(This quote was often attributed to Henry Ford, but its exact origins are unclear)
I. The Biggest Fraud of the Century
Let us begin by making a bold statement: the US dollar is the biggest shitcoin in the history of mankind. Needless to say, many will disagree, and for good reason, even I disagree to a certain extent. Frauds can only sustain itself insofar as victims collectively buy into its claims. But unlike a definitive rugpull we often see in the world of cryptocurrency, the US dollar is more akin to an addictive drug that is sold into every corner of the world, slowly and steadily establishing dependence in its victims, while leeching off the wealth of its hosts. To further elucidate this outrageous claim, we shall begin by first assessing what, exactly, is value in the most abstract sense.
Value, in the simplest sense, may refer to any sort of desirability we attribute to things. It is generally a relative concept, something is of greater value only insofar as it is compared to something that is deemed to have less value, even if the value is considered to be intrinsic. From an economic perspective, theories of value attempt to explain how the mechanism of pricing operates. Value may be attributed intrinsically as the product of subjective judgement. When the subjective judgements of different individuals regarding a particular value coincide, we may refer to this value as a consensus between these individuals.
The simplest example of value consensus is the value we attribute to gold. We attribute value to gold because of its universally recognised scarcity. This scarcity may be defined in absolute terms, e.g., the total supply of X, or in relative terms, e.g., the total supply of X in a given point or period of time in relation to the total demand of X in the same period of time etc. In the case of gold, its limited global supply combined with its distinct yet stable physical characteristics (e.g., it’s unique colour among metals), has made it an ideal form of value storage for exchanging commodities in various societies. The same has historically applied to seashells and other objects in certain cultures due to their perceived rarity as a stable storage of value, but gold eventually prevailed due to its more stable supply, distribution, and characteristics. Compared to seashells, gold is much harder to extract, yet unlike seashells, which are abundantly available in coastal regions but almost inaccessible to inland civilisations, gold is relatively more evenly distributed across different geographical regions, and unlike seashells, gold does not break nor corrode. Finally, and ironically, gold is also useless enough that its physical properties are not exploited for any other functional value only until its recent utility as a conductor material or dental fillings. These characteristics, and many other historical contingencies of humanity, crowned gold as the ultimate store of value universally accepted across societies today.
Gold has historically been the underlying collateral that the value of currency is derived from, either directly by using gold coins or other forms of gold as a medium of exchange, or by tying the nominal value of other currencies to gold, such as paper money. This was called the gold standard. The gold standard was replaced by the Bretton Woods system established in 1944 as an attempt to rebuild international economic order during WW2. The Bretton Woods system required participating nations to maintain external exchange rates of their currencies within 1 percentage through a currency peg based on a reserve currency, originally supposed to be the bancor. However, the US successfully bargained for the US dollar to become the world reserve currency instead, this effectively replaced gold as the underlying value reserve for most world economies with the US dollar.
The primary purpose of the Bretton Woods system was allegedly to fix exchange rates and provide a basis of international exchange between nations to facilitate free trade in the post-WW2 economy. In order to bolster international confidence in the US dollar as a stable reserve currency, the US dollar was fixed to gold at a price of $35 USD per ounce. This effectively fixed the value of all foreign currencies to the US dollar, which was itself claimed to be convertible to gold, but “better than gold”, as the US dollar earned interest while gold did not.
Less known about the US dollar-gold history, was the draconian enforcement of Executive Order 6102 by the US government in 1933 at the height of the Great Depression. Due to the Federal Reserve Act (1913), the printing of US dollars was limited by a 40% gold backing, which severely limited the ability of the US government to initiate quantitative easing as a means of monetary stimulus to address the financial crisis. As a consequence, the Roosevelt regime issued Executive Order 6102 in 1933, which required all individuals to hand in all forms of gold except small amounts of collectible coins etc. to the Federal Reserve for $20.67 per troy ounce, any plebs who refused to do so faced a fine up to $10000 and 10 years in prison.
