Many well-known bitcoiners say that bitcoin is money for enemies: Vijay Boyapati he tweeted about it; Nick Carter has written on it; Peter McCormack and American Hold echoed that conclusion here. On these pages in January 2022, Mark Goodwin wrote: “Bitcoin simply must be for enemies, or it will never be for friends.”
Sounds good and feels good, drop-mic style, but what does it do? to mean so that bitcoin is for the enemies? Or any money for that matter? What is the distrustful and decentralized nature of bitcoin that it brings to the table?
One answer is that bitcoin he doesn’t care about your opinions, including your assessment of potential business partners. It works whether operated by friend or foe. That’s true, but it goes for any other money as well: with fiat, I can buy groceries from strangers and heretics just fine. Another is that bitcoin allows people to transact peacefully without knowing each other’s status as an enemy. That’s true, but it goes for any other money, too: We don’t vet baristas for their ideological correctness before ordering a morning cup of coffee.
Maybe these are censored transactions, where the buyer and seller are happy to transact, but a third party (politician, bank, payment processor, police) gets in the way and blocks the payment. That is an improvement than bitcoin and others bearer assets like gold or cash on the money table, but that doesn’t mean that merchants are enemies.
In the past, I have showed that the more developed the bitcoin ecosystem becomes, the more it resembles the current monetary system it hopes to supplant. It is not that he should degenerate, be captured or start working for the ends of a select group of ideologically suspect people, but rather that he hits some unavoidable obstacles of our monetary world. Matt Levine in Bloomberg do you agree: “[…] crypto quickly recaps history and relearns the lessons of traditional finance. I don’t particularly mean this as a bad thing. Learning is good!”
Many lessons from deep financial history, Levine observes, are “buried tacit knowledge; The traditional financial system does a lot of things, and most of them do them for good reasons, but often most people have forgotten what those reasons are.”
In fact, almost everything that makes money work in the normal world is also present in bitcoin. That’s it why can trade as a monetary asset, why it can settle trade so successfully, and why it can trade as a global payment rail.
Introduction to Monetary Economics: How Bitcoin Does What Money Does
The above quote from Goodwin is interesting and, I suspect, incorrect. Bitcoin is not for friends. In fact, a buddy economy doesn’t need money at all. (They may want a unit of account to keep track of and balance favors, but between bona fide friends, even that can be worked out through barter.) This is why GA Cohen’s famous camping trip analogy initially works: in “Why not socialism?”, Cohen poses a real-world situation in which friends give according to their abilities and receive according to their needs. Since we all do that when we leave together, why couldn’t the world also operate on those premises?
A lot of people have disarmed that ideain the narrow example of the camping trip and more broadly for a wide world where no meet everyone, no Want the best for the other no Feel good about being charitable with our contributions. In fact, families are the only functioning socialist communes in the world, and they don’t function with money. Instead, they operate in confidence, with mentally unspecified (or charitably bestowed) favors and unstated responsibilities according to their respective roles. In a word: credit. Friends can trade with confidence, and that’s cheaper (less resource intensive) than money.
Long before Satoshi, monetary economists had settled this point: In a world with total commitment and total trust in one another, agents do not need money and can instead rely entirely on credit. Yes has total commitment and total trust in each member of the economy, small or large, can avoid the resource cost of money (the real ones in gold or bitcoinor your indirect under monetary fiat). The imaginary record of credit is enough. Stefano Ugolini, central banking academic at the University of Toulouse, write in typical Monetary economics jargon: “The frictions needed to make money essential generally make credit unviable, and the environments in which credit is feasible are those in which money is generally non-essential.”
For money to outperform a rival system that operates entirely on credit and trust (like our earlier story about friendship camps), the models that monetary economists have developed suggest that agents
- you may not have a perfect memory of previous business associates (or anonymity);
- must have limited ability to commit and enforce promises; and
- have the opportunity for a one-time transaction (eg, strangers coming to town).
That sounds a lot more like our world than the models that monetary economists play with. We are, in other words, fully in the scenario where money is fundamental. Money is the arrangement of commerce. when we don’t trust or can’t trust each other; when the exchanges are not of a repeated type; or when the transactional commitment devices with each other are not strong.
Now we’re getting closer to the familiar satoshi lines, whether or not he was aware that the monetary economy had achieved this result decades before: “The root problem with conventional currency is all the trust that is required for it to work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is littered with breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Its massive overhead costs make micropayments impossible.”
One of the most fundamental articles of monetary economics is “Evil is the root of all money”, by Nobuhiro Kiyotaki and John Moore, reversing the old biblical line. They establish the long-standing trading money markets and investigate the double coincidence of needs condition that has been used as justification for money since William Stanley Jevons coined the phrase in 1875. They show that it is not the only, or even the most important, way to make money viable in an economy, especially money in forms that have no other economic use (i.e., what economists monetary means “intrinsic value”). Instead, they show that lack of commitment and “factor in lack of trust” is paramount, even “the starting point for a theory of money.”
A few years earlier, a then federal economist from Minneapolis, Narayana Kocherlakota showed that “money is simply a primitive form of memory.” Notice the Bitcoin connection here, what are blocks with UTXOs but a long spreadsheet of transactions that acts as monetary memory?
Without obligation, anyone money or memory will do. Bitcoin, in a sense, is both.
Money overcome trust issues because “any function performed by money can be provided by the ability to access the past of one’s business associates.” Kocherlakota explains: “In the monetary environment, when an agent delivers resources today, he receives money that can be used to buy resources in the next period. Similarly, in a memory environment, an imaginary balance sheet is kept for each agent. When an individual transfers consumption to another, his balance goes up, and his capacity to receive future transfers goes up. When he receives consumption from another person, his balance drops and his ability to receive future transfers decreases. In the monetary environment, money is simply a physical way of maintaining this balance.
This indicates how, when money is doing its job well, it expands the feasible opportunities so we can all trade. Adequate money improves the operations available to us in the absence of money. Adequate money gives us true signs about scarcity and wants, what is economically available and what people demand. The purpose of intangible tokens, or even shiny metals that don’t seem to do anything, is to be a technological innovation that facilitates trade, as William Goetzmann so convincingly illustrated in his great book, “Money Changes Everything: How Finance Made Civilization Possible.”
Therefore, talking about the cost of money resources was always a red herring. Expanding trade and the division of labor, overcoming the problem of imperfect trust, memory or commitment, money, and a sound monetary regime add value to society. It improves our economic well-being instead of wasting it.
Another monetary knot that bitcoin solves elegantly is armen alkyanThe rationale for monetary institutions as lower-cost inspectors of the monetary token: “Anyone who buys second-hand paper also has to verify its authenticity, which slows down the speed of the transaction. […] Ignorance leads to the use of money and how money requires simultaneous exchange with specialist, expert and highly reputable intermediaries.”
Bitcoin bypasses the middle man and achieves in the modern digital world the trust of bearer assets of bygone ages. It is instantly verifiable, its inclusion in a previous (valid) block is trivially easy to inspect. That is the same enhanced technology that Kocherlakota identified in the 1990s and Goetzmann recounted more recently: a collective memory, a record of past dealings.
Memory Good money makes
If we think of enemies as those we don’t trust (totally) or can’t engage with (totally), pretty much everyone we meet in the modern world. Bitcoin is not for enemies All money is for enemies. We rely on friends, family and loved ones, and with them we can, therefore, carry out mutually beneficial exchanges without much recourse to money.
But it is when trust is lacking and credible commitment is not available that money becomes valuable. To say that bitcoin is for enemies is trivial: Every money is for environments where we cannot fully trust our trading partners.
This is a guest post by Joakim Book. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
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