Hi, welcome to my blog!🙋🏼‍♂️

I’m Jakob, a young guy, studying Economics and Finance. I’d like to explain to you about crypto and everything that is going on around it simply and completely. This is going to be the very first article about cryptocurrencies, therefore I can’t mention Ethereum, NFTs, or dApp (Decentralized Applications) without first thoroughly telling you about Bitcoin.

Bitcoin is where everything begins. It is the birth of cryptocurrencies and everything related to blockchain technology.

A long time ago… not really. Bitcoin is a relatively “new” thing. It all started in October 2008 when Satoshi Nakamoto, an anonymous programmer, posted a document on the web with the title: Bitcoin: A Peer-to-Peer Electronic Cash System. This was the so-called white paper that presented Bitcoin’s features and explained how it works.

During 2008 the world had other concerns… Do you know what was going on then? If your answer is “no, I have no idea” I will briefly explain it to you in the next paragraph, otherwise you can skip it.

In 2007, one of the greatest financial crises of all time took place in the United States. The reasons were: subprime loans, a bubble in real estate market prices, and excessive risk-taking by financial institutions. “Subprime” refers to loans granted to a person who is not qualified as a reliable debtor. Banks, as one would expect, demanded higher interest rates from such debtors, as they posed a higher risk to the bank. At the same time, there was a complex resale of those risky loans in form of financial instruments to investors and financial institutions. A higher risk together with an expected higher profit… Which led many to ignore the riskiness of those loans. In short, the following happened:

• a decline in real estate market prices happened,

• subprime debtors couldn’t repay the debt,

• financial institutions and investors found themselves heavily invested in worthless financial instruments,

• financial institutions went bankrupt (Lehman Brothers) and the real estate market crashed.

The bubble burst and brought the American economy close to its collapse, dragging with it even the global one.

The white paper published by Nakamoto was a direct critique of the then (and still current) financial system. He presented to the world a new type of financial system that was capable of operating and offering digital money without having any central control, institution, or state that manages it. It was supposed to work peer-to-peer (P2P), this to say without intermediaries, and assumed to solve the biggest problem of digital payments — The Double Spending Problem. And how?

Blockchain technology

Even today, Satoshi Nakamoto is just a pseudonym. Many argue that this is not an individual, but a group of programmers who invented Bitcoin and blockchain technology after years of study and research. The publication of the Bitcoin white paper in October 2008 was only perfect timing for a marketing move.

To be 100% clear about what I mean by “it works peer-to-peer, without intermediaries and solves The Double Spending Problem” I have to take a step back and tell you something about digital payments.

Why do we need digital payments? So, I am pretty sure you know the answer: online business — one of the fundamentals of today’s economy. We all use the internet nowadays; social networking, chatting, browsing, and of course, shopping, booking, and selling (Amazon, Airbnb, eBay). So obviously there is a need for digital money in order to exchange value on the web.

But what exactly is digital money? If I just take the word “digital money” literally, then it would be enough for me to scan 10 euros and voilà, digital money in .pdf format. Too easy to be real. If I had a file that represents 10 euros, I could easily copy&paste it ten times and end up with 100 euros in total. I would go through the process a hundred thousand times and become a millionaire.🤷🏼‍♂️💶 In addition, I could send a 10€ file to multiple people at once! As you may have already understood, this cannot work; anyone would make money out of nothing. We call it The Double Spending Problem.

The solution to this problem can be a centralized financial system. Banks, credit card issuers (Visa), and other intermediaries (Paypal) come to our aid. How? Let’s look at an example.

Let’s say, Adam, Zoe, and Tommy have 10 euros each. If Tommy wants to send his 10 euros to Adam, the bank will carry out and record Tommy’s transaction and know that Adam has now 20 and Tommy 0. If Tommy also wanted to send 10 euros to Zoe, the bank would not allow him to do so, as he has already spent his 10 euros. Very simple.

Therefore, in a centralized financial system, the bank has the task of guaranteeing the exchange of money from one individual to the other. In doing so, only that entity has control over the ledger in which every transaction is recorded. The ledger is in the hands of a central authority or intermediary, hence the name centralized finance — Cefi. The central entity (or company) records all transactions in its ledger, thus preventing double spending or digital “printing” of money.

Here are three important factors to consider:

• The first one is influence and power of control. Supervising the financial system gives the central entity a power of control and an influence, which (quite clearly) no one should use to their advantage.

• The second one is trust. The person entrusts their money to a financial entity (bank, company, credit card issuer) to be able to use the latter online. Attention! Indirectly use. It is the institution that manages this money, not the individual (such as with cash). It is therefore very important that we trust the institution that manages our money.

