Tag Archives: cryptocurrency

The Political Nature of Cryptocurrencies

“Government is instituted for the common good; for the protection, safety, prosperity and happiness of the people; and not for the profit, honor, or private interest of any one man, family, or class of men; Therefore the people alone have an incontestable, unalienable, and indefeasible right to institute government; and to reform, alter, or totally change the same, when their protection, safety, prosperity and happiness require it.”

Massachusetts Constitution, Part VII, John Adams

Cryptocurrencies by their very nature are political because no single government can control them. They act as an explicit form of wealth for the individual alone, that no state can expropriate. Unlike all other forms of wealth that can be expropriated from the individual, cryptocurrencies cannot because of the cryptography that they are build on top of. People are coming to understand that cryptocurrencies are better forms of money because they are governed by code alone, which makes the contract a digital sacrosanct.

Cryptocurrencies exist only for the benefit of those that hodl and use them while creating an explicit economic program of counter-economics in which the state’s coercion and violence is banished. Through building money on top of cryptography–a communication explicitly designed for war–a new kind of value is created from the explicit incapacity of governments to control them.

With the recent abolishment of the largest bank notes in India, Venezuela, Pakistan, and Australia’s announcement to join them, the war on cash is coming. This is a war for the total economic control of money by both governments and banks. This is not for our safety, or security–it is to ensure the theft of our wealth, and the continued enslavement to banking and political interest of the oligarchs.

To have a truly independent form of money strikes at the very root, the very heart of the issue: politics and economics are one in the same.

To Politicize Money

Money is the most fundamental of the social contracts. When we can come to understand that the monopoly that all governments and banks have on the issuance of money under the guise of ‘safety and security’ is nothing more than a ruse for their own enrichment, we can start to understand the very real power we now have to fight back.

Through taking our economic power and choosing to put it into a form of money that they cannot control, we create the most powerful form of political resistance that is possible: economic resistance.

If money is the only thing that these corrupt monsters care about, then lets make it about money–how much money we can cost them? What can we do together when we all withhold our economic power from their parasitic system?

Because it is for each and every dollar that is not spent in there system, we get strong. For every single economic transaction that does not occur in their system, we become strong. For each person that realizes that the state should never have had control of the monetary system, we get stronger.

It is only a matter of time until we are strong enough to take them on publicly and openly. What should be apparent is that money itself is the strongest and the most potent political weapon that there is. Once we acknowledge that money itself is first political, and secondly economic, that we can start to understand the true nature of bitcoin.

Bitcoin is not about money, it is about power.

Specialization and The Cryptoeconomy

Bitcoin and alternative digital currencies (altcoins) are much more that just simple currencies–they are a means of exchange, and the entry point into the new digital economy: the cryptoeconomy. Their development represents a technological protocol for digital ownership and economic exchange. This has far reaching ramification for both the internet and money as they both evolve to create their own new economic machine totally removed from state command economies and monetary systems.

With digital currencies acting as a new sovereign monetary force, they are facilitating the growth of a radical new sector of the digital economy that is total unregulated, and removed from the onerous regulations of all state governments. This is allowing for a proliferation of specialized ‘altcoins’ which range from useless to spectacular, each which seeks to create their own specialization within this new digital economy. While many are duds and even outright scams, there is a whole new economy being built, and many of the ideas are both huge in scope, and with the impact they want to create.

Specialization, Money, and Transaction Cost

smith ricardo

Adam Smith and David Ricardo

Adam Smith first presented the idea of specialization in Wealth of Nations. David Ricardo later expanded on this idea with his theory of comparative advantage, which is the idea that that nations should specialize in industrial production that they have distinct advantages in. Digital currencies can specialize in the same way, creating their own comparative advantage by working directly within the framework of the internet, rather then limiting themselves with anachronistic limits of state forms of money, and their laws. This, in turn, radicalizes not just money and finance, but anything to do with the internet and economics.

One of the most important economic features of bitcoin and other digital currencies is the near-zero transaction cost they have, which means that in almost all cases over an extended timetable, digital currencies will always have a lower systemic transaction cost than any form of fiat money. Thus, using bitcoin as a mode of exchange to invest in new and exciting technologies not only is quicker, cheaper, and more secure (when using appropriate security protocols!) than in the fiat economy, but also opens up a whole new world of investing opportunity that could not exist otherwise.

With digital currencies being native to the internet, unlike fiat money, they are empowered to create a totally new kind of economy which is not based on regulations and permission-seeking, but through creating totally new markets and technological opportunities. There is a plethora of new digital currencies and projects which all are using this same near-zero transaction cost to radicalize pretty much every single area of the contemporary economy through applying this technological advancement of money to their field. Each one of these project are focused on an area where the traditional economy is failing or falling short, and where a new digital version of it can change everything.

Initial Coin Offerings

ICOUsually a public offering from a company is going to take millions of dollars, lots of legal fees, and huge amounts of regulatory oversight. The massive inefficiencies and regulatory burdens of this process has locked out most people from being able to be involved in this process, and unable to reap the massive profits that can come from high-risk investing like this. Now with the ability to raise tens of millions of dollars using cryptocurrencies, almost anyone can create a public offering for just fractions of what it once cost. The most common way of doing this with crypto at this time is through an initial coin offering (ICO).

ICO are one of the most powerful modes of investing in the cryptoeconomy. Cutting through all of the red tape of investing and assuming the risks and rewards for oneself; there are huge opportunities (and scams!) that are occurring right now in the cryptoeconomy that are going to fundamentally destroy the old economy modes, in exchange for newer and better ones. The creative destruction of cryptocurrencies is changing all of the old way of investing and economic control, and imbuing that into the digital sphere.

