In the wake of the 2008 financial crisis, the mysterious Satoshi Nakamoto published a revolutionary white paper that described a simple peer-to-peer electronic cash system that would later become Bitcoin. In the decade since the launch of the digital currency, the nascent blockchain technology behind Bitcoin has been heralded as having the same radical potential as the printing press or the Internet, in particular presenting extraordinary challenges to traditional banking. Yet the paper contains no reference to existing political ideas, monetary or economic knowledge. Why?

THE WHITE PAPER, with an introduction by James Bridle, situates Bitcoin within an obscure historical movement of decentralisation, powered by the ideologies of encryption, showing how blockchain is part of a wider project to redraw the maps of political possibility. Crypto-economist Jaya Klara Brekke’s guide analyses Nakamoto’s canonical text as the Rosetta Stone that reveals the far-reaching implications of decentralisation.

In this discussion held at Foyles on 4 February 2019, Jaya sits down with Ben Vickers and Paul Mason to discuss how Nakamoto’s White Paper can serve as a compass for the rapidly shifting terrain of contemporary techno-politics.

Visit Ignota Books for more information about THE WHITE PAPER.

The post Podcast of the Day: The White Paper by Satoshi Nakamoto – Jaya Klara Brekke, Ben Vickers and Paul Mason in conversation appeared first on P2P Foundation.

Decentralization is the new disruption—the thing everything worth its salt (and a huge ICO) is supposed to be doing. Meanwhile, Internet progenitors like Vint Cerf, Brewster Kahle, and Tim Berners-Lee are trying to re-decentralize the Web. They respond to the rise of surveillance-based platform monopolies by simply redoubling their efforts to develop new and better decentralizing technologies. They seem not to notice the pattern: decentralized technology alone does not guarantee decentralized outcomes. When centralization arises elsewhere in an apparently decentralized system, it comes as a surprise or simply goes ignored.

Here are some traces of the persistent pattern that I’m talking about:

• The early decentralized technologies of the Internet and Web relied on key points of centralization, such as the Domain Name System (which Berners-Lee called the Internet’s “centralized Achilles’ heel by which it can all be brought down or controlled”) and the World Wide Web Consortium (which Berners-Lee has led for its entire history)
• The apparently free, participatory open-source software communities have frequently depended on the charismatic and arbitrary authority of a “benevolent dictator for life,” from Linus Torvalds of Linux (who is not always so benevolent) to Guido van Rossum of Python
• Network effects and other economies of scale have meant that most Internet traffic flows through a tiny number of enormous platforms — a phenomenon aided and exploited by a venture-capital financing regime that must be fed by a steady supply of unicorns
• The venture capital that fuels the online economy operates in highly concentrated regions of the non-virtual world, through networks that exhibit little gender or ethnic diversity, among both investors and recipients
• While crypto-networks offer some novel disintermediation, they have produced some striking new intermediaries, from the mining cartels that dominate Bitcoin and other networks to Vitalik Buterin’s sweeping charismatic authority over Ethereum governance

This pattern shows no signs of going away. But the shortcomings of the decentralizing ideal need not serve as an indictment of it. The Internet and the Web made something so centralized as Facebook possible, but they also gave rise to millions of other publishing platforms, large and small, which might not have existed otherwise. And even while the wealth and power in many crypto-networks appears to be remarkably concentrated, blockchain technology offers distinct, potentially liberating opportunities for reinventing money systems, organizations, governance, supply chains, and more. Part of what makes the allure of decentralization so compelling to so many people is that its promise is real.

Yet it turns out that decentralizing one part of a system can and will have other kinds of effects. If one’s faith in decentralization is anywhere short of fundamentalism, this need not be a bad thing. Even among those who talk the talk of decentralization, many of the best practitioners are already seeking balance — between unleashing powerful, feral decentralization and ensuring that the inevitable centralization is accountable and functional. They just don’t brag about the latter. In what remains, I will review some strategies of thought and practice for responsible decentralization.

Hat from a 2013 event sponsored by Zambia’s central government celebrating a decentralization process. Source: courtesy of Elizabeth Sperber, a political scientist at the University of Denver

First, be more specific

Political scientists talk about decentralization, too—as a design feature of government institutions. They’ve noticed a similar pattern as we find in tech. Soon after something gets decentralized, it seems to cause new forms of centralization not far away. Privatize once-public infrastructure on open markets, and soon dominant companies will grow enough to lobby their way into regulatory capture; delegate authority from a national capital to subsidiary regions, and they could have more trouble than ever keeping warlords, or multinational corporations, from consolidating power. In the context of such political systems, one scholar recommends a decentralizing remedy for the discourse of decentralization — a step, as he puts it, “beyond the centralization-centralization dichotomy.” Rather than embracing decentralization as a cure-all, policymakers can seek context-sensitive, appropriate institutional reforms according to the problem at hand. For instance, he makes a case for centralizing taxation alongside more distributed decisions about expenditures. Some forms of infrastructure lend themselves well to local or private control, while others require more centralized institutions.

