A Brief History of Bitcoin – 002
Now I’m going to talk about a brief history of bitcoin through the lens of those two promises. So, let’s get to it.
Bitcoin was invented by Satoshi Nakamoto – a pseudonymous inventor or group of inventors in the year 2009. A lot of people ask the question “Why do we not know who it is? Isn’t it weird that we don’t know who it is?” I think before the end of this presentation you will understand why that was done and I think if you had been the one who had invented bitcoin you would wish to remain anonymous as well.
Because you’re taking power away from some very powerful people and putting it in the hands of people who are not very powerful. You’re putting it in the hands of the average “joe blow” and so you would make some very powerful enemies with the invention of bitcoin. You’ll understand all of that before the series is over.
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Next, what is bitcoin? It is an open source, immutable and decentralized platform. So, let’s go through those, it’s very, very important to understand. What is open sourced? For those of you who don’t know, open source means that the code is freely available for everybody to see. When you buy an application like when you buy Microsoft word or Microsoft PowerPoint – you get a program that works but you can’t see the code. You don’t know what it’s doing in the background on your computer because you cannot see the code.
Bitcoin is open source – meaning you CAN see the code. Anybody can go and view it. There’s been millions of pairs of eyes on it so although I can’t code, I have complete faith that it does exactly what it says it does do because millions of pairs of eyes have looked at it and any one person could say “Nope – see this little tricky code back here? It doesn’t do what it says it’s going to do”. So, this has been extremely well vetted because it’s open source. That means we can trust it to a very, very high degree.
The next is immutable. Now, immutable means the same over time. This is powerful especially in the world of money and finance. Because in this world we have a situation where promises are broken all the time. In fact we just had the 50th year anniversary of one of the biggest breaks of promise ( or betrayal, some might say) in the history of world finance.
The world reserve currency ( the US dollar ) from its existence was promised that any time you show up with the US dollar, you could hand it in to the treasury and they would give you an amount of gold proportional to your US dollar. It was a claim on real gold. That was the promise of what the little piece of paper called US dollars was. In 1971, Nixon closed the gold window and said, “We are NO LONGER going to honor that promise”.
So US Dollars and other fiat currencies – they are NOT immutable. They are subject to the whims of men. And men can change their minds. They are subject to the whims of governments. Governments backed up by armies. They can change their mind, they can break their promise and there’s nothing you can do about it.
With bitcoin, you have certainty. It is immutable. It will do what it does for all time, and you can bank on that and trust that. So, it’s open sourced- you know what it does. It’s immutable – it’s going to do it forever. And you now have a lot of certainty and security in the world of your store of value and your payment rails. Very, very powerful information.
The world’s never, ever seen anything like it and as later in the section we talk about the deep dive on those promises you will really understand how that has affected the world.
By the way, pretty much everybody I tell this story to they always say it’s the most fascinating history lesson they’ve ever heard. It is a fascinating piece of history you are going to learn – and it’s something that’s not taught in schools and it’s not taught in colleges so unless you’ve gone out of your way to learn it before now it’s something that you probably don’t know.
It effects your everyday life in such profound ways and the history of it is fascinating. The final word here is Decentralized. And this is really leaning towards the concept of censorship resistant. So, decentralized is really makes for a robust system and something that cannot be shut down.
The best example I can share with you is if you remember back in the day, there used to be a little company out there called “Napster”. What they did was they just allowed you to download any song you wanted to for free, on the internet.
The problem with it was that it was centralized. There was a big room somewhere with a handful of servers in there. The government came in and unplugged it. Now there was no longer a way to download Napster.
Now this was anticipated by a whole bunch of coders and what they had built (and it was released the next day) was something called “BitTorrent” and other kinds of services like that. And what it was is it was the exact same concept as Napster – but it was decentralized.
Meaning instead of there being one big room with a whole bunch of servers on it, there was computers all over the world with songs that were replicated on it. If you wanted to download it – you didn’t download it from just one computer. You downloaded a little bit of the song from thousands of computers all over the world.
This made it decentralized. It was in different countries, it was in different jurisdictions, it was all over the world and even if you sent out a thousand police officers to grab those computers and destroy them, the very next day someone could put that same song on the network, and it could proliferate through the network with thousands of copies.
This concept of decentralization is what makes Bitcoin censorship resistant. When something is decentralized it is extremely robust and it means it doesn’t have single point of failure. If one server goes down it doesn’t matter – there’s still 999 copies of the thing elsewhere. So, it makes it robust, it means it’s always going to be there for you. And it makes it impossible to kill. A very important component of Bitcoin, which again you’ll understand a lot more clearly in the next section.
Something worth noting is that Bitcoin originally solved it’s two promises. At the very beginning; you could buy up your bitcoin and you could hold bitcoin and its value ( although volatile we will come to that a little bit later in the presentation ) , over a meaningful period of time- I’ll give you an example – over the course of a four year period there is not a person on the planet who bought bitcoin, sold it four years later and LOST money.
