Why Decentralized Money Matters
Thanks to the work of @JasonPLowery and this article by @FreedomMoney21 for informing my thinking on this topic. This represents my effort to paraphrase their work, tie it together and add to it.
The sections on Property Rights, Abstract Power, and Physical Power paraphrase Jason Lowery’s discussion with Preston Pysh on this podcast.
Property Rights
Property rights are how a population organizes and distributes internal resources, or the outputs of applied energy. Property rights = who controls what. This goes for humans and pack animals alike.
There are two basic systems for securing property:
Physical Power (Proof of Work - PoW)
Abstract Power (Proof of Stake - PoS)
Each has its own systemic, immutable properties.
PoW:
Inclusive and fair: anyone can harness their own physical power on the same terms as anyone else.
Unbounded and positive-sum: there’s no limit to the amount of power one can summon, and my ability to harness power doesn't take away from your ability to harness power.
Cannot be systemically exploited, because it is decentralized and fair.
Can be physically observed, and thus it can be validated/verified.
PoS:
Exclusive: it is assigned by those who hold the abstract power.
Bounded and zero-sum: my rank in society can only come at the expense of others' rank in society.
Can be systemically exploited, because it is centralized and unfair.
Cannot be physically observed, and thus cannot be validated. Solely based on trust.
Abstract Power (Proof-of-Stake)
Abstract thinking (i.e. humans) for the first time has enabled theology, philosophy, ideology, money, and abstract power. Before humans there was only physical power for securing your property.
With abstract thinking, physical power became morally condemned because it a) uses energy and b) has the potential to cause physical injury.
Agrarian society adopted abstract power hierarchies because they a) don't consume energy or b) physically injure. Thus they are more a) efficient and b) safe, in terms of immediate physical harm.
This means we decided on a system of Kings and Queens, Feudal Lords, Dictatorships and/or Governments, depending on time and place in history.
These all represent systems of chains of command for determining the distribution and expenditure of internal resources.
This has been a wonderful development in the evolution of life on Earth and has led directly to great technological progress and prosperity! Now that we’re not using all our energy killing each other to settle every dispute, we are free to direct our energy to higher and more noble pursuits.
But we observe throughout history, in humans (and in domesticated animals, more below) that when you take the will to fight out of people they become systemically exploitable.
Kings/Queens/Dictators/Governments have consistently throughout history exploited their populations at egregious scales.
When a population is fed up with being exploited, they employ physical power to regain control - known as revolutions and wars.
You still see examples of this today, to different degrees. For example, North Korea: Kim Jong-Un is their God-King.
It is a trust based system. You must trust in the benevolence of your God-King, Government, etc. for the abstract power hierarchy to remain stable and legitimate.
When power is abstract, Kings are unimpeachable unless you resort to physical force.
When power is abstract, it has no physical limits:
An alpha wolf can only control what he physically can control. When you remove that physical limitation and bestow abstract power, there is no limit to the power because it is not "real" i.e. it is not grounded in physics.
"I'm the King, so everything is mine!" "But, ummm, well, okay, I guess you're right."
Physical Power (Proof of Work)
On the other hand, physical power is a naturally decentralizing force.
One physical resource humans value is the surface area of the Earth.
An alien looking down would observe that, for some reason, humans have decentralized control over the surface area of the Earth (200 some-odd sovereign nations). We do it using massive, global scale power projection. There is no one government that has control over all the Earth's resources; we deliberately prohibit it through the PoW protocol by imposing physically prohibitive costs on any potential centralized control authority.
Thus, if you take a global view, militaries decentralize and devolve power rather than centralize it in the hands of the State as they do on a domestic scale. Every time Mr. Genghis Khan or Mr. Adolph Hitler or Mr. Vladimir Putin tries to expand centralized control authority over physical resources, they fail because our global system for securing property rights (PoW) is, indeed, secure. The system is secure because there is no limit to the amount of power honest, good people can harness to make it physically cost prohibitive to achieve control of all the resources.
This is on a global scale, but we can see the same dynamics at play on a smaller scale within nations.
The 1st amendment is a unique, extraordinary devolution of rights to the citizens. There are very few countries where you can say what you want on practically any topic without fear of arrest.
The 2nd amendment is a clear example of a system of decentralized power projection. Citizen's rights to bear arms imposes prohibitive physical costs on those with abstract power (i.e. governments) who might wish to exploit them.
