Blockchain, a New Hope

People use the term “Bitcoin” to describe two different things. There is the (FLO) free/libre/open-source software codebase called “bitcoin”, and there is also the largest deployment of bitcoin software called “Bitcoin”. The Bitcoin deployment produces units of bitcoins, each of which was valued at around $1000 in the first months of 20171, achieving a market capitalization over $19 billion2. While this second type of Bitcoin is celebrated in the media for turning “hackers” into millionaires, the first type of bitcoin provides us with a technical foundation upon which we can build new finance systems that can operate without the involvement of government or the use of violent force.

As a free/libre/open source (FLO) project, bitcoin’s intellectual property is shared with everyone without restriction. It’s also designed to work on Linux computers, which is the world’s most popular open-source operating system. This means bitcoin software is not only legally accessible to people, but practically accessible as well. The most powerful innovation contained within bitcoin is a new type of database technology called a “blockchain”. Blockchains can exchange data with many computers at once to create a “tamperproof, persistent record system” that can’t be modified by a central administrator3.This makes blockchains uniquely good at producing “digital cash” that can’t be stolen by a system administrator or double spent by a counterfeiter. By producing this cryptographically authenticatable digital cash popularly called “cryptocurrency”, blockchain enables people of all types to make their own money systems.

People recognized the potential of blockchains almost immediately after bitcoin was released when they began copying and modifying (“forking”) the bitcoin codebase to create their own “altcoin”. Slight variations in the blockchain produced wildly different types of coins. Litecoin, for example, uses optimized processes to create a cryptocurrency with faster transaction times than Bitcoin, or Dogecoin, which leveraged a comedic viral marketing campaign to gain adoption and value.

Going deeper, developers realized that the blockchain’s core function wasn’t to produce cryptocurrencies, but rather it is to enforce “crypto-contracts”, and the simplest type of crypto-contracting system would naturally produce a cryptocurrency. In the case of Bitcoin, the crypto-contract says if you give the Bitcoin network your computer’s processing power, it will rewards you and others with coins at a specific rate. With this insight, developers began to “generalize” the blockchain technology so it could be used to enforce more complicated contracts including Initial Public Offerings, smart-grid energy markets and, legal agreements and event voting systems.

Cryptocontracts come in the form of text documents containing coding languages recognized by the blockchain. One leading language is called Solidity, and it’s designed to operate on the Ethereum blockchain. Below is a small segment of code from “simple open auction” written in “Solidity”4.

contract SimpleAuction { // Parameters of the auction. Times are either // absolute unix timestamps (seconds since 1970-01-01) // or time periods in seconds. address public beneficiary; uint public auctionStart; uint public biddingTime;“

We’re still extremely early in the development of crypto-contracting languages, but their creators are very enthusiastic about their potential to automate a wide variety of tasks that are currently the sole purview or lawyers, accountants, financial service professionals and administrators of all types. While some high profile experiments with extremely sophisticated crypto-contracts have failed spectacularly, some lower profile ones conducted by large banking institutions are succeeding in unexpected ways.

Conventional financial institutions are beginning to use blockchains to move money more efficiently. Startups like Ripple are helping the global banking system transition from their archaic SWIFT (Society for Worldwide Interbank Financial Telecommunications) transfer system, which takes three days to move money between countries, to blockchain-based alternatives that take 3 minutes. This is clearly just the beginning of traditional financial firms involvement in cryptocurrency technologies. The formal financial sector is investing over $1 billion in blockchain in 20165.

Before you declare the blockchain co-opted by banking interests, it's important to realize that adoption of blockchain within the financial industry helps ensure that this technology and the ecosystem of financial products and services needed to make it accessible to the public will continue to grow. Indeed, the ecosystem is already quite impressive. People can already buy Bitcoin with a credit card from a reputable vendor, transfer it to anyone in the world with an internet connection, use it to speculate on over 700 different altcoins, and then spend it with a Visa debit card in many countries throughout the world6. This means that an alternative financial system that uses voluntary money, as opposed to government-backed “fiat” currency, isn’t just possible in the future. It’s usable today.

This creates a challenge for mainstream economists who have been operating under the assumption that governments’ monopoly on the production of money will be as enforceable tomorrow as it is today. Few have spent time exploring the implications of the proliferation of private, voluntary monetary systems. One school of economics never adopted the assumption that money can and should forever be controlled by the government: the Austrian School. This makes Austrian analysis much more compatible with a crypto-economic future that mainstream, Keynesian or Modern Monetary Theory economics.

Instead of viewing money as something only the government can and should produce, “Austrians” views money as a product, and, like all products, believe that it should be produced by commercial entities that compete with each other in free and open markets. One of the main proponents of this school of thought is Friedrich A. Hayek, who argued that, if given the freedom to do so, people will naturally produce, distribute and manage the money systems they need to create full employment for themselves and their communities.

In the preface of “The Denationalization of Money” (1976), he declares that “the cause of waves of unemployment is not “capitalism” but government denying enterprise the right to produce good money.”7But how could it be that resolving such an intractable problem as unemployment could be as simple as producing more and better money?

Imagine a deindustrialized city with a lot of dilapidated houses and a lot of people who’d be more than happy to fix them up for pay. If these communities had access to a local currency and some basic financial service providers that valued it, they could earn and save that currency to purchase needed supplies, trade it as a means of exchange to hire skilled workers and use it as a unit of account to negotiate a loan based off predicted future earnings. Grassroots economic activity that was previously impossible because of a lack of access to the technology money becomes possible when alternative types of money become available.