The Gold Reserve Act quickly followed in 1934 after the forced confiscation of gold by the US government, which basically consolidated the control of gold into the hands of Roosevelt himself. After these draconian laws were put in place, Roosevelt immediately changed the statutory price of gold from $20.67 to $35, greatly inflating the value of gold against the US dollar, robbing nearly half of the wealth held by US citizens overnight (well, not really, but if you don’t expect to die any time soon then gold would have appreciated anyway).
Now, let us look at the two main methods for governments to extort value out of the average Joe. Obviously, we have taxation, which is by far the best and most straightforward method to fund Mr. God Emperor’s million-dollar golf trips (of which is “legally” tax-exempt, of course). Fortunately, plebs aren’t good at mathematics, and are generally not wealthy enough to hire someone who is actually good at tax eva – I mean, accounting. The second method, which is even more obscure to the mathematically challenged, is inflation. The asset poor, which is basically every working-class individual and millenial wage slave today, have only a limited amount of cash flow, most of which are constantly escaping their savings account due to never-ending bills. What happens when inflation occurs? Bills increase, yet wages often stagnate. However, the asset rich profit tremendously during inflationary markets as hedge assets, and particularly rent and real estate skyrocket in prices. The constant transfer of real economic value of labour production from the asset poor to the asset rich ensures that a rigid socioeconomic structure is maintained where creations of labour (products, services, and commodities) appreciates while the compensation for labour (fiat currency) depreciates, separating the rich from the poor in a structural way.
Money-printing could also be used rob other countries as well instead of just pumping-and-dumping on wage slaves. Since the collapse of the Bretton Woods system, countries began to float their exchange rates to the US dollar, which still serves as the world reserve currency even though it is no longer pegged to gold *cough* oil *cough*. The stagnation of the US economy and the rise of the Japanese economy posed a significant threat to the dollar hegemony – the dollar kept rising against the yen and various other currencies, leading to a significant trade deficit for the US as domestic industries suffered from increased costs, particularly the US automobile industry. To decrease the US trade deficit, the Plaza Accord was signed in 1985, however it failed to address US trade deficit against Japan as the Japanese market was relatively protected. So, what now? Dump em!
One of the least acknowledged aspects of the US dollar by the general public is that the dollar is in fact the biggest “export product” of the US economy. More precisely, the dollar is the primary vehicle for exporting inflation, thereby passing on US domestic economic woes to other countries. This was precisely what happened to Japan during the Lost Decade. The Plaza Accord failed to penetrate the Japanese market as US products were subjected to high tariffs, thus the US had only one product left to export: inflation. From 1985 to 1987, the yen appreciated almost twice against the US dollar. This led to a massive bubble surge in the Japanese economy as financial asset prices skyrocketed due to expansionary monetary policies by the Japanese central bank from 1986 onwards. The Japanese asset bubble eventually popped, domestic consumption stalled, and investment activity carried overseas to you-know-where.
The weak gets weaker, such is the law of nature. In human society, the laws of the game can be changed by the ruling elites at their sole discretion, but the end results are the same: the poor get poorer, and the rich get richer. But what if a set of laws that cannot be altered by any individual entity or group with overwhelming influence existed?
II. Imagine Bitcoin
Consider the possibility of a set of laws that cannot be governed by any individual entity or controlled by a powerful enough group alone. This set of laws determines the value of itself, rather than act as a set of rules that determine the value of something else (e.g., gold or fiat). In this set of laws, the laws themselves are the value proposition, rather than the laws being the defining factor of the value propositions that are prescribed to other objects.
Imagine if Bitcoin existed during all of these disastrous events. Executive Order 6102 was only made possible because gold was a physical asset. I can hide it under my TV along with other dubious stuff (very, very safe for work, of course...), but as long as the government could: 1) severely restrict the liquidity of gold, and 2) confiscate it through force, then hiding gold under my TV wouldn’t be of much use. However, with Bitcoin, everything becomes different.