The government revoking 1st or 2nd amendment rights would be an example of those with abstract power deliberately removing the population's ability to impose physically prohibitive costs, thus making them docile, or "domesticating" them.
Domestication is the process of humans deliberately removing an animal pack's inclination toward aggression - or said otherwise, toward imposing physically prohibitive costs on those who would subjugate their territory. Literally, spaying and neutering.
The domestication of more than 40 types of animals gives us a causally inferable, randomized data set that allows us to observe what happens when you remove a population’s physical aggression. They become insecure and exploited, i.e. we eat them and/or feed them and cuddle with them. Every single time, no exceptions.
Removing human's ability to project power (impose prohibitive physical costs) is a form of domestication. Internationally, this might be restricting a nation's ability to stand up a military. In the US, this might be repealing the 2nd amendment. As soon as you give up your ability to project power, you open yourself to systemic exploitation.
Another way those with abstract power seek to exploit those without it is via making them dependent on aid, for example welfare. If taking away your guns is neutering you, giving you food stamps and housing is feeding you and cuddling you.
Once you become dependent on state aid and unable to project power, you are domesticated. You are docile and obedient because your survival depends on it. And you are able to be systemically exploited by those with (abstract) power.
Human Energy is the Only Scarce Resource
We have just examined the some of the properties, strengths and weaknesses of the two basic, fundamental systems for securing property: physical power (PoW) and abstract power (PoS).
Before the emergence of abstract thought, PoW was all there was. Just a bunch of animals running around and fighting one another. The primary weaknesses of PoW are that it is energy intensive (i.e. inefficient) and has the potential to cause physical harm. The strengths are that it is fair (positive-sum), and, well, it works as system for settling disputes.
With the emergence of abstract thought, PoS emerged as a new, alternative way to secure property. Gods, kings, governments, courts, laws. The primary strengths of PoS are efficiency (i.e. not energy intensive) and safety. The weaknesses though are that it is exclusive (zero-sum) and trust-based.
We now must acknowledge an uncomfortable truth: for all of the peace and prosperity PoS has given us, PoW has proven to be the superior and more secure protocol.
We can observe this empirically. We use PoS to settle most disputes on a daily basis. There is less friction if we all follow a common set of rules. But eventually, trust always breaks down — between individuals, between tribes, between nations. And when a dispute cannot be settled by diplomatic means, we resort to war.
I’d argue we war over two things. We war over resources, which are the stored output of previously expended human energy. And we war over the rules and rank of the to-be-newly-instituted abstract power hierarchy — functionally, the power to direct and control future human energy. So the root resource we war over is human energy, both stored and future.
For all the fearmongering and concern over depletion of resources we’ve been fed over the decades, the fact remains that we have not run out of a single, vital resource yet. We have always found a way to dig deeper, search further, and grow more.
Marshalling the one, true scarce resource we have to contend with — human energy — as an input, has always led us to the output of more of all the other resources we seek.
(Now, before any resource fundamentalists get upset, I get it. Just because something has been true does not mean it will continue to be true. And, yes, all resources are finite on a long enough time scale, from the depletion of hydrocarbons buried in the Earth’s crust, to the death of the sun, to the eventual heat-death of the universe. And finally, yes it is incredibly important to be good stewards, from individuals being good stewards of their farmland to humans being good stewards of the Earth, because good stewardship leads to a robust set of conditions that can sustain the continued evolution of systems. I believe all of this and none of it is inconsistent with the point I’m arguing, which to be clear is that human energy is the one true, scarce resource we’re forced to contend with for all practical purposes.)
Famous thinker and inventor Nikola Tesla realized this in the year 1900 when we wrote The Problem of Increasing Human Energy. He contemplated that if human life were to be sustained it would need to be interstellar:
Lord Kelvin, in his profound meditations, allows us only a short span of life, something like six million years, after which the sun’s bright light will have to ceased to shine, and its life-giving heat will have ebbed away, and our own earth will be a lump of ice, hurrying on through the eternal night. But do not let us despair. There will be still left on it a glimmering spark of life, and there will be a chance to kindle a new fire on some distant star.
