inamerrata

I don’t know about anyone else, but I’ve been finding the zeitgeist in Bitcoin a bit incoherent: every second idea that’s brought up is treated as either essential or an imminent disaster, and yet a few weeks later everyone who was so excited/enraged has moved onto some different idea to be excited/enraged about. Personally, I like to be able to use popular opinion as something of a safety check that I’m not getting too caught up in the weeds on things I think are technically cool, but that don’t actually matter — problem is, that’s not very effective when everyone else is getting caught up in the weeds worrying about things that don’t actually matter.

So I guess that means going to my back up plan, and looking at things from first principles: what’s Bitcoin actually good for, why are we doing any of this, and what will actually help with that? I’ve thought about that previously in terms of monetary theory — money’s for saving (store of value), or money’s for paying for things (medium of exchange), or money’s for writing out values in contracts (unit of account). But while that’s a nice framework for many things, it’s also perhaps a bit abstract if you’re looking to figure out concrete priorities.

Instead, I’m going to suggest there’s seven different reasons people care about Bitcoin:

1. Inflation resistance
2. Theft resistance
3. Censorship resistance
4. Cost reduction
5. Self-enforcing contracts
6. Wealth redistribution
7. Revolution

Let’s talk about what I mean by each of these, and why people might want them.

Inflation resistance

This really has three different scales:

• resistance to hyperinflation, where governments massively devalue their currencies in short periods of time (eg Venezuela, Zimbabwe, Argentina, Turkey or Weimar Germany);
• resistance to inflation spikes, eg where attempts to avoid a recession by pumping money into the economy results in an overall increase in the price level; and
• resistance to mild, planned inflation, where central banks slowly and deliberately reduce a currency’s purchasing power for various reasons.

High inflation is widely recognised as bad, both for individuals whose savings are diminished and for society as a whole, as it often results in recessionary shocks. By having a fixed supply cap and a liquid market, investing in Bitcoin is a simple way for people to attempt to avoid the bad side effects those policies might have on them, and, if widely adopted, may prevent the bad side effects of those policies in general.

Theft resistance

There are a variety of ways in which money gets stolen — from basic robbery, to more legal methods such as hidden bank fees, locking funds, or civil asset forfeiture. By being inconspicuous even in large amounts, easy to self custody, and easy to spend or transfer when desired, Bitcoin can be an easy way to avoid many ways in which wealth can be stolen or confiscated.

On the other hand, by being easily transferable, Bitcoin can also be more vulnerable to theft by other means, whether that involves threats or physical violence or insufficient technical security of online wallets. There are, I think, plenty of potential improvements to be made here.

Censorship resistance

A different problem some people face is people attempting to prevent them from spending their own money in the ways they’d like, or from receiving money for goods or services they provide. This can result from people simply trying to discourage illegal activities (cf, Silk Road) but can also apply to activities the government dislikes, even if they’re apparently legal (eg, Trucker protests) or completely legal (eg, Operation Choke Point, various GoFundMe bans); and there are various attempts to have more even more intrusive control over people’s spending (eg, China’s Social Credit System, Australia’s Income Management System for welfare recipients, credit cards with emissions limits on purchases, or CBDCs).

In so far as Bitcoin can allow you to transact with other people without third parties having any idea who is making the transaction, or what the transaction is for, then preventing targeted censorship is probably straightforward. And even if such information can still be recovered by approaches such as chainanalysis, even just being able to avoid having to reveal all that information to middlemen, such as banks or payment providers (who, in turn, may be required to collect such information due to KYC/AML requirements) is a win.

If you’re thinking of Bitcoin as “Freedom Money” this is probably the key feature that justifies that phrase: being free to do what you want with your own money, versus someone else being able to tell you “no, we disaprove, we can’t allow you to do that.”

Cost reduction

One of the problems with money is that everyone always seems to want more of it; so even if they’re not stealing your money outright, someone’s always trying to take a bit here and a bit there. Where there’s a monopoly payment platform in place, these fees can be exhorbitant (eg, Twitch takes 50% of subscription fees after deducting taxes/expenses, app stores tend to be 15%-30%, as is Uber Eats, OnlyFans takes about 20%, Patreon is 8%-20%). Having alternative ways of sending/receiving money can both be a way of directly avoiding these costs, and a way of convincing existing companies to reduce their fees by the thread of competition. To a lesser extent the same applies to regular banking services as well, with each transaction losing a few percent to credit card fees or currency conversion fees, as well as setup and account keeping fees.

