Money, Bitcoin and Time: Part 2 of 3

In the ancient story of money a new chapter is being written…
The Simple Truth about Bitcoin: Bitcoin is the hardest form of money ever invented. It has successfully brought the advantages of physical cash money into the digital realm. Bitcoin is changing the way people organize themselves. The next chapter in the story of money is being written in a new language…

Grasping Bitcoin [7]

Bitcoin seems easy to understand at first (it’s just magic internet money, right?), however truly grasping its significance is a formidable task. Once you think you have Bitcoin figured out, you’ll see it from another perspective and realize how little you actually knew. This pursuit of understanding Bitcoin is like a mountain climber that continually encounters false peaks, which fool him into thinking he has reached the summit, only to realize it is higher still.

Digital Cash Money [1]

As the global economy becomes increasingly digitized and interconnected, new technological realities are taking shape which will cause the market to naturally select for the most effective species of money native to this new digital terrain. Bitcoin is the first truly digital solution to the problem of money. It is the world’s first digital cash (in the original sense of the word cash discussed earlier) meaning that it is under the full control of its owner and can be used for final settlement in the same way as gold is today. Put another way, Bitcoin is digital cash money, a self-sovereign asset that contains within it all the trust factors and permissions necessary to transact with it. Bitcoin is not the liability of any counterparty, hence its nickname — digital gold.

“That in order to make a person covet a thing, it is only necessary to make the thing difficult to attain.”

— Mark Twain

In this way, Bitcoin would bring the desirous advantages of physical cash to the digital realm and combine them with an immutable monetary policy to inoculate its holders from all unexpected inflation. Drawing on lessons learned by other programmers during two decades of attempts at this innovative breakthrough, Nakamoto finally achieved digital cash money by combining four key technologies:

Technological Properties [1]

Bitcoin is open-source software, meaning its source code can be inspected by anyone. This makes Bitcoin a language, its source code and transaction history are universally transparent and can even be printed onto paper (interestingly, this makes it protected under the First Amendment in the United States, more on this later). As an open-source software project, Bitcoin is supported by a global network of volunteer programmers. These programmers are self-interested in the sense that they are almost always Bitcoin owners as they are aligned with its purpose philosophically, and therefore stand to gain financially from its expanding network. Their work over the years has greatly enhanced the functionality of the Bitcoin network. However, these programmers are unable to change the rules of Bitcoin (as we will see when we discuss Bitcoin’s social contract).

Blockchain, Energy and Mining [1,3,8,11]

Economic incentives and disincentives are used to maintain truthful records in the blockchain, it what is an ingenious application of the skin in the game concept. Nodes compete to solve complex mathematical puzzles in a process called proof-of-work. Nodes are incentivized to perform this computing task because the first one to solve the proof-of-work is awarded a batch of newly issued Bitcoin and the transaction fees generated within the latest block of transactions — called the block reward. A block is sealed approximately every ten minutes, which triggers the opening of the next block and proof-of-work competition. Nodes expend processing power (in the form of electricity) to solve these complicated mathematical problems, although considerably less and much more efficiently than the systems that support gold and government money today:

Bitcoin mining is exceptionally energy efficient relative to other monetary systems and their institutions.

“I’d put my money on the sun and solar energy. What a source of power! I hope we don’t have to wait until oil and coal run out before we tackle that.”

By using proof-of-work, which was originally invented as a measure to mitigate email spam, Bitcoin became the world’s first functional energy money. With physical monetary goods, we were required to build walls to safeguard our money. With the Bitcoin network, we are required to expend energy to preserve the sanctity of its ledger, secure its network and enforce the immutability of its money supply. Proof-of-work is essential for Bitcoin to function as hard, digital cash money and enables it to serve as the buyer of last resort for electricity worldwide. The Bitcoin network provides a perpetual economic incentive for everyone in the world to invent more efficient methods of harnessing energy. This global incentive will increase the rate of innovation in energy technologies. As Bitcoin expert Nic Carter puts it:

“The Bitcoin network is a global energy net that liberates stranded assets and makes new ones viable. Imagine a 3D topographic map of the world with cheap energy hotspots being lower and expensive energy being higher. I imagine Bitcoin mining being akin to a glass of water poured over the surface, settling in the nooks and crannies, and smoothing it out.”