Here’s a start: Try to be really, really clear about what particular features of a system a given design seeks to decentralize.

No system is simply decentralized, full-stop. We shouldn’t expect any to be. Rather than referring to TCP/IP or Bitcoin as self-evidently decentralized protocols, we might indicate more carefully what about them is decentralized, as opposed to what is not. Blockchains, for instance, enable permissionless entry, data storage, and computing, but with a propensity to concentration with respect to interfaces, governance, and wealth. Decentralizing interventions cannot expect to subdue every centralizing influence from the outside world. Proponents should be forthright about the limits of their enterprise (as Vitalik Buterin has sometimes been). They can resist overstating what their particular sort of decentralization might achieve, while pointing to how other interventions might complement their efforts.

Another approach might be to regard decentralization as a process, never a static state of being — to stick to active verbs like “decentralize” rather than the perfect-tense “decentralized,” which suggests the process is over and done, or that it ever could be.

Guidelines such as these may tempt us into a pedantic policing of language, which can lead to more harm than good, especially for those attempting not just to analyze but to build. Part of the appeal of decentralization-talk is the word’s role as a “floating signifier” capable of bearing various related meanings. Such capacious terminology isn’t just rhetoric; it can have analytical value as well. Yet people making strong claims about decentralization should be expected to make clear what distinct activities it encompasses. One way or another, decentralization must submit to specificity, or the resulting whack-a-mole centralization will forever surprise us.

A panel whose participants, at the time, represented the vast majority of the Bitcoin network’s mining power. Original source unknown

Second, find checks and balances

People enter into networks with diverse access to resources and skills. Recentralization often occurs because of imbalances of power that operate outside the given network. For instance, the rise of Facebook had to do with Mark Zuckerberg’s ingenuity and the technology of the Web, but it also had to do with Harvard University and Silicon Valley investors. Wealth in the Bitcoin network can correlate with such factors as propensity to early adoption of technology, wealth in the external economy, and proximity to low-cost electricity for mining. To counteract such concentration, the modes of decentralization can themselves be diverse. This is what political institutions have sought to do for centuries.

Those developing blockchain networks have tended to rely on rational-choice, game-theoretic models to inform their designs, such as in the discourse that has come to be known as “crypto-economics.” But relying on such models alone has been demonstrably inadequate. Already, protocol designers seem to be rediscovering notions like the separation of powers from old, institutional liberal political theory. As it works to “truly achieve decentralization,” the Civil journalism network ingeniously balances market-based governance and enforcement mechanisms with a central, mission-oriented foundation populated by elite journalists — a kind of supreme court. Colony, an Ethereum-based project “for open organizations,” balances stake-weighted and reputation-weighted power among users, so that neither factor alone dictates a user’s fate in the system. The jargon is fairly new, but the principle is old. Stake and reputation, in a sense, resemble the logic of the House of Lords and the House of Commons in British government — a balance between those who have a lot to lose and those who gain popular support.

As among those experimenting with “platform cooperativism,” protocols can also adapt lessons from the long and diverse legacy of cooperative economics. For instance, blockchain governance might balance market-based one-token-one-vote mechanisms with cooperative-like one-person-one-vote mechanisms to counteract concentrations of wealth. The developers of RChain, a computation protocol, have organized themselves in a series of cooperatives, so that the oversight of key resources is accountable to independent, member-elected boards. Even while crypto-economists adopt market-based lessons from Hayek, they can learn from the democratic economics of “common-pool resources” theorized by Elinor Ostrom and others.

Decentralizing systems should be as heterogeneous as their users. Incorporating multiple forms of decentralization, and multiple forms of participation, can enable each to check and counteract creeping centralization.

Headquarters of the Internet Archive, home of the Decentralized Web conferences: Wikimedia Commons

Third, make centralization accountable

More empowering strategies for decentralization, finally, may depend on not just noticing or squashing the emergence of centralized hierarchy, but embracing it. We should care less about whether something is centralized or decentralized than whether it is accountable. An accountable system is responsive to both the common good for participants and the needs of minorities; it sets consistent rules and can change them when they don’t meet users’ needs.

Antitrust policy is an example of centralization (through government bureaucracy) on behalf of decentralization (in private sector competition). When the government carrying out such a policy holds a democratic mandate, it can claim to be accountable, and aggressive antitrust enforcement frequently enjoys broad popularity. Such centralized government power, too, may be the only force capable of counteracting the centralized power of corporations that are less accountable to the people whose lives they affect. In ways like this, most effective forms of decentralization actually imply some form of balance between centralized and decentralized power.

