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What is Bitcoin and Blockchain?

This is the first article on Rados that's part of the Introduction to cryptocurrencies course. We believe that this course will equip investors with enough knowledge to be able to tell what's hiding behind the buzzwords - the biggest socio-economic revolution that humankind has ever seen or just an internet scam project that's trying to cash in on the hype and take money from uneducated investors. Feel free to leave feedback and suggestions in the comments under this post, we always love hearing from our readers. We hope you enjoy learning with us.

What is Money?

The thing that differentiates man from animals is money. Gertrude Stein

The words Bitcoin and blockchain both deserve a place in the book of the greatest inventions of humankind alongside with the Newton's laws and the famous Einstein equation. But what is hiding behind those words? What do they really mean? Let's find out!

Bitcoin is a radically new form of money. It's invention is a byproduct of globalisation, increased demand for international trade, and it is simply the latest step in the evolution of commerce. It is not the same kind of money like your US Dollar, British Pound or the Japanese Yen. And yet Bitcoin, or the digital gold as they call it, is money because it successfully fulfills its functions: a medium of exchange, a store of value, global recognition, limited supply and protection from counterfeits.

Unlike gold, Bitcoin has a couple other qualities that make it more useful in the modern digital age. Unsurprisingly, all of these functions stem from the virtual nature of this asset.

Firstly, bitcoin is the first form of money that can be owned by both humans and autonomous computer systems, such as artificial intelligence in the far future (AI) or smart contracts like a decentralized casino, on equal terms. While not immediately practical for our current economy today, Bitcoin opens up the door to a world of brand new opportunities for economic growth in the future.

Secondly, bitcoin is easy to store. It does not take up any space. It weighs nothing. It doesn't go bad on the sun if you don't put it in a fridge like a piece of cheese. As long as you remember your private key or have it written down you can't lose bitcoin. Bitcoin is easy to take with you no matter where you go, and it is just as easy to use it no matter where life takes you. Bitcoin is the best thing that has happened to international commerce.

Thirdly, bitcoin is protected from censorship. The only way to stop bitcoin is to permanently shut down internet all over the globe. If a country decides to ban bitcoin - its residents can simply relocate elsewhere and regain access to their money.

Lastly, bitcoin is impossible to be taken from you without your explicit permission. Your bitcoin is protected by a cryptographic key and an optional password. When used correctly this provides a better level of protection than all the lasers, retina and fingerprint scans that bank vaults use in James Bond movies. This inability to take bitcoin from you by force marks a turning point in societal evolution as well. Owning money should be a sacred basic human right. Money allows you to participate in commerce, to buy things that you need for your survival, and to invest in projects that you believe are going to benefit the society and yourself. Doesn't matter where you were born, what color skin you have, what Gods you worship, what language you speak - you get to decide how you want to spend your money for yourself. It's safe to say that after the people of the world embrace bitcoin we'll live in a much freer society. No government will be able to impose barbaric economic sanctions or embargo rules that end up not hurting the political elite of the oppressed country and yet hurt the people living in those countries greatly.

The Chinese have a saying: To know your future you must know your past. In order to understand why the whole world is caught up in bitcoin mania and what on Earth does the word blockchain mean, let's take a look all the way back at our history and trace the evolution of money, from invention to modern days.

Invention of commerce: Barter

Scandinavian and Russian merchants exchanging goods. Olaus Magnus, 1555

The history of money is, first and foremost, the history of commerce. Efficient commerce has allowed humankind to invent specialisation and division of labor: somebody would tend to the crops, somebody would go hunting, somebody was good at making tools or building houses. These people would do what they are best at and then gather together and exchange goods between each other. But sometimes it was hard to find a match for the trade. You'd need a new spear for hunting, but the spearmaker was not interested in meat that day. So you had to find out what the spearmaker wanted, go trade for that item, and then come back later.

