The Age of Cryptocurrency: How Bitcoin and Digital Money Are Challenging the Global Economic Order
by Paul Vigna
30 popular highlights from this book
Key Insights & Memorable Quotes
Below are the most popular and impactful highlights and quotes from The Age of Cryptocurrency: How Bitcoin and Digital Money Are Challenging the Global Economic Order:
gold is valuable as a currency or investment because we believe it is valuable (which is the same reason for valuing money itself). Gold’s value as currency is an abstract social construct.
For much of history since its beginning in ancient Egypt, the essence of cryptography—which takes its name from the Greek words for “hidden” and “writing”—lay in encoding language to keep a message secret.
centuries-long debate over the nature of money can be reduced to two sides. One school sees money as merely a commodity, a preexisting thing, with its own inherent value. This group believes that societies chose certain commodities to become mutually recognized units of exchange in order to overcome the cumbersome business of barter. Exchanging sheep for bread was imprecise, so in our agrarian past traders agreed that a certain commodity, be it shells or rocks or gold, could be a stand-in for everything else. This “metallism” viewpoint, as it is known, encourages the notion that a currency should itself be, or at least be backed by, some tangible material. This orthodox view of currency is embraced by many gold bugs and hard-money advocates from the so-called Austrian school of economics, a group that has enjoyed a renaissance in the wake of the financial crisis with its critiques of expansionist central-bank policies and inflationary fiat currencies. They blame the asset bubble that led to the crisis on reckless monetary expansion by unfettered central banks. The other side of the argument belongs to the “chartalist” school, a group that looks past the thing of currency and focuses instead on the credit and trust relationships between the individual and society at large that currency embodies. This view, the one we subscribe to and which informs
We have an opportunity to reform the financial system, to turn it into the public utility that it’s supposed to be—a level playing field that everyone can indiscriminately use in their bid to get ahead. Let that be the standard for the coming age of cryptocurrency.
Unlike with credit-card transactions, which are linked to an individual’s name and made known to that person’s bank and to anyone else with access to the person’s account records, a bitcoin address has no personal connection. It’s one reason some people turn to bitcoin
Bitcoin is just six years old. It has gone from what was ostensibly one lonely coder’s pet project to a global phenomenon that has sparked the imagination and activism of libertarians, anticorporatists, crypto-anarchists, utopians, entrepreneurs, and VCs. Bitcoin has gone from being essentially worthless to dearly valuable, only to crash and rise again, a wild trading pattern that has few analogues in capital markets. It’s certainly gone from nowhere to somewhere, and where it goes from here may be as messy and chaotic as where it’s been.
At their core, cryptocurrencies are built around the principle of a universal, inviolable ledger, one that is made fully public and is constantly being verified by these high-powered computers, each essentially acting independently of the others.
The blockchain keeps everyone honest, and a whole layer of banking bureaucracy is removed, lowering costs.
The core development team managed by the Bitcoin Foundation’s Gavin Andresen has a plan in place to create a flexible scale of fees per confirmation wait times whose rates would be set by a market mechanism. This reminds us that while bitcoin is far more efficient as a payment system than the bank-centric, centralized system, it’s not free. Both seigniorage and transaction fees represent a transfer of value to those running the network. Still, in the grand scheme of things, these costs are far lower than anything found in the old system.
As the issuance rate of new bitcoins slows further, the algorithm will almost certainly need to be tweaked to make transaction fees a more important part of miners’ remuneration to keep them incentivized to do their job. (Once the issuance rates drops to zero in the year 2140, transaction fees will be the only form of compensation
The unidentified founder of bitcoin dealt with this fairness problem by resorting to the free-market principles of competition. That is one of the purposes of the relentless hashing competition, a process that, to the uninitiated, can seem pointless. It’s a bit of a trick. Miners perform a task with the sole goal of winning a race to earn bitcoin, and almost as an unintended result, they end up confirming transactions along the way and keeping the blockchain up-to-date. This is the basis upon which bitcoin’s protocol decides who should earn the seigniorage, a model founded on the idea that in return for this privilege the recipients must invest resources—equipment, electricity—and that their computer must do work. That in turn provides
Based on his assumption that a bitcoin miner will on average spend 90 percent of the value of the mined bitcoin on electricity, Lane calculated that a $1,000 bitcoin price would result in 8.2 million tons of carbon per year, about the size of Cyprus’s emissions, and that a $100,000 bitcoin price would produce 825 megatons annually, or the equivalent of Germany’s emissions.
The problem is, with so many mining rigs now in play and only so many block prizes handed out, it can be a long time before a low-powered rig’s winning number comes up for a twenty-five-bitcoin prize. That’s why all but the very biggest of mining operators these days join mining pools, which divvy up the aggregate intake according to each member’s contributed computation power, with the smaller members typically receiving just fractions of a bitcoin each month.