While Internet discourses tend to emphasize their networks’ structural decentralization, well-centralized authorities have played critical roles in shaping those networks for the better. Internet progenitors like Vint Cerf and Tim Berners-Lee not only designed key protocols but also established multi-stakeholder organizations to govern them. Berners-Lee’s World Wide Web Consortium (W3C), for instance, has been a critical governance body for the Web’s technical standards, enabling similar user experience across servers and browsers. The W3C includes both enormously wealthy corporations and relatively low-budget advocacy organizations. Although its decisions have sometimes seemedto choose narrow business interests over the common good, these cases are noteworthy because they are more the exception than the rule. Brewster Kahle has modeled mission-grounded centralization in the design of the nonprofit Internet Archive, a piece of essential infrastructure, and has even attempted to create a cooperative credit union for the Internet. His centralizing achievements are at least as significant as his calls for decentralizing.

Blockchain protocols, similarly, have tended to spawn centralized organizations or companies to oversee their development, although in the name of decentralization their creators may regard such institutionalization as a merely temporary necessity. Crypto-enthusiasts might admit that such institutions can be a feature, not a bug, and design them accordingly. If they want to avoid a dictator for life, as in Linux, they could plan ahead for democracy, as in Debian. If they want to avoid excessive miner-power, they could develop a centralized node with the power to challenge such accretions.

The challenge that entrepreneurs undertake should be less a matter of How can I decentralize everything? than How can I make everything more accountable? Already, many people are doing this more than their decentralization rhetoric lets on; a startup’s critical stakeholders, from investors to developers, demand it. But more emphasis on the challenge of accountability, as opposed to just decentralization, could make the inevitable emergence of centralization less of a shock.

What’s so scary about trust?

In a February 2009 forum post introducing Bitcoin, Satoshi Nakamoto posited, “The root problem with conventional currency is all the trust that’s required to make it work.” This analysis, and the software accompanying it, has spurred a crusade for building “trustless” systems, in which institutional knowledge and authority can be supplanted with cryptographic software, pseudonymous markets, and game-theoretic incentives. It’s a crusade analogous to how global NGOs and financial giants advocated mechanisms to decentralize power in developing countries, so as to facilitate international investment and responsive government. Yet both crusades have produced new kinds of centralization, in some cases centralization less accountable than what came before.

For now, even the minimal electoral accountability over the despised Federal Reserve strikes me as preferable to whoever happens to be running the top Bitcoin miners.

Decentralization is not a one-way process. Decentralizing one aspect of a complex system can realign it toward complex outcomes. Tools meant to decentralize can introduce novel possibilities — even liberating ones. But they run the risk of enabling astonishingly unaccountable concentrations of power. Pursuing decentralization at the expense of all else is probably futile, and of questionable usefulness as well. The measure of a technology should be its capacity to engender more accountable forms of trust.

Learn more: ntnsndr.in/e4e

If you want to read more about the limits of decentralization, here’s a paper I’m working on about that. If you want to read about an important tradition of accountable, trust-based, cooperative business, here’s a book I just published about that.

Photo by CIFOR

The post What to do once you admit that decentralizing everything never seems to work appeared first on P2P Foundation.

Writing at New Economic Perspectives, Eric Tymoigne, a research associate at the Levy Economics Institute, argues that the fair price of Bitcoin is zero.

Tymoigne’s reasoning is based on the the fact that money is a financial instrument. The value of a financial instrument can come from being redeemable to its issuer, from providing an income stream or from having a collateralized value. For example US Dollars are redeemable against taxes. Bonds bear interest and stocks pay dividends. Gold coins contain gold, which can be sold as a commodity.

Since Bitcoin is not redeemable, provides no income and has no collateralized value, it is worthless as a financial instrument. Thus, its “fair price” is zero. Eric concludes that “Bitcoins are purely speculative assets.”

From the point of view of modern finance, Bitcoin is not money at all.

The inventor of Bitcoin, Satoshi Nakamoto, did set out to create a new kind of money. The very first words of the Bitcoin whitepaper state that a “purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”

Bitcoin is intended to be money. A different kind of money. A form of money that is not a financial instrument issued by a bank or government, as Tymoigne understands it, but a form of money that is independent of financial institutions, governments and all other intermediaries.

Bitcoin is intended to be a kind of money that can be used to make payments across the internet in a way that makes government unnecessary and doesn’t reveal real names or physical locations. As such, it does not have properties that would tie it to an issuer who could redeem it, or provide a money income, or be collateralized with a physical commodity. Decentralized money can not have the properties on which Eric Tymoigne bases fair price.

The economic school most associated with the Bitcoin community is the Austrian school, especially its libertarian capitalist adherents. This school views money as being firmly rooted in what Tymoigne refers to as its collateralized value, i.e. the gold content in a gold coin, what Austrian-influenced economists call “sound money.”