One of the reasons that this can be done is because of the stable store of value and the unit of accounting that bitcoin provides to these new investments. Through acting as a unit of accounting, people are able to invest directly into ICOs by sending bitcoin directly, and in some cases taking their profits in bitcoin directly too. There are also several great projects being built in the Ethereum ecosystem that are taking this same approach, with profits being paid out in Ether, the currency native to the Ethereum blockchain.

Let’s take a look at just a few of the great projects that are currently being working on in the cryptoeconomy.

Ethereum

I see bitcoin as being a core stable money of the internet, like gold throughout the world for most of modern history, and ethereum as being finance for the internet.

I see a lot of ‘bitcoin 2.0’ being developed with ethereum, and a lot of amazing project are being built on top of it creating ‘Dapps’ or decentralized app. These Dapps are the applications which are going to fundamentally restructure the economy. From self-driving cars that pay for themselves and take themselves to the repair shop, to drones that will drop off your tacos once you send some bitcoin, Dapps are going to change the world.

These project range from simply dice games, to robust prediction platforms, and public offerings for decentralized companies. Much of the reason for this is the simple object-oriented programing language, Solidity, that was developed for building smart contracts in Ethereum. This allows for simple smart contract to be built in a few days, rather then the few months it would take to do the same with bitcoin.

Monero

MoneroMonero in many ways is what bitcoin originally wanted to be. Using a new kind of cryptographic protocol that is different from bitcoin, Monero provides strong anonymity that ensures that users financial information, along with their personal identity is much harder to track then it is with bitcoin. For this reason, several darknet markets have recently started supporting Monero, and Monero looks like it is trying to create its own niche within the cryptoeconomy centered around true anonymity and privacy.

I personally also like that the devs of Monero are anonymous, as I cannot imagine the state would ever let someone build a cryptocurrencys like this, and not attack them directly. Overall, Monero looks like a strong privacy-centered digital currency that could one day be the privacy currency.

Augur

AugurAugur is a Dapp, meaning that it was built on top of etheruem as a decentralized app. Augur is the first of a few different prediction market apps that seek to create a prediction platform by letting users bet on pretty much anything. You can check out more information about it here: https://www.augur.net/

FileCoin

filecoinThere are a few different projects similar to FileCoin such as Storj and Madesafe, which are all seeking to create a decentralized storage and hosting solution for the web. These are the kinds of huge, infrastructure changing, decentralizing projects which I think can radically change the internet, and in turn society itself. While FileCoin has not had an ICO yet, both Madesafe and Storj have, and they also have small limited application of the project released. These are the sort of radical project that are creating the new cryptoeconomy.

Dual Power

Through creating alternative, decentralized networks that have the same functions as more expensive, centralized, state-sanctioned networks; we are creating the conditions of dual power in order to collapse the state. It is not just the market efficiency of these systems that will do this, but the very decentralized nature of them that will come to fully challenge the power of the state, and the networks they use. Each state-sanctioned network (facebook, fiat money, ISPs, exchange markets, etc.) will come to be challenged by a non-state network, and over time, simply because of the lack of onerous regulations, and the well-placed mistrust of the state; they will come to prevail over the state-sanctioned network.

The digital age is presenting the interregnum between centralized state power, and decentralized digital power. Over the course of the next decade, states will find themselves struggling more and more with the spectre of the internet and the new forms of power it has created. As states do everything in their power to try to stomp out these new decentralized networks (particularly in more extreme ways as their power is challenged), they will come to find that they do not have power in this space. They will see the destituent power of cryptosystems, and will only be able to show their powerlessness against the immanence of systems built upon the power of mathematics, rather than the wills of men.

The Destituent Power of Crypto

Arduino

“There is something that all people, whether they admit it or not, know in their heart of hearts: that things could have been different, that that would have been possible. They could live not only without hunger and also probably without fear, but also freely. And yet, at the same time—and all over the world—the social apparatus has become so hardened that what lies before them as a means of possible fulfillment presents itself as radically impossible” –Theodor Adorno

We will witness the radical impossibility that has been promised since antiquity: a world unified under the banner of true freedom. Through the power of digital technology and crypto, this world will become a reality. This is because the form of power that crypto is based upon is only a destituent kind of power–it only finds value in a world where money, language, and politics have been fully corrupted, and the only thing left to do is to refuse it. Through the deactivation of the power structure as we understand it through a totally new strategy of power inoperativity, we break the whole system.

The new digital economic exist outside and beyond the control of any and all forms of government. It does this through deactivating the control states have on the economy through creating a new monetary system. From the NSA, CIA, and DOD, there is no lettered agency that can claim any degree of sovereignty over our means of economic exchange, and private communications that we have made for ourselves within the framework of crypto. There is nothing they can do other then display their powerlessness against the majesty of cryptography, and their own selfish and fearful need to control everything. Crypto is the bases for the new society that we shall create in the shell of the old.

Destituent Power

Agamben“If revolutions and insurrections correspond to constituent power, that is, a violence that establishes and constitutes the new law, in order to think a destituent power we have to imagine completely other strategies, whose definition is the task of the coming politics. A power that was only just overthrown by violence will rise again in another form, in the incessant, inevitable dialectic between constituent power and constituted power, violence which makes the law and violence that preserves it.” -Giorgio Agamben

The goal is not to create a new form of money–that has already been achieved. The real objective is to render a new kind of law; a new kind of politics. A kind of politics that does not taint itself with the violence of man, or the machinery of the state. There no longer is a need for the law-making violence of the state machine, and we are creating a new world where such crude and barbaric forms of violence can no longer legitimize themselves. We shall vanquished such evil from this world through simply absconding into bits spread all through the globe.

A new epoch is beginning and the first goal is to render both old money and old politics not just worthless; but as a testament of its corruption.