The idea that local, competitive currencies can provide a solution to employment was, and still is, a radical idea that was the basis of Hayek’s opposition to the creation of the Euro. Instead of a single continent-wide currency, he proposed the free exchange of national currencies in Europe and the rise of “denationalized, free money” created by non-state entities such as corporations, local governments, civic groups and commercial banks. That idea was roundly dismissed by the politicians and technocrats of the time who were committed to the vision of a single currency for Western Europe.

If F.A. Hayek were alive today, it’s likely that he’d see the recent surge in popularity (and value) of Bitcoin as a sign that the “free money” movement he anticipated has begun to emerge. He offered that movement advice, giving explicit instructions for how people should operate a bank that uses an asset-base as collateral to put “private token money into circulation.” The main goal of this entity, he declares, would not be to create securities that appreciate in value but rather to create means of exchange that are as stable in value as possible. He believed that more stable currencies would enable people to organize more efficiently to achieve full employment.

This wasn’t pure speculation. Hayek had seen this process in action in the 1930s in Worgl, Austria8. At the time, Austria was in a massive economic crisis and its national currency experienced hyperinflation. In response, the town of Worgl created its own local currency as a means of exchange, enabling the continuation of local trading, and allowed people to fund the construction of new houses, a new bridge and relatively normal economic life for its citizens. . The “Miracle of Wörgl” only lasted a year before the National Bank of Austria shut it down9.

Cryptocurrency has already established itself as an important and useful tool during financial crisis. The Cypriot Banking Crisis of 2012-2013 began when Cypress, at the direction of the European Union, froze bank accounts and stole money from uninsured account holders. This led many Cypriots to attempt to move their money out of the nation and its banks. Since there weren’t a lot of fast and easy options to get money out of the country, they began buying Bitcoin10. Prices for Bitcoin increased nearly 500% during that month, from $46 on March 9th, 2013 to $230/unit on April 9th of that same year. A month later, as the excitement of the crisis winded down, the new price of Bitcoin stabilized around $110/unit, That price point remained relatively stable until about six months later when people in China, who are subject to extreme cross-border monetary transfer restrictions discovered the utility of Bitcoin. This led to a tenfold increase in Bitcoin’s volume coming out of China11 and a massive surge in Bitcoin’s value, which briefly reached $1000/unit before settling back to a new price floor around $25012. As of this writing, Bitcoin is priced at about $800/unit.

Bitcoin, unsurprisingly, has amassed its fair share of critics who point to the centralization of mining operations, its wacky governance and the unequal distribution of Bitcoins in the network as proof that it isn’t a panacea. These criticisms are certainly valid, particularly if you’re comparing Bitcoin to the centuries old central banking institutions that produce fiat money, but the fact that people take the project seriously enough to compare it to fiat currency at all is evidence of the massive and unexpected success of the first version of an open source project with the most humble of origins. Despite criticisms, market dynamics have established Bitcoin as a “safe haven” during economic crisis, and since economic crisis are routine and chronic, it’s seems only a matter of time before the next big financial crisis compels people to adopt voluntary monetary systems like Bitcoin and other cryptocurrencies.

Imagining the widespread adoption of voluntary money systems might seem scary, but it isn’t unprecedented. In fact, during the Free Banking Era (1837–1862), voluntary money systems were the only type in existence throughout the United States. This strange era in US history began when US President Andrew Jackson let the charter of the Second Bank of the United States expire in 1836. Jackson hated the Second Central Bank of the United States, calling it a “den of vipers,” and he considered “killing the bank” the greatest achievement of his life. His face on the $20 bill isn't an honor, it's a display symbol of his ideology's defeat.

1. Coinbase, ‘Charts’, https://coinbase.com/charts
2. Coin Market Cap, https://coinmarketcap.com/
3. Wikipedia, ‘Blockchain (database)’, https://en.wikipedia.org/wiki/Blockchain\_\(database\)
4. Solidity, ‘Solidity by Example’, https://solidity.readthedocs.io/en/latest/solidity-by-example.html\#simple-open-auction
5. Greenwhich Associates, ‘Blockchain Adoption in Capital Markets’, https://www.greenwich.com/fixed-income-fx-cmds/blockchain-adoption-capital-markets
6. Xapo Debit Card, https://xapo.com/card/
7. Friedrich A. Hayek, ‘Denationalisation of Money: The Argument Refined’, preface, Philadelphia: Coronet Books Inc, 1990
8. Beinard, Lietaer, ‘The Wörgl Experiment: Austria (1932-1933)’, Lietaer Personal Website, March 27, 2010, http://www.lietaer.com/2010/03/the-worgl-experiment/
9. Unknown, ‘The 1 Schilling - bank note from the Wörgler Schwundgeld’, https://commons.wikimedia.org/w/index.php?curid=10210513
10. Maureen Farrell, ‘Bitcoin prices surge post-Cyprus bailout’, CNN, March 28, 2013, http://money.cnn.com/2013/03/28/investing/bitcoin-cyprus/
11. Kashmir Hill, ‘Five Reasons For Bitcoin's Most Recent Price Surge’, Forbes Website, October 23, 2013 http://www.forbes.com/sites/kashmirhill/2013/10/23/five-possible-reasons-for-bitcoins-most-recent-surge/\#3c0a99b817c2
12. Coindesk, http://www.coindesk.com/price/

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