While the modern finance view holds that even with gold coins, “the gold content of the coin is not a monetary instrument, and it is not what makes the coin a monetary instrument” as Tymoigne puts it, on the hand the Austrian view is that it is specifically the gold content of a gold coin that makes it money.

Frank Shostak, associated scholar of the Mises Institute, claims “An object cannot be used as money unless it already possesses an objective exchange value based on some other use.” Murray Rothbard, one of the key theorists of libertarian capitalism, states that money cannot originate “by everyone suddenly deciding to create money out of useless material, nor by government calling bits of paper ‘money.'”

Rothbard further explains that the only way money can come to exist is “by beginning with a useful commodity under barter, and then adding demand for a medium for exchange to the previous demand for direct use.”

Though inconvenient to Bitcoin proponents, it’s clear that Austrian theory would not consider Bitcoin money, since it’s a “useless material,” which never had any “value based on some other use” prior to being money. Despite this, Bitcoin’s design has been influenced by a faulty application of the Austrian theory of sound money, especially the “gold standard.”

The logic of the gold standard is that the supply of sound money, a useful commodity such as gold, determines the value of paper money issued by governments. Paper money is not a useful commodity and therefore has no intrinsic value. The government should be limited in the amount of paper money they create to the amount of gold they have. The gold standard is a proposal to have a fixed ratio between sound money, e.g. gold, and paper money.

It is not the amount that is fixed, but the ratio. Neither the amount of gold, nor the amount of paper money is fixed in the gold standard, the ratio between them is. If the government gets more gold, it should also create more paper money according to the theory, to keep the exchange value of money stable.

The Bitcoin software is programmed so that a fixed total supply will be eventually be mined, 21 million Bitcoin, and the rate at which Bitcoin is mined is also fixed. Starting at 50 BTC every 10 mins, the rate is reduced by half every four years. As of 2016 the rate of Bitcoin creation is 12.5 Bitcoins every 10 minutes, and will become 6.25 in 2020.

Bitcoin’s creators attempted to follow the reasoning of the gold standard by fixing the number of Bitcoins, understanding it to be like paper money, but as Bitcoin does not have a source of sound money to fix the supply of Bitcoin to, they just made up a wacky formula out of thin air. Essentially attempting to fix the money supply by decree, and encode that decree into Bitcoin’s software. In the Austrian view, this results in a broken digital currency that lacks a ratio to sound money.

Bitcoin can not be rational. Its face value can not be expressed as a consistent ratio with a supply of useful commodities. It is irrational by design, just like Bitcoin would have zero value from the point of view of modern finance, it would also have zero value from the point of view of Austrian theory. Both views consider the entire exchange rate of Bitcoin to be a speculative bubble, but neither can elaborate on how this bubble came to exist.

The Austrian schools of thought subscribes to the “subjective theory of value” developed by economists such as William Stanley Jevons, Léon Walras, and Carl Menger in the late 19th century.

Without an objective measure of value, money has to be itself a thing that can be used. For value to be subjective, money has to be an object, the utility of which measures the price of all of the things priced in it. For this reason, the Austrian school can not see the forest for the trees when it comes to Bitcoin, because it can not see the obvious source of value as being the computational power used to mine Bitcoin, as Bitcoin is not directly backed or collateralized by the mining rigs and the power they consume.

The subjective theory of value was developed in opposition to the labour theory of value, especially in opposition to socialist views and the ideas of Karl Marx. However Marx’s theory of money is not rooted in redeemability, nor collateralization, nor income, nor usefulness, but rather in labour.

Ironically, while libertarian capitalist theories of money can not account for Bitcoin, Marxist theories of money can. The face value of Bitcoin represents a certain worth in terms of the labour time embedded in the computation power used to mine it. The Marxist theory of money is a Proof of Work theory.

For Marx, the value of all commodities is not subjective, but objective; all commodities have a value that is created by the labour required to produce them. The reason that money can be used as a way to express the price of other commodities is because it represents a certain amount of labour, which is also what the worth of the other commodities is based on. As Marx states in Grundrisse “1/x ounce of gold is in fact nothing more than 1/x hours of labour time materialized, objectified.”

Marx illustrates that the face value of money is a rational number. It always represents a specific ratio. In the case of gold, Marx employs the ratio between the amount of gold and the amount of labour, the work:gold ratio. The value of the total volume of gold is derived from the amount of work required to produce it.

For something to be money, it needs to have a rational value, and it is that value in which the prices of all other commodities are expressed. Money, as such, has no price, and can not.