Miners are set the task of solving the puzzle for two reasons. One, it imposes a cost on mining, since the computing power it demands is expensive, in terms of both the machinery and the electricity it uses. That helps to regulate mining and create a reciprocal relationship between what otherwise would be free bitcoins and the work required to obtain them. And two, it creates a competition with a payout at the end, which incentivizes the miners to do the work needed to confirm the transactions.
The machines enter the competition by simultaneously and rapidly coming up with new potential block hashes to encode and capture all the data in the new, fully packaged block and link it to the block hash of the previous block. The winning block hash must match one that bitcoin’s core algorithm has decided will be the current block’s winning number. The match is extremely difficult to make, so the computers keep coming up with new hashes until they get it right, tweaking the process each time to change the readout—over and over and over. Each of the countless new hashes produced by the computer is created by adding a unique, randomly generated number called a nonce to the other data contained in the block hash, which, as mentioned, includes the hashed underlying transaction information and the block hash of the previous block. Adding a new nonce each time completely alters the output hash.
If the bitcoin’s currency exchange rate ever got to $1 million, a number that some argue is feasible if bitcoin becomes a world-dominant payment system, its network would have a carbon footprint of 8.2 gigatons, or 20 percent of the planet’s carbon output.
industrialized mining operations might one day afford a nefarious actor the power to create a fork intentionally by seizing majority control of the total hashing power. That’s come to be known as a 51 percent attack. Nakamoto’s original paper stated that the bitcoin mining network could be guaranteed to treat everyone’s transactions fairly and honestly so long as no single miner or mining group owned more than 50 percent of the hashing power. If malevolent actors secretly created an alternate chain of fraudulent transactions to spend bitcoins they didn’t own, their efforts to have those transactions confirmed would fail if they didn’t have majority hashing power.
Work is another prominent word in the vernacular of bitcoin mining, in this case conveying the sense that the currency’s underlying value isn’t based on nothingness but on labor, and hard labor at that. In fact, computational difficulty is its defining feature. The harder it gets, the more real-world resources get spent performing the task, mostly in the form of electricity. Some crypto-economists argue that these inputs are what give bitcoins real value. Just as important, the amount of work—the computing equivalent of man-hours—gives legitimacy to the ledger, in that it represents a significant collective investment in assuring its integrity.
Armed with subpoena powers, an investigator would in theory be able to force whatever institution provided a bitcoin wallet to divulge the owner’s identity. This is why some people see bitcoin as a greater tool for prosecutors than as a cloak for criminals.
if they publicize that such and such a bitcoin address is theirs, then anyone can see every transaction they make in or out of that address. Because only alphanumeric identifiers appear and not names, law enforcement agents cannot easily navigate this system. Yet the traceability presents opportunities to follow leads that would otherwise run dead with cash.
control of a currency is one of the most powerful tools a government wields; ask anybody in Ireland, Portugal, Greece, or Cyprus who lived through those countries’ recent financial crises. Bitcoin promises to take at least some of that power away from governments and hand it to people. That alone augurs significant political, cultural, and economic clashes.
Ahmadi used her bitcoins to buy a new laptop. Only a few years ago, this would have been impossible. She credits bitcoin with “teaching us how to be independent and how to decide by our own, and best of all, how to stand on our own feet.” It’s allowed her to ponder a future in which she isn’t merely an appendage to the men in her life, a future in which she can chart her own course.
At their core, cryptocurrencies are built around the principle of a universal, inviolable ledger, one that is made fully public and is constantly being verified by these high-powered computers, each essentially acting independently of the others. In theory, that means we don’t need banks and other financial intermediaries to form bonds of trust on our behalf. The network-based ledger—which in the case of most cryptocurrencies is called a blockchain—works as a stand-in for the middlemen since it can just as effectively tell us whether the counterparty to a transaction is good for his or her money.
A phrase from Mastercoin’s David Johnston that some in the cryptocurrency community call Johnston’s law could come true: “Everything that can be decentralized will be decentralized.
But all those who used their knowledge in a bid to enact social change saw cryptography as a tool to enhance individual privacy and to shift power from big, central institutions to the human beings who live in their orbit.
All might appear calm, as it did at the time of this writing, but make no mistake: our global monetary system still has serious problems. *
The challenge for technologists and their venture-capitalist backers is to frame the disruption within a politically digestible narrative of overall progress, says Andreessen Horowitz venture capitalist Chris Dixon. “On the one hand you have the bank person who loses their job, and everyone feels bad about that person, and on the other hand, everyone else saves three percent, which economically can have a huge impact because it means small businesses widen their profit margins. But from a narrative perspective it doesn’t feel as good. There are individual losses and socialized gains.
Doge is an Internet cryptocurrency,” the Fox announcer said on national television. “It’s not traded in dollars, but a win here would pay 596,664,147 dogecoins.
The potential is great for people in the informal economy to exploit the blockchain’s middleman-free way to exchange assets and information and its irrefutable public record that’s free from the control of any one central institution.
the entire human populace is now taking charge of the means of production and changing the rules of the game. “They’re making their own freaking currencies, for God’s sake,