The sole reason that Executive Order 6102 was made possible is because of the overwhelming influence that the US government has over the legal liquidity of gold. This legal liquidity is what fundamentally supported the value of gold over the centuries – gold is valuable because it can be accepted as a universal store of value that can be exchanged for other valuable commodities. Gold, in this sense, is an abstraction of transactional value that is backed by its predictable scarcity and physical robustness – the supply of gold is relatively stable across the world, and its extraction largely follows a predictable increase in difficulty as easily accessible gold mines are depleted. However, if gold were to lose its transactional value completely, it would hold little value from an economic perspective as it does not offer much functional value outside of niche applications in modern technology – if gold could not be traded for anything else or be converted into some other exchangeable value medium, then it would become largely worthless.
Executive Order 6102 effectively removed the transactional value of gold and arbitrarily transferred it to the US dollar. But why was this possible, and what could Bitcoin, or any other decentralised digital currency do about it? The reason is simple: consensus. The US dollar is only valuable insofar as it is accepted by the world as an international reserve currency and the major trade currency. This is not because international players are convinced that the US dollar is valuable in itself, or that the US government possesses some particularly redeeming qualities that make the dollar the superior alternative. Rather, it is because of dollar imperialism.
The collapse of the Bretton Woods system led most major economies to adopt a floating exchange rate against the dollar. In the absence of a universally-agreed consensus for anything to back the value of the dollar (as the US dollar was no longer backed by gold), an alternative option was urgently required. This was oil, or what is later known as the petrol dollar, backed by none other than dollarisation and the constant, looming threat of US military invasion of any country, particularly oil producers, that dared to reject the dollar as the sole transaction currency for oil. This means that the consensus behind the US dollar is not voluntary, instead, it is forced, backed by none other than the US navy and the IMF. Looking at it this way, does the massive US military budget make sense now? With the rise of the Chinese economy, its military influence, and the digital yuan, one could even argue that the US military is currently underfunded, as the privilege of being able to freely export inflation to other countries as a means of global extortion or mutual economic sabotage is simply too great to forfeit at any cost. But Bitcoin imagined something else.
III. Imagine Freedom
Bitcoin is often misunderstood as a form of “virtual coin”, and as the old school institutions and banks like to frame it, Bitcoin “is a worthless bubble that resembles nothing more than the Tulip Mania at best”. Putting the absurdity of this analogy behind, the way that modern society views Bitcoin is still restricted to a conventional, tangible perspective, where any true store or medium of value must exist as a tangible thing of some sort, a “real coin”, or so they demand.
The idea of a set of laws itself being its own proposition of value is yet to be accepted by major international powers, and the reason is simple: no centralised authority will willingly accept any set of laws that they cannot arbitrarily determine and adjust in accordance to their own interests, often at the whim of a small handful of politicians and corporate owners. To governments, control over fiscal and monetary policy is the privilege that gives them the power to extort value out of the average citizen. This is because unlike wealth, which can be generated by labour and innovation then injected into the economy to increase the total size of the pie itself, power is a zero-sum game. Power can only be transferred between entities, it cannot be created. No “new power” can ever be generated to increase the total sum of its distribution without the forfeiture of power by another entity (or entities), such is the principle of the Social Contract. In this sense, a so-called “power vacuum” is nothing more than a term invented by those who are so used to being dictated by the powerful, so much so that freeing them of their chains and shackles would only lead them to confusion and anxiety.
Imagine a set of laws that can be adjusted at any time, yet it can only be adjusted through the collective consent of all participants in the decentralised and trustless network. Bitcoin is precisely this law. Bitcoin is not an “intangible coin that is made out of thin air”, it is a decentralised set of algorithms that proposes its own value by virtue of the laws embedded within the algorithm itself, which is maintained exclusively through the collective consensus of its participants. Bitcoin is not a “coin” at all, rather it is designed to be the law of value for itself, and unlike nations which rise and fall, Bitcoin will continue to exist as long as consensus around its law persists (and computers/internet of course). Bitcoin, is consensus itself.
Bitcoin obtains its value through decentralised consensus that can be freely negotiated and adopted by any interested participant. This law is not forced at gunpoint (or Brrrrrrr!), unlike the law of the US dollar, nor is it controlled by a small minority of influential figures (more on this next). Bitcoin’s law is fundamentally the law of freedom. In the most abstract sense, it represents the freedom to affirm or deny any proposition of value by any participant, a characteristic that does not exist for any fiat currencies. But is this true, and if so, how is this possible?