As more nodes compete to solve the proof-of-work puzzle, the difficulty automatically increases so that new blocks are added on average once every ten minutes. This automatic algorithmic change is called the difficulty adjustment and is perhaps the most ingenious aspect of Bitcoin. It is the most reliable engineering solution for making and keeping money maximally hard and gives Bitcoin the unique ability to adapt its network security as it grows. As we have seen, when a form of money appreciates, people are immediately incentivized to increase its new supply flow, which reduces its stock-to-flow ratio and compromises its hardness. With Bitcoin, an increase in its price does not lead to the production of more Bitcoin beyond its transparent and predictable supply schedule. Instead, it simply leads to an increase in processing power committed by miners which in turn makes the network more secure and difficult to compromise. Like a vault that becomes harder to crack the more money that is stored within it, Bitcoin offers people an incredibly effective means of value storage.

The Internet of Value [9]

“The internet of value” is a popular moniker to describe Bitcoin. In reality, the Bitcoin protocol can be considered an integral and newly evolved layer of the commercial internet. In computer science, a protocol is a ruleset that governs the transmission of data. The internet as we know it is an integration of four successive layers of open-source protocols, called the Internet Protocol Suite, that maintain constant communication with one another:

The Infinite Hardness of Bitcoin [1]

Bitcoin is the hardest form of money in existence. Its money supply is enforced mathematically and, like the other rules of Bitcoin, cannot be broken or changed. Only 21 million Bitcoins can and will ever exist:

The monetary policy of Bitcoin is set in (mathematical) stone.
As expected, the price volatility of Bitcoin is gradually declining as its network value grows.
Due to its decreasing supply growth rate, over 95% of all Bitcoins will be mined by the year 2025.
As sure as 1+1=2, Bitcoin will soon surpass gold to become the hardest form of money in history.

Bitcoin’s Social Contract [10]

Social contract theory starts with an assumed hypothetical state of nature full of violence that is unbearable for people to live in. Driven by a desire to improve their circumstances, people come together and collectively agree to sacrifice some of their freedoms to establish a social contract and empower an institution to protect them. Government is the result of a social contract: people sacrifice some of their freedoms to give the state control over the monetary system and armed forces. The state, in turn, uses that power to manage the economy, redistribute wealth and fight crime. In the United States, our current social contract grants the government monopoly control of money (via the Federal Reserve) and violence (via the Police and Military).

A New Form of Life [1]

Although Bitcoin is intended to be a monetary technology, it is a totally unique compared to other forms of money. Ralph Merkle, famous cryptographer and inventor of the Merkle tree data structure, has a remarkable way of describing Bitcoin:

“Bitcoin is the first example of a new form of life. It lives and breathes on the internet. It lives because it can pay people to keep it alive. It lives because it performs a useful service that people will pay it to perform. It lives because anyone, anywhere, can run a copy of its code. It lives because all the running copies are constantly talking to each other. It lives because if any one copy is corrupted it is discarded, quickly and without any fuss or muss. It lives because it is radically transparent: anyone can see its code and see exactly what it does.

It can’t be changed. It can’t be argued with. It can’t be tampered with. It can’t be corrupted. It can’t be stopped. It can’t even be interrupted.

If nuclear war destroyed half of our planet, it would continue to live, uncorrupted. It would continue to offer its services. It would continue to pay people to keep it alive.

The only way to shut it down is to kill every server that hosts it. Which is hard, because a lot of servers host it, in a lot of countries, and a lot of people want to use it.

Realistically, the only way to kill it is to make the service it offers so useless and obsolete that no one wants to use it. So obsolete that no one wants to pay for it, no one wants to host it. Then it will have no money to pay anyone. Then it will starve to death.

But as long as there are people who want to use it, it’s very hard to kill, or corrupt, or stop, or interrupt.”

Bitcoin is a technology, like the hammer or the wheel, that survives for the same reason any other technology survives: it provides benefits to those who use it. It can be understood as a spontaneously emergent protocol that serves as a new form of uninflatable money and an unstoppable payments channel. Structurally, the Bitcoin network reflects a quintessential manifestation commonly found in nature.

The Decentralized Network Archetype [7]

The Bitcoin network mirrors one of the most successful evolutionary structures found in nature, the decentralized network archetype:

Clockwise from the top left: the human heart, lightning, the human brain, a fungal mycelium network, roots from a tree, an aerial view of the Grand Canyon, branches from a tree and a cosmic web of galactic superclusters in the deep Universe (which is the largest observable structure in the known Universe at over 1 billion lightyears across).

“Transport networks are ubiquitous in both social and biological systems. Robust network performance involves a complex trade-off involving cost, transport efficiency, and fault tolerance. Biological networks have been honed by many cycles of evolutionary selection pressure and are likely to yield reasonable solutions to such combinatorial optimization problems. Furthermore, they develop without centralized control and may represent a readily scalable solution for growing networks in general. We show that the slime mold Physarum polycephalum forms networks with comparable efficiency, fault tolerance, and cost to those of real-world infrastructure networks — in this case, the Tokyo rail system. The core mechanisms needed for adaptive network formation can be captured in a biologically inspired mathematical model that may be useful to guide network construction in other domains.”

