Why is Bitcoin considered so ground-breaking, exactly? And why is it so revolutionary for the financial sector?

A mysterious individual using the alias Satoshi Nakamoto published a white paper in 2008 titled Bitcoin: A Peer-to-Peer Electronic Cash System, as we saw in a previous post.

The paper described a series of methods for making “electronic cash” (digital currency) that would be unregulated by any central bank, government or institution.

However, before Satoshi’s attempt to develop a future digital currency – and as he was very well aware of too – here had already been numerous prior attempts to develop digital. And they had all failed.

B-money, Bit Gold, ecash, E-gold, Hashcash, Liberty Reserve, and RPOW were among the first pioneers. Bold pioneers that failed.

These currencies had their merits and a number of differences between them, but we could summarize their failed ordeal in a couple of paragraphs:

While Double Spending could be considered a faulty design, Centralization on its turn, almost defeats the entire point of cryptocurrency as it is understood today. Just think of the things the entity or company in charge could do:

1. They could secretly generate more funds for their own benefit.
2. They could be shut down by the government, making all of the user’s funds more than useless.
3. Their central system could be hacked, and users funds could be taken.

Therefore, many have tried and failed to develop decentralized digital currency, before Bitcoin was even a glimmer in Satoshi’s eye….

Even attempting to do so appeared completely hopeless. For a while.

Therefore, many have tried and failed before Bitcoin was even a glimmer in Satoshi’s eye to develop decentralized electronic money, or digital cash.

Attempting to do so appeared hopeless for a while.

In contrast to a picture, PDF, or other document, you can’t just send someone cash by attaching it to an email.

Why?

Simply put, you must verify an actual exchange of value between parties took place, before you can consider the transaction complete.

Say, for argument’s sake, you encountered a Grey-type Alien and snapped a snapshot of him.

You want to buy the picture from me so that nobody else can get their hands on it. It might be worth a lot of money and it might also help you a lot, in your journalism career. So you’re willing to pay a decent amount to make that picture yours only.

So I suggest that I can easily send you the original digital photo, by including it in a text message.

The snapshot is on its way to you.

However, the photo has now been duplicated.

• There is now both the original file I have saved on my computer, AND the one that was attached to the text message.
• Instead of sending you the actual photo file, I emailed you a copy of it.

Unless you’re a famous person who frequently posts naked pictures online and has his/her phone hacked, this might not be a huge concern when it comes to transmitting digital photos.

But this is a huge thing when it comes to sending digital MONEY.

Let’s return to the cash transaction example involving Ex-Con with the Lemonade Stand, and the HS Kid wanting to buy gallons of it. You might remember this odd example from a previous post, idk.  

What if the HS Kid – despite the fact he has rich parents – just scanned a dollar bill and saved the image as “one-dollar.jpg”? Or just used Monopoly money?

Digital storage makes it simple to make as many copies of something as necessary.

What good would that do?! I mean, it can be subjectively very “good” for the scammer. But not for any of the parties he’s conducting business with.

And who exactly is the proprietor of the “one-dollar.jpg” image file if several different persons claim ownership of it?

• How can you establish that money you transferred digitally no longer exists at its original location
• How can it be proven that there really was a transfer of ownership?
• How could the HS Kid prove that after giving the Ex-Con a dollar, he didn’t intend to give it to someone else?

When dealing with electronic transactions, the net value of all exchanges must equal zero. If the HS Kid sends the Ex-Con $1, then the Ex-Con should receive $1, and the HS Kid should lose $1.

Because of this verification problem, sending money online used to require the use of a financial institution or a third-party payment processor like PayPal.

We were essentially dependent on one master figure. One central authority.

Here’s what happens. And allow me to use other examples outside the scope of the Lemonade Stand scenario. The lore was becoming too out of hand and hard to follow, and quite honestly, it does not seem like it is all that instructive to know about the shenanigans of a morally reformed ex-convict, and a kid with rich parents and way too much time on his hands.

So, let us consider 2 average Joes – Jack and Peter – who are about to conduct a transaction which is just as generic as they are.

• Jack has $1 in her account to begin with, but Peter has nothing.
• Jack instructs the bank to send Peter one dollar.
• Jack and Peter’s bank balances have been updated.
• The sums in Jack and Peter’s bank accounts are just digits on a computer somewhere.
• Both Jack and Peter and Ursula are confident that their bank account balances are always correct.
• You may have observed that no actual money is being exchanged.

Jack and Peter want to have the Bank process a digital transaction on their behalf rather than hand over actual $1 bills.

Banks are (or were) crucial for this kind of task due to something more their institutional powers. They would also function as ledgers – which is another function that the Blockchain has come to perform.

In the next post we will take a look at what ledgers are.