Crypto-Current (068)

§5.87 — Bitcoin opens a new monetary epoch, beyond Macro. Macro persists, henceforth, as a stubborn archaism. The macroeconomic monetary types (M0…MΩ) are undergoing replacement – immediate in principle and incremental in practice – by cryptocurrency coinages. Bitcoin does not restart this displaced series at M0, but somewhere in the middle, characterized by intermediate liquidity. In the direction of superior liquidity, experiments are oriented to lowering transactional friction, and increasing scale. Money is narrowed insofar as it becomes more conveniently cash-like, though with lower quality as a store of value. These phases of the spectrum are inhabited by stablecoins, large block-sizes, and dedicated payment protocols. In the other, broader direction, of higher viscosity, the orientation is towards monetary scope, which is to say ever wider asset classes, and – most significantly – smart contracts. In these – much vaster – phases of the spectrum, blockchain development can seem to be almost entirely disconnected from money production, involving ‘coins’ no less exotic than the particles of high-energy physics. It is worth briefly examining each of these ranges in turn, to glimpse what money is becoming.

§5.871 Narrowing our attention, in the monetary sense, is re-visiting the block-size debate.[1] In this regard, as more generally, scalability is the avatar of liquidity. The Mainstreamers seek, as rapidly as possible, to take Bitcoin towards M0. They interpret strictly constrained block-sizes as an obstruction to this development. Failing in their attempt to overcome Ultra resistance and direct Bitcoin down the monetary spectrum, the Mainstreamer agenda found its vehicle in a hard fork, which split off Bitcoin Cash (BCH) in 2017. The subsequent market verdict tends to strongly vindicate the Ultra position.[2]

§5.8711 — An alternative to block-size relaxation is tiering. Rather than shifting the Bitcoin blockchain down the monetary spectrum (through block-size relaxation), or splitting the chain, tiering supplements the chain with a dedicated payment facility. Payment processing takes place predominantly off-chain. The block-chain is invoked only as an arbitrator, securing transactions virtually. This is analogous to the way potential legal remedy secures contracts.[3] This is the approach taken by Lightning Network, and supported by the BIP141 SegWit soft fork.[4] It is – at a minimum – indicative of the direction in which the scaling of Bitcoin will proceed. Smart contracts, such as those anchoring Lightning Network transactions to the Bitcoin block-chain, are the essential building blocks.

§5.872 Broadening attention enters far more extensive and variegated monetary territories. Once the threshold into cryptocurrency is crossed, the computerization of money quickly proves irreducible to moving money between computers. Rather, money as such becomes demonstrably computational. This is to say, computational capability is increasingly subsumed into money. A new world of intelligent assets gradually emerges.

§5.8721 — The tendency of cryptocurrency development, no less than that of the Macro regime it incrementally displaces, is to liquidate all firm distinction between contracts and currency transactions (or currency as such). This is demonstrated by prevailing usage of the ‘-coin’ suffix, which references an origin in decentralized digital currency, but applies to the entire commercium of trustless, P2P deal-making. Anything that can be firmly committed to provides the potential content for a blockchained X-coin system. Reciprocally, definite commitments, in general, acquire explicit monetary characteristics.

§5.87211 — The implicit content of any commercial transaction is exposed to formalization and technical modification as a smart contract. Conditionalities are spelt out specifically, and practically, in software. Terms become code. A smart contract is defined by Szabo as “a set of promises, specified in digital form, including protocols within which the parties perform on these promises”. They are digital upgrades of evolved formal relationships which have been ‘techno-hardened’ in a double sense. Firstly, their formalization has been bound to – and incarnated within – the operations of specific physical mechanisms (Szabo’s list of precursor technologies includes vending machines, POS terminals, and bank payment clearing systems). Secondly, and relatedly, they pose a technological obstacle to breach of contract. They are comparatively mechanized, and trustless. In game theoretical terms, they do not offer a defect option – or opportunity to ‘cheat’ – but rather preclude it originarily. They are complex hard commitments. Any settlement negotiations have been concluded a priori. The guiding principle, as he argues, is that “the formalizations of our relationships – especially contracts – provide[s] the blueprint for ideal security.”[5]

§5.87212 — Szabo differentiates reactive from proactive approaches to security. The distinction separates those systems that involve punishment and restitution from those that obviate them. The former are far more closely bound to the intervention of ‘trusted third parties’. It is the latter category that converges with the smart contract. Smart contracts are intrinsically resistant to violation. Vending machines are an illustrative prototype. The historical progression leads “from a crude security system to a reified contract” whose terms are substantially self-policing. Since anything which can be the object of a business deal can be – in principle – covered by a smart contract, the field under consideration is no smaller than that of property in general. It shares the same horizon, in other words, with money at its maximally illiquid extension.

