Chapter 1: The Motivation Behind Bitcoin

It's widely acknowledged that a fundamental reason many are drawn to Bitcoin stems from a profound dissatisfaction with fractional reserve banking. This system creates the illusion of stable money, yet it is actually subject to manipulation by government-sanctioned monopolies.

The evolution of this system is quite natural: carrying substantial amounts of physical currency is both risky and impractical. As a result, trustworthy entities began safeguarding this hard currency and issuing paper representations of it, which we now recognize as banks. Over time, these paper claims became indistinguishable from money itself. — Ray Dalio, The Changing World Order

There exists an inherent moral hazard within banking, as these credible institutions often have incentives to issue far more paper claims than is prudent. This ultimately leads to bank runs and financial crises. The intervention of government has resulted in a chaotic state of affairs where money printing is monopolized.

With the lessons learned from films and discussions surrounding the 2007 financial crisis, we are all familiar with the banking system's mechanics. Central banks determine the lending capacity of commercial banks. While this process is far from perfect, it essentially operates as follows: to increase bank liquidity, central banks will purchase government bonds and other assets, reduce borrowing rates, and lower interbank borrowing costs. Conversely, to restrict liquidity, they will implement the opposite measures. Banks are compelled to comply.

When commercial banks have access to funds (thanks to central bank easing), they can lend significantly more to the economy due to the fractional reserve banking model. This creates a scenario where money circulates and the system becomes more leveraged.

To simplify, this mechanism seems to inherently expect a continuous rise in debt, currency devaluation, and inflation. This contrasts sharply with a financial system constrained by tangible reserves, such as a gold standard. In that scenario, countries can only extend credit equivalent to their gold reserves, preventing excessive borrowing and maintaining currency value.

In contrast, the fiat-based fractional reserve banking system is somewhat forgiving and inherently inflationary, as there are minimal repercussions for excessive printing. This notion that money is an illusion, manipulated by a government-sanctioned monopoly, starkly contrasts with the principles of cryptocurrency.

Many might agree that this illusionary framework aligns more closely with human tendencies. Alternatives like a gold standard, which proponents of cryptocurrency envision as a fully automated system devoid of institutions, could stifle economic activity. Treating currency as a valuable asset could deter spending, and rigid debt structures could inhibit borrowing. The prevailing culture of "endless borrowing" fosters a more audacious economic environment.

This dynamic has functioned relatively well since the 1970s, particularly as the U.S. and other Western nations have leveraged their economies to counteract natural slowdowns. However, as we find ourselves in 2022, after unprecedented quantitative easing (often described as "money directly transferred to your bank account"), it appears we may have hit a wall. The U.S. dollar is facing scrutiny, and it may soon require a strategy to maintain its global reserve currency status.

The emergence of various U.S. dollar stablecoins could be part of this solution. By utilizing cryptocurrency as a foundational layer, these stablecoins can rejuvenate the dollar's image, and their increasing popularity may help preserve its global standing. The U.S. seems to recognize this, as evidenced by proposed regulations surrounding stablecoin oversight.

Next, consider the finance industry, which thrives on ambiguity. Savers and borrowers would likely be hesitant to engage with one another if they fully understood their risk and return profiles. Finance obscures this complexity, creating a veneer of attractiveness. It's no surprise that leading financial journalists often employ sarcasm, as the intricacies of finance demand a "willing suspension of disbelief" from observers, creating an element of mystery that fuels economic activity. In contrast, cryptocurrency seeks to eliminate this ambiguity.

The legal industry also capitalizes on ambiguity. In a world fraught with uncertainties, parties must enter into contracts that are often imprecise. Each side may exploit vague terms to their advantage. The promise of cryptocurrency is that by encoding agreements into smart contracts, ambiguity can be minimized. Everything becomes a clear-cut if-then scenario, reduced to binary code.

However, this raises concerns: if every possible outcome and risk must be accounted for in a contract, complex agreements may become unfeasible. The existing ambiguity in contracts can facilitate economic activity, particularly when courts operate fairly and possess the discretion to interpret agreements.

Chapter 2: The Limitations of Traditional Banking Infrastructure

If one chooses to delve deeply into how the fiat banking system functions, they may discover that it operates as a poorly designed database, often relying on mainframes running COBOL—an antiquated programming language from the 1960s.

COBOL's simplicity renders it fast, but this simplicity often results in cumbersome systems. For instance, the Bank of New York Mellon reported having over 112,500 COBOL programs, totaling around 350 million lines of code—likely a common scenario among large financial institutions.

While many focus on calculating Bitcoin's energy consumption, it would be interesting to evaluate the energy usage of these legacy COBOL systems that banks depend on.