• The third factor is high transaction costs. The centralized system means financial intermediaries, institutions, and companies that provide financial services to people. Such services require higher costs in form of fees since this service is carried out by someone. Cross-border transfers are also subject to tax (spread or commissions) and are often time-consuming.

The indirect control of our financial resources to which we are subject if we entrust our assets to a financial institution also presupposes that the concrete possibility of using our money will be subject to schedules. After 4 pm or on weekends, a bank transfer is not feasible, which can be inconvenient in the event of an immediate need for money. In addition, the money we have in the bank in certain cases is just the credit the bank has for us. The bank usually invests most of the liquidity and does not have it available if someone decides on a day-to-day basis to withdraw all their money from a bank account.

I wouldn’t like my words to seem to show that central institutions are evil. Not at all; they are essential for the proper functioning of the economy. In future articles, we will see in which cases centralization is more effective than decentralization.

What is then Decentralized Finance? It is a financial system that does not rely on a central institution but on technology such as blockchain, which is based on mathematics and cryptography. It relies on a network of computers all over the world that collaborate, communicate, record, and verify data. An open-source system that anyone can see, review, develop and improve. The community leads it and decides about it; what to adopt, integrate and use. Decentralization envisages faster cross-border transactions, very low costs, 24/7 availability, no limitations, etc. The network effect, in addition, solves the so-called problem of “Single point of failure”. Since the system is distributed and active on many computers all over the world at the same time, it means that even if one of these stops working, the system will continue to work.

In the above example, we have seen that digital money not managed by a central institution cannot work. So how can we solve The Double Spending Problem on digital payments by eliminating central control and maintaining a peer-to-peer contact between two individuals, just like with cash?

Satoshi Nakamoto finds the solution. In early 2009, Bitcoin launched and solved The Double Spending Problem for digital payments without resorting to central control along with enabling a direct exchange of value between two individuals on the internet. I will tell you more about Bitcoin in the next articles!

Thank you for reading this article! I hope you found it interesting and helpful. If you want to support me, consider subscribing! You can associate an email to your wallet to get my new articles directly in your inbox! If you have a question or suggestion, DM me on Twitter and I will be happy to chat with you! 🙋🏼‍♂️

If you are feeling particularly generous and want to help a university student fund his studies, you can collect this on-chain entry as an NFT on Optimism and receive a visual representation of this article along with all the metadata!🙏🏼

Hi, welcome to my blog!🙋🏼‍♂️

I’m Jakob, a young guy, studying Economics and Finance. I’d like to explain to you about crypto and everything that is going on around it simply and completely. This is going to be the very first article about cryptocurrencies, therefore I can’t mention Ethereum, NFTs, or dApp (Decentralized Applications) without first thoroughly telling you about Bitcoin.

Bitcoin is where everything begins. It is the birth of cryptocurrencies and everything related to blockchain technology.

A long time ago… not really. Bitcoin is a relatively “new” thing. It all started in October 2008 when Satoshi Nakamoto, an anonymous programmer, posted a document on the web with the title: Bitcoin: A Peer-to-Peer Electronic Cash System. This was the so-called white paper that presented Bitcoin’s features and explained how it works.

During 2008 the world had other concerns… Do you know what was going on then? If your answer is “no, I have no idea” I will briefly explain it to you in the next paragraph, otherwise you can skip it.

In 2007, one of the greatest financial crises of all time took place in the United States. The reasons were: subprime loans, a bubble in real estate market prices, and excessive risk-taking by financial institutions. “Subprime” refers to loans granted to a person who is not qualified as a reliable debtor. Banks, as one would expect, demanded higher interest rates from such debtors, as they posed a higher risk to the bank. At the same time, there was a complex resale of those risky loans in form of financial instruments to investors and financial institutions. A higher risk together with an expected higher profit… Which led many to ignore the riskiness of those loans. In short, the following happened:

• a decline in real estate market prices happened,

• subprime debtors couldn’t repay the debt,

• financial institutions and investors found themselves heavily invested in worthless financial instruments,

• financial institutions went bankrupt (Lehman Brothers) and the real estate market crashed.

The bubble burst and brought the American economy close to its collapse, dragging with it even the global one.

The white paper published by Nakamoto was a direct critique of the then (and still current) financial system. He presented to the world a new type of financial system that was capable of operating and offering digital money without having any central control, institution, or state that manages it. It was supposed to work peer-to-peer (P2P), this to say without intermediaries, and assumed to solve the biggest problem of digital payments — The Double Spending Problem. And how?

Blockchain technology

Even today, Satoshi Nakamoto is just a pseudonym. Many argue that this is not an individual, but a group of programmers who invented Bitcoin and blockchain technology after years of study and research. The publication of the Bitcoin white paper in October 2008 was only perfect timing for a marketing move.