He goes on to suggest that the problem of becoming an interstellar species amounts to a problem of increasing human energy, and increasing human energy can be further reduced into three problems: 1) increasing the human mass (number of humans), 2) decreasing the retarding force (organized warfare), and 3) increasing the accelerating force (harnessing of the sun’s energy).
It is on the second we will now focus, as it where I believe Tesla’s predictions have come true in the form of Proof-of-Work Bitcoin.
Enter Bitcoin: Peaceful Power Projection Technology
The whole section on warfare is worth a read (page 181-189), but I will summarize the key insights.
Tesla understood that physical power was necessary, if destructive:
Law and order absolutely require the maintenance of organized force. No community can exist and prosper without rigid discipline. Every country must be able to defend itself, should the necessity arise…. If the nations would at once disarm, it is more than likely that a state of things worse than war itself would follow.
And that the ultimate answer to this problem, the problem of decreasing the retarding force (warfare) on the increasing of human energy wasn’t defense mechanisms outstripping attack mechanisms:
For if every country, even the smallest, could surround itself with a wall absolutely impenetrable, and could defy the rest of the world, a state of things would surely be brought on which would be extremely unfavorable to human progress. It is by abolishing all the barriers which separate nations and countries that civilization is best furthered.
But that we had evolved from “the law of the stronger,” to the weak learning how to defend themselves with a club, spear, or bow and arrow, shifting the competitive vector from strength to intelligence, to gunpowder and explosives…and that the ultimate outcome of this progression was a power projection technology that was so powerful its primary usefulness would be in the threat of the potential energy contained within it, I would argue basically predicting the nuclear bomb:
The ideal development of the war principle would ultimately lead to the transformation of the whole energy of war into purely potential, explosive energy, like that of an electrical condenser. In this form the war-energy could be maintained without effort; it would need to be much smaller in amount, while incomparably more effective.
And that when we had reached this unsustainable state of affairs, a paradigm shift in war would have to occur, to allow us to continue our power competition without imperiling all of humanity in doing so:
To break this fierce spirit, a radical departure must be made, an entirely new principle must be introduced, something that never existed before in warfare — a principle which will forcibly, unavoidably, turn the battle into a mere spectacle, a play, a contest without loss of blood…. The continuous development in this direction must ultimately make war a mere contest of machines without men and without loss of life — a condition which would have been impossible without this new departure, and, which, in my opinion, must be reached as preliminary to permanent peace.
Tesla goes on to predict what I’d summarize as robot-warfare, which, as it turns out, might not be all that far from the actual course of events.
It’s just that the robots take the form of Antminer S19 Pros.
The profundity of the invention of Proof-of-Work Bitcoin, in my view, is that it introduced peaceful power projection technology as a means for securing property for the first time, as a substitute to harmful power projection technology. Bitcoin is property that only exists digitally and is secured by electrical energy, as opposed to being secured by the kinetic energy of modern warfare. It allows us to continue engaging in physical power competitions without destroying human life.
Bitcoin might be the most peaceful technology ever invented.
But, why would anyone care to spend energy to compete to gain bitcoin?
Same reason we’ve always gone to war — for stored human energy and control over future human energy.
Bitcoin is money, and money is how we peacefully coordinate human energy at scale.
Coordinating Human Energy: Love, Violence, Money
I have now argued that human energy, both previously expended and stored and to be expended in the future, is the one scarce resource worth contesting, and, indeed is the one scarce resource that is contested via organized warfare, as all other resources for practical purposes are outputs readily obtained with the input of human energy.
So by what means do we coordinate human energy to productive ends? There are three primary means: Love, Violence, Money (a deeper dive into this concept can be found here, I will summarize briefly below).
Love: is voluntary, decentralized, efficient, but doesn't scale, i.e. it cannot be stored and stockpiled for future use.
Violence: is non-voluntary, centralized, inefficient, and scales. It can be stored and stockpiled for future use (nuclear bombs, for example). It is inefficient because it uses up a lot of money/human energy (I will argue below that money is just stored human energy, so hold that thought). It is also inefficient because forced labor is not as efficient as voluntary labor, and centralized decision making is not as efficient or effective as decentralized decision making. Knowledge always travels from the bottom up, it never travels from the top down. It is unreasonable to think one individual at the top of a (physical or abstract) power hierarchy could have more knowledge than the sum of the knowledge of all the individuals "on the ground."
