The Satoshi Revolution: A Revolution of Rising Expectations, Chapter 1 (part 1).
by Wendy McElroy
Section One: The Trusted Third Party Problem
Chapter One: Listening to the Past
“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts.”
A trustless system is one that does not depend upon the intentions of its participants, who may be honorable or malicious. The system functions in the same manner regardless of intentions. The blockchain, with a peer-to-peer protocol that is also transparent and immutable, is trustless. Intentions become important only when there is an intermediary who must be trusted. The third party’s good or bad motives become a determining aspect of the transaction and place the other parties at the mercy of his honesty. This is the trusted third party problem.
On a small scale, the problem will always exist because there are times when a middleman is useful or necessary. The ideal third party is trusted, trustworthy and competent. Some people are dishonest, however. They steal, overcharge, lie or otherwise betray their customers’ confidence in order to make profit over a fee. If the swindling is a one-time event and other third parties are available, the damage is limited. The two people take their business elsewhere, consider suing, report the swindler to business watchdogs and warn others.
An occasional dishonest third party is not the problem Satoshi Nakamoto addressed when he used Bitcoin as a lever to upend the world. It is the institutionalized and constant corruption of governments and central banks from which the average person cannot escape. Almost everyone who worked over-the-table, ran a business, bought goods from stores, accepted government benefits or paid taxes had to accept a fiat that constantly plunges in value due to inflation. Almost everyone who used credit, accepted checks, took out loans, conducted commerce or did business abroad needed to use banks that stole like drunken muggers.
To the average person, the situation looked hopeless. Competiting with the government-banking cartel was illegal and severely punished. No speedy, safe and private alternative existed for transferring funds across borders…or across town. Attempts to reform or remove the system seemed doomed. Reform was impossible because monetary policy had rotted to its core and needed to be uprooted, not improved; removal was inconceivable because the monopoly was deeply entrenched and all-powerful. People’s need for money became a straitjacket.
And, then, Satoshi Nakamoto. And, then, the blockchain and bitcoin. Not just a new currency but a new concept of money was created, and in a form that cannot be inflated because it is fixed at 21 million units. The supply of bitcoin can only decrease as some coins are inevitably lost, for example, by people who forget a password. Satoshi noted, “Lost coins only make everyone else’s coins worth slightly more. Think of it as a donation to everyone.”
Peer-to-peer transactions go through a middleman called a miner but no trust is required as the transaction is released only when “proof of work” is rendered; this consists of a miner solving complicated math. The solution is costly in computer power and time-consuming to produce but easy for others to verify. Satoshi commented, “With e-currency based on cryptographic proof, without the need to trust a third party middleman, money can be secure and transactions effortless.” The soundness and propriety of the blockchain’s protocol itself is assured by the use of an open source that is visible and verifiable to all. Satoshi’s private currency snaps the monopoly of governments and central banking.
There is precedent for this in theory and in practice.
Precedent in Theory
Friedrich A. Hayek is the most respected Austrian economist of the late 20th century. In The Denationalisation of Money: An Analysis of the Theory and Practice of Concurrent Currencies (1976), he argued vigorously for private and competitive currencies to displace government issued ones. Hayek asked a key question. “When one studies the history of money one cannot help wondering why people should have put up for so long with governments exercising an exclusive power over two thousand years that was regularly used to exploit and defraud them. This can be explained only by the myth” of the necessity of government money “becoming so firmly established that it did not occur even to the professional students of these matters…ever to question it. But once the validity of the established doctrine is doubted its foundation is rapidly seen to be fragile.” (A slightly revised edition entitled Denationalization of Money: The Argument Refined was published in 1978.)
Governments know it is hugely profitable to debase the currency as long as people have no alternative but to accept it and they put the full weight of bureaucracy behind currency manipulation. But the system is fragile because it relies on people not understanding that debasement is theft and not having a choice. Otherwise, the status quo crumbles. The 1974 Nobel laureate pondered why public understanding was so elusive. “[W]hy [is] a government monopoly of the provision of money…universally regarded as indispensable” and what would happen “if the provision of money were thrown open to the competition of private concerns supplying different currencies.” (Hayek’s specific proposal for private currency is explored elsewhere in this book.)
With eerie prescience, Hayek argued for currencies to be developed by entrepreneurs who could innovate new forms of money just as they innovated in other areas. One of the drawbacks of governments’ monopoly on money was that it imposed a freeze on the sort of invention now running free in cryptocurrencies.
The voluntaryist historian Carl Watner observed, “No one can tell in advance what form these monies might take because no one can know for sure what choices individuals would make or what new technologies might be discovered. Laws forcing people to use the Federal Reserve System money have frozen monetary developments at a certain stage….Just imagine if Congress had protected the Post Office by passing laws that would have prevented people from communicating via the internet. We would never have experienced the marvels of e-mail.”
Along with Hayek, the Austrian economist Murray Rothbard wrestled with the question of “why do people so vigorously resist private currencies?” His book, For a New Liberty: The Libertarian Manifesto offered an explanation. “If the government and only the government had had a monopoly of the shoe manufacturing and retailing business, how would most of the public treat the libertarian who now came along to advocate that the government get out of the shoe business and throw it open to private enterprise?” Rothbard predicted they would attack the libertarian with outrage for depriving them of the only possible source of shoes. People were thoroughly indoctrinated to believe that government was necessary and daily life could not function without it.
Hayek and Rothbard are unusual among economists in that they embrace private money. Even free market zealots rarely champion free market currencies and private banking. Instead, they debate marginal issues such as fractional reserve banking which amounts to a trivial reform. Or they argue for the need to restore a gold standard. But if the gold standard is applied to existing fiat, then it means trusting governments and banks to be transparent; it means trusting them to act directly against their own interests, which they have historically refused to do. The trusted third party problem remains untouched and it is the root of all other corruption, including currency manipulation. An inherently corrupt institution cannot be reformed; it must be swept away or totally avoided.
What could convince the public and economists that private currencies work as well or better than government issued ones? One way is to point out that they already have worked better by providing real examples from the past and drawing parallels to cryptocurrencies.
Source: Bitcoin News