“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”

15 min readApr 13, 2021

The message embedded in the genesis block amidst the 2007/2008 financial crisis as the pseudonyms architect ‘Satoshi Nakamoto’ behind Bitcoin unveiled p2p digital cash to the world. As we recently saw Bitcoin reach 1 trillion dollars in market cap, I am sure many have been reading various headlines in the news. I wanted to write this article to provide insight to those who may have questions and want to learn more about this emerging asset. If you have any questions feel free to message me, hopefully I can offer answers. This space can be daunting and full of noise, hopefully this can provide some signal.

https://mempool.space/block/000000000019d6689c085ae165831e934ff763ae46a2a6c172b3f1b60a8ce26f

What is Bitcoin?

Digital cash? Internet protocol? Unit of account? Trust? Scam? Bitcoin represents something different depending on who you ask. To some, merely speculation, to others the only way that they can put food on their table. The Bitcoin protocol was released amidst the 2008 financial crisis as displayed below on a notorious cypherpunk mailing list —

https://satoshi.nakamotoinstitute.org/emails/cryptography/1/

The original concept behind Bitcoin was to create digital currency that could be transferred anywhere in the world, at any time, to any person without having to trust a 3rd party or individual entity. October 31st 2008 saw the Bitcoin whitepaper being released. A censorship resistant, decentralized, open source digital cash; a monetary asset derived from math’s, code and proof of work (PoW); implementing a hard cap of 21 million Bitcoin that could ever be mined, with a 0% chance of non-consensual manipulation of the protocol. This provides any person in the world the freedom to opt in, or opt out, as long as they have access to an internet connection due to it’s open-source nature(actually now without an internet connection as Blockstream have released their own satellites). With no legal department or marketing team, Bitcoin was created with the belief of free market money; as apposed to the current centralized production of currency. One of the key characteristics was the digital scarcity, a challenging feature within the digital age where anything digital is inherently abundant. This may seem a new invention, but in reality, online digital cash has been worked on for decades as we can see below, Bitcoin was just the first broadly successful implementation -

This may all seem daunting if you have never studied these areas, and it is! Understanding computer science, cryptography, economics, thermodynamics and internet protocols is not an easy task aha. However, I think it’s important to highlight how most new technologies seem either daunting or not worth our time to research. There is a great quote from the US commissioner of the patent office Charles H. Duell who stated in 1889 that -

‘Everything that can be invented, has been invented’. — Charles H. Duell

This quote clearly did not age well. Do you think society trusted cars in 1885 when they had ridden horseback all their lives? ‘There dangerous, loud and well we just don’t like them’. You only have to look back to the 19th century when the Locomotve Acts were introduced from 1861–1878. This stifled the innovation of the leading automobile industry in the U.K. and business’s simply fled, and quite arguably, never significantly returned. Do you think society trusted using gold as money when they had used shells for hundreds of years? ‘Gold, why would we accept that, it is worth nothing’. Or the internet? ‘why would I use that, only criminals and geeks use that and it’s so slow!’. Being sceptical is a common human reaction, which we should use to our advantage. ‘I don’t trust this, let me research it’.

Network Effects -

Network effects are a key aspect of Bitcoin and generally a fascinating subject to understand within society. Simply put, network effects provide value through the addition of new participants. This is one characteristic embedded deeply within Bitcoin’s core value propositions. The more participants added, the more reinforced the network becomes. We can observe Satoshi understood this from an early message board post stating —

“It might make sense just to get some in case it catches on. If enough people think the same way, that becomes a self fulfilling prophecy.”

Taking a mobile phone as an example, when it was first invented it was worthless to most. The more individuals who began using the mobile phone and partaking in the network ultimately increased the value of the network. We quickly hit an inflection point within society where the adoption radically increased and within around 10 years mobile’s were everywhere. Now people question you for not having a phone as it is so common.

We see these trends throughout history, for example, the previously mentioned automobile or more recent inventions eg. the internet, credit card & computer to name a few.

