Is “virtual” currency “virtual”?

Chapter 0 Introduction

According to my own impression, the first sentence most often said by people who hear about Bitcoin for the first time is "It's just a virtual currency."

The word "virtual" makes many people look down on Bitcoin.

This article attempts to explain my understanding of Bitcoin virtual currency.

Chapter 1 What does “virtual” really mean?

Literally, virtual has two meanings:

The first meaning refers to "simulation", and the opposite of it is "real thing".

For example, if we get a 100-yuan banknote, a pink banknote, we say that this is a real banknote. But if you open your online banking, and there happens to be only 100 yuan in your account, there are just a few words like "Balance: 100.00", which also indicates that you can use 100 yuan to buy things, but this is not a physical object, it is virtual.

In this sense, the so-called virtual currency is currency that has no physical state.

Strictly speaking, for this meaning, it is more appropriate to use "digitalization", and it is more accurate to call virtual currency digital currency.

The second meaning refers to "false", and the opposite is "real".

For example, the famous game “Virtual Life” refers to “fake life”.

In this sense, the so-called virtual currency is counterfeit currency.

It is very likely that most of the first reactions I have encountered to Bitcoin, the so-called "virtual currency", have not carefully thought about the above two meanings. They almost confuse the above two meanings and give Bitcoin too many second meanings. Although there is no strong derogatory meaning, it carries more contempt.

Chapter 2 What is “analog” currency (digital currency)

The first meaning is easier to understand, so we will deal with it in this chapter.

Regarding the first meaning, that is, virtual currency (or digital currency) that exists relative to "physical currency", it is actually easy to understand. We can understand it by analogy.

Q coins are generally considered to be a virtual currency (digital currency). They can be used to buy QQ shows, game coins, and can be exchanged with RMB. The value of Q coins is backed by Tencent. It is precisely because Q coins are an incarnation of the RMB that we think it is a virtual currency (digital currency).

Alipay can also be understood as a virtual currency (digital currency), but Alipay's credit is stronger than Q coins, and it is strictly exchanged 1:1 with RMB. However, Alipay is still imitating RMB, using a digital thing to imitate RMB, and is used to complete some functions of RMB. So this is also a virtual currency (digital currency).

With the above analogy, it is easy to understand that Bitcoin is a digital currency.

The so-called digitalization is a concept relative to paper account books. There are two forms of credit card bills sent to users. One is a paper account, which is put in an envelope and delivered to you by courier. The other is sent to your mailbox via email. The former is a paper bill, and the latter is a digital bill.

Before the invention of computers, there were banks, such as the money houses in the Qing Dynasty. They used ledgers to keep accounts. It was a book filled with all the users' money and the records of money in and out. The most common ledger was the double-entry book used by accountants.

Double-entry bookkeeping can fully reflect the flow of a person's money, and can reflect the ownership of the rights and interests of the users registered in the ledger and the flow of money between them.

Double-entry bookkeeping is a great invention. Economist Joseph Schumpeter claimed that double-entry bookkeeping is the beacon of capitalism.

What banks do is to keep a double-entry account book for all depositors. Before the invention of computers, banks or money houses hired accountants to keep accounts for everyone with notebooks and pens. After the computer age, everyone used computers and keyboards to keep accounts. After the Internet age, many account users rely on programs to automatically complete the transfer. This process is what I think is the transition from paper accounts to digital accounts.

Bitcoin is similar to a bank, and is also a double-entry ledger that registers rights and transfers for all users. It is a purely digital ledger, and there are no paper bills in Bitcoin.

The bank's double-entry bookkeeping is done by bank staff, including accountants and software, to keep accounts for depositors. Why can banks keep accounts for users? Because of national laws, the state has mandatory regulations to do so. What are the benefits of bank accounting? With the right to keep accounts, you can use the user's money to lend, and you can make a fortune.

Bitcoin is built on a P2P network. What does it mean to be built on a P2P network? It means that Bitcoin allows anyone to use a computing device to participate in accounting. As long as the mining machine you design complies with the Bitcoin accounting protocol, you can compete to calculate a math problem. Whoever solves it first will obtain the right to account, and the system will reward you with 25 bitcoins.

Bitcoin is also such a ledger. This ledger records the complete transaction records of every Bitcoin from the first unit of Bitcoin to the present. It records who owns these Bitcoins and the transaction process. And because this general ledger records which private key owns the Bitcoin unit in it, whoever holds the private key owns the corresponding Bitcoin. So we can use Bitcoin as currency.

So Bitcoin is a digital currency.

Okay, let’s deal with the second meaning.

Chapter 3 What is real money?

What is real money?

I think that in history, shells and gold are real currencies. This authenticity comes from the consensus of people involved in economic activities, rather than from the credit endorsement of a certain organization or government.

Let’s ask the question another way: What is the essence of money?

