Unit 4:History of Money and Trust

From bartering to banknotes to Bitcoin

• Money allows people to trade goods and services indirectly. It helps communicate the price of goods, and it provides individuals with a way to store their wealth.
• Before money, people acquired and exchanged goods through bartering.
• Money is valuable as a unit of account—a socially accepted standard by which things are priced and with which payment is accepted. However, throughout history, both the usage and form of money have evolved.

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Understanding the History of Money

• Though the terms "money" and "currency" are often used interchangeably, several theories suggest that they are not identical. According to some theories, money is inherently an intangible concept, while currency is the physical (tangible) manifestation of the intangible concept of money.
• By extension, according to this theory, money cannot be touched or smelled. Currency is the coin, note, object, etc. that is presented in the form of money. The basic form of money is numbers; currently, the basic form of currency is paper notes, coins, or plastic cards (e.g., credit or debit cards). Though this distinction between money and currency is important in some contexts, for the purposes of this article, the terms are used interchangeably.

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The Transition From Bartering to Currency

• Bartering is a direct trade of goods and services; for example, a farmer may exchange a bushel of wheat for a pair of shoes from a shoemaker. However, these arrangements take time.
• Slowly, a type of currency developed over the centuries that involved easily traded items like animal skins, salt, and weapons. These traded goods served as the medium of exchange (even though the value of each of these items was still negotiable in many cases). This system of trading spread across the world and still survives today in some parts of the globe.

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Transition to Paper Currency

• banks eventually started using paper banknotes for depositors and borrowers to carry around in place of metal coins. These notes could be taken to the bank at any time and exchanged for their face value in metal—usually silver or gold—coins. This paper money could be used to buy goods and services. In this way, it operated much like currency does today in the modern world. However, it was issued by banks and private institutions, not the government, which is now responsible for issuing currency in most countries.13
• The first paper currency issued by European governments was actually issued by their colonial governments in North America. Because shipments between Europe and the North American colonies took a long time, colonies often ran out of cash. Instead of going back to a barter system, the colonial governments issued IOUs that traded as currency. The first instance was in Canada (then a French colony). In 1685, soldiers were issued playing cards denominated and signed by the governor to use as cash instead of coins from France.

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Mobile Payments

• The 21st century has given rise to two novel forms of currency: mobile payments and virtual currency. Mobile payments are money rendered for a product or service through a portable electronic device, such as a cellphone, smartphone, or tablet device.
• Mobile payment technology can also be used to send money to friends or family members. Increasingly, services like Apple Pay and Google Pay are vying for retailers to accept their platforms for point-of-sale payments.

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Virtual Currency

• Bitcoin​, released in 2009 by the pseudonymous Satoshi Nakamoto, quickly became the standard for virtual currencies. All of the world's bitcoin, as of June 2022, were worth just over $392 billion. Virtual currencies have no physical coinage. The appeal of virtual currency is that it offers the promise of lower transaction fees than traditional online payment mechanisms do and is operated by decentralized authorities, unlike government-issued currencies.

The Bottom Line

• The history of money is still being written. The system of exchange has moved from swapping animal skins to minting coins to printing paper money, and today, we appear to be on the cusp of a massive shift to electronic transactions. Ancient transaction forms have been co-opted: for example, bartering still occurs on the margins in some markets such as the business-to-business (B2B) space and some consumer services. The monetary system will surely continue evolving as long as humans require a medium of exchange.

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Unit 4: Bitcoin Mechanics

• A blockchain is a secured distributed ledger, a database disseminated between multiple users who can make changes.
• Mining is the process of validating transactions, which requires miners who are rewarded in bitcoin.
• You access your bitcoin using a wallet, a public key, and private keys.
• Bitcoin users pay small transaction fees in bitcoin to miners for processing the transactions.
• Bitcoin's weakness is in storage methods. The blockchain has reportedly never been compromised.

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• The Bitcoin Blockchain
• The Bitcoin blockchain is a database of transactions secured by encryption and validated by peers. Here's how it works. The blockchain is not stored in one place; it is distributed across multiple computers and systems within the network. These systems are called nodes. Every node has a copy of the blockchain, and every copy is updated whenever there is a validated change to the blockchain.
• The blockchain consists of blocks, which store data about transactions, previous blocks, addresses, and the code that executes the transactions and runs the blockchain. So, to understand the blockchain, it's important first to understand blocks.

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Bitcoin

• Bitcoin, a digital currency, is a decentralized system that records transactions in a public ledger, called a Blockchain.
• Bitcoin Transactions
• Consider a simple Bitcoin transaction between a sender and a receiver. There is an input, which is a record of the Bitcoin address from which the sender initially received the Bitcoin he wants to send to the receiver. Then, there is a specific amount of Bitcoin the sender sends, and an output, which is the receiver’s public key (or Bitcoin address). These are the basic components of a simple Bitcoin transaction.

