Understanding Bitcoin And Its Disruption Through Its Roots

Bitcoin concept

Five years since the invention of Bitcoin, currency as its first application has made significant inroads into the global financial system. Its disruptive effect has shaken up taken for granted notions of money and inflamed the imagination as to what money could be. Bitcoin is characterized as decentralized stateless currency. Some critics call it money with a Libertarian bent, designed to promote a new capitalism, while many economists are quick to judge its perceived deflationary design as a fatal flaw. Yet Bitcoin does not fit any existing paradigm. It can best be understood on its own merits within the framework through which the technology itself emerged.

The idea of Bitcoin was first introduced in 2008 in a white paper published under the pseudonym Satoshi Nakamoto. It solved a distributed consensus problem that effectively eliminated the issue of double spend. The blockchain, Bitcoin’s underlying technology is a public asset ledger that records and keeps track of anything of value. This distributed database works in tandem with the Bitcoin network as a payment system and bitcoin currency is both a store of value and an unit of exchange.

The impetus for Bitcoin didn’t emerge out of vacuum. It coalesced from various creative experiments and ideas and the architecture behind it was developed over the years. On July 20th, 2010, the mysterious creator Nakamoto pointed to the origin of the Bitcoin protocol saying, “Bitcoin is an implementation of Wei Dai’s b-money proposal on Cypherpunks in 1998 and Nick Szabo’s Bitgold proposal.”

Bit gold as Precursor of Bitcoin

Nick Szabo is a legal scholar and cryptographer known for his research in digital contracts. Prior to coming to his concept of bit gold, he had explored money more deeply than standard monetary theorists. Szabo looked at money in the past beyond its use for transaction in markets and within the larger context of governing systems in society. He examined Carl Menger’s account of the origin of money, which is treated as a classical theory in economics. According to Menger’s theory, money that predates the invention of coinage is thought of as emerging through markets where commodities were bartered. While agreeing with part of this view, Szabo brought a more complete picture, arguing that the origin of money preceded commodity markets in the form of collectibles such as shells. He pointed out how “the double coincidence of wants problem occurs not only in barter exchanges, but in other transactions that were as or more important than barter to hunter-gatherer societies: paying tribute, paying legal fines, bride price, and mortuary distribution (inheritance).”

Szabo thoroughly spelled this out in his essay titled Shelling Out — The Origins of Money, where he examined money as an evolutionary artifact of the species, drawing from anthropology and evolutionary science. He traced the precursor of modern money to concrete objects like wampum that were used by our ancient forebears. Calling them collectibles throughout the essay, he noted how their main function was “a medium of storing and transferring wealth.” Szabo analyzed how “for a particular commodity to be chosen as a valuable collectible, it would have had, relative to products less valuable as collectibles”, durability, security from accidental loss and theft and ease of mutual approximation of value.

He noted how “the unforgeably costly commodity repeatedly adds value by enabling beneficial wealth transfers … the cost, initially a complete waste, is amortized over many transactions.” This principle also applies to precious metals. He found precious metals to have “unforgeable scarcity due to the costliness of their creation” and that this provided value largely independent of any trusted third party. Yet at the same time, along with the issue of non-useability in the modern era for online payment, he acknowledged the problem in the expensiveness of metals to be used for repeated common transactions requiring a trusted third party to mint them into coins and transport them etc.

In his bit gold proposal paper, he also recognized the problem in current economy with reliance on trust in a third party for value, with modern paper money creating inflationary and hyper-inflationary tendencies through central authority control and such practices as fractional reserve lending. Thus, he called for a protocol whereby “unforgeable costly bits could be created online with minimal dependence on trusted third parties, and then securely stored, transferred, and assayed with similar minimal trust.” With the breakthrough of Nakamoto’s distributed consensus, this idea of production and secure circulation of costly bits came to fruition in the open source Bitcoin protocol.

Money as Token for Reciprocal Altruism

Bitcoin is made to digitally replicate the process of mining gold. Digital currency theorist Noel Jones explains how Bitcoin’s value is derived from “an object’s intrinsic worth”, specifically “real computational work that takes energy–no different from the energy used to dig gold from the ground.” This set Bitcoin apart from fiat money whose value is dictated from above and makes it possible for it to have real value outside of state decree.

So what is Bitcoin’s value that is determined through a network free from traditional control? This goes back to Szabo’s discovery of money emerging out of social relationships having to do with intrinsic human nature. In his exploration into the origins of money, Szabo came to see how the existence of primitive forms of money revealed that money is tied to human instinct, specifically the “desire to explore, collect, make, display, appraise, carefully store, and trade collectibles.” He also noted human species’ acts of cooperation outside one’s kin; something evolutionary psychologists call “reciprocal altruism” and pointed out how money was connected to this innate universal human instinct.

