The aim of Learn Crypto is to provide easy-to-understand explanations of what cryptocurrency is and how it works. This provides a good practical foundation for beginners. To truly understand cryptocurrencies, you need to ask the why questions, the most important of which is: Why do we need cryptocurrency?
Anyone looking to launch a new company or product should always start with one fundamental question: What problem does it solve? If that’s not a problem, why would anyone want to use it?
When Satoshi Nakamoto created Bitcoin—the very first cryptocurrency—in 2008—he clearly had a very specific problem in mind, because right at the beginning of the plan he—called the Bitcoin whitepaper.
What is the double-spend problem?
Ok, so now you’re right to ask “what’s the deal with double spending?” It simply refers to the fact that our current banking and payment systems operate on a trust model. Yes, there is a lot of technology involved in payment processing, but it cannot guarantee that the payment will not be reversed.
Almost everyone reading this has experienced this in one way or another. There are many reasons why current ways of spending money cannot offer so-called “irrevocable finality.”
To solve these problems, centralized organizations that provide financial services, such as banks or payment processors, need to invest in huge support groups whose role it is to mediate when this “double-spend” problem arises.
This weakness increases transaction costs, as these brokerage fees have to be passed on to the customer and thus sending very small transactions is largely impossible. Offering microtransactions simply wouldn’t be cost-effective when considering voiding false, incorrect, or fraudulent transactions
Their inability to offer reliable transactions means financial services firms need to know who their customers are. Therefore, whenever you open a bank account or credit card or even want to trade cryptocurrencies on an exchange, you have to pass KYC checks – know your customer. This means that a lot of personal information is provided.
That establishment won’t be willing to serve you unless they know a lot about who you are upfront, and that’s because they want to cut down on double-spend, which costs them money to figure out.
Bitcoin only started working in January 2009, a few months after the white paper was published, and since then there has never been a single Bitcoin transaction to reverse. This 100% efficiency is achieved through a reliable system – no KYC, no email addresses – which is completely decentralized – no staff, intermediaries or customer service representatives.
It’s an achievement, but Satoshi’s system isn’t perfect. This purpose comes at a price. An individual takes responsibility for managing Bitcoins, and wherever people are involved, there are always weaknesses, which is why scams are common in the space. Bitcoin works perfectly, but humans are fallible.
Fiat money and trust in governments
Human fallibility is at the heart of another problem Bitcoin solves, not described in the paper, but described elsewhere in Satoshi’s posts.
The Genesis Block, the first block of data on the Bitcoin blockchain – historical events – has a hidden message. Link to next Financial Times headline.
It could be that it was added for fun, but given Satoshi’s meticulousness in creating Bitcoin, it’s hard to ignore its significance. The world was reeling from one of the greatest economic shocks of all time, the effects of which we are still feeling, and by including this stock as an immutable record in its new financial system, it made a statement about roots. of the 2008 crisis – which goes back to human fallibility and centralization.
Many books have been written about what caused the 2008 financial crisis and even inspired a blockbuster movie. Read our reviews of The Big Short and other crypto related movies or buy a good review on Amazon, but the TL; DR is this. When economic power is concentrated in a few hands, there is always the risk that they will misuse it for their own personal or political gain.
The problems of 2008 were caused by the US housing market, but the same question of centralized control is at the heart of money creation itself, which is controlled by the government.
Since 1971, money has been backed only by the belief that governments are careful about how much money they create and what they spend it on. This is what the term Fiat Money means. The same pattern of trust that creates the double-spending problem has led to a US national debt of more than $23 trillion, more than the value of the entire US economy.
In the many posts Satoshi left to create a forum for early Bitcoin proponents to discuss its potential—Bitcoin talk—you can see his distrust of fiat money.
So the problem Satoshi was trying to solve with Bitcoin and the answer to the question “why do we need cryptocurrency?”