To be 100% clear about what I mean by “it works peer-to-peer, without intermediaries and solves The Double Spending Problem” I have to take a step back and tell you something about digital payments.

Why do we need digital payments? So, I am pretty sure you know the answer: online business — one of the fundamentals of today’s economy. We all use the internet nowadays; social networking, chatting, browsing, and of course, shopping, booking, and selling (Amazon, Airbnb, eBay). So obviously there is a need for digital money in order to exchange value on the web.

But what exactly is digital money? If I just take the word “digital money” literally, then it would be enough for me to scan 10 euros and voilà, digital money in .pdf format. Too easy to be real. If I had a file that represents 10 euros, I could easily copy&paste it ten times and end up with 100 euros in total. I would go through the process a hundred thousand times and become a millionaire.🤷🏼‍♂️💶 In addition, I could send a 10€ file to multiple people at once! As you may have already understood, this cannot work; anyone would make money out of nothing. We call it The Double Spending Problem.

The solution to this problem can be a centralized financial system. Banks, credit card issuers (Visa), and other intermediaries (Paypal) come to our aid. How? Let’s look at an example.

Let’s say, Adam, Zoe, and Tommy have 10 euros each. If Tommy wants to send his 10 euros to Adam, the bank will carry out and record Tommy’s transaction and know that Adam has now 20 and Tommy 0. If Tommy also wanted to send 10 euros to Zoe, the bank would not allow him to do so, as he has already spent his 10 euros. Very simple.

Therefore, in a centralized financial system, the bank has the task of guaranteeing the exchange of money from one individual to the other. In doing so, only that entity has control over the ledger in which every transaction is recorded. The ledger is in the hands of a central authority or intermediary, hence the name centralized finance — Cefi. The central entity (or company) records all transactions in its ledger, thus preventing double spending or digital “printing” of money.

Here are three important factors to consider:

• The first one is influence and power of control. Supervising the financial system gives the central entity a power of control and an influence, which (quite clearly) no one should use to their advantage.

• The second one is trust. The person entrusts their money to a financial entity (bank, company, credit card issuer) to be able to use the latter online. Attention! Indirectly use. It is the institution that manages this money, not the individual (such as with cash). It is therefore very important that we trust the institution that manages our money.

• The third factor is high transaction costs. The centralized system means financial intermediaries, institutions, and companies that provide financial services to people. Such services require higher costs in form of fees since this service is carried out by someone. Cross-border transfers are also subject to tax (spread or commissions) and are often time-consuming.

The indirect control of our financial resources to which we are subject if we entrust our assets to a financial institution also presupposes that the concrete possibility of using our money will be subject to schedules. After 4 pm or on weekends, a bank transfer is not feasible, which can be inconvenient in the event of an immediate need for money. In addition, the money we have in the bank in certain cases is just the credit the bank has for us. The bank usually invests most of the liquidity and does not have it available if someone decides on a day-to-day basis to withdraw all their money from a bank account.

I wouldn’t like my words to seem to show that central institutions are evil. Not at all; they are essential for the proper functioning of the economy. In future articles, we will see in which cases centralization is more effective than decentralization.

What is then Decentralized Finance? It is a financial system that does not rely on a central institution but on technology such as blockchain, which is based on mathematics and cryptography. It relies on a network of computers all over the world that collaborate, communicate, record, and verify data. An open-source system that anyone can see, review, develop and improve. The community leads it and decides about it; what to adopt, integrate and use. Decentralization envisages faster cross-border transactions, very low costs, 24/7 availability, no limitations, etc. The network effect, in addition, solves the so-called problem of “Single point of failure”. Since the system is distributed and active on many computers all over the world at the same time, it means that even if one of these stops working, the system will continue to work.

In the above example, we have seen that digital money not managed by a central institution cannot work. So how can we solve The Double Spending Problem on digital payments by eliminating central control and maintaining a peer-to-peer contact between two individuals, just like with cash?

Satoshi Nakamoto finds the solution. In early 2009, Bitcoin launched and solved The Double Spending Problem for digital payments without resorting to central control along with enabling a direct exchange of value between two individuals on the internet. I will tell you more about Bitcoin in the next articles!

Thank you for reading this article! I hope you found it interesting and helpful. If you want to support me, consider subscribing! You can associate an email to your wallet to get my new articles directly in your inbox! If you have a question or suggestion, DM me on Twitter and I will be happy to chat with you! 🙋🏼‍♂️

If you are feeling particularly generous and want to help a university student fund his studies, you can collect this on-chain entry as an NFT on Optimism and receive a visual representation of this article along with all the metadata!🙏🏼