Continuing from my recent essay, Bitcoin’s Dirty Little Secrets – Environmental, I thought I should give some space to the political dimenion of Bitcoins dirty little secrets.
Since the white paper was first published under the name Satoshi Nakamoto, the central premise (pun intended) of Bitcoin has been that:
A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.
Yet for all the promise of an alternative to the centralised monetary systems in use by high street banks and backed by government regulators, Bitcoin is a surprisingly centralised system with ~95% of Bitcoin is controlled by ~2.4% of the accounts in the network. When this knowledge is combined with the relatively small number of exchanges and general lack of regulatory oversight, it raises serious questions regarding the decentralised and democratic claims about Bitcoin.
Exchange Cash for
With the majority of Bitcoin mining being done by a small number of mining pools, most people who wish to hold and spend Bitcoin are forced to turn to an exchange. Whether they are exchanging dollars, Euros, Francs or another cryptocurrency, it is the crypto exchanges that are providing both the liquidity and the price discovery. The same way traditional exchanges do for government backed currencies. So much for decentralisation.
All this is done with minimal or no regulation. While this is a major attraction for people tired of big finance failures and government bailouts, government regulation – at least in democratic countries – brings a modicum of oversight and transparency. Something which is non-existent in the raft of unregulated exchanges through which vast amounts of Bitcoin flow. So much for democracy.
There are however use cases in which the potential anonymity of Bitcoin (potential because some wallets log user transactions), can be a boon for people living under corrupt and or totalitarian regimes. However, this benefit has to be offset against the risks involved in Bitcoin vanishing. Either through hacks, theft, fraud, misappropriation or people just loosing their access token. For relatively affluent people in Western democracies who loose a few thousand in such incidents, alternative sources of wealth such as loans and government backed savings can likely keep their head above water. For those living under corrupt regimes, such incidents may result in bankruptcy and starvation.
While to simply turn to regulation seems to be flying in the face of what Bitcoin is suppose to achieve, a decentralised currency, there does seem to be a use case for a ‘United Currencies’ exchange to which people can turn to find both freedom from the corruption of the regimes under which they live and security of what wealth they possess.
As Richard P. Gabriel noted in his essay Lisp: Good News, Bad News, How to Win Big, ‘worse-is-better.’ An assertion that ultimately unpacks to acknowledge that programmers are, by and large, ‘conditioned to sacrifice some safety, convenience, and hassle to get good performance and modest resource use.’ This is why perfect systems may exist in the lab, but it is the dirty hack that is more likely to go viral.
In praxis, the result for Bitcoin is that the ideological claims for a decentralised, government free, anonymous currency has given way to the ‘worse-is-better’ ideology of why most people seem to be dumping cash into crypto: to get rich and live the capitalist high life.
In closing, I can’t go past a quote from Nakamoto’s white paper:
As long as a majority of CPU power is controlled by nodes that are not cooperating to attack the network, they’ll generate the longest chain and outpace attackers.
‘As long as’ statements fall into the same epistemological category as ‘if only,’ a subset of testimony. In philosophy, testimony is simply the passing of a proposition from one entity to another.
While it has been argued that testimony requires plausibility, credibility and concomitant experience and competence on the part of the testifier, the reality is that testimony has a very subjective base. This is because if a listener wishes to believe what is said, then they will because the individual testifying is plausible.
But plausibility and truth are not the same thing. It is plausible for a zoologist to say, after only ever observing white swans, that all swans are white. The truth is there are black swans, which is but a simple classroom example of how a statement can be both plausible and false.
Returning to ‘as long as’ and the plausibility of Bitcoin. ‘As long as a majority of CPU power is controlled by nodes that are not cooperating to attack the network,’ all is well. But consolidation of CPU power in the Bitcoin space is following the Matthew effect, and ~72% of that mining is happening in China; a country not exactly renowned as a bastion of democracy. This is a trend with geopolitical and financial implications, and presents a future where ever more trust is being placed in an ever more centralising system. The very evils from which Bitcoin is purported to free us.
Good night, and good luck.
Government by Elihu Vedder is licensed under Public Domain.