Money is as old as civilization, but its shape has changed.
Money has taken different forms over time, but it has been with civilization since the beginning. It is even prior to writing. There are hieroglyphics and cuneiform writing that talk about money and record transactions.
In fact, money is so primitive that we can teach monkeys to use it. A team of researchers managed to do this and the results were curious. By teaching monkeys to trade specific stones for fruit, monkeys evolved and invented new ways to get more stones. Some tried to steal "coins" from others and invented prostitution, exchanging coins for sexual favors. Violence, sex and money! The primitive level of evolution.
Among homo sapiens we can look at money as a language. A way of communicating the value we place on products, services or gestures. We can then say that money is a form of communication. It is a prehistoric technology to communicate values in society.
The first form that money took was direct exchanges. Direct food exchanges. This was the first way to add value to others and their products. After that, money started to take on a more abstract form, it was no longer something you could eat. The most relevant form is the precious metals that are still considered today as a way of maintaining value. They have been in this position for so long because of their characteristics: scarce, transportable, divisible and universally valued.
It took a few thousand years before we had another technological leap in the concept of money: paper. Traders and travelers realized that walking with many coins became heavy and therefore difficult to transport. Then they deposited their precious and heavy metal with someone they trusted, who issued them a note saying how much metal they had left and that they could lift it if they presented that paper. Instead of exchanging gold and coins, people started exchanging with pieces of paper, which in the meantime have evolved into the banknotes we use and the people we trust are governments and banks. This evolution took a few hundred years before people accepted it, as it required people to gain confidence in this new form of money.
Later, about 60 years ago, plastic money came into being. Credit cards that, again, took a few decades to be accepted by the society that saw yet another level of abstraction in relation to the money it was used to.
With the advent of the internet, the idea of creating digital money began to emerge. In 1993 the first digital payment system called ecash appeared, to allow anonymous and secure payments over the internet. There were a few more examples and companies that tried to create internet money, such as egold, Karma or the most successful case of PayPal, which included Elon Musk and Peter Thiel. However, they all had a fundamental flaw: they did not follow the internet in its purely decentralized roots, thus becoming susceptible to corruption and singular points of failure.
Solving this problem is the miracle of Bitcoin: creating a global network that agrees to assign value to something and that can be used as currency without physical form or government support.
Bitcoin is often devalued because it is not something physical that we can interact with. But when you understand how it works, we realize that the need to "own" something in your hand is not a relevant feature to assign value to something.
As mentioned above, precious metals are valued for being scarce, transportable, divisible and universally valued.
Cryptocurrencies are more portable than other forms of money as they are purely digital. It is simply data that is passed from one account to another and for which we are entirely responsible.
They are divisible: we can send one millionth of bitcoin to another account, in the same way and at the same cost to send one million bitcoin.
Current currencies, called fiduciaries, - dollar, euro, real - are valued because there is a government, a central bank - and, by force, an army - that make us believe that they really have value. In the case of cryptocurrencies, they will have value whenever they are used to buy something and a price is established. For this, the law of supply and demand in its purest form works: if there are more people buying the price goes up, if there are more people selling the price goes down.
But in order to maintain this value, it is necessary to maintain the scarcity of that asset, a limit quantity, accessible to the market. This limit is maintained by the way Bitcoin and other cryptocurrencies were programmed. In the case of Bitcoin, there is a maximum amount of 21 million coins. These bitcoin are released into the network each time a block is created, some of which are left to the miner as their reward. This reward is scheduled to be cut in half every 210,000 blocks - about 4 years considering 10 minutes per block - this event is called halving. On the 28th of November 2012, the first halving took place from 50 to 25 bitcoins, and every 4 years there is a further reduction. In this way, Satoshi created an attractive reward at the beginning of the system to entice new followers to keep the network healthy. He also knew that if his creation became successful, its value would rise over time and, by allocating a smaller amount of bitcoin, mining would remain interesting financially. In addition, the growing number of transactions would create a new source of income for miners.
While currencies are affected by inflation - meaning that with each passing year the currency is worth less - Bitcoin will reach a mathematical and programmed maximum of 21 million, which combined with the increased demand for the currency will cause each currency becomes worth more over the years - that's why it is referred to as a deflationary currency. It is a currency that will have more value in the future than when it is acquired.
This is how the block chain and Bitcoin are breaking with the way we deal with money, making current forms and currencies obsolete and creating new, improved solutions with many clear advantages for users. Starting from the next article, we will explore other areas where the block chain may have as profound effects as in the financial world. For that, we will study Ethereum and smart contracts.