16. The Need for Encryption Created a New Way of Living

The name of the most common cryptocurrency, bitcoin, also refers to the protocol describing this virtual money and its implementation in the payment system. This cryptocurrency is decentralized and anyone who wishes can join the network by installing the software.

Generally accepted theory regarding the origin and the formation of bitcoin is that it was created in 2009 by one or more crypto programmers using the pseudonym Satoshi Nakamoto, although the preconditions for the development of this technology were created decades ago. The history of work on technology that created the base for cryptocurrency development has four decades long history, since the first RSA encryption that used a public key to encrypt confidential data and a private key to decrypt them was used in 1977.

The following years were characterized by the development of the mechanism of compression that was used to securely and efficiently store and verify a large volume of data that are today used by the bitcoin protocol. At this phase of the late 1970’s there was established the system for calculating all transactions contained in a data block. Later in the 1990’s the programming industry witnessed a wide range of researches related to cryptographic protocols that represented the foundation for development of electronic currencies that were centralized and proprietary.

An article written by mathematicians and digital money enthusiasts Stuart Haber and W. Scott Stornetta, entitled “How to Time-stamp a Digital Document”, announced the key principles of what would later be a platform on which bitcoin works. This article was later quoted by the author signed as Satoshi Nakamoto in his white paper where the principles of blockchain were explained.

One very significant turning point in the development of transaction protocol occurred in 1994 when   a computer engineer and a researcher in cryptography Nick Szabo advanced the idea of “smart contract”, which represented the computer transaction protocol that executes the terms of a contract. During the following decade Szabo was working on uprising of the project called BitGold, that was conceived as a decentralized digital currency based on chains of proofs of application and using countless elements that later were shown as the groundwork of bitcoin, such as timestamping, digital signatures and public keys, but at the first stage of the development it proved to be vulnerable to attacks, while later there were many efforts made in order to overcome this problem.

Later in 1997, the invention of Hashcash by Adam Back represented the proof that this system could work, justifying further research and development in this area. In fact, this idea had already been explored by Cynthia Dwork and Moni Naor in a report entitled “Pricing via Processing or Combatting Junk Mail” published in 1993, but Adam Back had no information about their achievements in this area. At that time Szabo described the possibilities offered by the advance of new technologies in an article entitled “Formalizing and Securing Relationships on Public Networks”. Consequently, many contracts can be implemented without difficulty if the possessions that represent the subject to the contract include a computer code guaranteeing the implementation of the contract provisions.

The next big step was the first peer-to-peer distribution via transfer platform called Gnutella, developed in 2000 by Tom Pepper and Justin Frankel. From the economic approach, it is a classified currency that is not issued by any banking institution nor is linked to a currency settlement. Also it is not commodity money, nor a fiat currency, given that it has no required price.

However, the development of technology enabled bitcoin to have particular elements of trading instruments, even though it does not share key characteristics with them. In that sense there are similarities with fiat currencies although cryptocurrencies are not backed by a material asset, since it has value only because economic actors agree to use it and since the internet makes trade between them achievable. It is more leaning on the monetary exchange function than to that of a store of value, even if its deflationary character can hypothetically lead to it.

The first public announcement of bitcoin occurred in 2008, which opened the space for the first blockchain to be at the beginning of 2009. At that times a repayment for finding a block was 50 bitcoin and is divided by two every 210,000 blocks, which is scheduled to happen every four years. Since December 2012, the return is 25 bitcoin, and according to that division process the year 2140 will be the one when no return will be provided, while the number of bitcoin will have reached a maximum of 21 million.

The rationalization of the nature of bitcoin transactions can begin from the straightforward paradigm of the contract of sale. The smart contract would guarantee that, when the seller broadcasts their possessions, the other party in fact receives the corresponding amount in exchange and, on the other hand, the buyer who pays the price is guaranteed of receiving the goods. In the earliest stage bitcoin was created by a closed community of enthusiasts that used it for internal practice. It is likely to state that they were then used for all intents and purposes as elements of allegation of an identity based on a vision that was contrary to accepted belief of the world in reaction against the establishment.

To illustrate the value of the smart contract mechanism Szabo used a simple example a car rental contract. Under this contract, one pays customary sums in order to use the car owned by a certain rent-a-car company. In this case the smart contract will routinely test out at each due date whether the amount owed is well paid by the renter of the car.

Provided that the imbursement is made, the renter will be the only individual allowed to use the car thanks to the process of authentication. In the event of non-payment, the car is automatically blocked and cannot be used by the tenant, and the renter regains control. The first order, first to generate bitcoins, then as anticipated, but only at one remove, to seize them, was consequently linked to what they served to demonstrate or transmit a certain way of existence and an assured way of seeing the situation.

Fundamentally, the bitcoin was not very diverse from what one finds in the world of fine arts, since for their enthusiasts it represented a way of living and demonstrating its distinction.

This article is part of the academic publication Dividing by Zero by Ana Nives Radovic, Global Knowledge 2018

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