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May 2, 2022

#003: Bitcoin (Part 1): The History

This episode is dedicated to the OG Crypto, the Big Daddy - Bitcoin.

This is a two part episode and in this first one we take a short tour of the evolution of money itself, understand the problems with the current monetary system, and how the idea of Bitcoin came along to revolutionize the way money works for us.

Adam Back: @adam3us
David Chaum: @chaumdotcom
Hal Finney: @halfin
Nick Szabo: @NickSzabo4

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Episode 3: Bitcoin (Part 1): The History

What’s going on guys! Welcome to this new episode of The MetaRoy Podcast. This is the show that makes learning about crypto simple and fun.

I am your host Roy and every week on this show we talk in detail about one aspect of the crypto world - well technically Web 3.0 - because that's kind of the word that everyone is using today to describe the universe in which all these new technologies live.

Today’s episode is about the story of Bitcoin. This is a two part episode and in this first one we’ll start with how money has evolved over the years, and we’ll look at some early attempts at creating digital currencies. I think this is really important. We have quite a show lined up for you so stay tuned till the end and I promise you this will be a fun journey. 

Also, if you’re new to this show, do follow me on Apple Podcasts, Spotify, or whichever platform you’re listening to me on. In return I promise you to have your back in anything and everything the world of crypto has to offer.

Before we start though, just a quick disclaimer. I am not a financial advisor and none of the following content is financial advice. Please do your own due diligence before making any moves in the crypto space. 

Also the world of crypto moves at lightspeed. So what I'm about to tell you is my view of the world, and I know many of you are going to listen to this in the future. And much of what I've mentioned here might be different by the time you hear it, but that's okay.


In the previous episode we explored in detail how a blockchain network works. Some of the internal workings of Bitcoin have already been covered in the past episodes. I urge you to check those out in case you missed out on some of the technical aspects of Blockchain and the Bitcoin Network in general. This episode will be a light and fun storytelling experience with not much technical details to wrap your head around. 

Anyway, it's going to be a fun ride so let's dig in!

History of Money

When I was first researching in detail about crypto, when I first got into Bitcoin and all that sort of stuff, one of the things I noticed quite early on was that I had to go back and think about money in general and how I understood it and how I again, sort of challenged my conceptions of it. And once I got that all sorted, I found that Bitcoin and crypto made more sense. 

So, that’s exactly what we’re going to do. We’ll take the plunge to understand the history of money. Nothing comprehensive, nothing too deep, but just a look at money, how it's evolved, how we use it, how we used to use it, and how we use it now, and some instances of what used to pass for money, all that sort of stuff. I think it could be really interesting. 

The Barter System

On that note, let's start with a bit of a thought experiment and imagine a world without money. Let's imagine ourselves living in a small economy, imagine something on the likes of Westeros from Game of Thrones. So, a society that is kind of relatively unsophisticated, doesn't have an awful lot of technology and there's a sort of an existential crisis vibe going on. 

And I guess what that means is that everything that the people living in this village use, they either have to kind of make themselves or grow themselves. You can't get it home delivered so no Amazon. So imagine like really, really primitive times all around. In this village, let’s assume you own a poultry farm and your job is selling chickens. And let’s say I grow vegetables and perhaps I have a lot of potatoes.

So let's imagine you’re in dire need of potatoes and I am in dire need of chicken. Obviously the easiest way would be to exchange potatoes for chicken. Now the question arises, how much of potatoes would be the worth of one chicken. This situation that we find ourselves in is what economists call a coincidence of wants - I have something you want and you have something I want. So assume that we agree to exchange a kilo of potatoes for one chicken and we both go home happy. But the next time we meet, you might not want potatoes anymore, you might want something else, let’s say onions. So as a potato farmer, I wouldn’t be able to buy a chicken from you. Or maybe I would need to go to somebody else and exchange potatoes for onions and then approach you for a chicken right? Imagine I go to a blacksmith and I exchange potatoes for a sword! You can guess what happens next! As you can see this system breaks down quite fast. If only there was an easier way to facilitate the transfer or exchange of goods, hmm? 

So a monetary system had to be devised to literally stop people from killing each other. And a lot of people believe that this is where money comes from, that initially human societies were barter economies, and everyone sort of slowly came to this realization which you just had. There is no hard evidence for this obviously but this seems to be the most plausible and commonly acknowledged belief. 

