My new book “Bitcoin Nation” was published on the 15th anniversary of the Bitcoin Whitepaper, October 31, 2023. You can read it below, one chapter per week. Or buy it here:

Ever since humans have lived in groups, they have collaborated and shared responsibilities. In the family, daily tasks are distributed among generations according to knowledge and abilities. In a village, one family specializes in food production, another in clothing. Without this division of labor, there would be no society, technology, nor prosperity.

But how can everyone be fairly paid for their work?

In the family, everyone usually contributes without compensation, expecting the family to help them in return to the best of their knowledge and abilities. Even in this small circle, unpaid labor often leads to frustration. The mother accuses the father of not taking out the trash, while the father replies that he works hard all day, while she “just” looks after the children. Besides that, the 15-year- old son could do it. The son in turn thinks that he already helps much more with household chores than his younger siblings. And so on…

The cause of these conflicts lies in individual value judgments. Everyone considers their work to be at least as valuable as that of others.

This uncompensated, nonspecific system of reciprocity obviously cannot be applied to an entire city, let alone a nation. Work must be fairly paid.

But what does “fair” even mean?

As we have seen, everyone values their work differently. One might consider payment based on working hours as a solution. Unfortunately, this leads to the question, of whether it is truly fair that a worker who assembles ten machines a day earns the same hourly wage as one who assembles fifteen. What if the assembly of one machine involves dangerous steps, and another does not? What about a farmer who works hard for a year but loses the entire harvest due to drought? Who pays him for his work?

You will surely admit that the value of work cannot be easily determined “fairly.” The best-known method to determine it is through the free market. What works for the price of goods is also an effective means for the value of services, including individual labor. But for this value to be determined “fairly”, the market must not be manipulated by altering the currency in which wages are measured.

Ancient philosophers concluded thousands of years ago that hard money, i.e., one with a constant amount, is the only means to achieve this goal. This insight has been derived and confirmed in previous chapters.

But how to maintain a constant money supply?

For about 5,000 years, the answer to this question has been gold.

Since gold is relatively scarce and difficult to mine, its quantity can only be slightly expanded each

year. Still, even gold can experience inflation. For example, when vast amounts of gold and silver were looted from the New World and imported to Europe, it had the same devastating effect on ordinary citizens as if the nobility had developed Midas’ touch. With advancing mining technology and the development of new rockets, it is only a matter of time before an even worse wave of gold inflation from outer space or the earth’s crust arrives.

Moreover, gold has the previously mentioned disadvantages that lead to the cycle from full reserve to partial reserve to fiat.

Is there a better solution?

Let’s take a look at the alternatives:
Central banks and political control over money are one option. Albeit, one that can never work in the long term. The incentive to manipulate the money supply for one’s own advantage is too great for mortals to resist indefinitely.

At the beginning of the twentieth century, Henry Ford came up with the idea of tying money to

energy. At first glance, the idea is appealing, as energy is the one thing in the universe that can neither be created nor destroyed.

However, there are many practical problems in implementing such a currency. Only the invention of computers and the internet made it possible. But on the internet, everything can be easily copied. How could a currency be created on the internet that could not simply be duplicated, thus expanding the money supply without cost?

The answer is the so-called distributed ledger. In short, if all transactions are made public and every user of a currency can verify all transactions, the money supply cannot be expanded unnoticed.

But who can write in this ledger?

Most email account owners are familiar with the phenomenon of spam. An open ledger could easily be crippled by a hacker flooding the servers with spam, such as in a DDoS attack.

To solve the spam problem, Adam Back invented the concept of Proof of Work (PoW) in 2002.

Before someone could send an email to a user, the sender had to find a hash of the email that fell within a specified range.

A hash is the value that a certain type of algorithm outputs when it receives a sequence of bits and bytes at the input. The interesting thing about hashes is that they cannot be reverse-calculated (as far as mathematically known). Having a hash, I cannot reconstruct the originally input bits and bytes. But conveniently, the same input always produces the same output, so a hash provides an unfalsifiable proof of the input without revealing the input itself.

If I were to publish a hash of this book on the internet, the timestamp of when I uploaded the hash would be proof that I wrote this book and no one else. Yet, the content of the book could not be stolen by copying the hash.

Modern hash functions, like SHA-256, are designed to be very sensitive to the smallest changes in inputs. If I remove just one whitespace from this book, it is impossible for anyone who does not have both unhashed versions of the book to recognize that both hashes belong to the same book.

A hash function can also protect against counterfeiting. A PDF document or even a printed contract can be easily manipulated. In court, thus, your deposition stands solely against that of the counterparty. There is, in the worst case, no reliable way for the court to determine which contract is real and which the forgery. Suppose the parties to the contract have also signed the hash of the original document. In that case, it’s next to impossible to falsify both the contract and the corresponding hash in an undetectable way.

Proof of Work uses these properties to make spam costly. By accepting only a certain range of correct hashes, the sender must add characters to the meta-data of the email to obtain a hash that falls within the specified range. Since the hash cannot be reverse calculated, the sender can only do this by adding random characters and testing various hashes, until they find a hash function with a fitting output. Thus, a certain amount of computational effort is required to contact the recipient. Since computation requires electrical energy, spam becomes expensive and is reduced.

This could create a currency structured in a way that the next entry in a distributed ledger is always made by the person who first constructs a transaction with a hash which falls within a specified range. Then, all users who read the ledger would verify whether this transaction is allowed. That is, if only money was spent that previously existed, and if the owners of the money initiated the transaction.

David Chaum proposed Such a concept in basic terms in 1982 called Blockchain.

But something was still missing for a functioning digital currency.