Network effects are present in all of the largest global businesses today. Facebook, Google, Amazon, Zoom, YouTube all provide examples of businesses that rely on network effects to function; let’s not forget the underlying network effect they are all built upon, the internet itself! Understanding the network effects of Bitcoin can help us to understand why anybody would even consider using it when they have ‘perfectly good’ Dollar’s or Yen’s or Ruble’s in their pocket. This can also help us understand how the use of Bitcoin in turn strengthens the network. As more people use it, more companies are built and on goes the cycle. I love this article looking at network effects and recommend reading.

Lets highlight some of the key Network Effects of Bitcoin -

· Speculation — There must be speculators to get the price away from 0.

· Consumers — Due to speculators holding BTC they want to buy things with this new digital cash technology. Does it really work?

· Merchants — Merchants must now accept as consumers want to buy things.

· Developers — Developers work within the space as people are buying and selling products with BTC, programs must now be built to allow this.

· Business’s — Business’s build products to facilitate the consumers, merchants and developers. Exchanges, wallets, websites.

· Financial Services — Financial services are provided as the industry grow’s. Derivatives, Trading, ATM machines.

All the network effects provide reinforcement for the previous, strengthening each other.

Village in El Salvador using BTC as they had limited access to USD’s during Covid-19. Twitter — @Bitcoinbeach

Now we have identified the underlying protocol and the network effects you may be wondering, that’s all well and good but how in the hell does this thing work?

This can be confusing for some people to wrap their heads around which I absolutely understand! This is a decade old technology, constantly evolving, with many nuanced areas, seriously. I mean how many people reading this understand TCP internet protocol or UDP or HTTPS yet we use them every day? Understanding Bitcoin to the nth degree is not realistic for the majority of individuals (I certainly don’t) and is not required to understand what it aims to achieve. I will attempt to provide a rudimentary explanation, however, encouraging further research for those who are interested. It’s important to remind ourselves Bitcoin is an opt in, opt out system, with no marketing team. Providing education on the topic and allowing people to decide for themselves whether they agree or disagree, want to use or do not want to use is really important. I am merely attempting to provide an introduction to people who may be unaware of what this is all about from my perspective and understanding. Hopefully this article steers you away from the you-tubers who claim you can GET RICH QUICK!! and instead helps you to understand some of the fundamentals, history and future outlook. Let’s start with miners as they provide the distribution of Bitcoin and enforce the security of the network.

Mining —

Miners — Mining is necessary to distribute new Bitcoin to the network, just think of it like a gold miner. Without the gold miner there would simply be no gold to distribute, so how exactly does this happen? Miners compete to find a new block on the network. Within this block is a subsidy those miners get as a reward. When people transact Bitcoin to each other, those transactions get sent into a 1MB block and miners compete to solve a mathematical algorithm ‘SHA 256’ generated by the protocol. When completed, miners receive the fees and the block reward. This block reward halves every 210,000 blocks (roughly 4 years) and will see the final Bitcoin being mined in roughly 2140. The more computing power that comes online to mine will result in blocks being discovered at a faster rate and effect the distribution. To combat this, every 2016 blocks (roughly 2 weeks) the difficulty of this algorithm self adjusts to ensure the distribution remains steady, it could be seen as a self adjusting money ensuring supply cannot be produced too fast. We can view this in real time here. The more computing power online, the more resilient and secure the network becomes. One thing you may begin to notice is this algorithm ensures miners can remain profitable as long as they have efficient miners and cheap electricity, an often overlooked topic. I reccomend this website to see the blockchain in real time. LINK

By miners carrying out this PoW, it provides evidence that the mined Bitcoin are authentic and not counterfeit via the computational proof of the mining that took place. Think of it as a global audit every time a new block is discovered. This data is then sent to the block chain which is effectively a public ledger confirming each and every transaction that has occurred. These transactions are then validated by a decentralized network of nodes who all work together to generate consensus within the network. Every individual can run a full node to verify whatever metrics they would like on the network. This can also be a way for users to verify what they receive is actual Bitcoin. This displays the first practical implementation of triple entry book keeping. By Satoshi solving the computer science problem which persisted for around 40+ years, the ‘byzantine general’, we can now authenticate a transaction took place with no fraud.