• “having Bitcoin” basically means there is access to a key-pair that consists of:
• A public key, to which a certain amount of Bitcoin has been previously sent.
• A unique private key, which authorizes the Bitcoin that is previously sent to the public key for it to be sent somewhere else.
• A public key is a random sequence of letters, that is akin to a username on social media. They can be shared with anyone. Indeed, you must share your public key with a sender whenever you want to receive Bitcoin. However, private keys, also a random sequence of letters, must be kept secret. With the public key, other users can see what is inside your account, but cannot touch it. A private key is needed to access this fund.

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Bitcoin

• Consider the simple transaction discussed earlier. The sender wants to send Bitcoin to the receiver. To do this, the sender uses his private key to sign a message with the specific transaction details. The message is sent to the Blockchain and contains:
• Input: The transaction source of the coins previously sent to the sender’s address.
• Amount: The amount of Bitcoin sent from the sender to the receiver.
• Output: The receiver’s public address
• This transaction is then broadcast to the network where miners will be able to verify that the sender has the right key to access the input – address to which Bitcoin was previously sent – he claims to possess. After verification of the transaction, the miners are rewarded with newly-created Bitcoin. This is how Bitcoin is created.

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Bitcoin Block

• Blocks are files where data related to the Bitcoin transaction are stored permanently. The block records any of the most recent Bitcoin transactions that have not yet entered any prior blocks. In a way, a block is like a page of a ledger. A block describes the “present” and contains information about the past and the future.

Bitcoin Script

• This is a simple, stack-based programming language that facilitates the processing of transactions on the Bitcoin Blockchain. However, it is important to note that the Bitcoin script, or simply called script, is not the language Bitcoin software is written in. The script is applied by using the programming language that Bitcoin software is written in. The script provides the Bitcoin software instructions on the coins in the Unspent Transaction Output. Users do not need to go through the throes of learning Bitcoin script. Bitcoin applications are there to complete this processing behind the scene.

Bitcoin Network

• It is safe to assert that the creation of Bitcoin has provided us a creative way of making payments. This even has the potential to become the payment method in the future. The creation of Bitcoin has revolutionized the industry and is the first cryptocurrency to attain global recognition, with the clear view of being independent of government and financial institutions.
• Bitcoin is an efficient user-orientated method that is designed to eliminate the need for intermediaries when users try to control their funds. Bitcoin network has millions of users globally, and its growth is continuous because it gains new users every day. Through Bitcoin, Blockchain technology, and some other platforms like https://bitcoinera.app/ have gained popularity. Initially used as Bitcoin Blockchain, the Blockchain technology is currently being used with other cryptocurrencies. Several organizations have adopted the use of Blockchain because as a decentralized technology, it offers its users a certain level of anonymity.

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Limitations and improvement of Bitcoin Network

• One of the greatest demerits of the Bitcoin network is that its market is highly volatile. This means that its prices increase and decrease rapidly. This poses a great threat to genuine investors and must take caution when investing in Bitcoin. Also, the decentralized nature of Bitcoin is only obvious to certain people. Indeed, the government can decide to ban Bitcoin transactions. They fear it to be susceptible to the illicit activities of criminals. These reflect some of the limitations of the Bitcoin Network.
• However, certain improvements can enhance users’ experience on the Bitcoin network. Merkle Tree and Abstract Syntax Tree should be adopted on the network. These two algorithms, when combined, make it easier to add complex data to the Bitcoin Blockchain. Furthermore, the “lightning network” should be adopted. This is a proposal that will introduce the execution of most transactions off the main chain, therefore giving it more time to handle important transactions.

Bitcoin Security

• There are many parts that make up the Bitcoin blockchain and network, but it is not necessary to understand it all to use this new currency technology. You only need to know that you use a wallet to send, receive, and store your bitcoin keys; you also should use a cold storage method for security because non-custodial wallets can be hacked.
• Custodial wallets can also be hacked, but many who offer this service take measures to reduce the chances that hackers can get into the storage systems. Most are turning to enterprise-level cold storage techniques businesses use to store essential data for extended timeframes.
• For good reason, many people are concerned about Bitcoin's level of security, especially since it involves exchanging money for encrypted data ownership. However, it's important to note that the Bitcoin blockchain has never been hacked because of the community consensus mechanisms used. Wallets are the weak spot, so if you're looking to get involved in Bitcoin, it's essential to understand how to utilize cold storage methods and keep your keys out of your hot wallet.

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