The Bitcoin Standard: The Decentralized Alternative to Central Banking

by Saifedean Ammous

Austrian Theory of the Business Cycle.11

Only with unsound money can these firms grow to such enormous magnitude that they can influence the press, academia, and think tanks to continuously beat the drums of more war.

In a society of sound money, government is reliant on the consent of its population to finance its operations.

Credit creation by central banks causes unsustainable booms by allowing the financing of unprofitable projects and allowing them to continue consuming resources on unproductive activities.

Government-issued unsound money, however, can stall this process, keeping unproductive firms undead but not truly alive, the economic equivalent of zombies or vampires drawing on the resources of the alive and productive firms to produce things of less value than the resources needed to make them.

The test of the free market is suspended as central bank direction of credit can overrule the economic reality of profit and loss.

The only cure that can work for these pathologies is sound money, which will eradicate the notion of people working for the sake of ticking boxes and pleasing sadistic bosses, and make market discipline the only arbiter for anyone's income. If you find yourself toiling away in one of these industries, where the stress of your job centers purely on pleasing your boss rather than producing something of value, and are not happy with this reality, you may be relieved or frightened to realize the world doesn't have to be this way, and your job may not survive forever, as your government's printing press might not continue working forever.

From the necessity of centralizing gold arose government money backed by gold, which was more salable in scale, but with it came government expansion of the money supply and coercive control which eventually destroyed money's soundness and sovereignty.

Sovereign money contains within it all the permission needed to spend it; the desire for others to hold it exceeds the ability of others to impose controls on it.

Nakamoto succeeded in achieving this through the utilization of a few important though not widely understood technologies: a distributed peer-to-peer network with no single point of failure, hashing, digital signatures, and proof-of-work.

The harder it was to produce new quantities of the money in response to price rises, the more likely it was to be adopted widely and used, and the more a society would prosper because it would mean individuals' efforts at producing wealth will go toward serving one another, not producing money, an activity with no added value to society because any supply of money is enough to run any economy.

The security of bitcoin lies in the asymmetry between the cost of solving the proof-of-work necessary to commit a transaction to the ledger and the cost of verifying its validity.

Bitcoin is built on 100% verification and 0% trust.4

in October 2009, when an online exchange named New Liberty Standard sold bitcoins at a price of $0.000994.

The eternal dilemma humans face with their time concerns how to store the value they produce with their time through the future.

bitcoin is the cheapest way to buy the future, because bitcoin is the only medium guaranteed to not be debased, no matter how much its value rises.

Bitcoin might have a claim to make for being the best technology for saving ever invented.

Timothy May: The combination of strong, unbreakable public key cryptography and virtual network communities in cyberspace will produce interesting and profound changes in the nature of economic and social systems. Crypto anarchy is the cyberspatial realization of anarcho-capitalism, transcending national boundaries and freeing individuals to make the economic arrangements they wish to make consensually… Crypto anarchy is liberating individuals from coercion by their physical neighbors–who cannot know who they are on the Net–and from governments. For libertarians, strong crypto provides the means by which government will be avoided.

Bitcoin can be seen as the new emerging reserve currency for online transactions, where the online equivalent of banks will issue bitcoin-backed tokens to users while keeping their hoard of bitcoins in cold storage, with each individual being able to audit in real time the holdings of the intermediary, and with online verification and reputation systems able to verify that no inflation is taking place. This would allow an infinite number of transactions to be carried out online without having to pay the high transaction fees for on-chain transactions.

foreign exchange industry. That industry produces little of value but an amelioration of the terrible consequences of monetary nationalism.

national currencies fluctuate in value based on each nation's and government's conditions, and their widespread adoption as a global reserve currency results in an “exorbitant privilege” to the issuing nation.

bitcoin's advantages lie not in its speed, convenience, or friendly user experience. Bitcoin's value comes from it having an immutable monetary policy precisely because nobody can easily change it.

Should the cost of running a bitcoin node increase significantly, it would make running a node harder for more and more users, and as a result it would decrease the number of nodes on the network. A network with a few dozen nodes stops being an effectively decentralized network as it becomes very possible for the few nodes that operate it to collude to alter the rules of the network to their own benefit, or even to sabotage it. This remains in my opinion the most serious technical threat to bitcoin in the medium and long term.

Being fundamentally knock-offs that are very easy to recreate, all altcoins do not have this luxury of real-world demand, and must actively build and increase this demand.

These teams are publicly known individuals, and no matter how hard they might try, they cannot demonstrate credibly that they have no control over the direction of the currency, which undermines any claims other currencies might have to being a form of digital cash that cannot be edited or controlled by any third party.

In other words, after the bitcoin genie got out of the bottle, anybody trying to build an alternative to bitcoin will only succeed by investing heavily in the coin, making them effectively in control of it.

The concentration of currency holding, processing power, and programming skills in the hands of one group of people who are effectively partners in a venture defeats the entire purpose of employing a blockchain structure.

Should any of these supposedly revolutionary decentralized currencies offer any real-world valuable application, it is completely inconceivable that it would be paid for with its own freely trading currency.

“Bitcoin is not important, but the underlying blockchain technology is what holds promise” is a mantra that has been repeated ad nauseam between 2014 and 2017 by banking executives, journalists, and politicians, who all share one thing in common: a lack of understanding of how bitcoin actually works.

“cargo cult science,”

“Blockchain technology,” to the extent that such a thing exists, is not an efficient or cheap or fast way of transacting online. It is actually immensely inefficient and slow compared to centralized solutions. The only advantage that it offers is eliminating the need to trust in third-party intermediation. The only possible uses of this technology are in avenues where removing third-party intermediation is of such paramount value to end users that it justifies the increased cost and lost efficiency.

And the only process for which it actually can succeed in eliminating third-party intermediation is the process of moving the native token of the network itself, as the code of the blockchain has no integrated control over anything taking place outside it.

To process bitcoin's entire yearly transaction volume, a personal laptop would need little more than two hours.

It is not the currency and its transactions that require so much processing power; making the entire system trustless does.

What cannot happen is bitcoin's blockchain benefiting the intermediation it was specifically designed to replace.

A non-bitcoin blockchain combines the worst of both worlds: the cumbersome structure of the blockchain with the cost and security risk of trusted third parties.

In the aftermath of the DAO hack, Ethereum developers created a new version of Ethereum where this inconvenient mistake never occurred. This re-injection of subjective human management is at odds with the objective of making code into law, and questions the entire rationale of smart contracts.

Smart contracts have not replaced courts with code, but they have replaced courts with software developers with little experience, knowledge, or accountability in arbitrating.

The only rationale for employing such contracts on a blockchain rather than a centralized computer system would be for the contracts to utilize the blockchain's native currency in some form, as all other contracts are better enforced and supervised without the extra burden of a blockchain distributed system.

There is a clear trade-off between scale and decentralization. Should a blockchain be made to accommodate larger volumes of transactions, the blocks need to be made larger, which would raise the cost of joining the network and result in fewer nodes. The network will tend toward centralization as a result. The most cost-effective way to have a large volume of transactions is centralization in one node.

The concentration of currency holding, processing power, and programming skills in the hands of one group of people who are de facto colleagues in a private venture defeats the purpose of implementing this elaborate structure.

The only commercially successful application of blockchain technology so far is electronic cash, and in particular, bitcoin.