Self-enforcing contracts

A much more esoteric feature that can attract people to Bitcoin (or cryptocurrencies more broadly) is the ability to write self-enforcing contracts (aka “smart contracts”). That is, rather than writing a contract “you do X, I’ll pay you $Y” and then having to go to court in the event of a disagreement, you setup a self-enforcing contract, and whoever’s in the right can just enforce the contract directly without needing any third party involvement (and the uncertainty, expense and delays that can entail).

There are a lot of limitations to that, of course, and it may be that for many things it’s better done outside Bitcoin per se, rather than directly on the Bitcoin blockchain (particularly for contracts that don’t involve exchanging bitcoin). But even when restricted to simple things like lightning’s hash-timelock contracts, this sort of technique can be a powerful enabling technique for other features.

Wealth redistribution

And then of course there’s the simplest reason of all: the opportunity to part fools from their money. This can be pretty benign — if some people don’t recognise Bitcoin’s value immediately, then you can buy it early then sell it to them later at a higher value when they do eventually recognise its value, ie essentially the “number go up” thesis.

But it can also pretty easily devolve to fraud, where you’re taking money upfront and promising to deliver something of value, without ever having the intention of doing anything much more than taking the money, and the only reason the people losing money are fools is that thy believed you. Maybe you do this by running a ponzi scheme and just spending your customers’ deposits, or maybe by creating worthless tokens and selling them to hoodwinked investors so insiders can profit, or maybe pretending you’ve come up with a new way of effectively turning lead into gold. Personally, I think even some of the ridiculously overconfident price predictions/targets fall into this category too.

Bitcoin and cryptocurrencies are particularly susceptible to this for a few reasons: there’s easily verified history of people getting really rich really quickly, so when people claim some new scheme will do the same for you, it may be more believable than it would be in other contexts; people who’ve missed out on those gains already might be susceptible to FOMO and jumping in on too-good-to-be-true offers without taking the time to do enough due dilligence; Bitcoin and cryptocurrencies are new and complicated, so it can be hard to see all the ways in which a scheme can fail and thus hard to correctly weight up the risks; and finally it can be hard to hold people responsible for frauds accountable in any meaningful way, perhaps because they managed to be anonymous the entire time, perhaps because they’re simply operating from another country, or perhaps because they deflected blame to the technology itself. Perhaps the strangest thing to my mind is that rather than encouraging people to call out frauds to prevent newcomers from being defrauded, people that do that get persecuted, both legally (McCormack, hodlonaut) and even more surprisingly (to me, anyway) socially (Tuur, Matt).

In most cases, people who have different goals for Bitcoin can work together pretty satisfactorily: if someone cares more about censorship resistance and someone else cares more about inflation resistance, that rarely results in much conflict; self-enforcing contracts can be an enabling tool for the other goals whether (eg, by allowing better lightning channels to make payments cheaper or vaults to make theft harder), theft and censorship resistance tend to go hand in hand, and everyone wants cheap transactions.

But people who are benefiting more from fraud don’t necessarily fit in as well: both because improvements on any of the other tend to require actual work, which defeats the point of getting money for nothing, and because often the promises they’re making are obsoleted by actual improvements in the other areas.

So, I think it’s probably worth putting in some effort to appreciate just how much influence fraudsters and scammers have in the space. For example, up until its downfall, FTX and SBF were, somehow, widely respected and considered a respectable partner in designing a regulatory framework for the cryptocurrency industry. That respect provides a platform to make claims like “Bitcoin has no future as a payments network”, which are then widely repeated because, hey, the guy’s a widely respected billionaire (and the fact that FTX effectively held an undisclosed naked short position on BTC to the tune of $1.4B was, prior to the company’s collapse, undisclosed).

How to actually do that is left as an exercise for the reader, of course.