Take for example an economy that produces apples, oranges and coconuts, you could have a table of prices that lists apples and oranges in terms of coconuts, oranges and coconuts in terms of apples, and apples and coconuts in terms of oranges. You could not have a price of apples in terms of apples, nor oranges in terms of oranges, nor coconuts in terms of coconuts, or rather that price would always be 1.

If we chose to use coconuts as money, presumably because we’re coocoo for them, how many apples are worth a coconut? How many oranges are worth a coconut? The value of the coconut is its socially necessary labour time. Say that is 10 hours. Therefor a coconut is “worth” 10 hours. Say an orange is worth 2 hours and apple is worth 5 hours, the price of the orange is 0.20 coconuts (20 cococents), and the apple is 1/2 a coconut.

As coconuts are money, more are produced than are used, since once you use it to make a chutney, you can’t spend it as money, and you can’t save it. So its original use value as food is replaced by its new use value as money.

Yet, the value of a coconut is still rooted in socially necessary labour time, like the commodities that are priced in it, this is why it can be used to compare all the other commodities, because its value is rooted in the same thing: labour.

If there are not enough coconuts for the savings needs of the economy, demand for coconuts will go up. The exchange value of coconuts will temporarily rise, but will fall back to its value as more labour is drawn into coconut production, and away from the production of the other commodities. The market regulates the value of coconuts.

Money can express the value of commodities, because both money and the commodities priced in it can be reduced to a ratio of work to supply.

While the libertarian capitalist theory is not useful in determining the value of Bitcoin, Marxist theory is. Bitcoin does not need to be backed or collateralized in any reserve of useful commodities, but instead in the labour time required to produce it. Proof of work.

The Bitcoin software employs an algorithm that increases the difficulty of the work needed as more mining capacity is added to the pool to keep the rate at the current limit that is configured in the software. This means that while the face value of Bitcoin represents a certain worth in terms of labour, this worth is not consistent. There is no fixed ratio between work and coin. More work creates more value, but instead of creating more coins with the same value each, it creates the same number of coins. Each coin has more value.

As more computational power, representing ever greater amounts of labour, is employed in Bitcoin mining, the number of Bitcoins produced does not go up, instead, the value of each Bitcoin goes up, creating a positive feedback loop. The more Bitcoin goes up, the more people are attracted to mining it, the more it goes further up.

The Bitcoin creators model Bitcoin as a kind of paper money with an arbitrarily fixed supply and therefore an irrational value, attempting to follow Austrian theory, rather than model it as a money commodity according to Marxist theory, which is regulated by the market.

While at first Bitcoin’s exchange rate was only of interest to the economy of enthusiasts who are attracted to its intrinsic decentralized features, eventually investors and speculators took notice, and Bitcoin become the purely speculative asset Tymoigne accuses it of being. The positive feedback loop quickly became a short circuit, and kick-started an asset bubble.

As the bubble grows, the capital gains from Bitcoin become larger, and exceed returns from other forms of investment. Investment portfolios will over time start to carry a larger portion of Bitcoin, squeezing out other investment options.

During a bubble, It becomes perfectly rational for investors to pay a foolish price for an asset if they are certain that it can be sold for a higher price to a greater fool. The exchange rate of Bitcoin become detached from the labour time embedded in the computational capacity of the mining pool and become underwritten instead by the supply of the greater fool.

This turns the bubble investor into a judge in a kind of a beauty contest described by Keynes as not being one where we choose the prettiest option, but where “we devote our intelligence to anticipating what average opinion expects the average opinion to be.”

Like a game of betting on the answers of the contestants on Family Feud, so long as the investors believe that the average opinion expects the average opinion to be that Bitcoin will go up, Bitcoin will win the Keynesian Beauty Contest and the bubble will continue to inflate. However, the greater fool regularly has a crisis of confidence, which causes frequent crashes during the rise.

So long as exchange rate doesn’t stay below the cost of mining Bitcoin for very long, the bubble won’t pop and Bitcoin’s positive feedback loop will quickly begin to push the exchange value up again. So long as the capital gains are still better than returns on other investments, portfolio compositions will continue to shift to holding more Bitcoin.

At the same time, as long as the return on capital gains of Bitcoin are greater than real interest rates, portfolios will become more leveraged. Investors will borrow more and more, as the payment of the interest is less than the expected return from the Bitcoin exchange rate going up.

Hyman Minsky describes three kinds of investors, “hedge” investors, which have enough income to pay both the interest and principal on their loan, “speculative” investors, that can pay the interest but not the principle, and “Ponzi” investors, investors who can not pay either the principal or the interest, and depend on the assets that they own to increase in exchange value.

As returns on Bitcoin continue to be greater than other investments, Bitcoin will become a larger portion of investment portfolios, as Bitcoin does not pay interest or dividends, this means that the income of investors will go down as a result. While returns on Bitcoin are be greater than real interest rates, investors take on more and more loans. As a result, more and more investors will “go Ponzi.”