Before we discuss the history of the monetary system, I want you to think of money as a technology like anything else. I think it is a really useful way to understand the history of money if we consider it as that. And as people get more adept at working at it, it becomes more useful and more advanced.

Role of Money in Society

Let’s quickly understand the role that money needs to play in our society. There are three kinds of roles that money is expected to play. So the first role is a medium of exchange. Now, what do I mean by this? A medium of exchange is a way of buying and selling goods or settling debts. So I want to buy your chicken. I don't have anything you want in return, but I can use another means of payment. But crucially, you have to then be able to use this means of payment that I give you in the same way with someone else. So a medium of exchange, and the really important part of it is that this form of payment has to be accepted by everyone else in the economy that we're operating. So that stops me from declaring that my chickens are a medium of exchange. 

The second function of money, the second role of money is as a store of value. A store of value holds its value over time. And again, a chicken is kind of useless in this respect. As I'm sure you do care for your chickens, obviously in the long term a chicken will die. So if I use this form of money, if I use it to buy a chicken from you, you need to be confident that you'll be able to buy something of equivalent value, perhaps another chicken with it in the future. So this idea of a store of value, is why money nowadays tends to consist of non-perishable goods and inanimate objects. It needs to be something that doesn't degrade or rot or go off or anything like that, because that would obviously be pretty useless. 

Then we have the third function of money, and this is as a unit of account. Now, this means that it can be used to record the value of what you own or compare the price of different items. So with supply and demand, if you've got an abundance of chickens and everyone has loads of chickens and they've got options of where they can get them, the price will come down. 

Evolution of The Monetary System

So, let's talk about some more early forms of money. Money has been in use in some form or another for thousands of years, and perhaps the first form of money was what is now known as commodity money. So these would be physical things that have value in themselves. So a good example here would be a chicken or livestock in general. And there is lots of evidence that cattle has been used as a form of exchange because a chicken has value itself. A chicken can give you eggs, it can give you meat. It can also give you more chicken. It's kind of like an interest bearing asset in a way. 

From livestock we moved to other valuable items such as cowrie shells, first used as money about 1200 BCE. Although they may seem a pretty random choice, the shells had a number of advantages: they were similar in size, small, and durable. Even though these shells are found in the coastal waters of the Indian and Pacific oceans, the expansion of trade meant that even some European countries accepted cowrie shells as currency. 

There were many other problems with commodity money in general - lack of a common measure of value, difficulty in storage of goods, inability to divide certain items etc. Hence came metalworking skills and consequently it became possible to use metals as money! It has been around for a long time. And I think there's evidence that lumps of silver were used in Cappadocia, which is sort of modern day Turkey, from around 2200 BC. So they weren't necessarily made into coins or anything like that. But yeah, people exchanged lumps of silver that could then be used by weight. From around 700 BC, we see coins begin to emerge and they're made of silver or gold, sometimes both substances called Electrum, which is a mixture of silver and gold.

Do you see that as we become better at working with this technology, that is money, we find it can do more for us? We'll just keep circling back to this thought over here that money is a technology over this episode.

Perhaps the oldest mention of paper money was found in China, because paper originated there. Around 800 AD, the Emperor Hensong began issuing paper money due to a shortage of copper. This was the first instance of money decreed by the government and issued without anything physical backing it. 

The Chinese again stopped using paper money around about the 1400s, and it seems to have re-emerged in Britain around the 1600s. Banks began storing coins in their vault and they issued notes in lieu of them. It was a bit like a receipt, an IOU. So if you took your money to a bank in the 17th century in Britain and you put in £10 worth of gold, they go, thank you very much, here is a receipt for £10 of gold. That in itself isn't much use to you, but you can then trade that with someone else for another receipt, another piece of paper. We're already getting towards this idea of this paper money being issued, but it's being backed by something in a bank somewhere. And these receipts became a kind of currency in themselves and that was where banknotes sort of evolved from this idea of banks issuing receipts.

So again, we see this idea of money as a technology. The emergence of paper money is kind of another technological leap forward. It enables larger sums to be traded and money to be more easily transported because it's much easier to take a load of paper and go across the seas. 