Some items that were useful to everybody in the society would eventually become the de-facto money of that age. For example, there are numerous pieces of evidence discovered by archaeologists all over the globe that claim that livestock was used as a common medium of exchange. The problem with livestock though, and most other immediately useful items, is that they aren't a good way to store value long term and have high maintenance costs. And thus the nature of the society and the trade itself has pushed humankind to standardize on a sensible medium of exchange and a store of value. These objects would later become the first money.

Money was created as part of an evolutionary process in the development of human society. It is the greatest invention of our species, as it allows us to efficiently work together towards common goals.

First revolution: invention of coins

Lydian coins, 550 B.C.

At the early stages of standardizing on a medium of exchange people would often pick items that are scarce and have some sacral meaning to them. Mountain countries would often pick seashells as a token of exchange. Hunter countries that had pride in their brave warriors would sometimes pick wolf teeth as a their money. However, seashells were abundant in sea countries and  did not hold value in international trade. And countries with other, more boring currencies, would often be grossed out by the teeth of dead animals and would refuse to trade for these items.

It was vital for future development of international trade to find a universally scarce item that everybody would be happy to trade for. And precious metals ended up as the universal medium of exchange. There is evidence that silver and gold were used as money in Mesopotamia as far back as 3500 B.C.

These precious metals possessed two very important qualities that enabled their use as money. The first one is scarcity - it is hard to acquire a new unit of this metal outside of participating in trade or doing useful work. This quality is protected by the laws of physics. The second quality is liquidity - these metals were universally accepted as a counterparty in a trade by virtually any merchant. This quality is based on social laws and is protected by an unspoken social agreement and tradition.

There is one other important quality to precious metals that has played a very important role later. Precious metals are easy to work with, one can mold them into any shape or form. The state was quick to catch up on that and started minting coins of a fixed weight and denomination.

Coins were invented in a country whose name is now mostly forgotten. In fact, not much would have been known about the country if not for the works of the Greek historian Herodotus. This country's name was Lydia, and it was destroyed and wiped off the face of Earth in year 546 B.C.

And yet one Lydian word has managed to find its way into the vocabulary of many a language. As rich as Croesus is said about a person of extraordinary wealth in English, Turkish and some other languages. It was during the rule of Croesus when Lydians have invented coins and embraced their use nationwide.

The first coins, depicted on the illustration above, were made out of a silver and gold alloy called electrum. They were slightly bigger than modern coins, about as big as a grown man's thumb. In order to protect the merchants from forgery the king would personally stamp each and every coin that was in circulation acting as the warrant of quality and value.

By producing coins of equal weight, size and value the king has eliminated a major source of inefficiency in commerce of those days - the necessity to weight and inspect gold before trade. From that moment on the merchants could simply count the number of coins in order to validate that they are being paid a fair price. Neither did you have to have the necessary ingredients, tools and skills for validating whether the gold was real or not - the king's stamp acted as proof of value. Coins have opened up the world of commerce to a wider population and helped establish new forms of business.

Interesting fact: It was in Sardis, the capital of the wealthy country Lydia, where the two most profitable industries after arms trading were invented: brothels and casinos.

At the end of the day Croesus has wasted all his wealth in a way that befits a great king: on buildings and army. In a famous episode of the ancient Greek history Croesus had asked the Delphic oracle for advice before going to war against Persia. The oracle had famously replied: If Croesus goes to war he will destroy a great empire. Croesus interpreted this as a good omen and attacked the Persians. But it was his trade empire of Lydia that was destroyed by this war. The mercenary army of Croesus was no match for the fearsome army of Cyrus the Great. The aftermath of that war was that coins were able to spread further outside of Europe to other civilizations through Persia.

The invention of coins is no doubt one of the greatest inventions of mankind. It allowed to greatly simplify commerce and invite more people to participate in the trading economy. The coins were easy to count, store and trade.

Unfortunately coins had disadvantages too. Coins were easy to steal or forcefully take from someone. It was hard to store and accumulate huge amounts of wealth as the security costs of having to protect the wealth were already high and couldn't be made less that the wealth itself, or the guards would simply steal the treasure. This inability to accumulate and easily trade big amounts of money ended up slowing further economic progress.

Second revolution: Banks