This process may seem confusing, and I would agree it probably is the most confusing for somebody with no understanding in computer networks or computer science and I would advise watching videos online, I find these far easier to follow!

https://www.bloomberg.com/news/features/2019-11-24/seo-inside-russia-s-largest-bitcoin-mine

A common response is: This sounds like a scam and it’s not really backed by anything but we must ask ourselves what is money? 🕳🐇️

Bitcoin & Energy -

I am no expert in energy, or energy markets by any means (trying to learn) but the symbiotic relationship between Bitcoin mining and energy is clear from photos attached above. This seems to be an area Bitcoin gains scrutiny particularly in the media. Like most things this is not a binary topic, instead, a nuanced one. There are some fascinating developments in mining taking place around the world and a public mindfulness to asses Bitcoin’s role within energy has emerged. I can recommend the following article to read more into this topic if you feel inclined to, looking at some of the waste energy Bitcoin is consuming, particularly in China relating to the seasonality of hydro energy. Due to the wet seasons in Sichuan, hydro power is abundant and not utilised which we can observe from the following Reuters article

“Sichuan underlines the case. Total hydropower reached more than 75 GW in 2017, greater than the total in most Asian countries. It was also more than double the capacity of the province’s power grid, meaning lots of wasted power”.

It seems policy makers in the provence have begun to encourage miners to make use of this otherwise wasted energy in recent years from reading the following article. I would also point readers in the direction of this website created by the Cambridge centre for alternative finance. It has great analytics and comparisons. https://cbeci.org/faq/

One trend I would like to highlight as I recently became aware of is the use of vented or flared Carbon Dioxide and Methane to mine Bitcoin.

“Total methane emissions from the upstream oil and gas sector (excluding mined oil sands) are likely at least 25–50% greater than current government estimate.”

By deploying portable, off-grid generators (Gensets), miners are making use of waste energy and using that energy to mine Bitcoin. The diagram below, taken from page 84 of the report linked underneath it shows a table of the GWP (Global warming potential) of Carbon Dioxide and Methane. We can observe in a 20-yr timeframe, the GWP of Methane is 72x more than Carbon Dioxide. Could this be an economic incentive for the elimination of venting and flaring globally? Which the IEA has admitted -

“At root, the issue of flaring is also a question of business models”

https://www.ipcc.ch/site/assets/uploads/2018/02/ar4-wg1-chapter2-1.pdf

“Around 145 bcm of natural gas were flared in 2018, a slight increase from levels in previous years and broadly equal to gas demand across the continent of Africa. This resulted in emissions of roughly 275 MtCO2, as well as some methane emissions (from uncombusted portions of flares) and other GHGs such as black carbon and nitrogen oxide. Russia, Iraq, Iran, Algeria and the United States were responsible for more than half of global flaring. Several field trials have demonstrated viable technologies to reduce flaring, but at root the issue of flaring is also a question of business models. If there is inadequate provision for productive use of the gas at the project planning stage, including the necessary gas infrastructure, then finding a technology fix later on is much more difficult. There is an increasing number of voluntary government and industry commitments to eliminate flaring by 2030. The SDS relies on a rapid reduction in flaring, with government policies and industry commitment all but eliminating it by 2025.”

https://www.upstreamdata.ca/post/natural-gas-venting-how-bitcoin-solved-a-160-year-old-problem

“Emissions remain high despite initial industry-led initiatives, government policies and regulations, as implementing abatement options quickly and at scale remains a challenge. Policies will be critical to achieve the 75% emissions reduction by 2030 demonstrated in the SDS, but further innovation and support are needed to better understand emissions levels, make leak detection and repair more consistent, and reduce the overall cost of emissions mitigation programmes.”
“The value of natural gas flared by 80 different nations around the world has increased by 11 per cent to hit a global peak this year of $16.4 billion, according to new data analysed by Brainnwave”.

https://twitter.com/halfin/status/1153096538

VIDEO

Since such a small amount of oil and gas producers are mining Bitcoin with their vented/flared waste gas, this number is set to increase dramatically in coming years.