In a similar vein, Bitcoin and its network participants receive signals from the market to create features that satisfy unmet demands or improve the functionality of its network. When block space demand exceeds capacity, as it did it late 2017, transaction fees spike and encouraged the development of a second layer protocol to increase transaction throughout (the Lightning network discussed earlier). As rent-seeking businesses, like Western Union, continue charging exorbitant fees for international remittances, market demand shifts to Bitcoin’s much more cost effective and permissionless payment channel. When governments crack down on Bitcoin exchanges, trading volume on peer-to-peer exchanges like LocalBitcoins.com flourishes. To enhance Bitcoin network accessibility, Blockstream launches satellites that provide global coverage for node synchronization. The Bitcoin network is constantly adapting to optimize for its own expansion and the interconnectedness of its participants. Perhaps Bitcoin is less so digital gold, and more so digital slime mold (just kidding, or am I?).

BAT is a cryptoasset designed to allow web browser users to monetize their own attention. Using a set of open-source software extensions, today you can perform browser-based microtransactions similar to BAT but using Bitcoin instead. This effectively eliminates the need for a cryptoasset like BAT. The capacity of Bitcoin to subsume market-proven features from competitive cryptoassets fortifies it from disruption.

Antifragility [1,11]

Seeing the ubiquity of the decentralized network archetype throughout nature in this way makes the invention of decentralized digital money seem less novel and more inevitable. An open and decentralized nature also enables Bitcoin to benefit from adversity. In light of its track record, Bitcoin is an excellent incarnation of Nassim Taleb’s concept of Antifragility:

“Wind extinguishes a candle and energizes fire… Some things benefit from shocks; they thrive and grow when exposed to volatility, randomness, disorder and stressors and love adventure, risk and uncertainty. Yet, in spite of the ubiquity of the phenomenon, there is no word for the exact opposite of fragile. Let us call it antifragile. This property is behind everything that has changed with time: evolution, culture, ideas, revolutions, political systems, technological innovation, cultural and economic success, corporate survival, good recipes, the rise of cities, legal systems, equatorial forests, bacterial resistance… even our own existence as a species on this planet.”

Fragility can be defined as sensitivity to disorder, whereas robustness is insensitivity to disorder. Antifragility is a property of anything that benefits from disorder, stress or adversity. The many failed attempts at killing Bitcoin thus far have only made it stronger by drawing attention to attack vectors or vulnerabilities that its global team of self-interested, volunteer programmers can then fix. These improvements have only increased the network’s operational efficiency. Also, each time it withstands an external attack or a chain fork (as we are witnessing with the abject failure of Bitcoin Cash), its reputation for network security and immutability is strengthened. The resiliency of Bitcoin is hardened by hostility.

Bitcoin’s Positive Feedback Loop [1,4]

All of the adversity Bitcoin has faced so far has only fed its growth. Absent any top-down authority, Bitcoin is organic in the sense that it has grown from the bottom-up based solely on its own merits as money. Bitcoin perpetuates the expansion of its network and maintains truthful records by relying on asymmetric economic incentives that make fraud far costlier than its potential rewards. Network participants are all rewarded economically for their interactions with Bitcoin, which creates a flywheel effect on its price and network security:

Bitcoin autonomously proliferates its network by economically rewarding everyone who interacts with it.

Bitcoin’s Network Effects [1,4,5]

Bitcoin’s meteoric growth has been both supported and protected by its unique multi-sided network effects. The basic example of a powerful 1-sided network effect is a social network (or a telephone network, as outlined earlier). The more people on a social network, the more valuable it is for others to be on it, as there are exponentially more possible connections. It can, however, be disrupted by a competitor that provides a more valuable service to its single customer cohort, the users, who might then transition to the new service (as happened when Facebook disrupted MySpace).

“In business, creation stories reinforce the role of the individual as a societal agent of change and speak to a core audience of customers. They are the bedrock for what marketers call a brand and the source waters for Wall Street’s shareholder value.”

Assuming Nakamoto was a lone wolf, it is arguable that his disappearance transformed him from a person into a mythological figure. This mystery fuels the brand awareness of Bitcoin and reinforces its quality of decentralization, as there is no single individual to vilify, denigrate or otherwise target in an attempt tarnish Bitcoin’s symbolism. Like a super hero with a secret identity, all we have is the icon of Nakamoto as a cryptic genius — the godhead of Bitcoin.

