China, Crypto-Currency, and the World Order, Part 2
I have a lot of friends who are programmers. The programmers have always gone like, “Those [Bitcoin] guys are crazy.”
And then, almost 100 percent of the time, they sit down, read the paper, read the code—it takes them a couple weeks—and they come out the other side. And they’re like: “Oh my god, this is it. This is the big breakthrough. This is the thing we’ve been waiting for. He solved all the problems. Whoever he is should get the Nobel Prize—he’s a genius. This is the thing! This is the distributed trust network that the Internet always needed and never had.”
So, one of the challenges is you take people who aren’t professional programmers or mathematicians and then you expect them to understand it from a standing start. And it’s daunting. And so then it gets a word attached to it, like ‘currency’ or whatever you want to call it, and then people think that it is something it isn’t. And you have a sense of this, but it’s a much deeper concept than currency. It’s the idea of distributed trust.
—Marc Andreessen (in conversation with Brian Fung)
It was noted in the first part of this essay series that the economic order of the world is being radically reshaped by two roughly coincidental transformations of stupendous consequence: a secular shift of industrial capability from the West toward the East, and an Internet-based revolution in the nature of money. Of these events, the former is already deeply established, and generally recognized, while the latter is still at an initial stage of emergence, and thus far less obvious in its implications. Their intersection remains deeply obscure.
One topic that seems, tantalizingly, to connect these historical threads is the prospective death—or at least radical demotion—of the US dollar. The Triffin Dilemma argues that any currency attaining world reserve status tends, perhaps irresistibly, to destroy itself.1The mechanism, roughly described, is that the chronic trade deficits required for the international distribution of a reserve currency undermine the domestic economic fundamentals upon which that same currency’s credibility initially, and ultimately, depends. This endogenous mechanism is sharpened by geostrategic rivalry, and further destabilized by complicating, partially independent factors such as the vicissitudes of the petrodollar convention. In combination, their effect has exhibited a clear directionality in recent times, with the proportion of international foreign reserves held in US dollars declining from 55 percent to 33 percent since 2000. America’s relative economic decline looks set to exacerbate the ‘winter’ of this great cycle. From the other side, the dollar is threatened by the piecemeal emergence of an entirely unprecedented non-state currency system, disengaged from all the familiar institutions of monetary management. At the historical horizon of the globalized US dollar, the Chinese yuan and bitcoin are hazily gathered together.
Abstractly anticipated, this twin-threat integrates into a single event of compounded significance, but concrete forecasting can easily become lost in its novel complexities. For roughly half a millennium, transitions in world economic leadership have been smoothed by cultural affinity and intimate strategic collaboration, within a commercial Protestant tradition that has shared a common language, and common enemies, since the late eighteenth century.2Transition of world economic leadership from the United Provinces to the United Kingdom was institutionally facilitated by transnational elite integration, crowned by the Glorious Revolution of 1688. The later succession of the United States to global economic preeminence involved a less clearly formalized, but nevertheless unmistakable degree of regime coordination, built in large part upon the military, administrative, and intelligence cooperation forged in the crucible of World War II. Innumerable indicators might be mentioned, including even the dynastic factor of Winston Churchill’s hybrid Anglo-American ancestry. Nothing comparable is conceivable today, as American global supremacy erodes in a context of intense strategic competition and pronounced civilizational difference.
Relative to the passage from the pound sterling to the US dollar, systematic adoption of the Chinese yuan would require “crossing the great ocean”—an expedition so daunting it is unlikely, in any straightforward sense, to take place. Superficially, digital cryptocurrencies are set at an even more distant remove, alien even to those commonalities that span the gulf between civilizations. Yet they are positively advanced by proximity to the world’s looming monetary precipice, because they represent a solution to the absence of trust.
The word “bitcoin” stands for two very different things (although one contains the other). In its narrow and exact usage it names a specific currency, abbreviated as BTC, incarnating a radically innovative monetary system whose design was fully specified in Satoshi Nakamoto’s 2008 “Bitcoin” paper.3The identity of Satoshi Nakamoto remains a topic of intense speculation, exceeding the bounds of the present discussion. The currency became operational in 2009.
The 2008 paper is both a practical invention and a substantial contribution to the philosophy of money. Its central insight is that money functions as a rationing system, acquiring value or application to tradable goods and services through a scarcity function. If digital money is to realize this function, it has two interconnected problems to solve. It has to be intrinsically limited, and it has to be exclusively alienable.
Bitcoin solves the first of these problems by emulating a precious metal. It is earned through a process of mining that requires cryptographic work, in order to access bitcoins from a finite ‘reserve’, released in stages, amounting in total to 21 million BTC. Preserving the finitude of this bitcoin money stock depends on the solution to the second—or ‘double-spending’—problem. Considered the principal obstacle to the creation of digital money, the problem of double-spending arises automatically in a medium which effects transfers by copying. Unless money is deducted from the payer as it is credited to the payee, value-conserving expenditures are impossible, yet this simple operation—going against the grain of digital information exchange—seemed to require the introduction of a guarantor, or trusted external party, which the system itself was unable to integrally provide.