Our power is a destituent one. A power which robs the current laws and politics of any meaning through displaying their total corruption. This empowering a new system which they cannot affect, they cannot touch, and they cannot corrupt. We can do this through shattering the current economic-political monopoly, and rending those powerful in old world indifferent to that of the digital realm.

We seek to reactivate Law as it was suppose to be, rather then attempting to constituting changes through the corrupt system of today. The laws of the old world are meaningless in this digital space; and now we need to make this is true in the world of flesh and steel as well. Once we see that abandonment of the current political architecture is the only way forward, that we will be able to start to creating our new form of politics.

The digital system radically divides itself from the state system of laws through a political praxis of non-violence. Through protecting information with encryption, and widely distributing media against corruption and injustice as a form of truth, we can create a new world.

The legal violence which enacts state laws and creates their power simply cannot exist here: there is no territory in which it can apply itself. This radical division is what fundamentally divides our codified digital laws from contemporary violence made laws. We don’t need the violence of statism to cooperate.

The Digital Commons as an Economic and Political Praxis

Through the power of the internet and the digital commons, we can recreate our systems of government to be the Utopian fantasies they were dreamed to be. We can reactivate the power of being ruled by constitutions–agreements to what we are entitled to as citizens. This can allow for us to be governed by the science and immutability of technology, rather then the finicky wills of men who corrupt with ease for selfish gains. No longer do we need to tolerate the violations of our sacred compacts, and the trouncing of the very rights which create our governments.

The deployment of all of these new cryptosystems with harden cryptography is not just a mathematical breakthrough, but the roots of an epochal change. The economic power of digital currencies deposes of state economic system in exchange for a digital one. This is just the very beginning of the deposition of power away from the hands of the state, and back into that of the people. Over the next decade these systems are going to fundamentally challenge the state, and their control on every level of life.

This power deposes because it is an explicit exit from the current, corrupt economic and political system that is pervasive and all-encompassing in our lives. In the digital, the whole multitude of society can exist; with no minders or masters. Here we have chosen to construct all of this for ourselves, without the help of our masters of state, or their capitalist allies who have corrupted our systems of government for private gains.

Towards the Future

We can create a radical new world where the freedom of all is not just a hope, but a reality. The power of technology has drawn us closer then we have ever been before, and now we can see the world as it truly is:

There are untold billions of us living in the most destitute of situations, fighting for the smallest of scraps from Empire. Once we see that there is the greatest of strengths in creating a new form of digital solidarity which can beat back the beast of global fascism, we then might stand a chance for a real future which we are no longer slaves; but truly free to determine the world which we will make.

The Legal Politics of Money

Digital currencies are a new form of economic organization that exist entirely outside of the reach of the State. This has far-reaching ramification not just for money and capitalism, but for the ideological super-structure of the world today. Forcing concepts like exchange and economics into a theorem where tangibility is no longer needed causes for an unraveling of the state power structure itself. Institutionalized violence is no longer prerequisite for the monetary and legal system to function.

The ideological structure of capitalism has embedded itself into the state via the legal system. The State then acts as a thug on behalf of capitalist by enforcing laws through means of legalized repression and violence. It is from this proof-of-violence concept that states are able to force people to accept the legitimacy of contracts, the law, and the value of fiat money at the point of a knife. If governments could not the violence of their legal systems to enforce the acceptance of fiat money, or the repayment of debt; the entire international monetary system would collapse overnight.

Sovereignty of Value and Legal Ideology

All contemporary forms of fiat money rely on the physical and legal enforcement of laws, and the monopolization of the payment systems in order to create exchange value. All state money systems operate on maxims of restrictions based in law, enforced with mystical propaganda in one hand, and a clenched fist of enforcement in the other. The propaganda that is used to convince people of the need for the State to control money is far more important than the laws that create that money, or the guns and violence that are used to enforce their value. It is only through the repressive apparatuses of the State, and the cooperation of their capitalist allies that allows for this system of fiat money to continue to hold value.

Legal restrictions create the nominal values of the currency bills from all states. It is the same for the EU’s Euro, the Chinese Yuan, or Malaysian Ringgit–the currencies have nominal, redeemable value for goods and services in those Nation-States (or unions), and not outside them.

The value of these national currencies are created explicitly from the monopolization of the payment systems, and the monopolization of the issuance of legal tender. The monopoly of money itself via legal tender, and the monopolization of the payment system by the banks working with the state, is how national currencies forces themselves into a means of value, unlike commodity-monies like gold, sliver, or bitcoin.

The value of fiat money is unnatural and is only create through legal force. The power to create fiat money exist solely in the legal realm. However, what forces them to have value is the violence in which the laws based around those nominal values function. There is no such law to make commodities into money; they are simply valued.  Mises surmises this in the appendix of “The Theory of Money and Credit,”

Ludwig von Mises

Ludwig von Mises

“Another acatallactic doctrine seeks to explain the value of money by the command of the state. According to this theory the value of money rests on the authority of the highest civil power, not on the estimation of commerce. The law commands, the subject obeys. This doctrine can in no way be fitted into a theory of exchange; for apparently it would have a meaning only if the state fixed the actual level of the money prices of all economic goods and services as by means of general price regulation. Since this cannot be asserted to be the case, the state theory of money is obliged to limit itself to the thesis that the state command establishes only the Geltung or validity of the money in nominal units, but not the validity of these nominal units in commerce. But this limitation amounts to abandonment of the attempt to explain the problem of money. By stressing the contrast between valor impositus and bonitas intrinseca, the canonists did indeed make it possible for scholastic sophistry to reconcile the Roman-canonist legal system with the facts of economic life. But at the same time they revealed the intrinsic futility of the doctrine of valor impositus; they demonstrated the impossibility of explaining the processes of the market with its assistance.”

