To understand the implications of a paradigm changing technology, one must intimately understand the problem that is being addressed. If we do not understand the problem at a granular level, how can we ever determine what may be a suitable solution? Bitcoin has been obtuse to many, the reason being that most simply do not understand the problem of money; if you are one of these people, don’t be hard on yourself — very few do understand. With this writing, the aim is to help the novice learner become familiar with our current problem of money. Once the problem is understood, the solution becomes obvious. When speaking to radical disruption, humans have a hard time adapting to a new reality. This is not only due to fear of change, but more so, we are psychologically conditioned to our environment — we cannot see that something is broken when it is all we have ever known.
“If I had asked people what they wanted, they would have said faster horses.” — Henry Ford
Everyone that is now a Bitcoin evangelist was once a Bitcoin skeptic — this rule applies with very few exceptions. Bitcoin is an excruciatingly complex system that requires a working knowledge of economics, computer science, open-source software, game theory, the global political landscape and investment strategy. Bitcoin is an open-source, globally distributed protocol for transferring and storing value; but, just as important, it has a vast technology stack being built out on top of the base protocol — drastically expanding Bitcoin use cases. Bitcoin can mean a wide variety of things to different people with different motivations and has a near infinite number of potential use cases. From this worldview, Bitcoin dominates without rival on three core applications:
Finite and programmatic money supply issuance with no risk of debasement (inflation) — in essence, the wealth you own will not degrade over time.
Nearly unconfiscatable wealth. Globally, 4.2 billion people live under oppressive regimes and dictatorships that confiscate wealth from citizens either through force or capital controls — these citizens do not have the option to leave as their bank accounts will be frozen.
Uncensorable speech in the form of money. Around the world, authoritarians use banking and money as a primary tool to silence their opposition through freezing accounts and prohibiting funding. This inability to fund an oppositional voice can lead to drastic imbalances of power, in which the prevailing regimes can commit unilateral atrocities against their citizenry.
In my view, these three applications are critical to Bitcoin’s success, and the expanding universe of subsequent applications are icing on the proverbial cake. Many newcomers to Bitcoin, believe these three use cases of Bitcoin to be unimportant or a “solution in search of a problem.” Which is understandable as it is common to look at things through the lens of Western democracy. Economics, central banking and money are very boring concepts to most. People are busy raising families, advancing careers and trying to make ends meet — we trust that “experts” have these things figured out. We don’t have time in our busy lives to dig into quantitative easing, interest rate policy, RePo markets, currency game theory among competing nations, the rationale for negative yielding bonds, why economic inequality has become so staggering, and how everything has become “so damn expensive?” Bitcoin can and is a solution to many of these topics; however, we will never understand why Bitcoin until we understand the underlying problem it solves. As Abraham Lincoln said, “If you give me six hours to chop down a tree, I will spend the first four sharpening the axe.” Just as sharpening the axe is key to chopping down the tree, understanding the problem is key to Bitcoin enlightenment. Let’s work to understand the problem, time to sharpen the axe.
What Is Money
It could be argued that money is the most important technology of any society. It quite literally represents half of every transaction that occurs within a society. Despite our daily use of money and how it controls our lives in many ways, we collectively have a very poor understanding of what gives money value. In short, money should simply be an abstraction of value that frees us from the inconvenience of barter — or easier said, a ledger of who owns what.
I will spare the reader the laborious task of going through each of these characteristics in great detail; but I will instead focus on the key deficits in our current monetary system and how the Bitcoin protocol fixes them. We must first have an elementary understanding of monetary history and how we got to the precarious precipice we find ourselves in today.
A common resounding artifact of any culture is the type of money that each culture utilized. Money, in many cultures, started out as beads, feathers and other rare artifacts. These systems of money didn’t work well primarily due to the fact the monetary good was not fungible. To illustrate this lack of fungibility would be the example of seashells used in many cultures. No seashell is exactly the same as any other seashell in terms of size, shape, aesthetic appeal and condition. With these disparities, it led to a lack of fungibility and the buyer and seller had to resort to negotiation of the value of the particular seashell in question — making pricing difficult. Another key component, and arguably the most important of all currencies, is scarcity. We cannot use rocks as currency evidenced by supply being near infinite; no rational economic person will trade finite goods and services for an infinite amount of money. As Andreas Antonopoulous points out, “One can look at archaeological dig sites, in which mountain civilizations used seashells as currency because it comes from the coast, and coastal communities utilized quartz as currency because it comes from the mountains — as long as this resource is not naturally occurring where you live, it has the potential to be a good money.”
In 600 BC, a major breakthrough was reached to solve this issue of fungibility, scarcity and, in many instances, portability. Portability is the ease at which a monetary good is transacted throughout space. The minting of rare metal coins became the solution to a lot of challenges plaguing early monetary systems.
Gold and silver have served as sound money for millennia and their track record is undeniable. If you had one Roman denarius coin, it was exactly equal in value to any other Roman denarius coin, solving the fungibility issue. Coins were small enough that they were fairly portable (albeit with risk of theft), but it did drastically improve upon the portability of previous barter systems; one didn’t have to bring a flock of chickens or a cow with you wherever you went to settle a transaction. Lastly, precious metal-minted coins solved the fundamental problem of scarcity. Gold and silver are a finite resource on our planet, despite our most ardent attempts to extract more, it remains a finite quantity. The entire quantity of all gold mined in human history would only fill four Olympic-sized swimming pools; it is one of the rarest resources on our planet. Gold being so scarce by nature gives it outstanding salability through time. Salability through time refers to the ability of a monetary good to retain its value through time. The above Roman coins have a higher value today than they did when they were first minted — gold and silver have outstanding salability through time.
