TLDR: Money is a tool for recording value exchanged among economic participants. One way to record such value is in a digital ledger. Bitcoin is the first digital ledger to figure out how to prevent the State from destroying it. Bitcoin’s deflationary monetary policy provides an alternative to state-fiat money’s inflationary paradigm.
Money is art. Money attempts to transport one person’s subjective experience into another’s mind: the experience of valuing something. However imperfectly, money lets one person answer another: How much is this worth to you?
Money is true speech. The payment of money for some good is a claim about how much I value that good. It cannot be faked because the act of payment requires a commensurate sacrifice of value. Any business trying to charge for a product understands the difference between a user’s white lie “I value this” and the customer’s true claim “I value this” proven with payment.
Money is a measuring tool. It measures the value exchanged between economic participants. This measurement can be performed using physical items: stones, shells, beads, or coins, each acting as a mnemonic device for tracking the amount of value exchanged. Alternatively, the measurement can be written down: scratches on a stone tablet, ink on parchment, or pixels on a screen, in the case of digital money.
Money is information. Our USD account balances are simply numbers recorded in a bank database by those in charge of our financial infrastructure. This written wealth has no physical manifestation. Our acceptance of these numbers as a valid measure of exchanged wealth is a collective fantasy. A fantasy incentivized by our common economic and security interests, and, if those fail, the threat of state violence.
If we accept that money can be implemented via a record of transactions kept among like-minded people, then it follows that any group of people is capable of starting their own.
Let’s create our own money right now…
From Genesis to Reader: 50
From Genesis to Author: 50
Above we’ve recorded Transaction 1 and Transaction 2 in which we create 50 SMP “from Genesis” for each of us, meaning we simply write them into existence. We can do this as long as the users of SMP coin (you and I) agree that this is a legitimate way to distribute our new money.
Let’s use it. Let me buy some pizza from you for 25 SMP. Below is the updated SMP Coin ledger reflecting our transaction history after the pizza purchase.
From Genesis to Reader: 50
From Genesis to Author: 50
From Author to Reader: 25
Transaction 3 spends 25 of my SMP coins, sending them to you the Reader, although I’m still waiting for my pizza…
An interesting point to note here is that this ledger does not keep a record of account balances, but only records the transaction history. The account balances can be derived from this transaction history. For example, after my pizza purchase, my (Author) account balance is 50–25 = 25, while your account balance (Reader) is 50 + 25 = 75.
Many may find this example frivolous, but such a record is sufficient to maintain a primitive money. To be taken more seriously, the first challenge for such a money would be to grow its network. As the number of economic participants in the network increases so would its value. As the value increases, adversaries would become incentivized to steal funds, attempt to control its ledger, or in the case of a state adversary like the US government, to shut down the upstart competitor.
This was ultimately the fate of all previous attempts to launch a non-state digital currency including e-gold and Liberty Reserve. Many were successful in growing their networks large enough to draw the ire of the US government, who proceeded to shut down the companies running the ledgers. These companies succeeded in solving the marketing challenges, but no one could overcome the security challenges necessary for a digital money to survive the scrutiny of a state-level actor… until Bitcoin.
There is no such thing as “a bitcoin”. It doesn’t exist in the physical world, and there is no single digital file or files that you can point to and say this file is my bitcoin. What bitcoin really is… is a history of transactions “written” in a digital ledger, in essence, identical to the primitive SMP coin ledger written above.
The difference between Bitcoin, my SMP ledger, and other private-money ledgers, disappeared by the US Government, is that no single entity is entrusted to maintain the security and validity of the Bitcoin ledger, making it extremely difficult to stop. This is what is meant when we say that Bitcoin is a decentralized currency. Bitcoin’s major innovation was the ability to maintain an immutable written ledger of economic transactions communally, without having to trust a central authority to secure or validate it.
In light of this truth, much of the criticism we hear directed at Bitcoin, that it’s slower than other digital money, that transaction fees are too expensive, are largely irrelevant as these are all explicit trade-offs consciously made to achieve Bitcoin’s primary objective: a decentralized, uncensorable, written record of transactions, impervious to even state-level adversaries.
Over time, Bitcoin will iterate to address these weaknesses on top of its foundation of impenetrable security, while competitors won’t be able to work backwards to address the weaker security assumptions on which they are premised.
What does a decentralized money, not controlled by anyone give us? The ability to run an experiment about whether inflationary or deflationary monetary policy is best, and to have different monetary regimes compete against each other to see which one works best for humanity.
There is no one to manage Bitcoin’s monetary policy, or to abuse it. Its hard limit of 21 million bitcoin is coded into the software protocol which defines it. This monetary paradigm provides a free market alternative to the inflationary state-backed fiat money we’ve grown up with. Because states can’t shut down the Bitcoin ledger, they will have to compete with it, and either do a better job to maintain their user base, or watch Bitcoin adopted as a superior money.
Bitcoin bulls argue that Inflationary monetary systems discourage savings, inflate asset prices, and distort the true costs of wars and unbridled consumption, and that deflationary sound money is the answer. Because of Bitcoin’s decentralization, we finally have a currency which has met both the marketing, and security challenges necessary to survive, and give us a chance to find out if they’re right.
Originally published at cryptograf.io on November 13, 2018.