By bringing out evolutionary biologist Richard Dawkins’ idea of money as a “formal token of delayed reciprocal altruism”, he elucidated how these forerunners of money provided a “fundamental improvement to the workings of reciprocal altruism, allowing humans to cooperate in ways unavailable to other species.” For instance, he noted how the advent of collectibles enabled high trade by replacing otherwise needed trust and long term relationships and how it also served as insurance for foods shortages, as it created a source of surplus by trading what people cannot immediately consume or store. It also allowed humans to pass wealth on to the next generation.

He described how between tribes, collectibles were used to tally favor and it helped overcome the limitation of memory and keep track of who did what. This prototype of money functioned as a kind of ledger to strike a balance of favor replacing the need for remembering complex social relations as well as covering what modern tort or criminal law does to settle disputes and remedy damages to avoid revenge and wars.

In this sense, collectibles were a vital invention that could facilitate trade and transactions as social relations to help people cultivate fraternity beyond one’s own kin and expand social bonds with humanity at large. As Szabo put it, “lowered transaction costs for all these kinds of transactions meant greater familial, political, legal and economic cooperation — i.e. the enhancement of kin altruism as well as reciprocal altruism and the mitigation of aggression.”

Contrary to modern money that has become abstracted and is often associated with wars, violence and seen as a cause of human misery, historical money was really not the root of all evil, as per its current reputation. It was then more the opposite. This original money was grounded in nature and as a medium of exchange was a token for reciprocal altruism. Value was created through human interaction based on a striving toward manifesting the innate nature of cooperation. How has it come to be that modern money ceased to circulate as a vital evolutionary tool and got abstracted from its intrinsic human value created in relationship, as when two or more are gathered in the spirit of mutual aid and brotherhood?

Nation-State Sovereignty

Gold and other commodities paved the way for mankind to go beyond tribes to develop a sense of belonging to the larger community through complex social agreements. The wealth of the earth came to be divided into geographically based territories, an artificial confinement within borders, which in time became mostly managed by central governance of a monarchy or the state.

Rick Falkvinge described how the origins of modern nation-state governments lies in the power and duty to perform civil arbitration and its first function was to settle disputes and determine who is right by appointed judges. He noted how “it was established that nation-state government owned and controlled the ledger of assets”, controlling the record of who owns what, even changing ownership. He pointed to how this expanded into collecting taxes without consent. Structures of governance were centrally organized around state authority over the public ledger with legislation of laws, issuing of national ID, voter registration, land registry and marriage certificates.

This sovereignty was largely made through the logic of conquest and domination of survival of the fittest. Throughout history, many wars and conflicts revolved around rights of miners and possession of gold or access to valued commodities. The Age of Discovery was another name for modern state colonization. In the European expansion into the Americas and the coasts of Africa, they found whole new worlds to explore and exploit. With genocide of indigenous people and plunder, the Europeans claimed the right to ownership of these properties that belonged to the earth. Civilization of the world was moved toward European nation state terms and social relations were defined by the Western idea of progress.

Governance came to be structured in the form of technological and geographically driven empires, having the nation with the most military might and control of resources at the center. For a time, it was the British Empire. Since then, the center of power has shifted to the United States as it became the greatest aggressor in the world, attempting to overthrow democratically elected governments through military intervention and coups. With the rise of corporate power and deregulated cowboy capitalism, the Anglo-European alliance expanded, creating the world’s first truly global empire.

The Central Authority of the Empire

Through the sovereignty of the state and its controlled asset ledger, fiat money was created as legal tender by government decree. With monopolized national currency, money ceased to circulate as a medium of exchange that would primarily carry two way peer-to-peer interests.

Sovereign currency became an instrument for state organization to aid the growth of national GDP and in recent decades to maximize corporate profits. We can see a prime example of this political control in the case of the U.S. dollar. In recent history, one pivotal moment of outright rejection of money as token for reciprocal altruism occurred at the turn of the century. The creation of the Federal Reserve in 1913 took the power to create money away from the government and the people it supposedly represents and gave it to private corporations. Karen Hudes, the former World Bank lawyer noted how the U.S. dollar is financed by debt issued by the Federal Reserve instead of the Treasury and called this debt a fabrication in which bankers load onerous interest obligation on the people. Now this corporate control over the global asset ledger and crucial points of extraction transformed national currency to carry a private agenda, supported by the creation of the petrodollar.