Unsurprisingly, currency comes with a number of problems, one of which concerns fiat money. This is currency that is issued on the “fiat” (decree) of a sovereign government and, unlike gold and silver coins, has no intrinsic value. Countries can thus issue such money at will, and some did (and still do), potentially making the currency worthless. 

Another of these problems was caused by fractional reserve banking. So the story is that this bank in Sweden had this gold and silver in its fault, and it was issuing these receipts, but it went too far and issued more receipts than it had reserves for. And this is what's known now as fractional reserve banking. Now, this isn't a problem so long as you don't have a bank run, which is basically like everyone trying and coming back to the bank to redeem their notes for gold or silver, because this is the thing that bank notes, these receipts could be exchanged for. But if you started doing fractional reserve, if you issued more than you had reserves for, again, that would work as long as everyone or as long as too many people didn't come and try and redeem them. And this is what happened with Stockholm's Banco. There was a bank run. Too many people decided, for whatever reason, that they wanted to redeem their notes for the metal from the reserves. And the bank collapsed.

This became such a problem that in 1821 the United Kingdom—then the leader in international finance—introduced the gold standard. In this monetary system, the standard unit of currency is typically kept at the value of a fixed quantity of gold, which increases confidence in international trade by preventing governments from excessively issuing currency. Centralized banking became the norm to take control of keeping a check on this.

Basically, a gold standard means that a nation's currency is valued according to a fixed amount of gold. So in practice, this means that a nation on the gold standard should have all of its currency in circulation backed by actual gold in its vaults. Is that the case today, though? No, not at all. And this is when people say, oh, Bitcoin is not backed by anything, it's like, well, neither is Fiat money. 

However, the gold standard had its drawbacks. Notably, it limited a country’s ability to isolate its economy from depression or inflation in the rest of the world. So the years after World War I saw economic catastrophes across the world. Germany was crippled by hyperinflation. Then we had the Great Depression in 1929 to 39, which devastated world economies. There was mass unemployment, stagnating wages. Everything was going down the toilet.

In 1931, the gold standard in England was suspended, leaving only the U.S. and France with large gold reserves.

Then, in 1934, the U.S. government made it illegal for Americans to own gold. They had to sell it back to the state at the rate of just over $20 an ounce. And then the dollar was revalued to $35 an ounce, raising the amount of paper money it took to buy one ounce of gold to help improve its economy. 

As other nations could convert their existing gold holdings into more U.S dollars, a dramatic devaluation of the dollar instantly took place. This higher price for gold increased the conversion of gold into U.S. dollars, effectively allowing the U.S. to corner the gold market. Gold production soared so that by 1939 there was enough in the world to replace all global currency in circulation.

So the money raised by devaluing the dollar helped lift America out of the Depression. So this idea of money was kind of freed up. And a lot of Americans got pretty upset about it, obviously, those who were holding a lot of gold. But it seems in retrospect, to have worked that dropping the gold standard, was the right call. 

As World War II was coming to an end, the leading Western powers met to develop the Bretton Woods Agreement, which would be the framework for the global currency markets until 1971. Within the Bretton Woods system, all national currencies were valued in relation to the U.S. dollar, which became the dominant reserve currency. The dollar, in turn, was convertible to gold at the fixed rate of $35 per ounce. The global financial system continued to operate upon a gold standard, albeit in a more indirect manner. 

At the end of WWII, the U.S. had 75% of the world's monetary gold and the dollar was the only currency still backed directly by gold. However, as the world rebuilt itself after WWII, the U.S. saw its gold reserves steadily drop as money flowed to war-torn nations and its own high demand for imports. The high inflationary environment of the late 1960s sucked out the last bit of air from the gold standard. 

In August 1971, Nixon severed the direct convertibility of U.S. dollars into gold. With this decision, the international currency market, which had become increasingly reliant on the dollar since the enactment of the Bretton Woods Agreement, lost its formal connection to gold. The U.S. dollar, and by extension, the global financial system it effectively sustained, entered the era of fiat money.

The Era of Fiat Money

Now, we've used this term Fiat a few times. It especially always comes up when we're talking about crypto. So let's just quickly go over what Fiat money is. So without currencies pegged to any other asset, countries across the world now had complete control over their money supplies, how much money they produced, what it was worth, etc. And this is Fiat money, money that is valuable because a government says so. 

