A Hodler’s Gay Science (2/4)

This is part 2 of the “Hodler’s Gay Science” serie

Opening up a new territory

For believe me! — the secret for harvesting from existence the greatest fruitfulness and the greatest enjoyment is: to live dangerously! Build your cities on the slopes of Vesuvius! Send your ships into uncharted seas! Live at war with your peers and yourselves! Be robbers and conquerors as long as you cannot be rulers and possessors, you seekers of knowledge!

In my opinion, Bitcoin most groundbreaking yet somewhat underrated discovery is that we can actually shape data to produce an object that is virtual but still shares the properties of physical objects that make them valuable economic goods: scarcity and rivalry.

Is Bitcoin really scarce?

Opponents disregards this fact when they argued that bitcoins are worthless because they are purely digital things. They are right because data being infinitely replicable cheaply in the digital age is indeed worthless, but they fail to see that Bitcoin is precisely an attempt at making digital scarcity, and that it has been tremendously successful at it so far.

A subset of this objection is that since Bitcoin can be forked or copied easily to spin up new “cryptocurrencies”, it is not scarce, quite the contrary it is even highly inflatable by anyone. There is some merit to this objection, since it is right as long as it concerns altcoins, whose business model is mostly to convince you that they are the next Bitcoin and compete to have the best narrative to do so, making them effective “airdrop money”. Both the great altcoin mania of 2013 and the ICO craze of 2017 tell the same story.

It is no wonder this argument appeals mostly to nocoiners though, since it obviously falls apart as soon as you really use Bitcoin, for no Bitcoin hodler in his right mind would ever accept BCH or BSV tokens as a payment, like you certainly won’t accept zimbabwean dollars instead of American ones. No one would ever argue that Zimbabwe inflating its own currency was also inflating the US dollar, and BCH or BSV supplies are in the same way irrelevant to the quantity of bitcoins in circulation.

Yet bitcoins are truly scarce, but what’s more important is that it is verifiably scarce by anyone.

How to create digital scarcity?

Interestingly, early proponents of Bitcoin have sometimes made a similar error when they tried to justify bitcoins’ value by rooting it in the physical world, mostly to energy consumed by mining. Trying to reduce Bitcoin digital scarcity to physical scarcity is another way to miss the point that bitcoins are valuable precisely because they are made of data that is absolutely meaningless outside of its own world.

Bitcoins’ scarcity is not a consequence of any real world scarcity, if the energy used for mining suddenly became overabundant bitcoins would still be as scarce as they are today. If energy suddenly becomes scarce and mining even more expensive than it is today, bitcoins won’t be more scarce either. To understand how Bitcoin accomplish digital scarcity you have to look elsewhere.

We said that bitcoins are verifiably scarce, meaning that bitcoins are probably the only commodity whose total stock is known and can be verified easily with absolute certainty by literally anyone willing to do it.

It’s even better than that: bitcoins will remain scarce and valuable forever as long as it will be possible to assert them this way. By auditing the network and the transactions that run through it, you’re not only asserting that the rules that make bitcoins valuable have been successfully enforced so far, you are doing way better than that, you are actually creating continuously its scarcity and its value.

The backbone of Bitcoin is this universal, very cheap audit that is made by all of its peers and also could be made by anyone willing to become one, that’s what make bitcoins scarce and therefore valuable. Without its peers running nodes, tirelessly checking that every transaction, every block absolutely abide by the rules they all agree upon, it would be trivial to reintroduce counterparty risks, and modify Bitcoin in a lot of ways that will ultimately destroy its value.

As Bitcoin is only information without ties to anything outside its own system, it can only grow while its peers agree on and actually enforce its rule by running its code, and can only be attacked and destroyed by its own peers deciding, most likely for selfish reasons, to agree on other rules.

Bitcoin is valuable only because of its network of autonomous peers that are enforcing and protecting Bitcoin’s rules because they all personally benefit from it and would be punished very harshly if they tried to game the system for their own interest. Replace them with a cartel or worse, a monopoly like a State, and soon you will see them trying to game the system and defraud the others, non peer, users, because that would benefit them most than the statu quo.

On a league of its own

It should be clear by now that Bitcoin is not a company or a normal software project. While the technology still evolves and requires some degree of organisation and decision making, it has a life on its own. I think more accurate to say that Satoshi “discovered” Bitcoin rather than invented it.

Some time ago I came up with an analogy of Bitcoin as a newly discovered way to transform data itself into something valuable for us humans, pretty much like it takes the invention of the internal combustion engine to turn some worthless mineral oil into a strategic resource like petrol.

Yet this analogy is far from perfect either, it’s a bit mechanical and it makes Bitcoin looks like a passive instrument, while it is more in a symbiotic relationship with us human. As it appeared when I examined which are the necessary conditions of Bitcoin scarcity, when we use Bitcoin it uses us too to become stronger and improve its odds at survival. That’s why I love the attempt at explaining Bitcoin as a fungi in this excellent article from Brandon Quittem, because you won’t get Bitcoin until you understand this almost biological symbiosis between us and… “it”?

Rendez-vous next week for the third part of Hodler’s Gay Science, in which we will dive deeper into the social and political consequences of Bitcoin.

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