Tag Archives: privacy

The Absolute Value of Crypto

Secrets have a value. How much, it is hard to say, perhaps invaluable would be a more apt description. Invaluable because a secret can mean the difference between life and death; that which can lead to victory or defeat in war. Secrets have an absolute economic value as well because it can truly mean the difference between life and death. Cryptography understands that the security of communication is essentially to life and death, and there is real value to both privacy and secrecy.

Bitcoin and other digital currencies are built on top of strong cryptography for this reason. This cryptography is strong enough to be considered unbreakable at this point in time, and most likely for the next several decades. Due to the mathematically assured, provable secrecy that bitcoin is built on top of, bitcoin creates additional value outside of the energy spent mining bitcoins by creating a cryptographically strong system of digital exchange. The ability to exchange through strong cryptography, and the secrecy it affords is part of what creates the economic value of bitcoin.

This value comes from the commodity that bitcoin is made from. Just as gold’s secondary values comes from its fungibility; the proof-of-secrecy function of bitcoin gives each unit their fungibility, which in turn creates secondary value. The provable mathematical security of bitcoin means the system is totally secure from legalized theft. No state, banker, or military general can steal your securely stored bitcoin; no matter how powerful they may be, or how many guns they have pointed at you.

A Very Short History of Crypto and War

Cesar’s Shift Cipher

Even before Julius Cesar first used his simple shift cipher for encoding his messages; ciphers, and stenography were wide used to conceal information throughout ancient history. These tactics of hiding information and keeping that information secret, or Crypto, developed as a tactic for war, and has had a large role within power struggles throughout the centuries.

As Napolian Bonaparte said, “The secret to war lies in communication.”

Over several millenia the developments of stenography and shift ciphers got better and better, as they were used for diplomatic and military purposes. A major advancement in the field occurred when poly-alphabetic ciphers, such as Vigenère cipher in 1553. Several centuries later the developments of cryptography were culminated in Kerchoff’s “La Cryptographie Militaire” in 1883, which are now surmised in Kerchoff’s principals.  This was a scientific manifesto on the military application of cryptography, and how to understand the security of cryptosystems and breaking them. Of these principals that Kerchoff established was the need to make the system based upon mathematical principals, and the supremacy of keeping the secret key secret, as if you do not, the system will be know by your adversary.

Just as in war you have an enemy, in crypto there is an adversary–an opponent that is seeking to compromise your system, and break it of its secrecy. If your secrecy is compromised, and if the secrecy of this communication is based upon life and death, you will die. This value of secrecy is absolute, and nation-state’s wars against one another accelerated the improvement of cryptography at a startling rate. This arms race in crypto ran parallel to the arms race for nuclear weapons in the 20th century, and was just as pivotal to its outcome.

The Mechanization of Cryptography for Advanced Warfare

Enigma Machine

The mechanization of ciphers with the rotor machines were developed in the early 20th century. It was the first true attempt to apply a more robust computational principals to ciphering with machines. The mechanization of ciphering reached its apex during WWII with the German enigma machine. In order for the Allies to break the encryption of the enigma, they had Alan Turing develop The Bombe. This was one of the first computers ever created in order to crack the code of the German enigma machines. These ciphers had become so complex, they now needed computers to help with the complex mathematical calculations to crack their code.

Like the wars that the empires throughout the ages have fought; at first their tools were rudimentary and crude, but developed with sophistication, technology, and scientific precision over the ages to what they are today. States now command weapons of mass destruction that can wipe out millions of people in a moment, and they use this as a token of power within the realpolitik of statecraft against other states.

This is called brinkmanship–the art of pushing dangerous scenarios for favorable outcomes on ones own terms. It is within this same vein of power that the tools of cryptography were developed as a means of war. We must ask ourselves: why has this technology been so zealously guarded, with so much human energy expended upon it?

Privacy and Secrets as Power

It is because within the realm of secrecy and privacy that people can organize independently, and outsmart stronger, more powerful enemies. Encryption is a weapon for the weak against the powerful, and a way for individuals to be given a mathematical assurance against the invasions of privacy, both for personal documents, and communications.  It is a mode of mathematically assured protection. One needs not to trust people with money or secrets any longer. Now they only need to trust the code upon which their secrets are hidden. That code is only mathematical, and is binary in nature.

From being built on top of this mathematical encryption technology that cryptocurrencies create a true use-value. Proof-of-secrecy creates both fungible, and security. These features, paired with the limited number of bitcoins, and computational and electrical energy that goes into creating bitcoin units, creates the total concept that gives bitcoin, and other digital currencies, their value. Bitcoin and other digital currencies give rise to a new mode of sovereign economic power. It is this economic force that over the coming decades will deconstruct, and depose of the old concepts of money, value, banking, exchange, protection, and finally the state itself.

The Digital Sovereign

Digital currencies are the economic power that will become the bases for a new way of organizing. This new form of power will create new social, economic, and political organizations which together will create a new superstructure of power I call the digital sovereign. Echoed in the sentiments of the declaration of independence of cyberspace, this is the process of creating a world that all may enter without privilege or prejudice accorded by race, economic power, military force, or station of birth. The digital sovereign is the space in which the civilization of the Mind will make itself victorious over the world of flesh and steel.

