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#81- The Case for Digital Currency: Nakamoto on Bitcoin

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12 years ago, an anonymous person using the pseudonym Satoshi Nakamoto published Bitcoin: A Peer-to-Peer Electronic Cash System. This week, Scott and Karl discuss this revolutionary concept of how Bitcoin set out to change the way the world views currencies.

At just ten pages long, Nakamoto’s original paper is still recommended reading for anyone studying how Bitcoin works. Nakamoto’s vision for the project is this: digital currency that anyone can use without needing to go through a bank or any other centralized organization.

Bitcoin provides a solution to the double-spending problem using a peer-to-peer network. According to Nakamoto, “The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work.”

Although the paper spares no technical detail in explaining how the Bitcoin network operates, both Scott and Karl agree— there is elegance and unrealized potential of Nakamoto’s idea. Karl says, “It’s a very clever solution to get at the core of money: it’s non-repeatability, it’s finiteness, but made of digits and not gold, silver, or copper.”

Scott adds, “We can operate this currency using a certain kind of citizenship, a certain way of running referendum, a certain way of self-governing, and none of those ways can be changed by a court ruling or a tyrant.”

Tune in to learn more about the future of cryptocurrency.

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Comments

  1. Eric

    What is modern money?
    We have a credit money system; meaning money = credit (a claim on someone else’s assets). You can trade your “claims on assets” for the assets themselves. This is also called buying something. Therefore money is credit.

    How is money created?
    Now, if money is credit, then credit creation must be money creation. This is done mostly by commercial banks making loans. If you would like to understand the plumbing further, here is a link:
    https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy

    Notice how federal reserve banks aren’t part of this equation? They lend reserves to commercial banks… and banks don’t lend reserves, they lend deposits. Reserves just sit on our balance sheets as a liability (money we owe).

    We ONLY lend out deposits (or term debt). If you deposit $100 into a bank, it will lend out $100, and unknowingly expand the money supply. If this $100 puts us over the reserve requirement ratio (RRR) then we will call our regional fed bank and borrow more reserves to remain in compliance.

    This also works in reverse… If someone pays off $100 of loans, money supply contracts. This is what caused the Great Depression.

    1929-1940 was much worse than 2008-2020 despite both having similar real GDP growth rates of roughly 1.5% per annum. Why?
    ’29-40 saw debt levels drop dramatically via default (called debt deflation). ’08-20 saw debt levels keep rising, thus no money supply contraction. ergo no depression.

    If the fed “prints” $100 of reserves and makes a bank take them, we will lend out $0. This is why QE wasn’t inflationary, it just made sure banks didn’t fail.

    Hope this helps.
    Best, Eric

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    1. Scott Hambrick

      Money is not a claim on someone else’s assets. It is an asset you own that someone else MAY wish to trade one of their assets. Saying it is doesn’t make it so.

      Money is fungible. Lending one dollar is identical to lending any other dollar in the organization. Every idea that follow from these two errors are necessarily going to be false.

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