Money: is technology that scales control of human energy without the need for love or violence (although, as we’ll see, fiat money and state violence are tied at the hip). It can also be stored and stockpiled for future use. It is much more efficient than violence, because it's a scaled system by which human energy is coordinated voluntarily, and it allows for decentralized market pricing mechanisms which aid in effective decision making.
From Freedom Money:
Money is a battery for human energy; the battery is charged as you work for someone else, and is discharged as someone else works for you. Money, therefore, represents stored human energy.
Now, while money is theoretically a technology for coordinating human energy that doesn’t require violence, in practice fiat money is backed by state violence.
Violence is effectively a means to make other humans supply you with their human energy (coercion), or to trade their human energy for your money. Violence has increasing returns to scale, and so is an inherently centralizing force. Whoever wields the most potential violence gets to control the (fiat) money, and whoever controls the money gets to covertly steal from everyone else by increasing its supply, which is just a wealth transfer from owners of existing money to owners of newly created money.
This is fiat money. People are fond of saying fiat money is backed by nothing, which I would argue is incorrect. It is backed by violence, which is simply scaled human energy.
Fiat money is abstract power layered on top of and secured by physical power, as all abstract power ultimately is.
Bitcoin is Violence Resistant
From Freedom Money:
Users of bitcoin — like users of all other forms of money — can be subjected to violence, or the threat of violence, as a means of forcibly acquiring their wealth. However, the violence needed to forcibly acquire bitcoin from an individual who controls their own private keys must be applied with extreme precision. Neither bullets nor weapons of mass destruction are effective methods of violence for stealing bitcoin. I would argue that the forms of violence required to forcibly acquire bitcoin don’t scale at all in comparison to traditional violence. Therefore, bitcoin is strongly resistant to theft via violence.
Furthermore, since the supply of bitcoin is not centrally controlled, bitcoin wealth cannot be stolen at scale via supply inflation in the same way that fiat wealth can and is stolen.
Thus, if we, humans, made the decentralized decision to adopt bitcoin as money at scale, it would return (wealth/money/power/stored energy) from the centralized control of the State (centralized violence and fiat money) to the decentralized control of the citizens. Even in the wake of total destruction, a destroyer would not be granted control of the bitcoin. It cannot be forcibly acquired via violence. It can only be acquired and controlled through the amassing of hash power, which as mentioned is unbounded, non-rival, positive-sum and thus naturally decentralizing. My amassing of more hash power does nothing to your ability to amass more has power, and vice-versa. There is no limit to the amount of hash power good, honest actors can marshal to defend the network from nefarious ones.
Of course, nobody wants to rule over ashes anyways, because the thing we’re competing over in the first place is stored and future human energy. If you destroy the stored (capital) and future (labor) human energy, what is the point? However, given the reality that in a bitcoin world as opposed to a fiat world no amount of destruction grants you increased control over the money (i.e. over the human energy), the calculus of war shifts even further in the direction of peaceful cooperation because the returns to violence are substantially reduced.
In a bitcoin world, The State's violent methods of coopting the money would be rendered obsolete, and so the State’s money would be rendered obsolete.
Why Bitcoin Matters
Bitcoin (more precisely, the Proof-of-Work consensus algorithm as a way to secure a decentralized, immutable ledger) has increased Money's competitive position relative to Violence as a means for directing and controlling human energy.
Technology is always changing the competitive balance here. Gunpowder and later nuclear bombs were technologies that dramatically increased returns to scale on violence, and thus I believe it is no accident of history that we entered the Fiat era concurrently with the invention of these physical power projection technologies.
But then new technology was invented that we call the internet, which was the precursor to bitcoin. With the internet, for the first time a global, decentralized, digital monetary system was made possible. Bitcoin is the invention that fills that void.
It is secured by non-violent, electrical energy. It cannot be controlled by violent, kinetic energy. It could theoretically be destroyed by kinetic energy if you could physically locate ALL the power sources securing it and destroy them simultaneously, but not controlled. It can only be controlled via electrical energy.
Bitcoin is Money, a decentralized means of coordinating human energy, decentralized meaning control is devolved to individuals. Money (good money), being a peaceful, decentralized means of coordinating human energy, sits in opposition to Violence and its derivative Fiat money, together a centralized means of coordinating human energy,
It is the best defense we have against state violence, corruption, and the inequities that result from an unfair, zero-sum system which undergirds modern civilization.