Every time there is a crisis of confidence of the greater fool, the Ponzi investors will go bust, as they can’t pay their loans, even after they sell off all their Bitcoin. As more investors go Ponzi, these will cause deeper and deeper crashes in Bitcoin, each crash will make Bitcoin a little less pretty, eventually Bitcoin will start losing the Keynesian beauty contest, perhaps to other alt-coins, perhaps to other investments completely, and the supply of the greater fool will dry up.

As the bubble bursts, Bitcoin will quickly become a toxic asset, with many holders wanting to sell, but finding few buyers. Miners will begin to abandon Bitcoin, and the positive feedback loop will begin to operate in reverse. Less miners will not mean less Bitcoin being produced, but instead the proof of work will become less difficult and the same number of Bitcoins will be produced. The value of each Bitcoin will fall. Eventually, falling to its “fair price” of zero, as Eric Tymoigne determined, or close enough to it. It will go back to simply being the in-game currency of libertarian capitalist fantasies.

The Austrian idea of money needing to be in fixed supply, drawing inspiration from “the gold standard,” is the undoing of Bitcoin. The coding of this bad idea into the Bitcoin software means, ironically, that the market can’t regulate Bitcoin. As more people invest in mining operations and the mining pool grows, the supply of Bitcoin doesn’t go up, so return on investment can’t regulate its exchange value.

Meanwhile, the bubble in the exchange rate of Bitcoin has made it useless as money. Price instability and high transaction costs have forced many vendors and payment processors who accepted it as payment to drop it as an option. This includes most of its most prominent mainstream supporters, like the digital distribution platform Steam or the payment processor Stripe.

As Bitcoin is still a relatively small part of overall investment portfolios, it’s impossible to know when exactly the bubble will burst. It’s likely that the libertarian capitalist bent of the community will actually work to delay this, as this community is a rich source of the greater fool, and probably is less likely to take on loans. We are very likely a long way away from a “Minsky Moment,” where a large number of Ponzi investors going bust causes a meltdown.

Not only has Bitcoin failed as money, but the asset bubble it has created has diverted investment from real production of goods to speculation, and the mining process consumes a phenomenal amount of energy, with catastrophic environmental effects. Meanwhile, it has done nothing in terms making the economy more fair or reducing the power of either governments, banks or any of the intermediaries it was meant to displace. There is no question that Bitcoin is a failure, a rather disastrous one, even if some speculators have been spectacularly enriched by it.

If there is value in the original vision of Bitcoin, to have a form of money that can be used to make payments across the internet in a way that makes government unnecessary and doesn’t reveal real names or physical location, it needs to be programmed differently. Such a currency would need to work in such a way that the supply of the currency increases when more mining capacity is added to the pool. This allows the market to regulate its exchange value by the natural increase and decrease of investment in mining relative to demand for the currency.

It is possible to create a cyptocurrency with a with a stable value by simply eliminating the feedback loop, creating a rational cryptocurrency with a consistent work:coin ratio. Bitcoin could be made rational by increasing and decreasing the number of Bitcoins produced per block along with the increase and decrease of the difficulty of the proof of work. This way, the number of Bitcoins produced would scale in proportion with the investment in mining.

However, there may not be much interest in doing this. As miners would need to choose to use their hashing power to make a standard rate of profit mining the rational cryptocurrency instead of chasing speculative returns by mining bubble-prone, intentionally irrational cryptocurrencies. Another obstacle would be get attention for it, as a rational cryptocurrency would not attract hype, because it would not have fantastically skyrocketing exchange rates.

Bitcoin was intended to be digital money for an ideal perfect market for libertarian capitalists, instead Bitcoin has turned out to primarily benefit bankers and speculators at the expense of the environment and the real economy.

For any that remain committed to the original vision of Bitcoin, a decentralized money that one could use with out revealing their real name and location, the path forward lies in creating a rational cryptocurrency, based on the Marxist and not the Austrian theory of money.

Yet, even with a rational cryptocurrency, it is unlikely to play a major role in the global monetary economy, given that governments are not constrained by reserves, crypto or otherwise. Even with a “gold standard” governments can still spend more by securitizing future tax obligations. Banks are likewise constrained only by qualified demand for their loans, not their own reserves. This means that the money in the global economy will remain government and bank money at the macro level.

Even if a rational cryptocurrency can not play the sort of revolutionary role that animates the dreams of libertarian capitalists, it can still provide a payment option that is international, convenient and privacy respecting, which remains worthwhile.

However, the institutions that would most likely create a rational cryptocurrency would be the banks or a fintech startup seeking to disrupt payment processing. While hardly heralding in a libertarian capitalist paradise, this would certainly be a better use of work than the misguided and harmful bubble Bitcoin is today.

