decentralization.
However, the mysterious Satoshi Nakamoto figured it out.
The Bitcoin White Paper, "Bitcoin: a Peer-to-Peer Electronic Cash System," was published on
October 31, 2008, at bitcoin.org.
The proposal was shared with the main cryptography mailing list. Nine days later, Satoshi Nakamoto stated,
"I had to write all the code before I could convince myself that I could solve every problem,
then I wrote the paper." The code was ready.
The software was released as an open-source project, and on January 3, 2009, the Bitcoin Network
commenced operation.
The headline from that day's edition of The [London] Times is embedded in block 0 of the Bitcoin chain.
The first page of The [London] Times on January 3rd.
00000000 01 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 ................
00000010 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 ................
00000020 00 00 00 00 3B A3 ED FD 7A 7B 12 B2 7A C7 2C 3E ....;£íýz{.²zÇ,>
00000030 67 76 8F 61 7F C8 1B C3 88 8A 51 32 3A 9F B8 AA gv.a.È.ÈŠQ2:Ÿ¸ª
00000040 4B 1E 5E 4A 29 AB 5F 49 FF FF 00 1D 1D AC 2B 7C K.^J)«_Iÿÿ...¬+|
00000050 01 01 00 00 00 01 00 00 00 00 00 00 00 00 00 00 ................
00000060 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 ................
00000070 00 00 00 00 00 00 FF FF FF FF 4D 04 FF FF 00 1D ......ÿÿÿÿM.ÿÿ..
00000080 01 04 45 54 68 65 20 54 69 6D 65 73 20 30 33 2F ..EThe Times 03/
00000090 4A 61 6E 2F 32 30 30 39 20 43 68 61 6E 63 65 6C Jan/2009 Chancel
000000A0 6C 6F 72 20 6F 6E 20 62 72 69 6E 6B 20 6F 66 20 lor on brink of
000000B0 73 65 63 6F 6E 64 20 62 61 69 6C 6F 75 74 20 66 second bailout f
000000C0 6F 72 20 62 61 6E 6B 73 FF FF FF FF 01 00 F2 05 or banksÿÿÿÿ..ò.
000000D0 2A 01 00 00 00 43 41 04 67 8A FD B0 FE 55 48 27 *....CA.gŠý°þUH'
000000E0 19 67 F1 A6 71 30 B7 10 5C D6 A8 28 E0 39 09 A6 .gñ¦q0·.\Ö¨(à9.¦
000000F0 79 62 E0 EA 1F 61 DE B6 49 F6 BC 3F 4C EF 38 C4 ybàê.aÞ¶Iö¼?Lï8Ä
00000100 F3 55 04 E5 1E C1 12 DE 5C 38 4D F7 BA 0B 8D 57 óU.å.Á.Þ\8M÷º..W
00000110 8A 4C 70 2B 6B F1 1D 5F AC 00 00 00 00
ŠLp+kñ._¬....
Bitcoin's genesis block inscription.
Nobody showed much interest except for Hal Finney, who was the first person to join the network.
https://x.com/halfin/status/1110302988?s=20
Although the nature of Bitcoin is such that once version 0.1 was released, the core design was set in stone for the rest of its lifetime as Satoshi posted, new developers joined the project and contributed to improve the security of software.
On May 22, 2010, the first commercial exchange of bitcoin occurred: Laszlo Hanyecz posted a thread on Bitcointalk.org with the title "Pizza for bitcoins?" offering 10,000 bitcoins for two pizzas. Another forum user accepted the offer and ordered two pizzas for Laszlo, marking the historic event known as "Bitcoin Pizza Day."
On April 23, 2011, Satoshi Nakamoto disappeared, mentioning in an email, "I've moved on to other things."
Appreciation for Bitcoin grew slowly.
https://x.com/GregSchoen/status/70261648811761665?s=20
In under 10 years, the Bitcoin Network emerged as the world's most reliable and secure financial network, supported by tens of thousands of globally distributed nodes.
Every time somebody gets censored, Boom! they become a Bitcoin fan. It's almost a binary thing: if you haven't been censored, or have never been strongly sympathetic with somebody who has been censored by the financial system, then you don't understand the biggest early use cases of Bitcoin. If you have, nobody needs to "convert" you. - Nick Szabo.
Bitcoin's scarcity stems from its immaculate conception, longest-established history, and extreme decentralization.
Bitcoin's discovery enabled financial self-sovereignty, allowing the global storage and transfer
of value in an uncensorable manner.
It is the first nonviolently securable property in history, since its
ownership is enforced through the possession of a small piece of data.
Bitcoin's strongest reputation has attracted the best cryptographers to review and secure its code.
Gifted people tend to want to work with other top people and work on something that matters, that they believe in. Motivation matters. Protocol design and coding is partly an artistic, aesthetic endeavour; people do their best work on a mission: uncensorable global internet money. - Adam Back.
Alternative "cryptocurrencies" compromise security for temporary gains in some functionality.
They resemble Bitcoin much like a doll resembles a baby. They lack the predominant source of value that
distinguishes Bitcoin from fiat money: the minimization of governance.
If the designers of your blockchain talk about "saving the planet", "increasing throughput", "compliance", "governance", "democracy", or any other topic more than they both talk and actually care about securing your financial property, run! do not walk away from that chain. - Nick Szabo.