194
12 Cryptocurrencies
your pocket associates you with the purchasing power equivalent to the face value of
the coin. In these examples both pig and coin are part of some database of tradeable
goods. Apparently, bank accounts are databases, maintained and verified by the
banks that associate the purchasing power, represented by the account balance, with
the owner of the account. Furthermore, the databases of different banks are linked
via the internationally agreed IBAN system under the auspices of the Society for
Worldwide Interbank Transactions (SWIFT).
In all cases the transactions are supervised by authorities to verify and guarantee
that the transactions complete correctly. When trading a pig, the two partners of the
transaction ensure that the pig is healthy and only hand over the pig if both partners
are satisfied. The faithfulness of gold coins was historically (at least in Western
movies) checked by biting into the coin. Paper money is printed on special paper
that makes the notes difficult to counterfeit. Moreover, it bears the seal of the issuing
authority, for example a king, and forging the seal carries a heavy penalty. Today,
banks supervise the transactions. They verify that the originator of a transfer has
sufficient funds available and that the account into which the funds will be deposited
actually exists.
Here we see that a bank transaction actually transfers the ownership of purchasing
power from one bank account to another. Since the accounts are part of a database, we
have to transfer database entries, which represent the information about the ownership
and the value of the transaction. And that information has to move from one database
to another. Moreover, we definitely want that transfer to be faithful and error-free. In
the following sections, we therefore have to find out what information actually is in
an abstract sense and how it is affected by perturbations when transmitted from one
database to the next.
To start, let us briefly summarize the key functions of money. Based on the concept
of the distributed database from the previous paragraphs we associate a chunk of
purchasing power with the information H , represented by an entry in some database.
First, H represents a value, which is a pig, the face value of a coin, or the amount
in a bank account. Second, H has an owner, for example the owner of a pig or a
bank account. Third, we need to be able to faithfully transmit H from one database
to another. Fourth, we must be able to verify the ownership of H at any time. Fifth,
transactions must be secure and tamper-proof; we try to protect our coins from pickpockets and trust the banks that they protect our accounts from illicit manipulations,
such as changing the amount of a transfer or initiating a fraudulent transfer.
The first three points, value, ownership, and transmission, are intrinsic to the
money, but the fourth and fifth point involve supervisory functions; we require that
ownership and transactions can be validated. Conventional money, typified by coins,
credit cards, or bank counts, have guaranteeing authorities that follow up and prosecute any violation of their “terms of acceptable use”. We shall see in Sect. 12.5 that
crypto-currencies have built-in validation mechanisms that make external supervisory systems obsolete.
From the discussion it should be obvious that the central concept underlying the
modern use of monies is “information,” which is closely related to the thermodynamic
entropy. This will be the subject of the next section.
12 Cryptocurrencies
your pocket associates you with the purchasing power equivalent to the face value of
the coin. In these examples both pig and coin are part of some database of tradeable
goods. Apparently, bank accounts are databases, maintained and verified by the
banks that associate the purchasing power, represented by the account balance, with
the owner of the account. Furthermore, the databases of different banks are linked
via the internationally agreed IBAN system under the auspices of the Society for
Worldwide Interbank Transactions (SWIFT).
In all cases the transactions are supervised by authorities to verify and guarantee
that the transactions complete correctly. When trading a pig, the two partners of the
transaction ensure that the pig is healthy and only hand over the pig if both partners
are satisfied. The faithfulness of gold coins was historically (at least in Western
movies) checked by biting into the coin. Paper money is printed on special paper
that makes the notes difficult to counterfeit. Moreover, it bears the seal of the issuing
authority, for example a king, and forging the seal carries a heavy penalty. Today,
banks supervise the transactions. They verify that the originator of a transfer has
sufficient funds available and that the account into which the funds will be deposited
actually exists.
Here we see that a bank transaction actually transfers the ownership of purchasing
power from one bank account to another. Since the accounts are part of a database, we
have to transfer database entries, which represent the information about the ownership
and the value of the transaction. And that information has to move from one database
to another. Moreover, we definitely want that transfer to be faithful and error-free. In
the following sections, we therefore have to find out what information actually is in
an abstract sense and how it is affected by perturbations when transmitted from one
database to the next.
To start, let us briefly summarize the key functions of money. Based on the concept
of the distributed database from the previous paragraphs we associate a chunk of
purchasing power with the information H , represented by an entry in some database.
First, H represents a value, which is a pig, the face value of a coin, or the amount
in a bank account. Second, H has an owner, for example the owner of a pig or a
bank account. Third, we need to be able to faithfully transmit H from one database
to another. Fourth, we must be able to verify the ownership of H at any time. Fifth,
transactions must be secure and tamper-proof; we try to protect our coins from pickpockets and trust the banks that they protect our accounts from illicit manipulations,
such as changing the amount of a transfer or initiating a fraudulent transfer.
The first three points, value, ownership, and transmission, are intrinsic to the
money, but the fourth and fifth point involve supervisory functions; we require that
ownership and transactions can be validated. Conventional money, typified by coins,
credit cards, or bank counts, have guaranteeing authorities that follow up and prosecute any violation of their “terms of acceptable use”. We shall see in Sect. 12.5 that
crypto-currencies have built-in validation mechanisms that make external supervisory systems obsolete.
From the discussion it should be obvious that the central concept underlying the
modern use of monies is “information,” which is closely related to the thermodynamic
entropy. This will be the subject of the next section.