I think the essence of money is not credit, just like gold. No one endorses the credit of gold, but it is naturally money. The essence of money should be consensus. If the public believes that gold is money and is willing to use it in transactions, then gold is money.

So what properties does gold have that make it a natural currency?

In the beginning, primitive society did not need money because there was no social division of labor and exchange of goods. But later, as wealth accumulated, goods exchange occurred, which further led to social division of labor. At this time, humans needed something to store value and promote exchange. This is money. Money is one of the prerequisites for the division of labor. Without money, there would be no division of labor, and we would be forced to give up the huge advantages brought by the division of labor.

However, in any economic system, the transaction medium that can be recognized by all market participants is not determined by human subjective will, but must meet certain objective requirements.

First, the medium of exchange needs to be durable. The so-called durability means that if it is gold today, it will still be gold ten thousand years later. Don’t let it be gold today and deteriorate tomorrow.

In fact, they are homogeneous and divisible. Gold is the same as long as the weight is the same; and no matter what the weight is, it can be bent and shaped. Other precious commodities, such as jewelry and jade, are neither homogeneous nor divisible.

The third requirement is also more important: the commodity chosen as a medium of exchange must also be a luxury product, which is scarcity. Human desire for luxury goods has never been endless, and the market demand for luxury goods can never be fully met, so luxury goods can always be recognized by market participants.

In the long-term free competition of economic activities, people will choose a commodity that is widely accepted by the public as a medium of transaction and a store of value, which is currency.

In other words, "real" money should be the "consensus" of people in economic activities. And it needs to be durable, homogeneous, divisible, and scarce.

The so-called virtuality means that I imitate others. Paper money is backed by the credit of the state. The state claims that paper money (legal currency) corresponds to gold, and it is a currency that the public is forced to execute through administrative orders. Under the protection of the state, legal currency does not have the above three characteristics at all, but has the attributes of exclusivity, centralization, and unlimited growth.

Exclusivity means that states can use laws and violence to enforce that only the currency they produce can be used in their own country;

Centralization means that only government agencies can produce legal tender, and no one else has the ability to produce currency;

Infinite growth is inflation. In order to implement certain decisions and actions, the government must spend money. With spending and power, who doesn't want to waste? The central bank prints money year after year. It is called seigniorage.

Paper money is neither a “consensus” in free economic activities nor has real scarcity. In this sense, it can be determined that paper money cannot be considered real currency.

As for Bitcoin, it was also designed based on gold. It has durability, homogeneity, divisibility, and scarcity.

First, durability. Bitcoin will always be Bitcoin and it will not react chemically with any substance.

In fact, homogeneity, under the protection of computing power, Bitcoin has created an uncopyable and unforgeable public ledger on the Internet. As long as several copies cannot be forged, one unit of Bitcoin will always be one unit of Bitcoin. Compared with gold, there are 24K, 18K and other gold on the market, which refers to gold with different purities. However, there will never be 24K Bitcoin in Bitcoin, which will always be 100% pure.

Third, divisibility. The smallest unit of Bitcoin can be one hundred millionth, and it is easy to divide and record. It is much better than gold.

Fourth, scarcity. The design of Bitcoin ensures that the upper limit of units is only 21 million, but the code is open source and can be copied. Anyone can copy it, change the parameters, and then create another coin. Why do we still think that Bitcoin is scarce? This is worth talking about.

Resources are scarce. Bitcoin mining consumes resources. The proof-of-work process mentioned above consumes a lot of computing power and electricity to compete for the right to keep accounts. Mining machines are expensive, electricity costs money, and building mining farms costs a lot. If I design a digital currency system that consumes less resources, such as Litecoin. Once you give up using the same algorithm as Bitcoin, you essentially give up competing with Bitcoin. Unless you can attract more attention from the characteristics and reach another consensus. Otherwise, it can only die or become a dispensable existence. Just like Litecoin, compared with Bitcoin, almost no one pays attention to it.

People's attention is scarce. Kevin Kelly mentioned in his new book "The Inevitable" that all products are essentially competing for consumers' attention. If a person pays attention to one product, he will inevitably ignore another product. This is why the technology of websites like Taobao is not difficult, but if you copy and build a website like this, even if your store opening fee is cheaper than Taobao, it will not be attractive and it will be very difficult to get users to migrate to it.

The consensus among people is rare. If you want to change something that everyone agrees on, it is actually quite difficult.

This is Bitcoin. No Bitcoin holder claims that Bitcoin is backed by gold, let alone the credit of a country. Bitcoin is a purely consensus medium reached by the public in economic activities. It has very ideal durability, homogeneity, divisibility, and scarcity.

So Bitcoin is a real currency, far more real than paper money.

Author: tan90d (Weibo @LightningHSL WeChat tan90d)
My BTC address: 14mhzjkJ71oMAMkKu3dy98dnUpkyQBHL1r
Source: Babbitt Information (http://www.8btc.com/tan90d31)