Fiat is Latin for let it be done. So in English, this has come to mean a decree or order, especially by those who have the authority to enforce it. So Fiat money is money by decree. Fiat money doesn't have to be backed by gold or any other assets, just power. And usually power means having more guns. So it all circles back to the sword. Some people talk about the idea of the state having a monopoly on violence, and I guess it means that when push comes to shove, the state can point a sword at you and go, you're going to accept this money, you're going to like it, because we've got lots more of these swords. 

So fiat money meant that governments had the monopoly on violence and were free to produce as much of fiat money as they wanted. And after 1971, there were periods when this Fiat money allowed for growth and prosperity again. So the lack of any gold standard meant that the supply of money basically grew unchecked. Banks were effectively able to create new money by issuing debt. 

An important moment is the repeal of the Glass Steagall Act in 1999 under Bill Clinton that made it so that investment banks and commercial banks could be merged. And this meant that banks were able to take the money from savings banks, and gamble with it. And this eventually led to the crash of 2008, where banks had created so many complicated derivative products and debt instruments that the whole system basically imploded. The crash of 2008, obviously was kind of the low point for Fiat money. And this is what brought us to the invention of Bitcoin and the birth of cryptocurrencies. 

That’s how this idea of money as a technology is evolving over time. It's a technology that allows other tech to be driven. It's greased the wheels, if we were still trading with shells or cows or just even lumps of metal, we would still be in a pretty primitive state. The great leaps forward, the innovations, the expeditions, the discoveries, all this sort of stuff, it wouldn't have been possible without money being created behind it. And, yeah, this technology has done wonderful things. As it's evolved, it lets us do more. And the ability to create new money has made us richer. But obviously, as we've seen, it's come with dangers. And the unchecked creation of new money today is obviously driving fears of inflation. 

But I guess what we can take away is that cryptocurrency is basically the latest technological innovation of money. It's the latest stage. It's the iPhone of money. It's evolved to combat some of the problems with the modern monetary system. 

The Bitcoin Story

So now it's time to talk about the big daddy, the OG crypto, Bitcoin. But before we go on, before we delve into the history of Bitcoin, for those people who didn't maybe catch any of the episodes on blockchain or are still getting up to speed, let's quickly remind ourselves of exactly what Bitcoin is. 

So Bitcoin is a form of digital cash, and it can be exchanged between individuals without the need for any sort of third party - it's completely peer to peer. So previously, digital assets could only be exchanged if there was some sort of third party, some sort of middleman, because there was no way otherwise to prevent them being copied. And we touched upon the double spend problem, because any digital asset can be very easily copied and sent to multiple recipients. 

So that obviously has no decent use as a currency, as a form of money, if it can be easily replicated. So the genius of Bitcoin was to find a way to exchange digital assets so that you could be confident that they were unique. And the way it did this was to use the magic of blockchain technology, which obviously we've discussed in the previous episode. So, yeah, a form of digital cash, an electronic money that can be exchanged privately, pseudonymously, but not anonymously - that is with a degree of privacy. 

Prior Attempts at Digital Money

Bitcoin wasn’t the first attempt at creating digital money. Ideas for digital money have been kicking around for quite some time.

So before we talk about Bitcoin in detail, let's talk about Digicash. Digicash is an early forerunner of Bitcoin. Before we talk about, let's remind ourselves of the difference between a cash and a digital transaction. Obviously, cash takes place peer to peer. It needs to be in person. But a digital transaction can be done over distance. You don't need to be in the same room. But obviously it needs a middleman, a third party to ensure the accounts are debited and credited correctly. 

So we're going to go back to kind of the 1980s, the computer revolution is just getting started, banks are starting to computerize. The whole world is starting to go digital. But there was this group of people who began to realize that having banks in the middle of digital transactions basically represented a pretty big potential threat to user privacy because not only they were going to be able to not only see how much money we were spending, but also where we were spending it. And obviously, that has major repercussions for Privacy because I read somewhere recently that nothing reveals so much about you as how you spend your money. 

