Crypto-Current (030)

Bitcoin and its Doubles

§3.00 — The abstract to the 2008 Bitcoin paper reads (in full):

A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work. The longest chain not only serves as proof of the sequence of events witnessed, but proof that it came from the largest pool of CPU power. As long as a majority of CPU power is controlled by nodes that are not cooperating to attack the network, they’ll generate the longest chain and outpace attackers. The network itself requires minimal structure. Messages are broadcast on a best effort basis, and nodes can leave and rejoin the network at will, accepting the longest proof-of-work chain as proof of what happened while they were gone.

§3.01 — Bitcoin coincides with a proposed subtraction. By dissolving the function hitherto attributed to a “trusted third party”* it realizes a flat network, in which all connections are P2P relations. Since the legitimating role of the third party – the extrinsic or transcendent element – is authentication of the originality of transactions, the network cannot be scoured of transcendence without “a solution to the double-spending problem”. The complicity of these twin goals is perfectly explicit: “What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.” Conceived as a project of political economy, this is what Bitcoin is.

§3.02 — The self-comprehension of Bitcoin, then, as already announced in the second sentence of the abstract, begins with the double spending problem – a concept so basic to all subsequent discussion that it demands abbreviation (to the ‘DSP’). Once again, a sub-division of the topic is in order. The DSP is (1) a highly-specific technical obstacle to the realization of any ‘trustless’ or decentralized digital currency, (2) a problem of extreme generality relevant to all monetary systems, roughly equivalent to fraudulence, (3) a re-formatting of the basic economic problem of scarcity for the epoch of Internet-based commerce, and finally – in its widest extension – (4) a crucial philosophical clue leading directly into the nature of the sign, and even re-founding rigorous semiotics (in the groundlessness of cybernetic self-reference).

§3.03 — Approaching Bitcoin as a solution to the DSP, in its narrowest and most functionally-critical sense, does not necessarily exhaust the significance of the protocol, still less its ripples of implication, but it undeniably comes close to capturing these in their essentials. It is in order to solve the DSP that Bitcoin innovates the blockchain, establishing – first in theory, then in implemented fact – the characteristic decentralization that defines it. Even features that are not, in principle, necessary to this solution, were in fact generated as more-or-less direct consequences of the approach that was selected to tackle it. For instance, while a simulation of metallism (and resultant rigid deflationary bias) is not strictly required for a blockchain-based digital currency, it follows as a matter of course from the way Bitcoin formalizes and resolves the DSP.

§3.04 — A prototypical form of the DSP afflicts even the very ‘hardest’ types of traditional money. Precious metal coinage can be debased through surreptitious adjustment of purity and magnitude – adulterated through admixture of inferior metals, reduced in size (by policy decision, executed through the mint), or attenuated through ‘clipping’ and ‘sweating’ (widespread practices of petty monetary fraudulence). The guiding strategy – or merely opportunistic tactic – in each case is that a certain quantity of gold or silver can be spent twice, traded as a sign, while economized as a substance. The fraudulent agent, whether government or private coin-clipper, exploits the door to duplicity inherent in the monetary character of the coin, according to which it operates as a sign of itself. The value of the coin has a double registry – the inscribed denomination, and the test of the weighing scale. Insofar as these two aspects of its worth can be prised apart, in some way that eludes convenient detection, precious substance can delegate its semiotic ghost to sustain the initial incarnation of its value, while taking on a second identity in another account. Insofar as money is a sign, the DSP shadows it, from its most primitive origin.

§3.05 — Paper money represents an immense semiotic liberation, and thus a corresponding accentuation of the DSP. The relation between inscribed denomination and metallic backing, no longer Janus-faced and intimate, yawns open. The distance is now bridged by an explicit promise, made in the name of a trusted authority, or monetary mediator. The immediate substance of the monetary sign – inked paper – is approximately worthless. The ‘paper’ of cash-money does not reference a commodity-substance, but a promissory vehicle. Value has been relegated to a word, in its contractual sense, historically consolidated through an evolution from the ownership titles (or ‘warehouse receipts’) issued by goldsmiths. Unsurprisingly, the ‘golden’ age of counterfeiting now begins. On the side of the legitimate monetary institutions and authorities, more exotic possibilities arise.

§3.06 — Even if fractional reserve banking – the principal financial business opportunity within a paper money economy – cannot be theoretically assimilated without reservation to the DSP, the resonances are, at the very least, uncanny. If not exactly spent twice, deposits are multiplied by lending.** If this function is formally reversed, in the customary manner, reserves (liabilities) are required only to cover a determinate fraction of loans (assets), which allows the latter to be inflated at a rate reciprocal to the reserve ratio. (A reserve requirement of 10% permits a ten-fold credit expansion from the ‘monetary base’.) Political permission for the multiplication of deposits can, therefore, be directly inferred from mandatory capital adequacy ratios (through simple inversion). The normalization of the practice marks a radical discontinuity in monetary history. From this point onwards, standard banking activity becomes the predominant source of currency issuance, and cash is fused inextricably with debt through the root mechanism of credit creation.