§5.87213 — The potential of smart contracts to facilitate criminal activities has understandably triggered some concern.[6] In particular, it provides the capabilities required for the long-dreaded ‘assassination market’ anticipated by Jim Bell in the mid-‘90s.[7] A ‘contract’ could – with remarkable smoothness – take on the sense this term bears within the organized criminal underworld, among others. The privatization of justice can look rough. This too is not only something money could do, but potentially part of something that money is.

[1] See §4.45-4.51

[2] The splitting of Bitcoin Cash (BCH) from Bitcoin (BTC) maps very neatly onto the money spectrum. The cryptocurrencies were divided by a hard fork, which occurred on August 1, 2017. Bitcoin Cash blocks were increased in size to 8MB (from Bitcoin’s 1MB). In mid-2019, Bitcoin Cash was trading at a value less than a thirtieth of Bitcoin’s. A technical potential for superior liquidity realizes neither liquidity nor scale without broadly-based market endorsement. A subsequent hard fork, on November 16, 2018, divided Bitcoin Cash from Bitcoin SV (BSV), with ‘SV’ standing for Satoshi Vision. Cryptocurrency investors have yet to be persuaded. The market cap of Bitcoin SV settled at roughly half that of Bitcoin Cash.   

[3] “Transactions can be made off-chain with confidence of on-blockchain enforceability. This is similar to how one makes many legal contracts with others, but one does not go to court every time a contract is made.”

[4] Securing Lightning Network transactions required an upgrade to the Bitcoin protocol. Specifically, the integrity of the new off-chain layer required a correction to ‘transaction malleability’ on Layer-1. This was effected by the Segregated Witness (SegWit) soft fork (BIP 141), activated on August 24, 2017. SegWit adjusts the way signatures are registered on the blockchain. The Lightning Network is built out of bidirectional payment channels, which reticulate in an open-ended system. The integration of two nodes into a channel establishes a smart contract. Opening a channel requires a ‘funding transaction’ which is registered on the blockchain, but subsequent payments remain off-chain, unless a dispute arises, or until the channel is closed. The Layer-2 system is thus anchored on the blockchain, as arbiter, but one only rarely invoked. The security of the main Bitcoin blockchain is leveraged economically. Since late spring 2018, the network has been growing exponentially from a low base, with a doubling period of roughly five months. It is envisaged as a complete decentralized substitute for the banking system, connecting all financial agencies down to the level of individuals – and even below – as nodes.  

Joseph Poon and Thaddeus Dryja published the Lightning white paper in 2016. It can be found online at:

[5] See:

[6] See for example:

[7] The concept is outlined in Bell’s short, incandescently brilliant, and almost peerlessly ‘edgy’ essay ‘Assassination Politics’. … The upsetting features of assassination politics flow without exception from the full-spectrum subsumption of social coercion into the market. State monopolization of violence is subverted by a distributed auction. …

Crypto-Current (067)

§5.863 — The final ingredient in the suite of soft technological advances that are drawn together in the initiation of cryptocurrency simultaneously resolves the Byzantine coordination conundrum and secures monetary tokens against duplicitous proliferation. It thus integrates the seemingly disparate challenges of decentralization and deflation. To repeat the point with reverse emphasis, it protects a decentralized monetary system against the twin threats of coalescence (into the enemy ‘city’) and inflationary devaluation. It has, in both aspects, to fully substitute for the function of pseudo-transcendent trusted authority. This requires a production of immanent or intrinsic credibility. The computer science solution was found in proof-of-work.