As a pure bred monetary technology, Bitcoin derives none of its value from alternative uses.
Bitcoin’s price appears to follow a fractal wave pattern based on the archetypal Gartner hype cycle.
Bitcoin is the fastest growing and most volatile asset in history, although both are leveling off as it grows.
The annual low prices of Bitcoin provide an effective proxy for the collective intransigence of its hodlers.
Every four years, the Bitcoin supply growth rate is cut in half. Each halving also cuts the Bitcoin sell pressure from miners in half and creates upward pressure on its price. Historically, this quadrennial event is the best proxy for the timing of Bitcoin price fractal wave patterns.

Minority Rule [3]

When it comes to group preferences, certain types of minorities — those who stubbornly insist on a particular preference — that constitute even a small level of the total population (often less than 4%) can cause the majority to submit to their preferences. Another clever concept from Nassim Taleb, called the minority rule, is the result of complex system dynamics, like those inherent to human interaction.

“Aramaic is a Semitic language which succeeded Canaanite (that is, Phoenician-Hebrew) in the Levant and resembles Arabic; it was the language Jesus Christ spoke. The reason it came to dominate the Levant and Egypt isn’t because of any particular imperial Semitic power or the fact that they have interesting noses. It was the Persians –who speak an Indo-European language –who spread Aramaic, the language of Assyria, Syria, and Babylon. Persians taught Egyptians a language that was not their own. Simply, when the Persians invaded Babylon they found an administration with scribes who could only use Aramaic and didn’t know Persian, so Aramaic became the state language. If your secretary can only take dictation in Aramaic, Aramaic is what you will use. This led to the oddity of Aramaic being used in Mongolia, as records were maintained in the Syriac alphabet (Syriac is the Eastern dialect of Aramaic). And centuries later, the story would repeat itself in reverse, with the Arabs using Greek in their early administration in the seventh and eighth’s centuries. For during the Hellenistic era, Greek replaced Aramaic as the lingua franca in the Levant, and the scribes of Damascus maintained their records in Greek. But it was not the Greeks who spread Greek around the Mediterranean — Alexander (himself not Greek but Macedonian and spoke a different dialect of Greek) did not lead to an immediate deep cultural Hellenization. It was the Romans who accelerated the spreading of Greek, as they used it in their administration across the Eastern empire.”

There is an asymmetry that those who do not have English as their first language usually know basic English, but native English speakers knowing other languages is less likely. If a meeting is taking place in an international office in say, Istanbul, among twenty executives from a sufficiently international corporation and one of the attendees does not speak Turkish, then the entire meeting will be run in English (the commercial Lingua Franca). This is the minority rule in action.

“Never doubt that a small group of thoughtful, committed citizens can change the world; indeed, it’s the only thing that ever has.”

A Superior Species of Money [1,4,12]

Bitcoin also introduces three new traits of money never before seen — censorship resistance, adaptivity and programmability. Censorship resistance means that no group or individual in the world can stop payments made on its network. Bitcoin gains censorship resistance by virtue of its decentralized architecture. Adaptivity refers to the ability for Bitcoin’s network to become more secure as it stores more value, its open-source nature which aligns the incentives of its global team of volunteer programmers with its own to ensure it is always up to date with state-of-the-art software enhancements and its ability to subsume features from competitors that have been proven in the marketplace. Programmability refers to the digital nature of Bitcoin and its ability to interface with smart contracts and other decentralized applications. As we have learned, the free market for money is a competitive environment that is shaped by continuous market-driven natural selection; as a competitor in this domain Bitcoin is a superior species:

“If the modern world is ancient Rome, suffering the economic consequences of monetary collapse, with the dollar our aureus, then Satoshi Nakamoto is our Constantine, Bitcoin is his solidus, and the Internet is our Constantinople. Bitcoin serves as a monetary lifeboat for people forced to transact and save in monetary media constantly debased by governments… the real advantage of Bitcoin lies in it being a reliable long term store of value, and a sovereign form of money that allows individuals to conduct permissionless transactions.”

Bitcoin is a tool for freedom. As the most accessible asymmetric bet in history, Bitcoin is also a unique investment opportunity.

Investing in Bitcoin [1,5,13]

Investing is all about taking intelligent risks. As Daniel Kahneman, a Nobel Prize-winning psychologist, describes it:

“Intelligent risks are based on wide and voracious data gathering checked against gut instinct; while dumb decisions are built from too narrow a base on inputs.”

