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. …

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