Gold was used as money for thousands of years – then suddenly it wasn’t. To make gold better money, gold became reliant on centralized services. Aware of gold’s failures, cypherpunks designed bitcoin to have superb monetary characteristics that avoid the pitfalls that ended the gold standard. Bitcoiners already think of Bitcoin as money. However, anything can be used as money, especially in a limited setting. Bitcoin is the best money because it preserves its value across time and space while avoiding central points in failure. Gold miners are destructively pursuing the money of yesterday, while Bitcoin miners are minting the money of tomorrow.
Within the confines of prison walls, inmates cannot access cash. Instead, the prisoners collectively agree on certain goods to be used as currency for the prison – cigarettes. Cigarettes work as currency in prisons, even for non-smoking inmates, because they are a sought-after good with homogeneity, scarcity (in prison), durability and divisibility. Due to recent smoking bans, instant ramen noodle packages have surpassed cigarettes as the prison commodity money, as instant ramen noodles are also homogeneous, scarce, durable and divisible. Like cigarettes, prisoners who do not fancy the good can still hold it and trade it at a later date – like currency. In effect, almost anything can be currency within a specific time and place. Although, due to a flash of legislation this can all change, as we’ve seen happen with the demise of gold (Executive Order 6102) and prison cigarettes. (Executive Order 6102 made it illegal for American citizens to hold gold as money, because jewelry was not outlawed. EO6102 essentially ended the international gold monetary order.)
Historically, as gold became increasingly widespread and accepted, it became more desirable. The first standardized gold coins in 550 BC quickly fell victim of a new form of theft known as coin clipping. In addition to threats such as counterfeiting, citizens could receive a gold coin only to find a tiny piece clipped off of it (image 1). To prevent coin clipping, coinages would imprint ridges alongside the edge of the coin, acting as a form of verification allowing a recipient to verify the quantity of content delivered in a coin (image 2).
The new coin ridge security feature lowered the overall fungibility of gold. An individual would reject a non-ridged gold coin over a ridged gold coin, essentially lowering the fungibility (recognizable monetary equivalence and interchangeability) of the gold coins. Coin clippings, counterfeiting, transactional dishonesty and theft necessitated security enhancing services. Bank’s custodial services limited theft risks, while standardized minting practices reduced counterfeiting by certifying gold into coins or bars. However, these increased security practices decreased gold’s decentralization as gold’s fundamental services became centralized. Customers' reliance on centralized services opened the entire gold network to attack and ultimately led to the demise of a multi-millennia currency order. Can Bitcoin escape gold’s fate (image 3)?
From a product development perspective, decentralization is a prioritized feature. In addition to enabling bitcoiners to transfer assets peer-to-peer, the cypherpunks also designed bitcoin to accommodate inexpensive or free security features. Bitcoin wallets offer more security than the strongest bank vaults while remaining free and infinitely more portable. Bitcoin does not require ridges or centralized mints because anyone can verify the legitimacy of any bitcoin at zero cost. Without the need for transaction intermediaries, custodians or centralized mints, bitcoin does not need to sacrifice any of its decentralization in the interest of increasing security.
Unlike gold, which requires massive capital investment, long-term project time frames, and government licensing, while operating in exclusive mining operations, anyone can mine bitcoin anywhere. In addition to its security services, gold mining is also centralized. Gold mining requires exclusive government permits, major capital investment and complicated supply chain relations to sell/process the gold/ore. Bitcoin miners can interact solely with peers and the network, with zero reliance on centralized services. While bitcoin miners can choose to liquidate their holdings via centralized services, the expansive variety of bitcoin off-ramps prevents any single entity from establishing a monopolistic advantage or acting as a centralized choke point. Furthermore, unlike gold miners, bitcoin miners can easily liquidate their assets as bitcoin mining has far less capital risk than gold mining.
To reduce theft and fraud, the best money the world had ever seen, gold, had to centralize custody, minting and transaction intermediation. Centralized services became choke points that legislation could use to change the rules of gold – drastically altering its value proposition, usability, as well as the attractiveness for new miners to join the industry.
Bitcoin’s design, however, enables a more competitive and scalable monetary network that retains a fully decentralized approach to its supporting services. Bitcoin is facilitated either by a fully peer-to-peer system or through an expansive set of intermediaries that lack any form of monopolistic advantage that could be exploited by a power-hungry public or private centralized entity. Based on the lessons learned from the demise of gold and cigarettes as money within their respective contexts, the Cypherpunks prioritized decentralization to ensure Bitcoin’s monetary longevity. Moving forward, Bitcoin miners and companies with bitcoin on their balance sheet (Microstrategy) will benefit the most, as bitcoin marches toward being the preferred money of the future for 8.1 billion people.