Inflation and Wealth Destruction
It has become increasingly common to hear statements along this line of thinking: “$24 for lunch? Everything is getting so expensive! Health care, housing, insurance, education for my kids, I can barely afford to live!” To this end, it begs one very simple question: What is more likely, every good and service you are consuming is inexplicably becoming more expensive; or, is the one common denominator in all these things (money) becoming worth less? Think on this question for a moment. How could it be that nearly every good or service is becoming less affordable? Given the massive advancements in computing, engineering, automation and manufacturing throughout the last 30 years, shouldn’t things become less expensive, not more expensive?
The truth is the wealth you’ve accrued in state-issued currency is losing its value every single year. Every single year. A baseline definition of inflation may be a phenomena in which general price levels rise, and each unit of currency buys fewer goods and services. Inflation is a monetary phenomenon, not a price phenomenon. Prices go up because inflation is happening, not the other way around. If you have $1,000 today and let it sit in a checking account, next year you may only be able to purchase $950 worth of goods and services, and this loss is compounding every single year. The even more unfortunate news is that this devaluation is rapidly accelerating (losing value faster and faster). To give a simple analogy, let’s say you are a wheat farmer and the wheat market has been very profitable for you. Last season, all competing wheat farmers’ crops were destroyed by a flood; but, you alone had no losses and had a great harvest. You made a fortune due to the fact you could charge such a high price being the only game in town for wheat — we chubby Americans are willing to pay a lot more to make sure we get some wheat for our cakes. Let’s say the next year, for some inexplicable reason, wheat starts growing naturally, everywhere. Wheat is growing in people's yards, to the point it becomes a noxious weed — wheat “ery’where.” The wheat market becomes saturated, as the supply is now ubiquitous. Your wheat now becomes worth nothing as the supply has exploded. This same phenomena is happening with our money, its paper — with infinite quantity.
Wealth Inequality In The Fiat System
Wealth inequality is one of the most destabilizing factors in any society. This can be witnessed in the French Revolution where the bourgeoisie were met with guillotines in the street. If one were to look at our current distribution of wealth, it is demoralizing at best, along with modern U.S. politics. Our politicians and citizenry seem to talk past each other, finding common ground is a radical exception. It could be posited that part of the reason we cannot find common ground in our political sphere is that we cannot agree on a common problem. Using vague, commonly perceived generalities in addressing our national financial problems, one prevailing ideology tends to cast blame at immigrants and the welfare state, while the opposing ideology aims to blame anyone with financial success and is seen as demonizing productive citizens.
If we all worked to understand one of our most destabilizing issues (money) a little better, we may realize that we have more in common than we want to believe. Our current economic system creates perverse incentives and misallocation of capital; both sides of the argument are simply trying to navigate this broken economic system. The Titanic is sinking, team red and team blue are arguing how to best arrange the chairs on the deck. A very strong argument could be made that wealth inequality has more to do with a broken economic system than any policy issue.
Bitcoin is fungible. One bitcoin is the exact same quality as any other bitcoin in existence, the software you run can independently verify that it is real and is not a counterfeit. When I say “software you run” I am referring to a Bitcoin app you use on your phone. Don’t stress; this software will only become easier to run over time — you boomers. Nothing but love for my boomers.
Bitcoin is perfectly portable. Bitcoin is data, and you can move anywhere in the world simply by carrying a thumb drive or a memorized phrase of words to access your wealth.
Bitcoin is censorship resistant and confiscation resistant. If you take possession of your private Bitcoin keys, no one can access that wealth unless you give them permission. Bitcoin guarantees the scripts you run; if you choose to send money to someone no one can stop that transaction from happening. This enables cross border commerce with low friction and low latency.
Bitcoin is programmable money. The applications that can be built out on top of Bitcoin are endless; smart contracts, escrow, streaming money and immutable messaging applications are able to be built on top of this technology stack. Bitcoin is a decentralized immutable (unchangeable) database. If you paid attention to the most recent election, shouldn’t everyone be in favor of an immutable database no one can manipulate or be accused of manipulating? There would need to be no more accusation and no more defense. Bitcoin data cannot be tampered with. Most databases are a computational “etch a sketch, Bitcoin is computational amber” (Szabo). We will vote on Bitcoin someday.
Bitcoin is global money. The human rights issues we’ve analyzed from inflation, confiscation and censorship are a global phenomenon. Bitcoin is fighting to solve some of humanity’s biggest problems (whether everyone knows it or not) — join the fight.
“The internet is uncontrollable. And if the internet is uncontrollable, freedom will win. It’s as simple as that.” — Ai Weiwei, Chinese Dissident
JPK
I would like to thank Andreas Antonopoulous, Dan Held, WTF Happened in 1971, and the United States Federal Reserve for making it easy to dunk.
This is a guest post by John Paul Klaboe. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.