In the last century, oil has become an engine underlying industrial societies. Those who control oil resources have come to gain greater control of global geopolitics. Like adventurous American eagles who had no fear of soaring away into the heights of lofty visions, unregulated greed gained vast political power that was then inserted into every transaction by taking over and maintaining control of the oil spigot as well as money printing and flow.

After the dollar was accepted as the international currency for most trade through the 1944 Bretton Woods Agreement and gained status as the new global King, another crucial event happened with President Nixon’s declaration to drop the gold standard in 1971. With this, the dollar became nothing other than high-grade paper issued by the U.S. Government, but printed by profiteering private banks. The next step was a digitization of financial transactions made between computers, through which the melding of the world’s financial markets into a single global organism was cemented.

The expansion and abstraction of money delinked from any intrinsic value and from the interests of the local community created new levers of power and promoted endless derivatives, manipulation and bidding up of asset values. Now through the paper markets, prices of precious metals were suppressed and as Bill Holter articulated in the article Loss of Control, the price of almost everything became subject to central control. This ability to create money out of thin air along with U.S. military hegemony gave U.S. based corporations tremendous power to rule global finance and trade and extract wealth from virtually anyone. Through dollars becoming the world denominator, corporations could dictate their vision of society by directing wars to maintain their power over energy and finance in the world.

The Debt Ponzi Scheme

Those who control the ledger control savings for future generations and control the outcome of disputes. They ultimately can control the destiny of an entire population. Global patronage networks of elites bound together through mutual bond and stocks have monopolized the global financial system. The revolving doors of central banks and private investment firms like Goldman Sachs have created one ledger to rule them all, injecting narrow selfish interests into digital numbers on a computer screen. Now through privatized asset ledgers, the elites can govern virtually every transactional flow, undermining the sovereignty of entire nations by engaging in financial war and colonization. This broke the bond of universal humanity and turned social relations into a new class system of creditors and debtors; in other words masters and slaves. Through their extractive power, transnational corporations use control points like the IMF to create forever indebted nations in the Global South and also control populations in the West through mortgage, student loans and credit card debts.

What are these debt interests imposed upon people by third parties foreign to local communities? Debt comes from the entitlement of a small segment of society and their unearned claim to the monetary systems of the world. Money has become a token of this ungrounded superiority; the world now supposedly owes these elites, who thus feel they should be treated above everyone else. This grandiosity has morphed into American exceptionalism, where unsustainable upper middle class living standards are normalized and nations of consumers are allowed to live beyond their means with massive trade deficits at the expense of the majority of the world and its vast pool of exploited labor. Manipulated numbers on the ledgers are converted into a manufactured sense of moral obligation, forcing all to participate in systematized violence of growing debt pyramids.

The 2008 financial meltdown followed by the bailouts of Wall Street banks began to expose this ponzi scheme; economy had become one big speculative casino at the people’s risk. With endless derivatives and government’s quantitative easing (QE), central banks have frantically been trying to taper the bubbles before they burst. Countries like Greece and now Ukraine on the fringes of Europe are the first ones to experience this devaluation into third world status. It was in the midst of this emerging global financial crisis of central government that the invention of the blockchain emerged.

New Gold Standard

Bitcoin is a global public asset ledger that does not rely on the sovereignty of any state. It self-regulates through algorithm. Like gold, this piece of mathematics enshrined in computer code resists the corrosive forces of outside manipulation. It safeguards society from man’s inflated grandiose self and the urge to have power over others, repeatedly shown in the tampering of banked funds as well as currency debasement and confiscation seen in Argentina and Cyprus. Bitcoin frees wealth from the control of privatized ledgers and enables individuals to determine social relations, liberating interactions and expressions that had been marginalized or denied. Furthermore, as commodity money, Bitcoin brings back the gold standard and aids the process of creating new economies outside of state and corporate control.

What is the gold standard? In the past few centuries, it was implemented as a monetary policy among nations. The gold standard is like aligning with an internal law of mother earth that organically generates and regulates its own economy. No one can control the supply of gold as it cannot be created out of thin air. Its supply is limited and the value is derived from energy scarcity as the mining process is resource intensive and gets more difficult the deeper you go to mine it. Contrary to neoliberalism’s doctrine of infinite growth, the earth embodies a reality of finite supply. There is a very deep wisdom expressed in Mahatma Gandhi’s eloquent words: “The world has enough for everyone’s need, but not enough for everyone’s greed.”

An economy based on a gold standard was a more realistic one, at least one in harmony with the finite earth. It was based on the understanding that people can have according to need and the expansion of supply is made possible according to real demand and not greed. Bitcoin has a cap of 21 M. It will take more than 100 years (till the year 2140) to finish mining all bitcoins. This process is self-organized through miners competing to solve difficult mathematical problems in something called proof-of-work. The difficulty is programmed to slow mining growth and correspond more naturally with the demand and supply of the market.