§5.8631 — Proof-of-work dates back to the final years of the last millennium. The critical step was taken by Adam Back[1] in his proposed ‘counter-measure’ to the exploding Internet spam problem.[2] Proof-of-work credentials could be used to indicate the seriousness – or non-frivolity – of a message. By demonstrating that trouble has been taken, they recommend attention. In the case of the Byzantine generals, they separate committed communications from glib deceptions, without recourse to extrinsic validation. In the case of monetary accounting, they preclude cheap forgeries, and thus eliminate every normal incentive to forge.

§5.86311 — Back quickly realized that proof-of-work credentials (or cost tokens) were intrinsically money-like. “We use the term mint for the cost-function because of the analogy between creating cost tokens and minting physical money,” he notes.[3] They were both earned, and valuable. In fact, all six of the essential monetary qualities could be attributed to them. This insight was formalized – as hashcash – in 1997.[4] Back described hashcash as a ‘denial-of-service counter-measure’, although its potential applications were far wider.

§5.8632 — A cost-function is time-like, or asymmetric. It has the synthetic a priori characteristic, essential to cryptography, of being difficult to discover but easy to check. Back states that it “should be efficiently verifiable, but parameterisably expensive to compute.” The combination defines (valid) work. Concretely, work measures applied computational power. It has the game-theoretic meaning of commitment. While deterministic cost-functions are possible, those adopted by hashcash and subsequently Bitcoin are probabilistic, producing tokens based on the performance tested set by particularly arduous (trial-and-error) exercises, precluding short-cuts.[5]

§5.86321 — Among the practical concepts introduced into monetary history by proof-of-work, perhaps the most important is difficulty. Several points are worth noting explicitly. Firstly, the asymmetry in the difficulty of production relative to checking is so massive that the latter is treated as of negligible difficulty. This comparatively informal side-concept then contributes precision to the idea of convenience. Secondly, and of greater technical consequence, difficulty – while probabilistic – can be exactly quantified. In this second critical asymmetry, the problems posed as proof-of-work tests are fully understood even while completely unsolved. They can not only be finely determined, but also set, and adjusted. This makes difficulty a technical variable. In cryptocurrency, it substitutes for all macroeconomic controls.

§5.86322 — Hashcash catalyzed a theoretical breakthrough in cryptocurrency-oriented computer science during the final years of the last century. Most notable were two sophisticated proposals published in 1998, Wei Dai’s B-Money and Nick Szabo’s Bit Gold. Both were conceived as decentralized money systems based on a proof-of-work function. Compared to Bitcoin, neither proposal was fully realized.[6] Neither, in any case, was implemented. Proof-of-work had, however, securely established itself in principle as the foundation upon which money would come to rest.

[1] In a 2002 retrospective on hashcash, Adam Back refers to earlier work by Dwork and Naor who had already “proposed a CPU pricing function for the application of combating junk email.”

Dwork, Cynthia and Naor, Moni Naor, ‘Pricing via processing or combating junk mail’, Proceedings of Crypto (1992).

Dwork and Naor:

[2] ‘Spam’ is used here in an expansive sense. It encompasses the primary explicit object of Back’s concern, which is the Sybil attack. A Sybil attack ‘spams’ online identities, rather than advertising messages, in order to overwhelm systems with voting procedures (which would include pre-proof-of-work consensus mechanisms). The term ‘Sybil attack’ is much younger than spam. It seems to have been coined in 2002 (or earlier) by Microsoft researcher Brian Zill. The term took its name from the book Sybil, a case study in dissociative identity disorder.

[3] For this and subsequent Back quotes, see:

[4] Of the critical computer science components required for the Bitcoin protocol, proof-of-work was the latest to become available. Cryptocurrency predecessors B-money (Wei Dai) and Bit Gold (Nick Szabo) were both formulated in 1998, less than two years after hashcash was introduced. That Bitcoin did not arrive for another decade might, then, be considered a puzzle of interest. It suggests, at least, that momentum in software development is easily over-estimated. It is also possible that the PC hardware and Internet infrastructure conditions for Bitcoin ignition were not earlier in place. Perhaps an accelerated arrival of Bitcoin, even if conceptually mature, would have been practically premature. Additionally, regarding supportive conditions, the socio-cultural context of the 2008 financial crisis and resultant mass disillusionment with central bank monetary competence is suggestive. In the final years of the new millennium’s first decade, the case for an escape from macroeconomically-managed money made itself. It awaited only cogent formulation.