This difference between valor impositus and bonitas intrinseca: the nominal value of units imposed by the state–such as the dollar or shekel–and that which holds real intrinsic value; such as the metals, minerals, or other storage of value.

The best example of how these two values act against one another would be a gold coin that has a lower face value than what the coin is worth on the open market–it is not the stamping of the metal that creates value, but the amount of gold that it is comprised of.

Mises spoke further of the historical difference between the nominal value of coins, and their weight as metal:

“Nevertheless, in defiance of all official regulations and prohibitions and fixing of prices and threats of punishment, commercial practice has always insisted that what has to be considered in valuing coins is not their face value but their value as metal. The value of a coin has always been determined, not by the image and superscription it bears nor by the proclamation of the mint and market authorities, but by its metal content. Not every kind of money has been accepted at sight, but only those kinds with a good reputation for weight and fineness. In loan contracts, repayment in specific kinds of money has been stipulated for, and in the case of a change in the coinage, fulfillment in terms of metal required. In spite of all fiscal influences, the opinion gradually gained general acceptance, even among the jurists, that it was the metal value—the bonitas intrinseca as they called it—that was to be considered when repaying money debts.” Part 1, Chapter 3

Today because of the structure of late capitalism, where the state monopolizes the currency, and the banks monopolize the exchange of currency, there is no way to demand repayment in anything other than more fiat. It is from the insidious brilliance of forcing all exchanges into legal structures with no alternative payment forms, that fiat money both creates its own value, and also becomes a legal power.

We can see that money today is not valued because of its bonitas intrinseca, but only its valor impositus. This means that the only way that the state can make its money hold value is through explicit legal means, which are reliant on repressive legal enforcement, and nothing else.  

Physical World Against Digital Laws

There is a glaring issue with this mode of money creation when we start to consider for a moment that the world that we live no longer is orchestrated by legal enforcement of the state, but digital communications.

There is no physical footing in this world, no place for the apparatus to establish itself.The repressive violence states use to enforce their laws simply cannot exist here.

If we return to Foucault in Truth and Power he provides us with more hints about the functions of the state and why ‘cutting off the king’s head’ has been impossible until recently:

Moderator: The King’s head still hasn’t been cut off, yet already people are trying to replace it by discipline, that vast system instituted’-in the seventeenth century comprising the functions of surveillance, normalization and control and, a little later, those of punishment, correction, education and so on. One wonders where this system comes from, why it emerges and what its use is. And today there is rather a tendency to attribute a subject to it, a great, molar, totalitarian subject, namely the modern State, constituted in the sixteenth and seventeenth centuries and bringing with it (according to the classical theories) the professional army, the police and the administrative bureaucracy.

Foucault: To pose the problem in terms of the State means to continue posing it in terms of sovereign and sovereignty, that is to say in terms of law. If one describes all these phenomena of power as dependent on the State apparatus, this means grasping them as essentially repressive: the Army as a power of death, police and justice as punitive instances, etc. I don’t want to say that the State isn’t important; what I want to say is that relations of power, and hence the analysis that must be made of them, necessarily extend beyond the limits of the State. In two senses: first of all because the State, for all the omnipotence of its apparatuses, is far from being able to occupy the whole field of actual power relations, and further because the State can only operate on the basis of other, already existing power relations. The State is superstructural in relation to a whole series of power networks, that invest the body, sexuality, the family, kinship, knowledge, technology and so forth. True, these networks stand in a conditioning-conditioned relationship to a kind of ‘meta-power’ which is structured essentially round a certain number of great prohibition functions; but this meta-power with its prohibitions can only take hold and secure its footing where it is rooted in a whole series of multiple and indefinite power relations that supply the necessary basis for the great negative forms of power. That, is just what I was trying to make apparent in my book [“The Order of Things” which was originally titled “Words and Things.”].

To cut off the king’s head we must venture into a realm where a footing for his power cannot be found. A realm where the physical violence, repression, and thus the capacity to physical enforce nationalistic laws cannot exist. The meta-power of the state and their various laws end where they do–in physical territory, in a physical world. There is no need to cut the heads off of false prophets whom we are immune to.

Digital sovereignty departs from the theology of law, and builds a new economic system that operates from a critical bias of math, instead of physical enforcement. These systems are based upon non-physical knowledge alone (knowledge of the private key), which means these systems are built solely around their mathematical soundness. The code upon which these currencies are written is their own sovereign valor impositus. The computer code itself is the legal-mathematical structure that enforces the rules of bitcoin, and other digital currencies–no State or third-party is needed.

Digital Sovereign and The Banishment of Physical Force

Digital currencies are the kernel of power that a new economic and legal superstructure will be built from. Power is no longer something that comes from the sword, but from the pen.

Violence cannot be an explicit tool of enforcement or appropriation in a nearly-anonymous, digital system like bitcoin or other digital currencies. Economic independence outside of the control of the state or the banks is now a real possibility. This severely underminds the power of the State, the banks, and state-capitalism in total. Digital currencies allow for a new frontier of economic freedom and independence, that is not achievable with the current monetary and legal systems. With bitcoin, people are free to choose who they conduct transactions with, without the permission of the state, banks, or the violence they use to enforce their laws.

When we start to critically assess the current money systems of the world, along with the ideological and mythical structures of sovereignty, law, and the state; we find that they quickly break down under scrutiny. We come to understand that the dominion of the ideologies over our lives is not based upon some holy, progressive knowledge that protects us and gives us salvation; rather, it is barbarism wrapped in blanket, upon blanket of lies, obfuscations, and deceptions.

We see that it is not magnanimity or justice that governs the actors of the State; but selfishness, greed, corruption, and cowardice. We come to see the world as Angelus Novus did, and the horrors of what is stacked in front of us and growing with each passing day. To make whole that which has been smashed is possible, but we must wake the dead in our quest for redemption. The gate is strait, and it is our duty to show others the liberation that can come with each passing second.