This built-in scarcity is true to the reality of the earth’s finite resources. There is a natural limit to economic growth and here wealth creation coincides with actual resources. This is a move away from the infinite growth model, where wealth creation becomes abstracted from the reality of everyday people and promotes an environmentally destructive cycle of overproduction and endless consumption. In a sense, Bitcoin follows nature’s law, yet at the same time it is vastly different than gold as a medium of exchange and so implements a very unique gold standard.

The New Economics of the Network Effect

Traditionally, currency based on the gold standard had an issue of a shortage of monetary supply or liquidity -of not being able to accommodate growth of liquidity to demand, say for the world economy in an increasingly globalized world. Some economists argue that gold-like deflationary currency was the scourge that caused the great depression. Yet, unlike physical gold, Bitcoin is extremely portable and highly divisible (bitcoin can be divided into 8 decimal points and more if consensus is reached). In other words, infinite divisibility solves the problem of liquidity in the traditional gold standard. Also, unlike the gold standard of the past that was set by the state, Bitcoin’s elimination of the need for third party trust breaks the bond between sovereignty and currency. As the world’s first transnational currency, the gold standard for Bitcoin is set by the sovereignty of emerging global civil society.

All this brings about an inversion of fiat currency. Fiat currency is debt-based and multiplies; when more money is printed, it loses quality, inflating its supply while decreasing value. On the other hand, Bitcoin as an asset-based currency gains value through the network effect. As more people enter the network, it divides and the total net value of the network and each node increases. This network effect radically shifts the concept of wealth. While in the current monetary system, wealth is thought of as something to be attained by competing, extracting and multiplying, Bitcoin starts with a premise that we already have all the wealth we need to accommodate the whole economy and all of humanity and this wealth is circulated by giving, receiving and sharing with one another directly.

Bitcoin is an offspring of the open source culture of the Internet and distributes a sharing economy that promotes collaboration and innovation. Contrary to mainstream media hype around the Silk Road and the demise of Mt. Gox, the fastest growing use of Bitcoin is actually now in charity and tipping. As a fluid gold of the digital age, Bitcoin is the Internet of money and it flows like no other currency has before. It naturally splits and moves everywhere securely in both small and large increments very cheaply. Its built-in scarcity functions as a reward for early adopters and attracts investors. This helps kick-start a new economics with a living standard more in balance with the Earth. To repeat the wise man’s words, the world has enough for everyone’s need but not for everyone’s greed. Earth is finite, but our willingness to share can create infinite common wealth to feed and put roofs over everyone in the world.

With its new fluid gold standard, Bitcoin reduces the tendency for wealth creation without work, which was listed as one of Gandhi’s seven deadly sins. This is because decentralized money makes things like rent seeking, private control and extractive economic activities much more difficult. Also, contrary to bitcoin critics’ argument that its deflationary design incentivizes hoarding, Bitcoin actually discourages extreme wealth accumulation, as the only way for it to gain value is through wider adoption, division and sharing. Furthermore, hoarding is just another word for saving. It cultivates an instinct in people to not to buy things that they don’t need and each person can take a more active role in regulating greed and unnecessary consumption.

New Era of the Global Commons

As currency wars and financial crises continue toward an inevitable end game, the invention of the blockchain heralds a new era of global commons. It can bring a departure from the old world of empire and create a new state of peaceful co-existence, regarding everyone as equal peers, where special interests of single groups, nations or corporations are no longer held out as superior and given the right to control or exclude others from access to world finances.

The blockchain belongs to mankind as a common-wealth ledger that can benefit all. With this public asset ledger, a new form of organizing society becomes possible. Entry into the network is voluntary and open to anyone who is willing to abide by the set of mathematical rules, regardless of nationality, race, gender and credit history. This distributed time-stamped ledger can strike onerous debt. Our willingness to account for past colonization can bring retribution through innovation. The late Hal Finney, who was considered to be one of the earliest bitcoin pioneers once urged early adopters to put their “unearned wealth to good use.” Balance of power can be brought by including those unbanked and underbanked who have been impoverished for so long through this extraction-based economy.

The invention of Bitcoin coincides with peak oil and the beginning of the end of industrial civilization. Blockchain distributed consensus can challenge the elite corporate and crony consensus that is backed by lobbyists and war financiers of oil and nuclear industries, who are currently dictating energy and monetary policy around the world. Bitcoin as a technology of the information age can help decentralize energy by harnessing the power of globally spread supercomputers that are the heart of Bitcoin network with the abundant sun through naturally decentralized solar power. Bits of sunshine rays can redeem abstract digital numbers, restoring our intrinsic connection to nature.

