Our education system (or at least in the country where I'm from) is such that students learn very little about the principles and foundation of money. For example, nobody is teaching about the history of money, how it is created, how it works, why it works etc.
Maybe the principles of money are known to economics students, but it is easy to check that the general population knows very little about the concept of money. Given how important money is in everyone's life, this lack of knowledge is really symptomatic. So much so that one has to ask oneself if this is done deliberately to keep the masses ignorant of one of the most important aspects in their lives.
In the following, I want to share a couple of interesting points about how crypto compares to fiat money and where is the important difference. It is about 3 types of consensus inherent to Bitcoin that I learned from the book:
Bitcoin and Cryptocurrency Technologies, Chapter 7. Community, Politics, and Regulation
As the authors state, there are basically
3 types of consensus that any cryptocurrency functioning as money has to have:
- consensus about rules
- consensus about history
- consensus about value
1. The
consensus about rules is basically a set of rules the majority agrees to follow.
Fiat money doesn't have this kind of consensus, because the government declares the rules by fiat. It may even change the rules along the way as it sees fit. Great example is the current hyperinflation disaster in Venezuela.
Cryptocurrencies do have this kind of consensus. In Bitcoin, we have a consensus about what makes a transaction valid, what makes a block valid, how new bitcoins are minted, what the total supply is, etc.
2. The
consensus about history is actually about record keeping.
Like in the previous point,
fiat money doesn't need this kind of consensus. It is enough to physically own money, or the banks can take care of your money and keep a record for you, so there is no need for this consensus.
Cryptocurrencies do need this kind of consensus. In Bitcoin, there has to be a consensus about the history of all valid transactions as well as about the current state of the public record.
3. The
consensus about value is a mutual agreement about the value of money.
This consensus is the only consensus
both fiat and crypto require in order to function properly. It is about people agreeing that the value of the money they are using will be there in the future.
This consensus equally applies to dollars, euros, and bitcoin. You have to believe that the money you hold will retain its value tomorrow. If many people believe in the same outcome, there is a consensus about value.
Interdependence of the 3 Types of Consensus Bitcoin (and other cryptocurrencies) have to have all three types of consensus to work as they are supposed to. Moreover, these 3 types support one another. If everyone agrees about valid blocks and transactions, everyone agrees about the state of the public record. As a result, everyone agrees that the currency is not double spent and everyone agrees that the currency will be valuable in the future.
And the other way around: If everyone agrees that the currency will have value in the future, everyone will make sure the consensus rules are followed and the miners have incentive to obey the rules. Then, automatically there is a consensus about the state of the public record.
The ingenuity of Satoshi Nakamoto can be seen, among other things, in connecting these 3 consensus mechanisms and making them work so well in practice to support each other.
