Cryptocurrency: token from an imaginary land

Harari in Sapiens: A Brief History of Humankind (2011) argues that Sapiens came to dominate the world because it is the only animal that can cooperate flexibly in large numbers. It arises from its unique capability to believe in things existing purely in the imagination, such as gods, nations, money, and human rights. All large-scale human cooperation systems — including religions, political structures, trade networks, and legal institutions — owe their emergence to Sapiens’ distinctive cognitive capacity for fiction.

This fiction enter new era in 2008 when Satoshi Nakamoto, also a pseudonym of an unknown person, invented Bitcoin, a cryptocurrency. What is cryptocurrency? It is basically a form of digital currency (a.k.a money) produced from a process called mining. In mining process, miner is basically required to do a task with computer processing. It is time consuming and as a rewards for this effort, bitcoin is awarded to successful miners.

But as digital Bitcoin can be, what prevents people to just simply copy the original and multiplies it. Would it crush the very reason money or currency exists? Before we discussed it further, we may need to revisit some history of money.

Money is medium generally accepted for payments of good and service. For it to be used, each parties of a transaction must mutually agree and see money as valuable item. A long time ago, precious metals used to signify this value but as time progressed it is burdensome to do large transactions with this heavy weight metals, paper currency then introduced. Instead of seeing the proof of money value from what material it is made of, paper currency value comes from government guarantee. The government guarantees that the money produced can be exchanged and accepted for payments.

And yes, paper currency is not so counterfeit-proof but, the government, especially central bank, heavily regulates its spread. Through not so little experiments, the world has understood the payoff of just duplicate the money instead of exchanging some labors for it. The more of this money produced and circulated (illegaly or legally), money will lose its value. Thanks to not so invisible hand of the market, the market will correct its value himself.

Now with the ubiquitous copy paste or backdoor techniques available to produce this digital money and no government institution to backs it, how could Bitcoin realizes the intrinsic value of some password or code entitling you to some real value money?

The answer is the same as the very reason Sapiens came to dominate the Earth, the power of fiction, imagination for innovation. Proof of Work (PoW) and blockchain is another great invention of the century. Miners repeatedly grouping newly broadcast transactions into a block, which is then broadcast to the network and verified by recipient nodes. To be accepted by the rest of the network, a new block must contain a proof-of-work (PoW). Each block contains encrypted code of the previous block, thus linking it to the previous block giving blockchain its name. To modify a transaction, to copy or to alter the code would be extremely hard, as an attacker must modify all subsequent blocks in order for the modifications of one block to be accepted.

As such this distributed ledger (blockchain) completely solved century old problems of money replications which also plagued the current paper currency and digital transactions. Whoa! Some great fiction there! Blockchain also eliminate the need of third party to confirm the transactions, disrupting traditional bank’s role as medium of digital exchange/transactions and Central Bank of a specific nation’s country.

But great invention as it is, Bitcoin still have not seen universal acceptance. In its early days, bitcoin saw its major use for black market transactions. Peer-to-peer transactions with security concerns and highly technical nature of the concept understandable only to computer enthusiasts/practitioners what hinders Bitcoin mainstream rise. Lack of regulations and no governments guarantee over the transactions are issues still needed to be addressed but as stock exchange needs time maturing its ecosystem into mainstream acceptance, the same applies to Bitcoin and its sister cryptocurrency.