It held its value. In fact, it massively outperformed and has been the best investment on the planet. Nothing else compares to the return on investment that bitcoin has had. But the main point is that it held its value – it was a successful store of value over meaningful amounts of time.
Yes, it goes up and down in the short term but over meaningful amounts of time it holds its value and it delivers on its promises.
Now the other promise that it had was as a free, instantaneous transfer of these coins to anyone, anywhere in the world. And it did that very well at the beginning. So, at the beginning it delivered both promises.
But, in 2017 bitcoin had some scaling issues. It basically hit its limit of what the network could handle.
Now this was a problem that was anticipated for quite some time, but what it meant was that it began to fail at promise number 2. It was still being an excellent store of value, it still held its value over a meaningful amount of time. But sending money suddenly became expensive.
Sure, if you were sending a million dollars or even a thousand dollars, the fees for doing so were in the order of 3 or 4 or 5 dollars. And that was still way better than transferring money via swift system or paying international wire fees or even paying domestic wire fees. So, it was still good, but it wasn’t delivering on its promise of free and instant. It was still instant – but it wasn’t free transfer of wealth all over the world.
It did that because it started to slow down because the network got clogged and in order to get your payment through you needed to effectively bribe the miners of the network. We call them miners, they are the people who preserve the network, keep it secure and let it run. They’re the people that have the servers in their houses, in their basements, in their data centers, wherever they want to have their servers. They are the 1000s of servers all over the world that keep the system going and keep it decentralized. We call them miners.
So there was so many transactions wanting to be used, you actually had to tip them money and say “please include my transaction” to get it through the network. Now, this was anticipated, and it was certainly undesirable from the user perspective, and it was also anticipated for many years. We knew bitcoin would get to these scaling issues quickly.
And here’s where the history of bitcoin becomes quite interesting. So in 2017, we hit those scaling issues and there had been two big camps of people who had two different solutions, with two camps behind them. One was to increase the block size; we will breeze over that.
And the other one was to say “We’re going to create something called a “Lightning Network”. And it’s going to sit on top of the bitcoin network. And it’s going to allow us to scale significantly.” Well these two camps had a bit of a back and forth and they kind of had a little bit of a hissy fit here and there and what happened was Bitcoin actually splits into two.
The Lightning Network ( with the majority of people ) saying “The solution that we are going to implement is called ‘Lightning Network’ and we’re going to call it Bitcoin, and some people were so passionate about their solution they said “Alright we’re going to break away over here and we’re going to become something slightly different – we’re going to be called “Bitcoin Cash” and we’re going to do our solution over here”. And this created a whole bunch off problems in 2017.
Now it’s interesting- Bitcoin has a four-year cycle. Well, it has had to date, it’s debatable whether that four-year cycle will continue but to date for very good reasons known as the halving.
Every four years bitcoin goes through a massive run up. It did it in 2013 – went up 100x in the year 2013. Bitcoin did it in 2017 – it went up 100x over 2016/2017, but JUST in the year 2017 it went up 20x.
And now we’re in the year 2021 and you’ve seen just a big run up and I think we’re just halfway through it. I think we are going to see some astronomical numbers from bitcoin in the near future.
2013,2017 and 2021 – it’s the four-year cycle playing out as predicted. And so, 2017 cycle was I would argue somewhat muted. I think it really got hurt by these scaling issues that we had during that time.
But the reason I bring it up here and want to share it with you through bitcoin’s history is that for a period when the bitcoin network said “Okay, we’re going to adopt Lightning Network” and everybody understood at the time that it was going to take somewhere between 2 or 3 or 4 years to build all the infrastructure, build all the things on top of it that really make Lightning Network work.
All of the applications that will sit on top of it, it’s going to take a little time to build. So basically from 2017 to really the end of 2020 – bitcoin was failing on one of its promises. It was ONLY a store of value. It was still a payment rail, but it wasn’t free like it was once promised.
And since now 2021 lightning network has really matured, come to the fore and once again done correctly bitcoin is free and instantaneous money transfer all over the world. And we had this massive run up in price even though it was not delivering on the second of its promises. I think that story is going to play out as we look further into the future and look at who’s adopting bitcoin and things like that.
We will understand the reasons they’re adopting it because just in the last 6 to 12 months – the lightning network has matured, and we can really see the payment rail promise starting to come back. So, we will talk more about that in the future.
In 2021 the lightning network matures and explodes in popularity but it is STILL just a baby. But it is growing exponentially and that’s something exciting to understand from that perspective.
Now both promises are once again fulfilled and they’re even better than before. So, before the Bitcoin transactions used to be free and we used to say you’d have to wait about 10 minutes and an hour for final confirmation that your transaction went through.
There were kind of minimums to it didn’t make sense to do it with too small a sum. But with the invention of the Lightening network it is even better than it was before. it is completely free. Bitcoin transfers are actually instantaneous, you can take confirmation in seconds. It is just better than everybody had ever hoped.