I think that the Internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing, but that will soon be developed, is a reliable e-cash; a method whereby on the Internet you can transfer funds from A to B, without A knowing B or B knowing A.
IN 2140 THE LAST Bitcoin will be mined.
It might sound crazy that something digitally produced could also be scarce, but this paradox is the reason Bitcoin is such a big deal in the computer science community, and also why the story of Bitcoin is more important than the supporting technology of the blockchain.
Until 2009 digital scarcity did not exist in any meaningful way. If I had a file on my computer – a picture of a cat, say – I could copy that file for as many people as I wanted at a price too low to calculate. Everyone with my cute cat picture could then make their own copies to share with friends and before you knew it there would be billions of the same adorable kitty photo on hard drives across the planet without anyone having to pay for it.
This data abundance was part of what made the early digital era so disruptive, especially for industries that made content lending itself well to electronic storage. Music and movies, for example, existed long before we had digital computers and portable storage devices like USB drives. Unlike sandwiches and sunglasses, however, songs and films could easily and cheaply be converted to bits on a hard drive and shared using portable disks or over the internet.
Digital abundance fundamentally changed Hollywood, the print media and every other industry where existing work intersected with the new digital regime of cheap storage and transmission. We all know what this meant for video rental and record stores.
Another offshoot of digital abundance is the sharing economy that enabled companies like Airbnb and Uber, which make finding people with spare rooms or space in their car a trivial matter of loading up an app on a phone and expressing a desire to sleep or get somewhere. Digital abundance brought a lot of awesome new things into the world, along with introducing the idea of content piracy and finally companies like Apple and Netflix proving that convenient beats free and making billions of dollars by streaming you data that is practically free to replicate.
With the introduction of Bitcoin and its proof of work consensus model digital scarcity became possible for the first time. Now digital goods could be created that couldn’t be replicated.
For the first time since the invention of digital storage, Bitcoin enabled bits of information to be transferred from one unit of storage to another, without creating a copy. I could now send you a unique picture of a cat that would become yours and yours alone without leaving behind any clones.
On 3 January 2009 Satoshi Nakamoto mined the first block of Bitcoin – also called the ‘Genesis Block’ – creating the first entry of data on the blockchain that would remain unique.
This was also the date upon which the Chancellor of the Exchequer in the United Kingdom announced a second possible bail out for banks, following the subprime financial crash that began in 2008.
This might look like gobbledegook to most, but to cryptographers and computer scientists the Genesis Block is a thing of beauty:
01000000 - version
00000000000 00000000000000000000000000000000000000000000000000000 - prev block
3BA3EDFD7A7B12B27AC72C3E67768F617FC81BC3888A51323A9FB8AA4B1E5E4A - merkle
root
29AB5F49 - timestamp
FFFF001D - bits
1DAC2B7C - nonce
01 - number of transactions
01000000 - version
01 - input
0000000000000000000000000000000000000000000000000000000000000000FFFFFFFF -
prev output
4D - script length
04FFFF001D0104455468652054696D65732030332F4A616E2F32303039204368616E63656C
6C6F72206F6E206272696E6B206F66207365636F6E64206261696C6F757420666F72206261
6E6B73 - scriptsig
FFFFFFFF - sequence
01 - outputs
00F2052A01000000 - 50 BTC
43 - pk_script length
4104678AFDB0FE5548271967F1A67130B7105CD6A828E03909A67962E0EA1F61DEB649F6B
C3F4CEF38C4F35504E51EC112DE5C384DF7BA0B8D578A4C702B6BF11D5FAC - pk_script
00000000 - lock time
It was no coincidence that Satoshi chose to mine the first Bitcoin just as banks were being bailed out again. We know this because Satoshi specifically encoded the text ‘The Times 03/Jan/2009 Chancellor on brink of second bailout for banks’ into the coinbase of the very first Bitcoin block.
The coinbase, not to be confused with a company of the same name, is the first input of a new blockchain transaction.
Along with the details of a transaction, the coinbase can include any other data too, which has given rise to a new industry of people storing things in the blockchain and building applications on top of it.