This is why bitcoiners are fond of saying "fix the money, fix the world."
Bitcoin vs. Ethereum: Proof-of-Work vs. Proof-of-Stake
In this light, then, it should be clear that bitcoin represents a new, different monetary system and global property security protocol while Ethereum represents an evolution of the old system.
Decentralization exists on a spectrum, with more decentralization generally equating to more resilience in a system through the minimization of single points of failure.
Bitcoin, being secured by proof-of-work, tends toward decentralization because of the bullet points listed at the top: it is fair, inclusive, unbounded and positive-sum.
Ethereum, on the other hand, being secured by proof-of-stake, tends towards centralized control: it is unfair, exclusive, bounded and zero-sum.
What these properties manifest themselves as practically are:
Preferred access: ETH was pre-mined and given to insiders.
Total control: once you have 51% of the stake, you have lasting control of the network. Nobody else can amass 51% of the stake without you giving them some of your stake, i.e. without your permission.
In contrast to bitcoin: once you have 51% of the hash power, you only have control of the network as long as you maintain 51% of the hash power. You can’t stop anyone from amassing more hash power.
This isn’t to say that Ethereum is ultimately useless, I don’t think that’s true. We just have to be clear on what it is, and what it is not.
It is not decentralized money. It requires the permission of those who control the stake to use. At its origin, stake was not acquired openly and fairly, accessible to anyone, but rather given to select entities and individuals. The rules of the network were changed to make the supply of ETH deflationary, which means the value of the network accrues to those who already own ETH. It also naturally concentrates control of the network over time as those who have ETH acquire more ETH through staking while the overall supply of ETH decreases. If you own staked ETH today, you now have a growing piece of a shrinking pie and every day that goes by, new would-be acquirers of ETH are at an increasing disadvantage. Fantastic for ETH holders! Not so much for others.
It is not a way out of the old system. It is simply an extrapolation of and improvement upon the current fiat system, where a small group atop the abstract power hierarchy gets to determine the rules of the game for everyone else.
What is it good for? Making the current system more global, open and accessible for all. It basically takes what is good about cash and digitizes it, making it easier to store, transport, send and receive than cash. It is a wonderful development and improvement in the global financial system that unbanked individuals around the world can acquire USD stablecoins without having access to a fiat on-ramp (so long as the stakers grant permission to transact).
I think the main reason to be bullish on Ethereum is the chance that it is the network that globalizes the US dollar via stablecoins. If you think about it, we have 200+ sovereign nations all with their own currencies. That is basically a global barter system. With digital access to US dollars outside of the legacy banking system, I think the dollar gets adopted in much of the world and most other currencies die out.
Imagine traveling to a new country and not having to worry about acquiring and carrying around the local currency, getting ripped off with fees and an exorbitant spread along the way. Just pay from your phone with stablecoins and go. If you must, swap digital dollars for digital pounds or what have you on a decentralized exchange, at a fair and competitive rate and without fees beyond negligible network fees.
Or think about an individual in Argentina, for example, trying to save to buy a house. They don’t have access to a US bank account and the local currency is famously unstable. What do they save in?
Previously, probably physical cash US dollars stored in a safe or under a mattress, incredibly unsecure and subject to misplacement, theft, destruction by flood or fire, etc.
Now: stablecoins on a self-custody wallet requiring only a smartphone and an internet connection to access.
This is a better world for a lot of people and something, I think, to root for. What’s more, surely the US government will aid and abet this system once they realize they can have full eternal control over it for a pittance at today’s prices, in contrast to bitcoin for which they may impose more road blocks.
So, one potential outcome here is that USD stablecoins ultimately emerge as the primary money and collateral in the Ethereum ecosystem which over time may become synonymous with the global financial system, with ETH serving as perhaps the world’s most valuable staking and utility token. If in the future Ethereum is the technology that digitizes the dollar and dollarizes the world, and trillions upon trillions of value are secured by and settled on the base layer, that’s a good reason to be bullish ETH token price.
Bitcoin, on the other hand, is a good reason to be bullish human progress and peace on earth.
Disclosure: I own BTC, ETH, USD
Disclaimer: nothing published in this newsletter is financial or legal advice. The author may be long or short any of the securities or assets discussed at any time before or after publishing.