Bitcoin and 2008

The Bitcoin white paper, published under the pseudonym Satoshi Nakamoto on October 31, 2008 -- six weeks after the collapse of Lehman Brothers -- was explicitly a response to the institutional failures that the financial crisis had exposed. Its opening sentences described a system of "electronic cash" that would allow "online payments to be sent directly from one party to another without going through a financial institution." The elimination of financial intermediaries -- banks, payment processors, central authorities of any kind -- was the design goal. Trust would be replaced by mathematics.

The timing was not incidental. The 2008 crisis had demonstrated that the institutions charged with maintaining the stability of the financial system had instead contributed to its near-collapse, and had then required massive public subsidy to survive the consequences. The Fed's quantitative easing program -- which Nakamoto's successors in the Bitcoin community followed closely -- represented exactly the kind of institutional money creation that Bitcoin was designed to preclude: no authority could expand the Bitcoin supply beyond the 21 million coins encoded in the protocol, regardless of economic conditions or political pressure.

Bitcoin's design embedded several specific responses to what its creators perceived as institutional monetary failures. The fixed supply cap addressed inflation concerns; no authority could "print" more Bitcoin. The distributed ledger addressed counterparty risk; no single institution held the records that determined who owned what. Proof-of-work consensus addressed trust; the validity of transactions was established by computational work, not by the authority of any institution. These were genuine innovations in the design of value-storage and transfer systems.

What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System (2008)

The gap between Bitcoin's design intentions and its actual use has been large and, to its creators, presumably disappointing. Bitcoin is not used primarily for peer-to-peer electronic cash transactions -- it is used primarily as a speculative asset, held by investors who expect its price to rise rather than used as a medium of daily exchange. Its volatility -- Bitcoin has lost more than 50% of its value multiple times in its history -- makes it poorly suited as a unit of account or a stable store of value. The transactions it facilitates are slower and more expensive than credit card payments for most purposes.

More fundamentally, the elimination of trusted intermediaries has not produced a trustless system -- it has produced a system in which trust is reposed in different intermediaries (crypto exchanges, wallet providers, stablecoin issuers) that are less regulated, less capitalized, and in several cases fraudulent. FTX, Celsius, BlockFi, and Voyager -- all of which failed in 2022 -- were crypto-era versions of the fractional reserve banking institutions that Bitcoin was designed to replace, with less consumer protection and more concentrated ownership than their traditional counterparts.