In the declaration of independence of cyberspace we declared our virtual selves immune to state sovereignty, even as we continue to consent to the subjugation of our bodies. In the mean while we have spread to every corner of the global to ensure that our thoughts cannot be arrested, and so that the crimes of the state and capitalism will be seen by all, for all of history to come.

We now have the means to reappropriate our sovereignty, our economic independence, and ultimately our political organizations and the State itself. This can and will be done to end the era of state-capitalism, and usher in a new era of global digital organization. We are creating a civilization of the Mind in Cyberspace, and using digital currencies to economically unite us is the first step towards this new world.

—

Next: Bitcoin as a Commodity Money

The Transaction Cost of Bitcoin

Bitcoin and other cryptocurrencies have create a new monetary system that relies privacy and pseudonymity to conduct economic transactions, rather than governmental laws and regulations. This monetary structure has several distinct advantages over fiat money that makes cryptocurrencies fundamentally superior to all fiat money.

The current economic paradigm using fiat money creates a system in which transaction costs shall always be higher than those found within the bitcoin ecosystem. This is due to the costs that are associated with the creation, maintenance, and enforcement of laws within the fiat currency system that allows it to function. The privacy and anonymity functions of bitcoin allows for it to function as a money system, while not needing to pay for the legal structure, or enforcement cost of normal money systems.

What Creates Transaction Cost?

According to Ron Coase, who originally theorize about transaction costs in his work the Theory of the Firm, there are three types of transaction cost:

1) Search and information cost

2) Bargaining and decision cost

3) Policing and enforcement cost

These are features that all transactions have and are built into the cost of the transaction. For example you want to buy a loaf of bread, first you need to know where to buy bread (search and information cost). Then you need to decided what a reasonable cost is, and to see if you can get bread at that cost (bargaining and decision cost). And finally you need something to pay for that loaf of bread (policing and enforcement).

Now all three of the above features are ‘cost’ that are associated with any kind of exchange; legal or illegal. The largest key difference with illegal transactions is that third type of transaction cost (policing and enforcement) is replaced with evasion and extralegal cost.

Evasion cost substitutes the policing and enforcement cost. So if one wanted to avoid paying $25,000 in taxes, they could pay a lawyer $10,000 to save $25,000 in taxes. So part of the $25,000 is going towards paying the policing and enforcement cost, where as $10,000 is the alternative evasion cost that one can pay to assure they get away with their full $25,000. So if one pays the evasion cost of $10,000, they will save $15,000 in total.

This $15,000 is a special type of profit because it is derived directly from NOT paying the full transaction cost. This is called risk profit and is only experienced when one takes on evasion cost, or the cost of doing illegal business.

All transactions consists of the three above associated cost. What crypto-currencies offer is a fundamentally different paradigm for how to deal with legal and enforcement cost. Instead of needing violence to enforce the rules of the money system (like fiat money), bitcoin embeds ‘the legal system’ directly in cryptography, merging law and mathematics. This allows for an economy to be built directly on top of the non-aggression principal. Cryptocurrencies have no policing and enforcement cost whatsoever, which shall always create a lower transaction cost.

The Law and what it offers

Today, the law is what offers us financial protection within our current economic system. This is why you can challenge or dispute transactions that you do not recognize on your credit card or debit card. This is also why the Department of Homeland Security can seize your banking accounts and all of your money without notice. Both of these situations arise because of the laws that govern the current economic system. Though laws offer a distinct way of protecting actors within their economic system, and are sometimes of great necessity, it can also be at great expense to the general populous, and to the determent of the economy on a whole. Police stole more goods than all burglaries combine in 2014–if you haven’t already, it might be time to rethink the majesty of the law, and what it means to be governed.

Detriments of the Law

Utilizing laws as a bases to create an economy system has two distinct detriments: The cost that is needed to create and enforce laws, and biases of those involved in the legal system.

When we look at the cost of legal economic enforcement, we must look at all aspects of the law and the expenses associated with them. Breaking down these cost is almost impossible when we look at the breadth of lawsuits, permitting procedures, various licensing, taxation, and various government entities that are funded through taxation. These cost are rolled into all economic transactions that one does within a fiat economy, as the burden of police and enforcement cost are forced on to the consumer, producer, and the sum total of society. Thus, through simply having laws that must be enforced, the transaction cost associated with that money will increase.

Legal bias

Another hidden expense that comes from a economic legal system is the inherent bias that those involved within the legal and political system are going to have towards themselves. Or in another word, corruption.

Those who are closes to the centers of power are the ones that will benefit the most from the law, or the corruption of the laws. This is why the most profitable investment that can be made is lobbying. This is also why no criminal charges have been brought to those responsible for the 2008 financial crisis, no charges for the NSA spying scandal, and why the average congressperson is a millionaire. This is because of the corruption of the legal framework that they operate within and control, and the way that they allow for the corruption of the legal system to favor themselves and their cronies.

The corruption of our legal system is not an error, but occurs by design. Those who are closest to the centers of power are also the ones with the most agency within this system. They have varying degrees of control within the legal system that correlates with how close to the center of power they are. Thus, the closer to the center of power, the higher degree of agency they have within this legal system, which creates the conditions for manipulation and corruption of the legal system. This creates a two-tiered legal system in which those who are closer to the center of power shall have more economic opportunity than those more removed from it.

Over the last century, the corruption of the legal, economic, and political system has resulted in the economic state we are in today: a broken political system that is beholden to the interest of bankers, oligarchs, capitalist, and members of the legal system before all others. This not only is unethical and morally reprehensible, it is also very, very expensive.