(There are two related topics I’m not including as “fraud” per se, that other people might: if you’re just doing an exit scam, eg running a completely legitimate custodial exchange, then one day running off with all your customers’ funds, then I’m considering that theft more than fraud; if you’re just doing money laundering and only lying about the source of your income/expenses to people who you think have no business knowing about it anyway, then, to me, that’s more an issue of censorship resistance)

Revolution

Finally, I don’t think it’s unfair to say that some see Bitcoin as a way to overthrow the unjust established order. That Bitcoin will stop crony capitalism, stop wars by preventing funding them via inflation, and generally prevent the fall of civilisation and usher in a new renaissance.

Personally, I’m doubtful that this line of thinking really holds up: my guess is that the best bitcoin can really do is more along the lines of “keeping honest people honest”:

• Bitcoin’s inflation resistance might stop a government that’s not trying to steal/destroy the country’s wealth from accidentally starting on that path, but it won’t prevent a despot from simply banning bitcoin and aggressively persecuting anyone they suspect of using it anyway;
• likewise if you have to search everywhere to find a tiny SD card, that’s less tempting to confiscate than a bag full of cash, but there’s plenty of cases where governments have successfully confiscated Bitcoin despite people applying reasonable levels of protection (and governments tend to have a competitive advantage at $5 wrench attacks anyway);
• as far as censorship resistance goes, if a government’s willing to just imprison its critics, that’s probably already a greater threat than not being able to run a gofundme account;
• maybe significant wealth will get redistributed from later adopters to early adopters, but at best that will just put different people with different flaws in positions of power, and won’t do away with greed or corruption.

But, hey, I could be wrong; if hyperbitcoinization does somehow ushers in a global idyllic utopia, I won’t be complaining.

Alignment

An obvious question that the above might inspire is why should we have one solution to all those different goals — why wouldn’t it be better to work on different approaches so that you can make fewer tradeoffs and end up with a better result for each individual topic, rather than some one-size-fits-all compromise?

I think one key thing tying them all together is decentralisation. Any centralised solution seems likely to breakdown:

• centralised control over inflation gets compromised by governments wanting to spend more than they tax without building up debt
• centralised custody provides a single point to attack for governments and activists who want to censor transactions or steal funds
• centralised payment platforms provide opportunities to raise fees to monopoly levels, greatly increasing costs
• contracts with a central controller (who can choose to delay enforcing the contract terms or to not enforce them at all) provide a way to overrule the letter of the contract, whether that’s via regulatory influence or economic incentives from the losing party to the contract (or because the central controller was the losing party to the contract)

So there is at least some reason to imagine they have enough in common that trying to do everything with a single system isn’t necessarily crazy.

Conclusion

I think that covers most of the reasons, both good and bad, of why people are interested in Bitcoin. While I might go into these in more detail later, I think, for me, the summary is:

• At least for now, inflation resistance is mostly a “don’t screw it up” issue. That doesn’t stop people from constantly trying to screw it up of course.
• Theft prevention has lots of possible improvements: multisigs, OP_VAULT, lightning watchtowers, supply chain authenticity, etc.
• Censorship resistance still needs work: improving privacy to make it harder to know what to censor via things like encrypting p2p, dandelion transaction broadcast, PTLCs over lightning, etc; but also further encouraging people to get things off-chain where they can stay secret and uncensorable, rather than doing them on-chain where they’re easy to observe and then attack.
• Cost reduction is, I guess, something we’re still doing pretty okay at; on chain fees are still low, the lightning network has even lower fees and is continuing to improve, etc, so this seems more an issue of “more, faster” than any particular change in direction being needed.
• Self-enforcing contracts is a much more open ended topic, and I don’t think amenable to a bullet-point summary.
• As far as fraud goes, making it an expected standard that anyone with Bitcoin denominated liabilities regularly publish a standardised cryptographic proof of solvency/reserves/liabilities (and making it easy to audit that either via your own full node, or via simple third party phone apps) would likely make it easier to detect and avoid ponzi schemes, at least. (Going further and having these being treated as securing the listed creditors for bankruptcy proceedings might also be straight forward, and encourage creditors to routinely validate these proofs)

Movie quote

Zeitgeist — I’m Zeitgeist.

Deadpool — Cool. I’d like to say you have the power to put your finger on the… pulse of society?

Zeitgeist — No… No, I spit acidic vomit.

Deadpool 2, 2018