Photo by zcopley

The post The Face Value of Bitcoin: Proof of Work and the Labour Theory of Value appeared first on P2P Foundation.

“Despite all the drawbacks mentioned, Bitcoin remains a landmark and pivotal development, showing that globally scaleable currencies are technically feasible. It sets the stage for potential commons-based p2p-driven currency systems and the Bitcoin ledger can become a tool for self-organizing communities.”

Bitcoin is a complex phenomenom, and it is a landmark development, even a technological singularity, for good or ill. At the P2P Foundation, we also have complicated feelings about it.

The Positive Aspects of Bitcoin

Let us first summarize why Bitcoin is indeed such a singularity.

Bitcoin is the first globally scaleable, social-sovereign, post-Westphalian currency

This is not trivial. Before the Treaty of Westphalia, local currencies where the norm, many with negative interest rates, and they bolstered local independence, but the scaling effects of the printing press, which led to a Europe-wide religious civil war, made necessary a re-organization of the political space around the emerging nation-states. These nation-states outlawed local currencies, destroyed local autonomy, and also relied on sovereign currency to establish their power. While local currencies have a periodic resurgence in times of crisis, none of the complementary currencies scaled. Local currencies can therefore never be the expression of global commons power, i.e. the power of global virtual communities. Bitcoin has no intrinsic value, it is a hyper-fiat currency, i.e. it only exists because of the trust and political will of the international libertarian hacker segments of the population, in the particular algorithm.

Bitcoin is a weapon of last resort for activist communities

The mainstream monetary and payment system is at the service of a particular world order, and can be mobilized against opposition to it, as became very clear around the Wikileaks affair, where banks, VISA and Paypal collaborated with various authorities to block the fundraising for Wikileaks. In such times, access to alternatives like Bitcoin is vital for activist groups, it becomes their lifeline to funding outside of the control of the central authorities.

The potential of the Bitcoin ledger as a tool for human self-organization

Apart from being a currency, the underlying universal ledger technology of Bitcoin has potential to usher in a new era of more easy self-organisation, by enabling the possibility of smart contracts and software-driven ‘distributed autonomous organisation, as expressed by initiatives like Ethereum, Common Accord, and the crypto-equity experiment of Swarm. Though these developments and possibilities are not without danger, and though most of the current enthusiasm is utopian and mostly based on hopes and just a few budding experiments, this technology is potentially a game changer by bringing down the transaction cost for self-organization.

The Negative Aspects of Bitcoin

Notwithstanding the above, Bitcoin’s development comes with a potentially very high and anti-social price tag.

Bitcoin is not a true peer to peer currency but leads to more extreme inequality

It is sometimes asserted that Bitcoin is a peer to peer currency because any computer with mining software can create the currency, but not everyone has access to the same number of computers and not everyone has computers, hence, the design of Bitcoin, which favours early entrants and those with investing power, is an engine of inequality. Bitcoin’s Gini coefficient, a metric of inequality, is a whopping 0.87709 and according to Bitcoinica, 1% of the players own 50% of the coins.1 That inequality is not diminishing, but rising: according to Bitcoin Trader, for a given period, “the top 100 have gone from holding 1,776,434 coins to holding 2,254,634 Bitcoins, a whopping 27% increase!”2 The mining capacity is also already concentrated.

Bitcoin can’t lead on its own to a disintermediated society

We live in an epoch of techno-utopianism with a strong drive for techno-cracy. The former means that many believe that technology alone determines certain outcomes, while the latter believes it is a good thing that flawed human processes are replaced by ‘clean’ technological processes. Both attitudes are very dangerous. First, distributed technologies do not necessarily lead to distributed outcomes. We have seen this historically with the effect of the invention of printing, which led to a democratisation of knowledge and literacy, but also in time replaced the local autonomy of free medieval cities with much stronger and controlling nation-states, i.e. more political centralization, not less. Networks which have no counter-measures to maintain equality inevitably lead in time to a new concentration of resources. Hence, in Amazon and iTunes, the so-called long tail of culture consumption predicted by Chris Anderson is no longer operative, and in p2p social lending, 80% of loans are provided by big bangs and institutions, the very forces the technology was supposed to disintermediate. Again and again, we see that the potential disintermediation of power, which may affect established powers, creates new intermediaries, such as the platform monopolies. Technologies are indeed, used by social forces, who inflect technologies for their own needs. The inequality of bitcoin ownership will inevitably further affect the structures that make bitcoin operational, leading to new kinds of monopolies. Technologies are always infused with human values, no programming or infrastructure is truly neutral in that respect.