Free Markets and Their Functions

People enter into economic agreements because they are just that: agreements. These are natural transactions that occur because of our own subjective interests for ourselves.  This is why we enter into social contracts in the first place; because we freely and naturally agree with the stipulations of the contract and proactively make the choice to be part of the contract. A transaction like this does not need anyone to enforce anything–both parties are willingly entering into a transaction because they both are getting something they desire from the transaction. Both actors have utilized free-choice to choose to enter into this agreement. This is the natural state of economic affairs, and there is no actual need for policing and enforcement cost in transactions that are entered into within free agreements. Thus, for voluntary agreements, there is not need to pay for policing and enforcement cost, which in turns creates a lower total transaction cost within a monetary system.

With bitcoin, people are making exchanges via the internet where there is no need for a legal enforcer to ensure that transactions are conducted fairly–that is what the bitcoin software does. Because of this feature–where bitcoin can allow for private individuals to preform economic transactions without needing a centralized enforcer–means that bitcoin does not have to pay policing and enforcement cost. This means that if we are to look at the economic cost of transactions within a monetary system, fiat currencies will always have a higher total transaction cost because of the need to pay for a policing and enforcement cost.

Conclusion

When observing any contemporary economy system we can see that there are three types of transaction cost: search and information cost, bargaining and decision cost, policing and enforcement cost. Because bitcoin uses software to create a secure form of money, there is no policing and enforcement cost that are associated with bitcoin. This means that when we look at the total transaction cost across an economy, an economy using bitcoin (or another digital currency) will always have a lower transaction cost than a fiat economy that must pay for policing and enforcement cost.

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Next: Bitcoin and Liquidity Preference

Bitcoin, Alt-coins, and Free Money Theory

Gavin with some BitBills

Gavin Andresen wrote this piece on his blog about alt-coins and several of the issues they create. As much as his concerns are valid, there is a different perspective where digital currencies of all kinds can compete in an open market to capture the most customers bases off of the greatest advantages they offer. This was presented in “The Denationalization of Money,”  the magnum opus of Fredrick Von Hayek, Nobel laureate in economics and close friend of John Maynard Keynes. Hayek’s primary argument in this work was that through allowing the private issuance of currencies, banks would be forced to compete on the open market to have the most competitive currency. Below I am going to explore some of the concerns that alt-coins present and how they can be understood from the perspective that Hayek offers in the Denationalization of Money.

Free money theory

Bitcoin has a significant advantage over other digital currencies with that it is the first digital currency, and no other digital currency is significantly different from bitcoin. With that being said, alt-coins not only help legitimize bitcoin as THE currency of the internet, but also help create a whole new digital currency economy, in which alt-coins can specialize, or succumb to market forces.

Gavin makes an excellent point that alt-coins don’t do too great of a job differentiating themselves:

“So what?  The free market at work, right? If they’re good they’ll survive, if not, then they’ll fail. If they’re better than Bitcoin somehow then maybe someday one or more of them will usurp Bitcoin as the biggest and best!”

He then goes on one to voice his concern that:

“Creating gazillions of alt-coins seems to me to just be a way of getting back to an “inflate on demand” world. Not enough genuine Bitcoin money for you? No problem! Create a new alt-coin to produce more!

As much as this concern is valid, I think we can see that his first point seems to be the direction we are heading. The value storage of the number of alt-coins in circulation vs. their price simply does not compare to bitcoin. There are more than 20 million litecoins today, with the total supply capping out at 84 million. LTC price in recent months has gone from  $2.75 per LTC, to under $2. You can see that despite there being a total cap on the supply of LTC at 84 million, it is still is valued 30 to 40 times less than bitcoin, despite being a pretty good copy of it. This is because bitcoin has the first-mover advantage behind it, and thus has had more time to establish a market for itself.

If bitcoin is doing such a good job, than why are alt-coins valued at all?

Each one has its own reason, so I’ll just use litecoin as an example for now. Litecoin has value most because of speculation, but it is also a good bitcoin catastrophe insurance, it has second-mover advantage, and it is the most liquid way to get out of bitcoin, but not back into another fiat currency.

Insurance

Let’s face it–bitcoin does not have a lot of friends, and it has a bad reputation

Personally I’m bullish enough on digital currencies to believe there will be a $10,000 bitcoin one day, and so are others like Max Keiser. Gavin hypothesized this may be part of the reason why alt-coins are around.

Maybe altcoins will be an important safety valve in some future crypto-currency-dominated world. Maybe if there is lots of economic growth and some technical reason prevents the velocity of money from accelerating to match the increased demand for transactions people will use alt-coins to fill the gap.

And I think what Gavin is saying about the velocity of money is true. I believe this is the behavior that we are seeing with litecoin being used as a shelter during turbulent bitcoin times.

Even if alt-coins were to become a threat to bitcoin, it would most likely be for a good reason. Perhaps mining centralization could lead to some issues down the line, or pump and dumps too frequent–who knows? Other than a faster block-time, and 4x the supply of coins, I don’t see any difference of advantage of using litecoin as a storage of wealth, or a mode of exchange.

I do however see how it is useful as a short-term hold of wealth for shelter during turbulent bitcoin market periods. There are members of the /r/bitcoinmarkets is an example of a community that utilizes this technique. There is also ample evidence that this is also done on the Russian exchange btc-e.com as well in order to do ‘pump n’ dumps–where one inflates the price through rapid buying, and then dumps to collapse the price and buy back at a lower value.

Litecoin may also become valuable as a mode of exchange. We can see that the recently closed online drug market place, Atlantis, accepted litecoin, in addition to bitcoin. Litecoin could very well bootstrap its way to become more valuable, similar to how bitcoin did with The Silk Road.