IV. The Law of Freedom
Since Bitcoin and just about any other decentralised cryptocurrency operate on a set of decentralised incentive systems either through Proof-of-Work (PoW), or Proof-of-Stake (PoS) etc., one of the most common arguments against the concept of decentralisation is the claim that centralisation could equally exist in supposedly decentralised networks such as Bitcoin. After all, before the Chinese crackdown on Bitcoin mining, China had always been the dominant producer of Bitcoin. China possessed around 70% of the global share in hash power ever since the invention of ASIC rigs. This centralisation of hash power in China has even led prominent figures such as Peter Thiel to speculate that Bitcoin is a financial weapon of the Chinese government, designed to undermine the US economy. Of course, Bitcoin is as much as a threat to the US as it is to China, and as we will see, centralisation of hash power is not actually an issue.
In a decentralised ledger network, transactions are broadcasted across the network as new blocks are added and recorded by all other participating nodes. Nodes are run by miners, who are responsible for verifying transactions. To verify the intention of each node, the Bitcoin algorithm demands “proof” that the node has invested sufficient sunken capital into the network. In Bitcoin terms, this sunken capital is computational power, or “hash power”, which underlies the Proof-of-Work concept. The game-theoretic underpinnings of PoW are designed to create a general equilibrium where as the price of each Bitcoin increases, more miners are incentivised to enter the network, which in turn increases mining difficulty. The increase in mining difficulty further demands greater investment in hash power, such as hardware, electricity, and obviously time. This ensures that as the total value of the Bitcoin network grows, the costs of overtaking the entire network also increases proportionately, thus the overall security of the Bitcoin network increases accordingly.
However, this design is not without its flaws. If a single or coordinated group of entities collectively take over the majority of hash power on the Bitcoin network, they will be able to conduct what is known as a “double-spending attack” (or 51% attack) by rewriting transaction records on the network, making it possible to spend the same Bitcoin twice. As we have seen, numerous Bitcoin knock-offs such as Bitcoin Gold and Bitcoin SV have been the target of 51% attacks. However, even though hash dominance has also occurred on the real Bitcoin network before, such as in 2014 where the mining pool Ghash.io achieved 51% hash power, the same 51% attack did not happen. Instead, Ghash.io voluntarily ceded their hash power, and capped their own hash power at 39.99% of the entire network, while also requesting other pools to follow suit in order to preserve public trust in the network. Why did they do this? Once again, the answer is consensus.
The true defining factor of any decentralised network is consensus, or in plain terms, public trust. However, this public trust is directed at the network itself, it is trust in the law embedded within the algorithm, the integrity of the algorithm itself, and the incentives that empower the entire community within the network. Decentralised “trust” replaces trust in institutions with trust in mathematics, algorithms, technology, and the predictable nature of human behaviour. In a seemingly paradoxical way, this trust is “trustless”, as it will continue to exist insofar as the consensus mechanism behind Bitcoin (or any other cryptocurrency for this matter) continues to be accepted by an ever-expanding community.
For this very reason, the Bitcoin network is naturally resilient to 51% attacks, for the law itself is the value in which the law provides to all those who consent to its truth. Unless the malicious actor is determined to sabotage the entire Bitcoin network at all costs, a 51% attack would be inherently contradictory to the incentives of miners, whose livelihoods depend on public consensus affirming the integrity of the Bitcoin network itself so that Bitcoin continues to have value. As the total value of the Bitcoin network increases, the costs of sabotaging the entire network also increases, as an exponentially greater hash power would be required to achieve a 51% hash dominance. This also means as hash power increases, network security also increases. As of the time of writing, the Bitcoin’s network value is $732 billion dollars.