This is Bitcoin’s most unmistakable breakthrough. Every transaction taking place within the system is entered into a sequential public ledger, or blockchain, which has to be updated as a whole for any exchange to be registered. The cryptographic work of the system’s mining activity now acquires a secondary, automatic function, validating each blockchain iteration, and defending the ledger from usurpation by fraudulent agents. The guarantor of each value-preserving ‘cash’ transfer is thus the entire blockchain itself, operating as a spontaneous or agent-independent trust mechanism. Through this continuously updated, integrated record of all commercial events, the blockchain supports a consistent account of Internet-communicable synthetic scarcity, or self-regulated digital rationing—in other words, the world’s first fully-decentralized electronic money system.Bitcoin scarcity is decentralized due to its independence from the promises of an issuing authority.
In describing this system, one passes very rapidly from the singular to the generic, in a way that is easily understood by analogy, and worth dwelling upon momentarily. Had Netscape been adopted as the name for web browsers in general, certain confusions would almost certainly have arisen. Most significantly, the question “will Netscape survive?” would have been fatally ambiguous. As actual history has demonstrated, Netscape in this counter-factual sense was able both to die, and to thrive beyond all prior expectation. Many hundreds of millions of people use a ‘Netscape’ every day, although under other (specific and general) names, while only a vanishingly small fraction are aware that Netscape ever existed. It is not clear whether Bitcoin, in its specific sense, could ever be entirely extinguished, but it could certainly be marginalized to the edge of irrelevance: driven from the market by competitive cryptocurrencies through which Bitcoin, in the general sense, advances towards ubiquity.
In its broadest evocation, Bitcoin symbolizes a gathering Internet revolution, of a scale and profundity that is difficult to exaggerate. The technical capability required to run BTC—installed blockchain-supporting software—has a potential extending far beyond the currency itself, and only a very small fraction of this has been explored thus far. This is most dramatically evidenced in the growth of a sprawling spin-off bitcoin ecology of altcoins, or Bitcoin-like P2P contract systems, tagged by the -coin suffix. Prominent altcoins include Darkcoin, Dogecoin, Litecoin, Namecoin, and Truthcoin, with many others on the way. At the outer edge of blockchain abstraction lie applications such as Ethereum, whose Turing-complete scripting language can support smart contracts, and even autonomous intelligent agents. At this point of sophistication, the ultimate potentialities of the system are not merely undetermined, but undeterminable in principle, and the gateway to a previously unvisited techno-commercial cosmos is opened.
It is this extreme generality that Eli Dourado celebrates in his article “Bitcoin isn’t Money—It’s the Internet of Money,” arguing:
Bitcoin is not just a substitute for money; it can be a form of generalized, programmable, decentralized contracting. […] Most of Bitcoin’s critics are making a category error. They are taking aim at Bitcoin the currency, when in fact Bitcoin is much more than a currency, in the same way that the Internet is much more than the telecommunication services that preceded it. […] Bitcoin is a new transport layer for finance that allows decentralized, disruptive, permissionless 4Dourado cites Vinton Cerf’s 2012 article “Keep the Internet Open,” where the notion of “permissionless innovation” plays a crucial conceptual role. development of applications on a separate layer. It has the capability to do for finance what the Internet did for communication.
Among the blockchain-based facilities Dourado envisages are assurance contracts, prediction markets, and continuous micropayments, as well as notary, bonded identity, and reputation rating services. It is easy to see why ‘getting’ Bitcoin triggers something akin to metaphysical shock. As a self-sufficient digital depository for legal identity, it exhibits—virtually—a potential to absorb the cultural infrastructure of formal transactions without obvious limit. There is perhaps no conceivable ‘deal’ without blockchain compatibility, and therefore no definite horizon to its commercial, legal, or even political utility.
Of particular relevance here is the blockchain innovation of artificial trust often referred to as trustlessness since it substitutes for trust, and is thus pre-adapted to a world in which trust is unavailable.[ref]Google the combination “trustless + bitcoin” for abundant confirmation.[/ref] Under the conditions currently impending, a global hegemonic transition occurring beyond international consensus or civilizational continuity, this deep feature of Bitcoin seems certain to be foregrounded. By apparent remarkable coincidence, a collapsing order of promises, or credible global authorities, is accompanied by the emergence of an alternative system of credibility. As the traditional supports of the world’s institutional architecture are subjected to accelerating erosion,5Monetary authorities are the most relevant example here, but every institution dependent upon some measure of public trust is, in principle, susceptible to implicit competition from blockchain-based (trustless) alternatives. the premium upon trustless functionality can only increase. Bitcoin suggests itself as a replacement for authoritative guarantors, while opening entirely novel vistas of decentralized institutional creation. The contextual friction, dysfunction, and disagreement of a world in hegemonic disarray only reinforce its attraction.
In comparison to the smooth transitions in economic supremacy, from the United Provinces, to the United Kingdom, to the United States, the passage beyond the American world order can only be considered rough. It is this roughness that shapes the socket, for which Bitcoin—in its most expansive sense—is the plug. The installation of trustless systems fits into a hole in the world.
How does the rise of trustless Internet technology modify the strategic landscape of the great powers, and the world’s other principal actors? To what extent can their responses be anticipated? Only by addressing these questions can some concreteness be introduced to our understanding of the path ahead. They therefore provide the topic for the third (and final) part of this series.