Bitcoin and the Disintermediation of the State
The groundbreaking innovation of Bitcoin is that it is the first technology for transferring digital “goods”. Since the inception of computer networks, it has been possible to send digital data and objects between computers, but such a “transfer” actually only sends a copy of the data to the recipient, maintaining another copy with the sender. In other words, it is a method of copying, not sending. By using public-key cryptography on a decentralized asset ledger, Bitcoin allows for goods to be stored on the public asset ledger and for their ownership to be restricted to the person who has the requisite public key. As such, Bitcoin is the world’s first instance of digital cash, bringing the scarcity, rivalry, finality, and irreversibility of physical transactions to the digital realm, and most importantly, allowing digital transaction without the need for trusted third party intermediaries.
This, on its own, is a significant blow to governments’ attempts to financially control their subjects. Bitcoin has opened a crack in the ever-growing wall of restrictions on the movement of digital and physical money. Very large quantities of money can now be moved globally without governments having any ability to stop them. But more important than permissionless transactions is the monetary policy of Bitcoin, and the formidable challenge it poses to national monetary sovereignty.
As governments continue to inflate their currencies to fund their ever-growing welfare and warfare commitments, citizens have been deprived of a reliable instrument for saving their wealth into the future and across generations. Bitcoin is the elegant technological solution to this political problem which sidesteps the political process.
The supply of the bitcoin currency started off increasing at a rate of 50 coins every 10 minutes, but that rate will halve every four years, and as the existing stockpile grows while the new supply decreases, the bitcoin supply growth quickly drops to very low rates. Whereas the growth was very rapidly inflationary in the first few years of Bitcoin’s operation, it has dropped to 4% in 2017, and will drop to around 2% in 2021. By 2025, the growth rate will drop below 1% and never rise above it. More than 75% of all the bitcoin that has ever existed has already been mined and is in circulation. As the supply growth rates begins to drop below that of even the most stable national currencies, the use of bitcoin as a store of value and hedge against inflation is increasing.
As demand for holding bitcoin grows, no government or authority can ever increase the supply to accommodate the demand. The only solution is for the price to rise, incentivizing current holders to sell some of their holdings. Digital scarcity has worked out really well for those who have invested in it so far: Bitcoins have gone from being worthless bits traded between cryptography enthusiasts to a monetary good when they were first bought for cash in 2009, at a rate of $0.00076 per bitcoin. In the 7 years since then, the price of a bitcoin has gone up by more than 1 million fold, exceeding $1,000 at the time of writing. The total market value of all bitcoins held is in the range of $17b. As the growth rate of the supply is declining, the value of Bitcoins being held as a store of value is increasing.
The existence of Bitcoin allows individuals the option of exit from some of the most important coercive arrangements of modern nation states. Whereas for years the pendulum of technological innovation in payments had swung the way of surveillance and central control, Bitcoin channels the strengths of distributed networks online to put monetary sovereignty back in the hands of users. This is already apparent in places like Venezuela, where citizens use bitcoin to buy basic goods from US online retailers to be shipped to Venezuela.
The secret to Bitcoin’s economic success is inextricably linked to Bitcoin solving the engineering solution of digital cash with practically unassailable security and robustness. By being a decentralized and distributed network, Bitcoin has no single point of failure that could be turned into a security hole. The veracity of Bitcoin’s record of transactions is guaranteed by the expenditure of this processing power on a very elaborate procedure of verification called Proof-Of-Work. Network members who expend electricity and processing power on verifying transactions are rewarded with the new issuance of the network’s currency. This economic security model has generated very strong incentives for owners of processing power to direct it at securing the Bitcoin network, and has resulted in it today becoming by far the largest computer network in the world.
The processing power behind the Bitcoin network is in the order of a million times larger than the world’s largest supercomputer, Tihane-2. As the validity of the record of transactions is determined by verifying actual expenditure of processing power, the only way to alter the record of bitcoin transactions is to spend more processing power than the entirety of the network combined. After 8 years of investment into hardware to verify bitcoin transactions, the cost to producing a more powerful network would likely run into the billions of dollars today. As a result, in 8 years of operation, the Bitcoin network was not compromised once.
By channeling the power of distributed networks and low supply inflation rates, and offering economic rewards for accurate verification of transactions, Bitcoin has provided a transparent technical computing solution to problems which political theorists had long deemed the exclusive purview of the state, namely the provision of money and banking services. The impeccable reliability of the inflation schedule and the veracity of balance holdings and transactions, without the need to rely on trusted third parties, makes Bitcoin a very interesting non-state competitor to an arena long monopolized by coercive government control.