“All of the vented/flared gas in the US converted to electrical power would yield approximately 7.4 GW, which in turn represents about 50–70% of the total power converted by the Bitcoin network currently.”

This is obviously not even taking into account global vent/flared gas. When companies such as Gazprom in Russia (the largest publicly listed natural gas company in the world) begins experimenting in this area, it highlights the legitimacy of the potential solution to vent/flared gas. Article

Could we consider Bitcoin an implementation of Henry Ford’s hypothesized energy currency in 1921? ARTICLE HERE

The Lightning Network -

For those unaware 2016 — 2017 was a very contentious period where conflicts arose surrounding scalability. Due to the 1MB block size limit, on-chain transactions became expensive as the fiat price increased and made redundant previously desired use cases. This caused conflict within the community regarding scalability and was arguably Bitcoin’s biggest test. Those who disagreed with the protocol scalability forked and created their own ‘chains’ with alternative consensus rules; one example being a block size increase. This block size increase gained support by large mining pools who attempted to shift over to the new proposed chain in favour of the larger blocks. I do not have the time to thoroughly explain all the nuances of this topic and would encourage checking out the book — https://blog.bitmex.com/the-blocksize-war/

So what was the conclusion?

In 2016 the Lightning Network whitepaper was released proposing to move a higher velocity of transactions off chain at lower costs enabling more ‘day to day’ transactions, in a cash like network. Maintaining the characteristics of censorship resistance and open source were important for the community instead of adopting a more custodial approach to settlement having to rely on a third party; PayPal or a bank transfer for example. The main chain would be a settlement layer as more transactions move onto L2 or other payment networks. In the past year particularly, the first ‘killer apps’ have hit market and are showcasing a promising outlook.

Strike- A neo bank enabling global, instant & free final settlement. This product has rolled out in El Salvador and the US, with a global rollout coming throughout this year. A massive opportunity particularly for global remittance notorious for large fees. Here is a hypothetical transfer through TransferWise which would take 12 days (since it is the 3rd of April as I am writing) and cost a fee of £2,195. Using Strike this would be free and instant.

Umbrel- Giving users the opportunity to run their own node and self host open source applications themselves with the click of a button. This is really a powerful tool for the individual and reduces the trust we have to rely upon with more centralized services who commoditise our data.

Sphinx- A podcasting app powered by micro payments allowing a potential new method for podcaster’s, streamers and content creators to monetize/engage with their ‘tribes’ on the platform in a self sovereign way. As far as I understand, podcasting is just the first use case and private chat’s, video calling and who knows what is coming down the pipeline! Adam curry the ‘podfather’, known for being one of the first podcasters has recently began using these platforms referring to the business model as ‘podcasting 2.0’. VIDEO.

In Summary

Hopefully, this brief article has helped you gain a more nuanced understanding of this relatively new technology from its initiation, current stages, and future development. The future is uncertain, undoubtedly the next decade will be a major turning point for Bitcoin as I expect development and growth in the space to accelerate. As Seetee pointed out -

“It’s amazing to see that the Bitcoin space attracts so many intelligent people of younger generations much like the internet did when it was in its infancy”.

If you have any questions or disagree with me don’t hesitate to reach out I will be happy to answer/discuss. Hopefully, this brief article was helpful in some way or another.

Thanks for taking the time to read.

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“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”

What is Bitcoin?

Network Effects -

In Summary

Also, Read

Written by Billweaumont