Bitcoin funds a dangerous ideology

The big danger to the social movements of the industrial era were fascism and stalinism, both forms in which the power of the state became extreme. But what fascism is to the state, propertarian libertarians are to the markets: they aim for the realization of a total market, where every aspect of human life is commodified. The design of Bitcoin is anarcho-capitalist, i.e. it is designed to favour the freedom of property owners, and the more you own, the freeer you are. Because such propertarians do not want to see the existing inequalities in society, decreeing them to be the result of free choice, they inevitably ally themselves with oligarchic forces and support their political programs of the dismantling of social solidarity mechanism, and any regulation which limits the freedom of powerful corporate forces. The valuation of Bitcoin means an important transfer of social wealth to this political tendency, which allied with venture capital and the oligarchies that invest in Bitcoin, alters the balance of power away from emancipatory and progressive political forces. Early libertarian investors in Bitcoin, can sell their bitcoins at a premium to new entrants, thereby capturing substantial speculative value. So while the claim that Bitcoin is a pyramid scheme is obviously false, it does institute a rent from new entrants to existing owners. In this sense, Bitcoin, far from being a tool of distribued equality, which is already a false empirical claim at present, is an ideal tool for the development of hyper-capitalist economic models. In this sense, Bitcoin is an ideal tool for netarchical capitalism, the hierarchies that enable, but also control the networks, and capture value from it.

In Conclusion

Despite all the drawbacks mentioned, Bitcoin remains a landmark and pivotal development, showing that globally scaleable currencies are technically feasible. It sets the stage for potential commons-based p2p-driven currency systems and the Bitcoin ledger can become a tool for self-organizing communities.

The post A political evaluation of bitcoin appeared first on P2P Foundation.

Image: Ariel Zambelich/WIRED. Coin design: Gail Anderson + Joe Newton

It appears that Satoshi Nakamoto’s GMX email account, which he originally used to announce Bitcoin in the P2P Foundation’s Ning forum, has been hacked. The hacker has used the account to post a warning to Satoshi in our forum. The following article, written by Robert McMillan, was originally published at Wired.com.

“Dear Satoshi. Your dox, passwords and IP addresses are being sold on the darknet. Apparently you didn’t configure Tor properly and your IP leaked when you used your email account sometime in 2010. You are not safe. You need to get out of where you are as soon as possible before these people harm you. Thank you for inventing Bitcoin.”

Someone has taken over the email account belonging to bitcoin’s secretive creator, Satoshi Nakamoto, saying he will sell Nakamoto’s secrets for money.

The hacker, who told WIRED his name is “Jeffrey,” claims to have also obtained information on Nakamoto that could be used to unmask his identity. Jeffrey didn’t tell us much, but when we asked him how he managed to take control over the [email protected] email address that Nakamoto had used for some of his correspondence, he wrote: “The fool used a primary gmx under his full name and had aliases set up underneath it. He’s also alive.”

In a Pastebin post, Jeffrey said he will release Satoshi’s secrets if someone pays 25 bitcoins—about $12,000 to his bitcoin address. He says he has email messages dating back to 2011. A programmer (or group of programmers) going by the name Satoshi Nakamoto released the open source software that drives the bitcoin digital currency in 2009. Ever since, as has bitcoin expanded into a worldwide phenomenon, people have tried to unmask its creator, but his true identity has never been sufficiently proven.

Jeffrey wouldn’t say how he took over Nakamoto’s account, and he didn’t respond to many of our questions. But it looks like he leveraged the gmx.com address to take over other Nakamoto accounts. One was used Monday to post a message to the P2P Foundation website. Another to deface an old bitcoin developer page on the Sourceforge open-source coding site.

In his P2P Foundation message, Jeffrey claimed that information about Nakamoto was already being sold online. “Apparently, you didn’t configure Tor properly and your IP leaked when you used your email account sometime in 2010. You are not safe. You need to get out of where you are as soon as possible before these people harm you.”

But Jeffrey didn’t provide any evidence to substantiate this claims. And it’s not clear what information he really has on bitcoin’s creator.

Satoshi Nakamoto disappeared from the public eye back in 2010, so it’s possible that after a few years of disuse, the webmail provider that runs Nakamoto’s account, GMX.com, simply allowed somebody new to register the [email protected] address. Based in the U.K., GMX.com couldn’t immediately be reached for comment.

A more intriguing possibility, however, is that the account was hacked. If that’s true, Jeffrey could have access to a treasure trove of private Satoshi Nakamoto emails. And that information could help unmask Nakamoto’s true identity.

Michael Marquardt, the head administrator of the Bitcointalk.org discussion forum, says that Jeffrey sent him an excerpt of an email he’d sent to Nakamoto back in March of this year. “So either the email account was compromised since March,” he says, “or the attacker gained access to old emails when he compromised the account.”

“I’m pretty sure,” Marquardt says, “that this is just some troll in it for the laughs.”

Andy Greenberg contributed to this story.

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