Other Altcoins

Namecoin, Peercoin, and Primecoin all have there own unique features that one day may make them very valuable, but today that is not the case. As Gavin pointed out, these developers could focus more on their alt-coins unique features (which I’ll discuss in a separate post), but to simply have it be another bitcoin copy is little more than inflationary flack. There are always 51% attacks, and people simply not accepting alt-coins to solve that. I believe from seeing where we are at in this very new economic paradigm we are see exactly what we need to see: A few unique and well-differentiated alt-coins seeing limited success, along with the death of dozens of other more useless coins.

When we look at bitcoin through the eyes of Hayek, none of this is surprising. Digital currencies represent Free Money, or money that has no monetary authority other than itself. This means that the value of digital currencies can only come from their intrinsic value which is established through the market. This is one of the reasons that bitcoin’s first-mover advantage is so important–it was the first digital currency to gain a wider following and create market legitimacy, thus it has the largest market cap of all digital currencies in circulation.

This also helps explain why alt-coins do have some limited success. Because they still have the same money function that bitcoin has, which is more efficient that fiat currency, that can be used to give them value. Yet, because there are fewer people accepting alt-coins today, nor do they differentiate from bitcoin greatly, many of them are still highly-speculative prospects that have gained little traction because of this lack of differentiation.

Conclusion

Hayek’s theory on free money found in the denationalization of money helps explain why digital currencies have value. This theory also helps explain the complex market relationships that allows for some currencies to keep and hold value, while limiting the success of others. It will remain to be seen how successful alt-coins will become, but it is most likely that because of bitcoin’s first-mover advantage that it will always remain the primary digital currency. With that being said, alt-coins will always be needed in the market for bitcoin catastrophic insurance, and to act as an alternative mode of exchange.

A Bit of Math: The Equation of Freedom

John gray is a premier political philosopher, and formerly a lecture at the London School of Economics. His erroneous essay on Bitcoin deserves a philosophical reply. In the following I will refute John Gray’s assertions on the functions of money and benevolence of the state, in addition to displaying that he speaks from a place of anointed authority with a misunderstand of what the concepts of digital freedom and liberty mean. It is my hope that through refuting John Gray that I can offer a framework for understanding the maxims of Digital Freedom and thus digital currencies themselves.

In his essay, John Gray States:

“While the policies that were adopted in the wake of the financial crash may have saved the world from a rerun of the 1930s, they also mean that money is steadily losing its value as a store of wealth. With near-zero interest rates, small savers are robbed as surely as they would have been if the original Cypriot plan had been implemented, just more slowly.”

A Golden Dawn, the neo-nazi part of Greece, having a rally.

His error is in assuming that crisis has been averted.  It is clear when looking at the big picture over the last five years, we can see that crisis has not been averted, but rather it has been mitigated for the current point in time. The Bank of England’s Governor stated that he believe that the current depression is worse than the Great Depression of the 1930s, and the data supports this. Greece unemployment is greater than the U.S. had at the peak of the great depression, and they also in the 6th year of their Great Depression. It is no wonder that just like in the early 1930s that we are seeing the rise of Fascism in Europe again with Gold Dawn–the Neo-Nazi Party of Greece–which is now the third largest party in Greece.

Many other European states are not fairing much better. Italy is clearly floundering, with a -2.4% economic growth for 2012, bail-out being likely in the next 6 months, and having their prime minister convicted of tax evasion, and then evading even the very ruling banning him from politics–corruption is an issue that cannot be understated. This is also an issue in Spain where the prime minister and his People’s Party are under fire for allegedly accepting cash payments from construction firms. This is on top of the economy having a projected unemployment of above 25% until 2018, the largest protest ever for an independent Catalonia, and 20% of the economy going black. Let me remind you that this is a nation that tore itself apart in a civil war during the 1930s because of economic problems, it is not fantastical to think that it could happen again.

Perhaps the only accurate part of this statement is that money is steadily losing it’s value. This is due to the policies of Japan, The U.S., and The E.U. all engaging in ‘quantitative easing,’ which is a sophisticated word for expanding the money supply. Japan is trying to double their money supply to achieve a rate of 2% inflation ‘as soon as possible,’ and the U.S. has tripled their money supply since 2008. This may have helped combat the obvious deflationary forces that have been present since 2008, but this is akin to jumping out of the frying pan only to find yourself in the fire later on. I believe that we will see stagflation starting 2016, and with the global economy already doing this poor, it shall create massive political pressure that will go unheard again.

Moving forward, let’s look at more of the erroneous statements of Mr. Gray:

“The currency has been criticized as a tool of speculators and money-laundering and its value has oscillated wildly as a result of hacking.”

This is an assumption that should display Mr. Gray’s rudimentary knowledge of how Bitcoin and the internet functions. It has not been ‘hacking’ itself that has caused for the volatility of bitcoin prices, it is simply with the market growing and trying to establish itself. Some of the major bitcoin heist did temporarily effect the price, but to believe that it is the cause of volatility would be inaccurate.  When you have such a small pool of wealth that is being dealt with (the market cap today is around $1.1 billion total–not just in circulation), it means that any shift of more than a few $100,000 is going to move the market quite a bit.  If you moved more than $10 million into any currency on the ForEx market it would not even be noticeable–it would be a drop into the financial ocean.

Later in his essay Mr. Gray displays his lack of understand about the functions of the internet:

“[Cyberspace is] a site of unceasing warfare – abounding in worms and viruses, vulnerable to attack and decay, and needing scarce resources and energy to operate – the virtual realm of the internet is a projection of the human world with all its conflicts.”

His whimsical notions of how cyberspace functions should be more than enough to inform us that he does not understand how the internet works. First, war is an act of violence in its totality–violence simple cannot exist on the internet. Period.  Calling viruses, worms, and hacking ‘warfare’ is a disservice to those that have died under the bludgeon of warfare, and creates a fundamental misunderstanding of what is occurring–violence is not one of them. Through allowing this ignorant idea that ‘war’ exist on the internet, Mr. Gray has endorsed the violence that the state brings to people like Pvt. Manning and Edward Snowden who have done no actions of violence whatsoever.