This new gold of the sun can link money back to peer-to-peer social relations based on our kinship as members of humanity. It can facilitate transaction as a cultural practice of reciprocal altruism to awaken our indebtedness to one another and cultivate shared responsibility for the human species who owe so much to the Earth.

The lifting of control over the global ledger puts the power of consensus into the hands of ordinary people. In this time of climate change and endless resource wars, survival of the fittest has reached the point of threatening the survival of the planet. We are now faced with a time of decision in human history; a choice between paths of destruction led by the oligarchic 1% or an evolution of the species. Do we want to stagnate the Earth’s wealth in the hands of the few or make it flow for all as our common wealth? The invention of the blockchain calls for our radical imagination that can meet challenges with courage and bring creative solutions to the problems of our time.

Bitcoin concept photo by Cybrbeast.

Discussion

  1. David Gerard

    This could be one of the best-timed articles on this blog ever.

  2. Joe

    Great article (deserves more exposure) !

  3. Martin

    Very good article and needs to be published wiedly.
    pls remove the dot after the tipping address ( copy-paste trap )

    1. Birdie

      This is just the peefcrt answer for all of us

  4. Konrad

    What a great article. Thank you for helping me to a deeper understanding of money, collectibles, and a deeper sense of potential for Bitcoin!

  5. Mike Stuart

    Thanks for an insightful post Nozomi. Its now obvious to me that World War 3 has been ongoing for some years now, and is primarily an economic conflict. The blockchain can end this war by opening the global asset ledger to public transparency and public participation. It does so with mathematical precision, like Lady Justice before whom all 1’s and 0’s are =.

    Can you suggest good links for “Wei Dai’s b-money proposal on Cypherpunks in 1998” which you mention but not in detail?

    1. Nozomi Hayase

      Mike,

      Thank you for asking me about this. Here is a link to Wei Dai’s b-money proposal.

      http://www.weidai.com/bmoney.txt

      I must admit that my article rather simplified the transformation of Szabo’s bit gold proposal to Bitcoin. It is more like an alchemical process, a combination of many things that made Bitcoin possible. For instance, the solution to the doublespend problem came in the form of Hal Finney’s “Reusable Proofs of Work”, which is said to be based on Adam Back’s invention of Hashcash etc.

  6. Cirvis

    Your funbux just crashed hard.
    It lost nearly 90% of its value in a bit more than a year.

    That’s because it’s not used by normal people and the free market readjusted its price to match its real economy that consists almost entirely of drug dealers and paedophiles.

    1. Nozomi Hayase

      The Bitcoin’s price drop is combination of many factors. Bitcoin is in its infancy and it has small liquidity. If anything, I think this is good as it drives out speculators. You have to look at it in the longer term. Remember, Bitcoin has performed better than any currency in history in the last five years. Just in the last two years it is up at least 15 times what it was then.

      Bitcoin works fine even if the fiat price is $1. By the way your last sentence was inaccurate. The vast majority of things people buy with BTC is not illegal drugs. I’ve been using for buying airplane tickets and many other useful items.

  7. Jonathan Vaage

    If you liked Szabo’s “Shelling Out” article, you would love Daniel Krawisz’ paper “Reciprocal Altruism in the Theory of Money”. It includes a fascinating interpretation of money using game theory.

    http://nakamotoinstitute.org/reciprocal-altruism-in-the-theory-of-money/

    1. Nozomi Hayase

      Jonathan, superb! Thank you for bringing this to my attention. I will definitely research it further!

  8. David MacGregor

    Thanks for this excellent article, which gives a slightly different perspective on the true value of Bitcoin.

  9. Juan

    Bitcoin can be taken over by the establishment, the financial mafia and the government and cause damage way bigger than the problems it allegedly solves.

    Here’s an example of thre of the most corrupt people on the planet joining ‘the bitcoin community’

    https://blog.xapo.com/announcing-xapos-advisory-board/

    1. Nozomi Hayase

      Xapo is a wallet company and it is a business that works with Bitcoin. It itself is not Bitcoin. People can choose to have nothing to do with them and still happily use BTC and be their own bank.

      You might want to read this article I wrote recently focusing on the problem of the untamed beast – crony capitalism. I touched on your concerns in this article, especially in the section Dissent, the Mother of Assent and Distributed Accountability.

      https://www.opendemocracy.net/nozomi-hayase/taming-beast-of-illegitimate-corporate-power

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