Liked this Reddit post I made so I thought I'd share it here as well.
Here are my two favorite ways of understanding and explaining Bitcoin's core value proposition. (I've made a lot of these points before in comments so my apologies if this stuff is old hat to anyone. I thought it was important enough to put together in one place.)
"TRUSTLESS" MONEYYou often see people describe Bitcoin as money that "doesn't require trust." Unfortunately, they rarely take the time to really explain what that means. I think in order to fully understand why Bitcoin's "trustless" nature makes it so revolutionary, you need to do two things: (1) explicitly consider trust in the context of both value
storage AND value
transfer; and (2) compare Bitcoin's performance in these two respects with the performance of the "Big Three" conventional monetary alternatives, namely, digital fiat, physical cash, and gold. Ok, so how does the competition stack up?
1. Digital fiatStorage - Most people in this sub probably understand that the dollars in "their" bank account are nothing more than bank-issued IOUs for dollars. As such, holding dollars in a bank requires that you trust the bank to make good on those IOUs (and not say, freeze your account or steal your money) as well as requiring you to trust the bank with your confidential financial information (i.e., your balance and complete transaction history). Storing your funds in fiat also requires you to trust the central bank not to erode your money's purchasing power through arbitrary expansion of the money supply.
Transfer - In order to send digital dollars to someone else using the conventional financial system, you have to trust a central authority (a bank, PayPal, Western Union, etc.) to effectuate that transfer in accordance with your wishes. And that means you also need their permission. If the transfer you want to make is one that the central authority (or the government it answers to) doesn't approve of (e.g., a donation to Wikileaks), you're out of luck.
2. CashStorage - Holding cash doesn't require you to trust your commercial bank, but it still requires you to trust the central bank's management of the money supply. Furthermore, securely storing cash yourself (without the aid of a trusted third party) is difficult, if not impossible. You can't make backups of your physical banknotes (or they'll call you a counterfeiter), can't encrypt them, and can't use the equivalent of multi-sig or Shamir's secret sharing algorithm to eliminate the loss of those unique physical items as a single point of failure.
Transfer - you
can transfer cash from one person to another without a trusted intermediary, but only if you and the recipient are in the same physical location. That's obviously a massive (and usually unacceptable) inconvenience in a modern global economy. Moreover, large in-person cash transactions are not without their own set of risks (e.g., the risk of being robbed or receiving counterfeit banknotes).
3. GoldStorage - With gold, you don't have to worry about a central issuer arbitrarily expanding the supply, but attempting to store gold in a secure and trustless manner presents the same types of logistical challenges as storing a significant quantity of cash.
Transfer - The analysis here is pretty similar to the one for cash. In-person transfers are possible without a trusted intermediary (although still problematic), but trustless transfers at a distance are simply not possible. Of course, IOUs for gold can be transferred across distance electronically, but transacting in IOUs simply reintroduces the requirement for a trusted central authority.
Ok, so why is Bitcoin revolutionary under this framework? Because it's the first form of money that lets you both store and transfer value (including across distance) without the need for a trusted intermediary. With Bitcoin, there's no central authority with the power to arbitrarily create new units, freeze (or seize) your account, or block a particular payment from being processed. And payments can be made quickly and trustlessly to anyone anywhere in the world without the requirement of physical proximity. They don't call it magic internet money for nothing.
THE THREE REQUIREMENTS FOR GOOD MONEYThe second way of understanding Bitcoin that I really like starts with a very fundamental consideration of the nature of money. What is money? Money is
memory. Money is a societal IOU. Money is a
favor voucher. Money is an
accounting ledger for keeping track, in a provable way, of value given but not yet received. (If you want to get really fancy, you can describe money as a
"formal token of delayed reciprocal altruism.") The paradox of money is that while everyone wants it, no one
actually wants it (they want the stuff they can exchange it for). The "real" economy is the exchange of useful goods and services for other goods and services. Money is simply a way of keeping score, a
medium of exchange that facilitates that real value exchange across time and across multiple parties. (In contrast, a traditional barter transaction involves a simultaneous bilateral exchange of value.) Ok, so I've now said the same thing in about half-a-dozen different ways. Why? Because it's that important. You need to understand what money is in order to understand what properties a system of money should have, which in turn allows you to understand why some of us are convinced that Bitcoin has the potential to be the best form of money the world has ever seen. So what are the requirements for good money? Well, you'll find lots of discussions on this topic that identify six or so very specific properties ("divisibility," "fungibility," "portability," etc.), but personally I think it's more intuitive to think in terms of just three requirements. Those three requirements can be mapped, more or less one-to-one, onto the three traditional functions of money. They are:
- transactional efficiency - This requirement corresponds most closely to the "medium of exchange" aspect of money. I'd argue that, from a modern perspective, this requirement necessitates digital representation.
- reliable scarcity - This corresponds to the "store of value" aspect of money.
- network effects / widespread acceptability - Only a form of money that is widely accepted is suitable for use as a "unit of account."
In other words, a good monetary ledger must be easy to update; the information contained in the ledger must be reliably accurate or "honest"; and the ledger must be one that people--preferably lots of people--are actually using. Gold is reliably scarce but not transactionally efficient. Fiat (and specifically, electronic fiat) is transactionally efficient but not reliably scarce. Both fiat and gold have high degrees of acceptability. Bitcoin is even more reliably scarce than gold and even more transactionally efficient than fiat. But its acceptability is, for now, comparatively low. And, at least in the short-term, the network effect requirement is by far the most important of the three. But while gold can't become more transactionally efficient (sorry, Peter Schiff, the
CombiBar doesn't quite cut it) and fiat can't become more reliably scarce, Bitcoin
can become more acceptable as more people begin to use and accept it. Indeed, the nature of the network effect creates the potential for a virtuous cycle as greater Bitcoin adoption leads to greater usefulness, which can in turn incentivize greater adoption, leading to greater usefulness, etc.
