Summary
Bitcoin can be seen as a decentralized system that operates on a market basis, trading computations for currency. Previous digital currency projects, such as b-money and bit gold, lacked a sound monetary policy and failed to implement decentralized markets effectively. However, Satoshi’s Bitcoin succeeded by imposing a finite supply and predetermined monetary policy. This led to the development of the difficulty adjustment algorithm and Nakamoto consensus, key innovations in Bitcoin’s design. Bitcoin’s market for computations operates continuously with a consensus asking price, enabling eager order matching. The simplified structure of Bitcoin’s market system, based on a predetermined schedule and consensus pricing, eliminates the need for complex bidding systems and allows for efficient order settlement. Satoshi’s focus on sound money and a predetermined monetary policy were key factors in Bitcoin’s success.
Key Points
1. Bitcoin was created with a focus on sound monetary policy, aiming for a finite circulating supply that cannot be diluted over time. This goal set it apart from previous digital currency projects like b-money and bit gold, which lacked a predetermined monetary policy.
2. Decentralized systems, such as bitcoin, operate as markets where buyers and sellers exchange goods. Bitcoin’s market for distributing the initial supply of bitcoin into circulation is simplified by imposing a predetermined release schedule and a consensus asking price, eliminating the need for tracking and choosing among user-submitted money creation bids.
3. Bitcoin’s consensus pricing of computations allows for the eager matching of buy/sell orders within the network, leading to the creation of a novel Byzantine-fault tolerant (BFT) algorithm known as Nakamoto consensus. This consensus mechanism only requires 50% of participants to not behave adversarially, a significant improvement in decentralized consensus algorithms.