Thinking out loud: To thrive, Bitcoin must give up on decentralization

A number of hot topics in the crypto space are starting to coalesce, strongly reminding me that the model of

A number of hot topics in the crypto space are starting to coalesce, strongly reminding me that the model of decentralization from authority simply doesn’t work. To be candid, it is a direct contradiction to the very definition of money. I am assuming that Bitcoin supporters desire that one day, it should behave as full-fledged money.

Some of the recent happenings include: the persistent push for regulation by several Bitcoin leaders. If not regulation, then recognition by the government as a currency. The 51% scares. And the various controversies surrounding elected members of the Bitcoin Foundation.

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The key attributes that differentiate Bitcoin from fiat are: (1) it is (said to be) “decentralized” from authority, (2) peer-to-peer (p2p) (3) transactions are irreversible (4) transactions are (sort of) anonymous.

(For the sake of clarity, because the term of “decentralization” is occasionally used in reference to Bitcoin’s p2p attribute, here it is reserved only for the decentralization from authority, e.g. government.)

The concept of centralized digital currencies has been intriguing to us. We’ve followed the developments with MintChip.

There are three levels of centralization: 0%, partial and 100%. I argue that Bitcoin can retain its value-added features and still have 100% centralization.

The biggest value-add is the p2p functionality, which will save billions wasted in the economy on middlemen and fees. Reversibility is good for some, not good for others. Same goes for anonymity.

Going through the other two levels of centralization, 0% is trivial. As pointed out in a post on Ghash, a currency with no rules would cease to exist instantly. It’s worthless. Every man does what he wants. Double spending, counterfeiting, etc.

Bitcoin is in fact already centralized, but partially. There are major players and experts delivering their input, and developers who control the next version of the code. If 51% mine it at the same time, it’s centralized with them. It’s just that Bitcoin is not in the hands of the government (and by extension, the majority of the population).

But aren’t governments evil?

For our purposes, not really. Here, we evaluate the merits of a government based on how democratic it is. Several rogue states existing today and many governing powers over the centuries were not democratic. In these cases, the interests of the “government” focus on those individuals in power, and may or may not include interests of the people they rule.

In an ideal democracy, a “government” is really an artificial entity. What many people forget to realize is that in an ideal democracy, the “government” comes solely to represent the interests of the population. The population, ideally, are all partners in this joint venture called “government”.

If democratic enough, any government will, by definition, seek the best interests of its people. If the people are unsatisfied with whom they’ve delegated, their own democratic process allows them to remove them from power, subject to democratically-decided conditions that preserve the integrity of the process.

As an extreme example, suppose it was discovered that an old law from 1745 prohibited the wearing of footwear on grass, punishable by death. In 2014, a citizen is spotted by a policeman transgressing this law. The policeman happens to remember this law, arrests the individual and seeks full prosecution. The individual posts his story on reddit, and 99% of the nation is outraged. It may take a bit of bureaucracy, but the law will undeniably be overturned in democratic states like the US, Canada and Australia. (You’re also probably reminded of the old California law banning commerce with other forms of “money”, which is getting repealed.) The same cannot be said in an undemocratic state, notwithstanding the involvement of international bodies like the UN.

I pause to note that my intention is not to indiscriminately belabor trivial concepts. These concepts are important to articulate in order to properly apply them to democratic money.

I would therefore rephrase the earlier question as: But aren’t governments not perfect? I agree. They are far from it. Even a democratic government is only as good as the people it comes to collectively represent. Plus you need to factor in additional non-idealities arising from inefficiencies in transforming a chaotic system of parts into a coherent, representative whole. There’s also the issue of the tendency for individuals to become corrupted by their power. Thus, it is practically impossible to find a perfect government.

The extent of a government’s intrusion into the private sector needs to be balanced in order to optimize its economy. Most will agree that at least some minimum amount of government is needed to build roads, fight crime and perform other duties on behalf of the collective society. But if oversized, economic prosperity can be severely compromised by, for example, abuse of the wealth-sharing system or other inefficiencies naturally found in such a structure.

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There are therefore good reasons why free people have evolved toward current forms of government. From an economic view, it is necessary to have. When it comes to protecting the integrity of common assets like money, the highest level is achieved by a centralized authority democratically delegated by the asset’s stakeholders.

Back to Bitcoin….

True decentralization of Bitcoin is fictitious. It’s a moot point, really a contradiction. One cannot lobby for universal adoption while at the same time shun centralized authority. If universally accepted, the population will naturally gravitate towards establishing an authority. And it doesn’t have to be a “government” authority, although if everyone in a democracy is behind it, that’s what you’ll end up with. So you get “fiat” all over again. Only this time, you hopefully get the other benefits, like being p2p.

To become a true currency, it needs to be accepted by the bulk of the population, which includes many, many people not yet affiliated with the Bitcoin community. Of these, many have no problems with government centralization. Should the community decide to exclude them and continue with their fractionally centralized currency, this would (1) be undemocratic, and (2) not allow Bitcoin to mature beyond its current state, in which all level-headed people agree is not a full-fledged currency.

Some may argue that in a true democracy, decisions like those related to monetary policy should be made via a purely democratic process (e.g. vote) each time, not just by a few incompetent officials or “experts”. Bitcoin would behave this way, and thus not centralize authority to a few individuals. In an efficient economy, however, this is simply not practical or economical. Nothing will get done and the insights of those best informed will be lost in the havoc.

Try it, but bear in mind the likelihood of it gravitating back to the fully centralized model.

It’s also worth noting that there’s no guarantee that the leaders of a partially centralized Bitcoin are any less imperfect than those in formal governments, especially after the Bitcoin Foundation’s recent elections.

But people way smarter than you disagree

Perhaps true.

The cryptocurrency community is diverse. I haven’t performed an empirical study on the community. But one cannot argue that a good part of its most passionate members are comprised by the following groups: early adopters, those against governments, IT whizzes and daytraders. I believe that many of those who have advocated Bitcoin as a means of casting off the yoke of governments have not considered the economical implications of their view. I have trouble recalling a well-recognized figure in Economics advocating Bitcoin for such reasons, but correct me if I’m wrong. This is meant to be democratic.

If today’s model is no good, why is Bitcoin worth so much?

When asked for my predictions on Bitcoin price, I usually reply that I have no idea. There is a demand for it, which partially drives the price. But there is no way of numerically deriving its price point, which seems unpredictable.

I do believe that the majority of altcoins are a passing fad and beyond their heyday period experienced during November to February. There are hundreds, the majority of them absurd. The prices of most were pumped. The main reason why the majority appreciated in value is that the next person thought they’ll pump even more. Most are likely in a steady period of decline back to where they came from.

There are likely exceptions which may gather mainstream adoption, either as altcoins or as second or third generation digital currencies. As the creators of altcoins have pointed out, it is about finding the ideal recipe for a coin. Perhaps it already exists and needs to float to the top, like the Google of cryptocurrencies. Or it is yet to be discovered.

Bitcoin may be capable of maintaining a high price even under today’s model. Just that it will remain volatile. It can sporadically appreciate in value, even while not behaving as an ideal currency.

In Conclusion

Democracy, we think, is a good thing. A democratic Bitcoin is a centralized Bitcoin.

Thinking Out Loud’ is a new column where the writers of DC Magnates present their opinions on the digital currency industry curated from covering the market

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