***
As discussed in the previous chapter, Bitcoin becomes more difficult to mine over time as the number of computers running its software increases. The rate of increasing difficulty is adjusted over time, and if we know how many computers are currently crunching through the code we can calculate when the next halving of the block reward will be, along with when the last block will be mined. Hence the current date, some time in 2140.
At this point there will be 21 million Bitcoin in circulation and the mining algorithm will stop rewarding new coins. This will not be the end of Bitcoin, however.
One of the first computer scientists involved in the Bitcoin project, Mike Hearn, once asked Satoshi why he chose the 21 million limit. Satoshi’s answer was:
I love this paragraph because it shows Satoshi’s remarkable foresight and mental prowess combined with his embrace of uncertainty and practicality.
At first glance there might seem to be a problem with the number of 21 million Bitcoin, however. There were roughly six billion people on earth when Satoshi wrote his white paper, and it was clearly impossible for everyone on the planet to own a Bitcoin. You couldn’t even give one to each citizen of the United States without running out. So why not make more available?
The answer is that Bitcoin needed a long runway into the mainstream. Make too many available too soon and they will quickly be deemed without value. Too few and they will be regarded as too exclusive.
The answer was, as Satoshi described it, ‘something in the middle’.
As with other Bitcoin rules, this placed it in a sort of a Goldilocks-zone for currency. Like porridge that can be too hot or too cold, Bitcoin needed to be just scarce enough without being too rare, private enough that governments wouldn’t snoop on it while being public enough that it could be trusted.
To future-proof Bitcoin Satoshi also specified that each single coin would be divisible to the degree that everyone on the planet could own some.
A Bitcoin can be split up into one hundred million smaller units which the community has lovingly named ‘Satoshis’. A Satoshi, or a ‘Sat’ for short, is to a Bitcoin what cents are to other currencies like the dollar.
The difference between cents and Satoshis, however, is that cents soon become worthless in the inflationary world of central banking, and currencies become less and less scarce as central banks print more and more of the stuff to keep up with demand.
This trend is reversed in the deflationary realm of Bitcoin as the base unit becomes scarcer and people spend more and more of its constituent units. Instead of making more and more over time, we make less and less Bitcoin as the algorithm progresses. This is a way of preventing the inflation that plagues current global financial markets and often spins out of control in the case of hyperinflation. Ask someone in Venezuela or Zimbabwe in 2018 if they like this system, for example.
In the old world of money you have to own more and more of a currency to survive over time as things become more expensive in that currency. Not with Bitcoin. Demand may increase at unpredictable levels, but supply will continue slowly and consistently.
As Bitcoins become scarcer and the value of sats increases it will be common for online stores and exchanges to display intermediate values between the two. One popular unit of account for Bitcoin is called ‘bits’ which each represent a millionth of a Bitcoin. Bits are worth more than sats and less than Bitcoins, so you might see them in use before we make the leap to pricing things in Satoshis.
It was a common misconception in the early days of Bitcoin that you had to buy at least one.
‘I want to get into Bitcoin, but I can’t afford one,’ a new user told me.
At the time I was part of a team building an online platform for storing, trading and using Bitcoin and this was a perception we hadn’t foreseen. Designing an interface that made it obvious that you could buy a fraction of a Bitcoin was not nearly as difficult as explaining this to people before they used our software in the first place.
As long as the adoption of Bitcoin increases, so will the value of fractions owned until one day you’ll describe it in sats. In the future owning one Bitcoin will be possible only for a very few, very rich individuals.
Creating digital abundance with computers that copy pieces of information at almost no cost upended some of the economic principles of the old world, like first-mover advantage which relies on controlling something in limited supply.
Bitcoin introduced the concept of scarcity to this new digital world of abundance, bringing some of the old economic principles along for the ride.
Baseball cards, copies of rare books, old bottles of wine and other commodities had value in the real world proportionate to how rare they were. Bitcoin made it possible to create scarce digital commodities for the first time – even if none of them tastes as good as an old bottle of cabernet sauvignon.