§3.07 — The rise of banking is inseparable from an eclipse of cash. Even in the popular imagination, money loses all association with a hoarded commodity, as it is re-embedded in an account, where it exists solely as a ledger entry. Henceforth, the reliability of money as a store of value is seen to rest upon nothing more substantial than the integrity of institutionalized accounting procedures, which would subsequently – and in turn – be made conditional upon higher-level (political-administrative) monetary management. Since the inception of the electronic age, the digital transcription of financial ledgers has accelerated the trend, fostering explicit, widely-publicized dreams of ‘the cashless economy’. Cash-money becomes an increasingly marginal sub-component of credit flow, progressively ghettoized among atypically frictional, trivial, or disreputable money transfers. From the perspective of financial macro-management, its final abolition would be a consummation.

§3.08 — Fractional reserve banking partially anticipates macroeconomic governance in the discretion it affords to money creation, but – in itself – it offers only the faintest glimpse of the new world that is arising. This systematic incorporation of Keynesian ‘animal spirits’ into the realm of government policy objectives, beginning – very tentatively – in the 1930s, and then ascending to dominance in the post-war world, completes the politicization of the economic sign. Money is now invested with mass psychological meaning, identified with a technocratically-accessible dimension of collective arousal, and economic sentiment becomes an explicit object of administrative manipulation, through the money supply. The profundity of this development is easily under-estimated. In the era of macroeconomics, monetary policy is seamlessly fused with psychological operations, oriented to strategic public mood alteration or ‘demand management’ orchestrated with reference to an array of guiding concepts which are overtly attitudinal: ‘wealth effects’, ‘money illusion’, and ‘wage stickiness’ prominent among them. It is now the psycho-social propensities to save or spend that are to be theoretically reconstructed by the academic-administrative economic complex, with integral cynicism, on the functional analogy of pharmacological medicine. Economic and clinical therapeutics become increasingly hard to distinguish in principle, as they are differentiated only by their specific techniques of psychological intervention, and by the scales of their domains. In each case the (individual or collective) patient, vulnerable to ‘depression’, is subjected to expert treatment through the measured application of artificial ‘stimulus’. Feedback is provided by economic sentiment polling, designed to gauge business and consumer confidence. There is nothing metaphorical about any of this, except insofar as euphemism is called upon in the public presentation of monetary and fiscal objectives. Macroeconomic policy is – quite simply, and exactly – mass mind-control. As it is normalized, it sees ever less need to disguise the fact.

§3.09 — To remark upon a ‘double-spending problem’ at all in such a world, in which the very notion of intrinsic monetary integrity has been dissolved – with minimal remainder – into the politicized economy, replaced by the technopharmaceutical administration of financial dope, might easily seem comically (and no less tragically) Quixotic.*** It requires only the slightest deepening and darkening of perspective to see money, in itself, as a lost cause. No small part of the initial, catalytic excitement generated by Bitcoin is explained by this background of relentless hard money defeat.

* In his introduction to ‘The Dawn of Trustworthy Computing’, Nick Szabo describes the role of the ‘trusted third-party’ within the world’s existing electronic information infrastructure: “When we currently use a smart phone or a laptop on a cell network or the Internet, the other end of these interactions typically run on other solo computers, such as web servers. Practically all of these machines have architectures that were designed to be controlled by a single person or a hierarchy of people who know and trust each other. From the point of view of a remote web or app user, these architectures are based on full trust in an unknown ‘root’ administrator, who can control everything that happens on the server: they can read, alter, delete, or block any data on that computer at will. Even data sent encrypted over a network is eventually unencrypted and ends up on a computer controlled in this total way. With current web services we are fully trusting, in other words we are fully vulnerable to, the computer, or more specifically the people who have access to that computer, both insiders and hackers, to faithfully execute our orders, secure our payments, and so on. If somebody on the other end wants to ignore or falsify what you’ve instructed the web server to do, no strong security is stopping them, only fallible and expensive human institutions which often stop at national borders.”

** The influential Rothbardian tradition of libertarianism consistently denounces fractional reserve banking as systematic financial fraudulence, structurally indistinguishable from counterfeiting (or fake money production). Within this political-economic context, the attempt to differentiate the DSP from a ‘double lending problem’ (DLP) might easily appear unnecessarily fastidious.

*** The understanding of the market order as a Quixotic cause, in all its anachronism, is captured by the description of Ludwig von Mises as ‘The Last Knight of Liberalism’ in the title to Jörg Guido Hülsmann’s intellectual biography. The Austrian perspective, within which Mises appears so obviously to be a defender of the capitalistic principle in a post-capitalist world, is itself reflexively captured by the Quixotic framing it explores, and thus rendered scarcely legible by its own untimeliness and social peculiarity. The oddity of our world is captures by the prevalence of a political-economic denunciation that targets ‘neoliberalism’ – in which Mises is implicitly entangled as a triumphant voice. Not only utter defeat, then, but a subsequent ‘restoration’ as a representative of that by which one has been defeated. This is the dialectic as dark humor.

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