The internet in itself is a place of intangibility and human expression–that is the bases for the very code the the internet is written upon, and the functions that the internet carries out. Ideas, intangibilities, concepts, exchanges of information, and knowledge–that is what the internet is in all of its forms–nothing more and nothing less.  It is from this very place that programmers of the 21st century have found themselves asking the same questions as the legal philosophers of the 16th century–in a very different light however.

The freedom of the internet is derived from the freedom of actions which one can do on the internet through the functions of the code that one is using–the code itself is a tool, a tool to help create these expressions and communications over the internet. Programs based upon this same form of logic that philosophers are subject to, hence why it is called logic. It is not surprising then to discover that with the building of the foundation of the internet that small community of cypherpunks found themselves discussing  principals and values like freedom, privacy, and sovereignty.

It was from these discussions that the question of assurance came up: How can we be assured that our privacy is safe? We cannot trust someone else with our privacy, or else it would not be private, so how to we negotiate that? The answer to this question was math. Mathematics offer us statistically assurances that if we are to use a cryptosystem, such as a PGP key, or Bitcoin, that the statistic capability to break hash function is very, very, if not impossible hard to do. Thus, we arrive at a system of privacy that offers the mathematical assurance of privacy–not the lies of men sworn to protect these privacies. Armed with this knowledge, this same community that was just a bunch of ‘punks’ became the vanguard of the internet privacy and freedom.

From their deep thoughts to the question of liberty and government violations of that that The Declaration of Independence of Cyberspace came from. It was clear almost 20 years ago that the Internet was too powerful for megalomaniacs of governments to let it be. It was also clear that the defense of the internet was going to be needed and it is for the same reason that the Electronic Freedom Foundation was founded. Even back in 1995 it was clear that the freedom of the internet could not co-exist with the oppressive governments of the world–either the internet would be free along with the world it connects to, or it would be limited, choked, and exist only at the whims of those in the halls of power–just as our societies exist today. With the true extent of NSA spying today still unknown, I believe it is clear to see who is winning. As nation-states are clamping down on the freedom of their citizens and the internet across the globe, people are finding solidarity within that principal itself: The freedom of the Internet.

As a man that has called himself as a liberal, it is sickening to here such dribble as this be written from any man that calls himself a scholar:

“[Crypto-anarchy is] a philosophy that shares the fatal illusion of anarchism in all its varieties, the notion that most human beings actually want freedom from government. Invading personal freedom in times of crisis isn’t always unpopular – far from it. Not only during the 20th Century but throughout history, human beings have turned to governments, and often to tyrants, for protection and security. The safety they are looking for may be just a mirage. That hasn’t stopped them wanting it.”

I am shocked and horrified to hear a scholar advocate for the tyranny of governments–popular or not.  Simply because Adolf Hitler and Benito Mussolini came to power through legitimate means and because a majority of citizens would willing have other citizens taken to the gallows for false promises of liberty does not excuse such actions in any way, shape, or form. Totalitarianism, Fascism, and Authoritarianism all have a deep and powerful appeal, particularly in times of great uncertainty. It is akin to the power of having Demi-God come to you and say, “Give me the power to kill and work outside of the bounds of the law–for I shall give you peace in our time.”  It was these very feelings that caused for the the untold deaths of tens of millions of innocents during World War II–a horror that we cannot, must not, and shall not ever experience again.

What men like John Gray and his masters do not realize is that this is the beginning of the final push for a global liberated single humanity. Those that are Digital Natives understand the power of the internet and how it has, and shall continue to change the world. Digital Natives see how much closer we are to one another than we are to the elites that run run own respective nation.  Our counterparts in Greece, Egypt, China, and the world over, that are struggling with the political oppression in their nation is the same struggle as our own. They are our brothers and sisters of the world, and fellow citizens of Cyberspace. It is with them, not the John Gray’s of the world that we shall find liberty together.

He concluded his essay with the following statement:

“Whatever happens, this will surely not be the last attempt to find freedom in cyberspace. While the freedom Bitcoin promises is an illusion, it’s one that will always have a grip on the human mind – the dream of finding some kind of talisman, a benevolent tyrant or a magical new technology, that can shelter us from power and crime and protect us from each other.”

It is tragic to see that Mr. Gray understand the human heart’s most basic yearning to find freedom, yet refuses to acknowledge that technology may have brought this within our grasp. I believe that this is where there is a fundamental difference in the world view of my generation and his generation.  To take from the Declaration of Independence of Cyberspace:

“You are terrified of your own children, since they are natives in a world where you will always be immigrants. Because you fear them, you entrust your bureaucracies with the parental responsibilities you are too cowardly to confront yourselves. In our world, all the sentiments and expressions of humanity, from the debasing to the angelic, are parts of a seamless whole, the global conversation of bits. We cannot separate the air that chokes from the air upon which wings beat.”

We have moved into a world where those who hold economic and political power do not understand that which we are creating together in the Great Common known as Cyberspace, and so they seek to destroy the freedom we have created here. Because they do not understand us they have sent swarms of regulators to eat out our substance and subjugate us to laws that far outside of our jurisdiction. Because of their own stupidity and certainty of that stupidity that they have doomed themselves to fighting a war which they cannot win.

That is a war with freedom itself. This is not the glistening banner of shinny, pretty freedom that American politicians speak of, but true, unadulterated, messy, freedom. The freedom that is not just a promise, but a rule. One that is blind and unbiased, that functions from maxims and not opinions, and is of rules, not rhetoric. It is from this idea of advancing economic freedom from a categorical imperative that we are able to see the power of the federated cryptosystem that Bitcoin is.