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Berentsen and Schär
Figure 4
Payment System with a Distributed Ledger
Goods
Buyer
Seller
Stone ownership
Communication
The Yap system was based on a distributed ledger, in which every inhabitant would keep
track of a stone’s ownership. When a buyer made a purchase, this person told his or her neigh-
bors that the stone now belonged to the seller. The neighbors then spread the news until finally
all of the island’s inhabitants had been informed about the change in ownership (Figure 4).
Through this communication, every islander had a precise idea of which unit of value belonged
to which person at any point in time.
In its essential features, the Yap payment system is very similar to the Bitcoin system. A
major difference is that in the Yap system false reports could not be immediately identified,
so conflicts regarding the current state of the implicit ledger would have to be argued and
settled by the group. The Yap system therefore was restricted to a group of manageable size
with close relationships, in which misconduct could be punished by the group. In contrast,
the Bitcoin system is designed to function in a network where no participant can trust any
other participant. This feature is necessary because it is a permissionless payment system in
which participants can remain anonymous through the use of pseudonyms.
1.5 Bitcoin and the Bitcoin Blockchain
Bitcoin is a virtual monetary unit and therefore has no physical representation. A Bitcoin
unit is divisible and can be divided into 100 million “Satoshis,” the smallest fraction of a Bitcoin.
The Bitcoin Blockchain is a data file that carries the records of all past Bitcoin transactions,
including the creation of new Bitcoin units. It is often referred to as the ledger of the Bitcoin
4
First Quarter 2018
Federal Reserve Bank of St. Louis REVIEW