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Next: Bitcoin and The Internet as Ideological Apparatuses

The Intrinsic Value of Bitcoin

gold_mining_rocker_boxThere are several features that create the intrinsic value of bitcoin, but the primary one is its production cost. Bitcoin is a commodity money like gold, sliver, or copper which means that the energy cost to extract these raw materials creates their base value. The actual exchange between two people is totally subjective, as the subjective theory of value shows us, but we can assume that practically no one would sell their commodities for a price below what it cost them to extract the commodity. Today, the cost of mining bitcoin is getting to be quite difficult, which is part of the reason for the increase in price we have seen.

The Base Value of Bitcoin

Let us take a moment to think about how mining for bitcoin is similar to mining for gold. If you go into your backyard and try to see how much gold you are going to find, you’ll probably come away empty handed. That’s because you are using a pick and shovel, and it is no longer the 1850s–someone else got that gold (if it was there) long ago.

That just like how bitcoin mining is today–well more like 95 years ago when gold was about $20 to the ounce. Check and see how many bitcoins you could make with this mining calculator. Most likely it’s not a lot. This is because just like with gold mining, someone developed a better way to mine for bitcoins, making mining with a normal computer unprofitable today. This is because the newest bitcoin miners use energy more efficiently to mine bitcoin.

Keep in mind that the commodity value is just the base amount–that is just the production cost. Bitcoin, like gold, is a special commodity–it’s a commodity AND money at the same time. These special commodities are appropriately called commodity money. Commodity monies are special in that they have an inherent value by being a commodity, but because of their traits, they make great money too.

It is this secondary value of being good form of money that creates the secondary social value of bitcoin and other commodity monies. It is both the production cost of bitcoin, along with the properties of good money that it exudes which creates the total value of bitcoin.

Commodity money creates a secondary value as a mode of exchange through the base production value. It is because of this trait of being made from a real commodity that commodity-monies can ‘bootstrap’ their way into becoming a mode of exchange. Once this happens it allows for market mechanisms to decide on the price of the commodity money beyond its production value. This is how commodity monies become more than just commodities, and become modes of exchanges and in some cases a storage of wealth. This is why gold became the most sought after commodity during the mercantilism era: it met the four qualities of good money better than any other object in the world, and was by far the best storage of wealth. This was not because it was shinny, but because it was incredibly rare. This is also why gold and silver have 3,000 years of history as being used as money and a storage of wealth–due to the intrinsic qualities they hold because of their scarcity.

The Value of Fiat Money

Where Fiat money eventually ends up: An arm full of Zimbabwe money that is worth nothing.

So than why is fiat money valued at all? Fiat currencies are not independent, nor is there any value contained in the money itself–it’s just paper. So how do these worthless pieces of paper have value?

Through the governments guarantee that it will accept fiat currency as legal tender, and that all transactions within its economy will meet this basic minimum standard of the law. This is what allows the government to bring violence to anyone who challenges the legitimacy of government’s monopoly on money. The power of fiat money is derived from the government’s legitimacy–that is why they can just make new money up out of thin air.

Statists argue that seigniorage from the state is not only needed, but is desired. For the State is the law, and the law is a means to an end in itself–that is why the state has the legitimacy of violence to decide if a person deserves to live or die. It is through this power of that the State can redistribute, protect, or harm their own citizens–for the benefit of all, or for a few. It is from this base of power that states create the laws to conduct economic transactions within their sphere of influence. This is why fiat money is only valid within particular nation-states own sphere of influence, and not that of other nation-states.

Philosophy of Value

The intrinsic value of bitcoin far beyond its commodity value. What creates its real value is the mathematical assurance that the bitcoin ecosystem cannot be predicated upon force, unlike fiat money. This is because of the cryptography that bitcoin is built on top of allow for two very distinct things:

For this to work, a robber would need to know all of the wallets that you have, and the amounts you have in them.

1. It assures that the vast majority of transactions within the bitcoin economy are based upon voluntary participation, which in turn ensures:

2. Almost all transactions must be non-violent, unlike state-based currencies, where the legitimacy of the currency comes from the state’s ability to bring violence to you for not complying with their laws or legal structure.

These qualities result from the privacy function of Bitcoin. Privacy, within the context of an economy is what allows for a fair, voluntary economic system to be created. Bitcoin exchanges ‘the protection’ of the law, for the mathematical assurance of cryptography.

Bitcoin has made a new economy in which the categorical imperative is not the law; but privacy. We prefer to have no laws, because privacy allows for us to build the voluntarily social contracts without the threat of violence from the state, or anyone else because our true identities are unknown. We understand voluntary transactions ultimately lead to a lower transaction cost for both parties because policing and enforcement does not have to be paid for.

Conclusion

In another age, fiat currencies and national governments were tools that we needed to evolve technologically. This economic mode was an excellent model for the growth and development of an advanced industrialized society, and all that came with it. Today however, both national governments and fiat currencies are anachronism that keeps greater humanity from advancing itself to its next stage of societal evolution: Anarchism.

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Next: Understanding The Economic Functions of Bitcoin