Almost tomorrow, Jan 12, 2019 in California. Bitcoin celebrates its first 10-year anniversary of the first ever bitcoin consensus-based transaction when 10 bitcoins changed hands.
Amazingly, opening its second succesful decade, the consensus concept built on blockchain is still hugely (the keyword) misunderstood. Explainable on the critics’ side. But more amazed how a big portion of the crypto community interprets and acts in contrast to what a consensus money is intended to be.
In order to compare consensus and fiat monies, one should grasp the ideas of both systems. Blockchain is easier. To start, it would be enough to digest the 9 pages (in fact only full 8 ones) of the original bitcoin white paper by Satoshi Nakamoto from that remarkable month of October 2018. Since then no comparable white paper in consensus money appeared. This won’t be an easiest reading of your lifetime and it is strongly recommended to discuss it with someone else who had also read the white paper. In that way you have more chances to grasp the idea.
With fiat money it is much more complicated. Currently there is no a single economic school in the USA which explains the fiat monetary system correctly. You won’t find the correct answers even in the most expensive universities in the USA, coast to coast. A very limited number of people in the US know exactly how fiat money functions. Most of them are gathered in three institutions: Fed, SEC and US Treasury. Your best bet of around 50/50 would be to communicate with some of them. More sure bet would be to take a scientific path and ask as many inconvenient questions along the way as possible. First hint: dismiss the dominant QTM from the beginning.
A sure rule of thumb which can hint you a little bit further in your searches on fiat money would be: if someone criticizes either bitcoin or blockchain as being a form of scam, bubble, or craze, then this person for sure (keyword) doesn’t understand how the fiat works. No matter how high position in business, politics or academics. And vice versa: if a person can answer very subtle questions on consensus monetary system, there is a high chance he/she understands how the fiat is working.
Due to these circumstances, for this article’s purpose the knowledge of fiat is less required from the readers. For higher-level comprehension of the fiat system the article will guide you on where to find the answers.
Since it looks to become a long-read, the author decided to split it into 11 parts published here on Medium step by step. Please, be patient and stay tuned. 🙂
Let us begin…
Consensus in Blockchain
It is very simple — the longest chain of blocks. The “longest chain” is mentioned 7 times in the bitcoin white paper. Participating nodes agree to consider at any (!) given time the longest chain as the only “valid” one to a) recognize, and b) continue extending.
Don’t make any conclusion that there is any agreed blockchain stored at any major number of nodes at any given moment in time. There is not. One block in bitcoin is created in approx 10 mins (due to the architecture). At the time of writing there are approx 10K nodes in the network. Every full node is working on its version of the next block. Only at the end of this approx 10 minute time span one node is the first. Then this is translated to other nodes and those accepting this newly created block start to work on the next one. And so on.
Imagine there are 100 blocks in the system already, and 10K nodes, each of which is working on its own 101st block. For 9 mins and 59 seconds there are 10K versions of the “longest” chain, none of which is dominant. For 1 final second one of those chains becomes the first to discover/complete the block and thus dominant. The rest 9,999 nodes start gradually accepting this fact and extend to the following 102nd block, while the rest are still at the 100+1 block. And so on. In other words, the consensus in blockchain is very dynamic and hard to measure at any given moment in time. When a clock is stopped there is 1 node which has 102 blocks available, and 9,999 nodes having their own 9,999 versions of the 101 + 1 blocks.
Thus, at any given point in time the longest chain constitutes the consensus in the blockchain world. Nothing else.
Consensus in Fiat
No contemporary economic school talks about it. But the fiat’s initial consensus is very powerful indeed. Let’s talk about the US consensus for the purpose of this article. The usdebtclock.org is an open book on the US economy and to some bigger extent — World. Once there, take a look onto the leftmost corner of the page. There is the US National Debt standing at almost $22T as of the moment of writing. Aka as US Public Debt. This amount of debt has been created by the US government on behalf of the entire US population as a result of consensus.
This debt is divided equally between all (!) US residents, no matter the age, sex, social status or race. Even illegal residents are responsible for that. Every time a new person is born in the USA, along with the birth certificate a debt certificate is issued to such a person. At the moment of writing the amount of the “certificate” equals $67,800 and… growing. Just take a look at the cell next to the to the US National Debt. The same debt certificate is issued to any newcomer to America, whether legal or illegal. If a person dies, the person’s debt is then redistributed evenly among the remaining ones in the USA. If an illegal immigrant is deported, his/her debt is attached evenly to those who remained. Welcome to America.
Thus, in the US-based fiat money system the initial consensus is the total amount of National/Public debt divided equally among all (!) citizens/residents of the USA. To great extent this US-based consensus is also the initial consensus to a very big part of the entire World. This is outside the scope of this article. You can learn more while studying the Bretton Woods system from 1944, and then Jamaica Accords from 1976 which abolished the former.
For the purpose of this article it is enough to see the two consensuses relate to each other as the longest-chain vs initial-public-dept-per-capita.
To be continued…