But what if the Bitcoin network has a tremendous hash power, but all of which are controlled by a single entity, say, the Chinese or US government? Would this still improve consensus and security of the network? The answer is negative, if you value freedom and equality through decentralisation of power. A centralised network is not the result of consensus, it is precisely the opposite of consensus – plebs will only consent to a central power insofar as the costs of revolt exponentially outweigh the expected returns compared to staying obedient. Such has been the iron fist of all ruling authorities, whether they are democracies or dictatorships, and is also the reason why betrayal of one’s nation has always been one of the most heavily punished crimes in any jurisdiction.
Vitalik Buterin once wrote an article arguing that the most important scarce resource is legitimacy. Buterin gave the example of Steem-the-company, which was bought by Justin Sun, the founder of TRON, a blockchain project that received heavy criticism due to its centralised nature. After the acquisition, the STEEM community voted against the use of the STEEM company tokens for governance purposes, much to Sun’s dismay. This led Sun to launch a “counterattack” on the blockchain governance protocol by injecting large amounts of STEEM tokens borrowed from exchanges, overthrowing the community proposal and establishing Justin Sun as the God Emperor of the STEEM network. Needless to say, the community collectively revolted, and as a consequence, the STEEM blockchain was forked into the HIVE blockchain, with all tokens carried over to the new HIVE blockchain – apart from Justin Sun’s share. This happened because as soon as Justin Sun took over the company of the STEEM blockchain, community trust in the project plummeted. Sun’s subsequent attack on the governance protocol fully removed any and all public consensus on the legitimacy of the STEEM blockchain itself, leading to the creation of a new blockchain and the migration of the community. Sun wants to become the God Emperor of STEEM, but the plebs disagreed, and in a decentralised public network, the plebs are given the power to do so.
Buterin concluded by emphasising the importance of legitimacy as a scarce resource, a sort of “higher-order acceptance” arising from any game of coordination. This higher-order acceptance is precisely why attempts by a centralised entity at acquiring a decentralised blockchain network backed by sufficient community consensus of legitimacy would likely result in failure, for consensus cannot be bought. One can buy up all the coins or hash power in a decentralised network, yet still fail to gain even the slightest degree of legitimacy. In this sense, if the Bitcoin network were ever to become controlled or “bought out” by, say, the Chinese or US government, one would expect the value of Bitcoin to crash severely, if not all the way down to zero, for it would no longer possess the legitimacy of decentralisation, and the community will simply depart to create a better law for the new world. The same would presumably apply if the Bitcoin distribution becomes too heavily skewed towards whales.
Unlike traditional depictions of a peasant revolt as a bloody, physical battle between slaves and the state, in a decentralised, open-source network, the possibility of forks means the costs of collective revolt is pretty much zero. This is because any public, open-source blockchain network with a lack of community consensus can be immediately forked into a new network with different rules agreed upon by the community. If this forked network is to gain consensus among the community, the old network will be made obsolete. Thus, in a decentralised, open-source blockchain network, consensus itself is the liquidity of network value, it is the medium of exchange that gives rise to the legitimacy of law, represented by none other than the network itself and its collective community.
V. Bitcoin: Imagining the Future
Where streams gather, lakes form, and where consensus builds, legitimacy arises. Public blockchains have the potential to overturn disagreements into innovation by massively promoting competition through the use of open-source mechanisms such as forks (pun intended). And as a bottom line, anyone who disagrees with the consensus of a particular blockchain can simply leave the network at will by selling their tokens – in the decentralised economy, we are free to truly define our own propositions of value with no governing authority to force us to accept paper.
However, the Law of Freedom was only made possible through the countless hours devoted by the worldwide community into the innovation of blockchain technology itself. Imagine if Bitcoin succeeded in convincing Vitalik Buterin to agree that it did not need any improvements, then Ethereum and smart contracts may not have been invented at all. In this sense, not only is consensus a medium of value that gave rise to the freedom to define legitimacy by the community itself, disagreement in the public blockchain community can also give rise to the creation of new value.
This, is the Law of Freedom, derived from the power of consensus for legitimacy itself, freely flowing across the boundless cyberspace, controlled and governed by none other than the people. And it all started, with the Imagining of Bitcoin.