Discounting is the single most important concept in finance and possibly economics. It’s the idea that money (cash) is less valuable tomorrow than today. The reason is quite existential: our impending death.
Better to spend now than to never enjoy the fruits of your labor. The related inexorable march of inflation also makes money less valuable over time. The US Central Bank has two goals: 1. Ensure the dollar can buy 2 % less stuff a year from now than today and 2. keep the unemployment rate as low as possible.
In other words, because we are all going to die and because the greatest economic minds on the planet are dedicated to ensuring every dollar is worth 2 % less next year than this year, we have a “discount rate” which roughly equals the rate of inflation plus the average level of existential angst in society.
Bitcoin rejects this economic model, declaring loudly: “to hell with discounting!”. While he never said those exact words, Hal Finney was implicitly among the loudest voices chanting Bitcoin’s no-discounting mantra as one of the most important people in the history of Bitcoin. Finney was on the original cypherpunks mailing list in the early 1990s, and was the recipient of the first ever Bitcoin transaction in 2010.
In 2011, right before Satoshi faded into silent anonymity he anointed Finney his successor as Bitcoin lead developer. Finney’s name is often bandied about in discussions of the true identity of Satoshi. Finney died in 2014 of Lou Gehrig’s disease, prompting one to wonder how he could have been so cavalier in his implicit rejection of at least the existential half of the discounting model.
The answer lies in Arizona, where Finney’s preserved head is floating in the frozen suspense of a cryogenic tank. The ultimate vision of Finney and the cypherpunks is immortality. They believe humanity is on the precipice of cheating death.
Cryogenic freezing is the means the cypherpunks employ to ensure they will be resurrected in the impending age of immortality — a medical breakthrough that presumably will be attended by the ability to revive frozen souls who in turn will be permitted to drink greedily from the elixir of youth.
Inventing digital money with a fixed number of total coins (i.e. no inflation) was critical to ensuring resurrection of the body would also resurrect a similar level of economic security enjoyed at the moment of freezing (cypherpunks do not use the word “death”).
Smart contracts, i.e. the ability to program money, were needed to code an incentive for would-be saviors. Cryogenically frozen cypherpunks wanted to lock their net worth in Bitcoin for perpetuity while also dangling some fraction of the locked Bitcoin as a reward for the person who revived them.
This is where smart contracts come in: to ensure the fidelity of the incentive to revive by locking the Bitcoin reward in the fort knox equivalent of an escrow — a super safe built out of cryptographic guarantees.
Bitcoin is insulated from the corrosive forces of inflation, one Bitcoin today is at least as valuable as one Bitcoin tomorrow: or so the theory goes. For this reason, the cypherpunks rejected one of the tenets of modern money theory: death is optional and therefore money is no longer worth more today than it is tomorrow.
A monetary system based on steady inflation to stimulate hot-potato spending — even if it lubricates the gears of the economic machine — is not ethical in light of immortality.
The cypherpunks believed they would live forever, and so built a monetary system instantiating this philosophy. Bitcoin is god money. This is one reason why it can be hard for those of us still resigned to mortality to fully embrace Bitcoin.
Bitcoin is built on a philosophical foundation as different from the mainstream one as Mars is from Earth. Understanding this underlying design philosophy is critical to understanding the confusion many feel in trying to reconcile the world of Bitcoin with the world of stocks and bonds.
Of course, one need not be a transhumanist to advocate for a fixed money supply system. The great majority of Bitcoin holders see it as a hedge against the fickle prospects of the dollar and US monetary system more broadly.
It is currency backed by the certainty of code. But it is also only backed code, which at the moment does not match up well against the nuclear arsenal should the two forms of money ever seriously go head to head.