[5] “The hashcash CPU cost-function computes a token which can be used as a proof-of-work,” Back explains. This cost-function “is based on finding partial hash collisions on the all 0 bits k-bit string 0k,” as would also be adopted later by Bitcoin.

[6] B-Money remained dependent upon third parties for dispute resolution, while Bit Gold did not employ proof-of-work for Byzantine consensus (but only as generator of value) leaving it vulnerable to Sybil attacks. It is difficult to note these deficiencies without recognizing the economical genius of the Bitcoin synthesis. With Bitcoin it was for the first time shown what proof-of-work could do.

Crypto-Current (066)

§5.862 — Under even modest techno-historical scrutiny, cryptocurrency divides within itself, or doubles. Beside the major topic of money-production is revealed a minor (and inward-turned) twin. Cryptocurrency has its own – additional – use for money, which is to say for itself, intrinsic to its possibility. It folds upon itself essentially. While making money – in multiple senses – it also makes of money a new, specific machine-part. There are things it needs doing which will not be done unless rewarded. Thus the initial return on the issuance of money – seigniorage – is allocated by Bitcoin to the maintenance of its own decentralization.[1]

§5.8621 — Only by way of money in its minor sense – i.e. as the mining compensation token – does money in its major sense undergo practical redefinition as an automatically self-sustaining decentralized system. The path of money production is shaped by the protocol in such a way as to spontaneously reinforce those user behaviors the system depends upon. So tightly is this incentive mechanism constructed that all bitcoins originally reward Bitcoin maintenance, while also stripping Bitcoin maintenance of discretion, by integrating it rigorously into the process of mining. There is nothing a bitcoin miner can do to sustain Bitcoin beside mining bitcoins. Sheer industrial effort, alone, is rewarded, and that has been made enough.

§5.8622 — It is particularly important to note that bitcoin mining rewards make no payment for loyalty, as compensation for non-defection. The miner is not in any respect a trusted official. The relation between money and trust has been fundamentally re-ordered. It is rather, now, that the miner makes bitcoins trustworthy through an activity which demands no trust whatsoever. The historical passage, as previously remarked, is from the consumption of trust to its production. §5.8623 — Currency units denominate incentives. There is nothing notably novel in this insight. Making incentive engineering inherent to currency production, however, proved a decisive technological break. Bitcoin initiates the epoch of cryptocurrency, strictly speaking, by structuring its protocol as a game. This is the sense the token now carries. Besides providing money, it directs those behaviors specifically required for its social implementation. The positive cybernetic loop here is conspicuous, and remarkably ingenious. The value of money is made a function of its own operation, as a directive force. The more bitcoins are worth, the more they engender an industry which builds Bitcoin.[2]

[1] It might be asked: Was it not always necessary to pay gold-miners – or at least for gold-mining – as also for work in the mint, or the central bank? Did not money, then, always involve a minor internal digression or auto-productive reflex? What is really new here? Raising this question is potentially informative, since it tends to isolate the cryptocurrency innovation. The incentive system at work in Bitcoin substitutes for monetary authorities. The only forerunner is to be found in primary precious-metal production, in which – crucially – the miner is rewarded immediately and automatically for industrial activity. Neither work contract nor marketing is necessary. Mining, of this kind, produces money. In the case of Bitcoin, all money – without exception – is mined, originating as property of the miner. Bitcoin is not, however, reducible to simulated gold. Bitcoin mining, unlike its concrete precious-metal predecessor, is also, simultaneously, minting, or monetary validation. A functional analog of the assay is built into the mining process, integrally. Its cycle produces trust, rather than drawing upon it. What makes it good money is made part of the way it makes money. This seamless loop is its essential innovation, synonymous with what cryptocurrency means.

[2] In the electronic wholesale markets of Shenzhen, cryptocurrency mining rigs have been added to the range of commodities on offer, alongside such comparatively recent product lines as vaping devices and drones. Here the power of incentives is starkly illustrated. This outcome was – of course – entirely unanticipated by the Bitcoin white-paper, which assumed general purpose personal computers (rather than dedicated ASICs) would be the engines of cryptocurrency mining, perhaps in perpetuity.