So one particular person who is most concerned about this state of affairs was a guy called David Chaum, a computer scientist and cryptographer from California who started working on Digicash.Chaum developed a so-called "blinding formula" to be used to encrypt information passed between individuals. Digicash used public key cryptography to develop a form of digital money that could be transacted much more privately than was possible under the regular system. So users of Digicash didn't have to hand over any personal information while transacting. Quite similar to Bitcoin. However, as we've seen from the episode on Blockchain, centralization is never good. Even though users were able to transact more privately, the DigiCash company itself was still needed to confirm transactions and balances. 

Another project founded in 1996 called Egold, attempted a similar thing. It offered individuals online credit in exchange for physical gold and other precious metals. This company ran into issues with various types of scams, however, and was eventually shut down by the federal government in 2005.

I mentioned how David Chaum had become worried about the erosion of privacy in the digital age. There were others working on this problem too, and they have come to be known as the Cypherpunks. So the Cypherpunks emerged in the early days of the Internet. They basically were a group of libertarian leaning computer programmers, cryptographers, scientists, thinkers, and others who were mainly obsessed with the idea of Privacy in the digital age. They had amazing foresight. They saw the computer age dawn. They saw the coming of the Internet. And they realized pretty quickly that although it was potentially an amazing thing, they were increasingly concerned about how the Internet and digitization in general could be used by governments in particular to infringe on personal Privacy. You've got to have a real understanding of how the world works to even visualize something in the future, especially in the early days of the Internet.

And they believed that cryptography was the tool that they could use, they and others could use to protect themselves from outside interference. They had a secure and anonymous email list, which they could communicate and use, share ideas. 

They weren't solely focused on digital money but it was privacy in general. Anonymous mail, forwarding systems, these digital signatures. There was a lot more to it than just creating a system of money that we could interact with anonymously. But that said, it was a core concern of theirs. So Privacy and pushing back against the power of the state were just as important to their identity.

So one of the first guys was a British computer scientist and cryptographer called Adam Back. And he came up with a system called HashCash. Now it was originally designed to combat spam email. And he made use of the proof of work system that we discussed when talking about blockchain, this idea of using cryptographic hash functions to create problems, basically for a computer to solve. And as we saw, the only way that the computer can do this is to submit a lot of guesses and thus use up a lot of power. So under the system that Adam Back came up with, a computer was rewarded with hash cash when it solved this problem, when it made the correct guess. 

The problem with HashCash, the main problem was that the units of HashCash acted as sort of digital stamps. They could only be used once. So if you were using the HashCash system, you needed to keep creating new ones. And obviously this isn't very useful if you're trying to make a form of money

Hal Finney, another member of the Cypherpunks, had the idea of being able to reuse these proof of work guesses which would then theoretically give them value as a currency because of the work that had been done to produce them. We're going to see a bit more of Hal Finney in the future because he is a big contributor to Bitcoin. 

In 1998, developer Wei Dai proposed an "anonymous, distributed electronic cash system" called B-money. And then there was another guy called Nick Szabo. He came up with a system called BitGold. Now, this was 2005, and this is very similar to Bitcoin. Wei Dai’s B-Money and Nick Szabo's BitGold, they were only ever theories. They were only ever kind of written down. No one actually built them, but they both had similarities, both with each other and with Bitcoin. 

So all these three systems HashCash, BMoney and BitGold, were all forerunners of Bitcoin. And all these guys mentioned, as I say, they're key players in the Bitcoin story, and we'll talk more about them at different points in the story. So the systems they designed, these were all attempts to create a form of digital money. But they all had flaws. They all came up short for one reason or another, as we've discussed. The biggest problem was that no one seemed to be able to figure out how to make such a system work without a central authority overseeing things. 

That’s it for today folks. In the next episode we are going to dive in further into the story of Bitcoin. We will get on to the roller coaster journey that is Bitcoin, explore some of the interesting anecdotes on how Bitcoin came into being, how it got some of its bad reputation and learn about the newest milestones around Bitcoin.

I hope you enjoyed this first part of the two part episode about the story of Bitcoin. I would love to hear your thoughts on this episode. Drop me a comment on my website, on twitter @TheMetaRoy or through instagram @TheMetaRoy. And do stay in touch for the next episodes are going to be even more interesting, so do follow this podcast on Apple Podcasts, Spotify or wherever you like listening to your podcasts on. Hope you have a great rest of the week ahead and see you next Monday!