Bitcoin is often referred to as digital gold, in reference to its hardness, self-sovereignty and as an instrument for final settlement. Following this analogy, there will only be one digital equivalent to gold (due to winner take all dynamics inherent to the free market for money), and if you were going to bet on which one will succeed you’d want to bet heaviest on the biggest (due to its deep liquidity and multi-sided network effects), most renowned (due to the minority rule) and the longest lived (due to the Lindy Effect, more on this later). As people tend to think by analogy, this comparison to gold mostly works well, although it is incomplete.

Bitcoin is competitively superior to both gold and government fiat money, and has plenty of room to grow.

“Technology follows 14-year innovation cycles. These began with the Mainframe in 1954, then the Microchip in 1968, the Personal Computer in 1982, the Internet in 1996 and most recently the Mobilenet in 2010. As a result of the innovations introduced by Bitcoin, soon we will christen 2024 as the dawn of the Trustnet.”

The TrustNet can be thought of as the dawn of trustworthy computing. In theory, it will enable new technologies such as the internet of things, decentralized autonomous organizations, self-owning commercial assets, decentralized internet provisioning, decentralization of energy distribution, reputation markets, computing power markets, stateless identity, immutable media, AI-run organizations, token curated registries, prediction markets and circles of trust. This anticipated innovation wave is consistent with a multi-decade cycle of information technology expansion, consolidation and commoditization:

As innovations in information technology age, they inevitably become commoditized and create the bedrock upon which future waves of innovation are built.

A Momentous Innovation [1,4,5,7,8,10]

Bitcoin is a momentous innovation of the digital age. As such, it has many unique characteristics, properties and capabilities never before seen in a monetary technology:

· Immutable Monetary Policy — Predictable, transparent and unchangeable money supply schedule. The most critical aspect to outcompeting in the free market for money, as people will naturally come to favor the hardest form of money available to them (uninflatable money).

· Digital Scarcity — Necessary to solve the double-spend problem and bring the speed and finality of physical cash settlement into the digital realm.

· Absolute Scarcity — The only asset in the world which has an absolutely finite supply, like time itself.

· Global Final Settlement System — A permissionless, unstoppable payments system with zero counterparty risk (like gold, only digital) that can be used to quickly and efficiently provide finality of settlement across scales and space.

· Self-Sovereign Network — A self-sovereign monetary good (an informational bearer instrument) whose network operates autonomously in full accordance with its own immutable rules as reliably as the laws of mathematics.

· Stateless Money — The first globally connected payments system that is politically neutral. Possible catalyst for the separation of money and state over the long run.

· Revolutionary Social Contract Implementation — A unique 2-layer social contract implementation that decentralizes power among its constituents and creates a hypercompetitive market for its own network security. A new form of social institution.

· Global Consensus — Perhaps the only truly objective set of facts in world history, its distributed ledger is created by converting processing power into indisputable truth.

· Global Energy Buyer of Last Resort — Enables anyone in the world to convert excess electricity into digital gold on demand. A perpetual incentive for everyone in the world to develop more energy efficient innovations.

· A New Form of Life — Feeds on human self-interest and electricity to provide uninflatable money, an unstoppable payments channel and immutable governance.

· Adaptive Security — By virtue of the mining difficulty adjustment, as more value is stored on its network, the network adapts to become more secure.

· Adaptive Functionality — As an open-source software project, programmers around the world are constantly improving Bitcoin’s codebase, however it is up to the users to adopt these changes, which creates a governance equilibrium in which only those changes that are in the collective best interests of users will be adopted. Enables Bitcoin to subsume superior features from competitors that are market-proven, making it highly resilient to disruption.

· Programmability — As a digitally native form of money, it can be used as a form of payment, collateral or fuel for a variety of smart contracts (self-executing software or commercial agreements). Can interface with other decentralized applications. Could function as the core value system for the TrustNet, the anticipated wave of innovation triggered by the emergence of Bitcoin.

Bitcoin has made a major impact in the world in its 10 years of existence, and it still holds a great deal of promise for the future. All in good time. Given its inextricable relationship with money and Bitcoin, the concept of time is worth exploring more deeply. It turns out that time’s role in our lives, individually and collectively, is the key to understanding prosperity and the ways in which Bitcoin could play a key role.

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Synthesized Works & Further Reading

[1] The Bitcoin Standard: The Decentralized Alternative to Central Banking by Saifedean Ammous (a masterful work on which much of this essay is based)

Freedom Maximalist. Bitcoin is Honest Money — stack sats here: http://bit.ly/2THg4Jg Links To All My Work: http://bit.ly/3fG91KV YouTube: http://bit.ly/321Lzm0

Freedom Maximalist. Bitcoin is Honest Money — stack sats here: http://bit.ly/2THg4Jg Links To All My Work: http://bit.ly/3fG91KV YouTube: http://bit.ly/321Lzm0