Toward a Node World Order
How bitcoin obsoletes inflation and promotes human flourishing
This essay was originally published in The Bitcoin Times, No. 5: The Austrian Edition, now available digitally and in a limited collector’s edition print here. Use the code “Bitstein” for 40,000 sats off.
Audio version available on the Bitstein Brief Podcast.
Perpetual vigilance on the part of the citizens can achieve what a thousand laws and dozens of alphabetical bureaus with hordes of employees never have and never will achieve: the preservation of a sound currency.
— Ludwig von Mises, The Theory of Money and Credit1
Introduction
The primordial state of man is poverty. Nature is unforgiving in its scarcity of available means. On a fixed amount of land with a fixed amount of technology, there is a physical limit to the output of labor. As Hans-Hermann Hoppe observes:
Only one way exists for such a stationary society to further increase real income per head or to grow in size without a loss in per capita income: through technological innovation, i.e., by the employment of better, more efficient tools made possible through savings brought about by the abstention from leisure or other immediate consumption.
He concludes that only through the process of lowering time preference, so as to accumulate an increasing amount of capital goods and technology, was it possible to break out of the Malthusian trap set by the limits of resources immediately available by kick-starting the Industrial Revolution.2
Without a certain amount of capital and production, standards of living we take for granted are not physically possible. During the Industrial Revolution, many children had to find work in dangerous factories in order to help earn income for the family. The way out was through what George Reisman called “the productivity theory of wages.” An increase in productivity, through capital accumulation, means each monetary unit earned can fetch more consumer goods in the marketplace. Through this process, families could earn enough resources with fewer wage earners. Children could leave the factories, and more leisure could be afforded generally.3
However, tools are merely tools, and a public ideology can prevent their most productive use. Mark Thornton points out that the abhorrent use of slave labor, while having been rendered increasingly unprofitable by industrial progress in the process described above, remained in practice until its violent and bloody abolition, because of aggressive state intervention in the form of mandated slave patrols and prohibition of private manumission of slaves.4
Progress, then, appears to require three things: capital accumulation, technological advancement, and a public ideology to support it. More tools must be produced, better tools must be invented, and people must know how and want to use their tools.
The Malthusian trap has been broken, but it is unclear whether or not humanity has the potential for even richer cooperation. Given the ubiquity of money in an economy, as the great facilitator of the division of labor that allows any economic development to occur, it is a technology ripe for innovation.
The Origins of Money
In a world of perfect certainty, there is no need for money. Ludwig von Mises describes the hypothetical state of what he calls the “evenly rotating economy” in Human Action as having no change and thus no uncertainty. In this equilibrium, there is no action, because all knowledge of when and how to allocate and exchange resources is already known.
However, in the real world, we don’t know the future. We face uncertainty and have scarce means to deal with it. Circumstances and preferences can change at any moment, both for ourselves and others. Because of this, we have to prepare.5 We cannot rely on direct exchange to get the resources we want, because of what is called the double coincidence of wants problem. Others may not have what we want, or they might not want what we have, and vice versa. To deal with this uncertainty, we begin to acquire goods, not for their own sake, but because we think they are more likely to be desired by those with whom we wish to trade. These goods may be classified as “media of exchange.”
Not every good is as useful as such. If the good is not durable, the actor cannot be certain that it will still be useful by the time he wants to trade in the future. If it is not portable, it might not be available at the place where he wants to trade in the future. If it’s not divisible, it might not be available in the amount he wants to trade in the future. An actor would want to choose a good that best handles these uncertainties and remains salable over the most possible times, spaces, and scales. As Mises points out in The Theory of Money and Credit, “an inevitable tendency for the less marketable of a series of goods used as media of exchange to be one by one rejected until at last only a single commodity remained, which was universally employed as a medium of exchange; in a word, money.”6
Historically, this market competition for the most salable good converged on gold, because of its desirable physical properties: a low supply growth rate, durability, malleability, etc. However, while these properties were beneficial at the time, they were not necessarily enough in the long run.
The State and its Motivation
Productive enterprises are constrained by peaceful economic means, because they are beholden to private property, at the whims of consumer demand, and have no recourse to competition except to improve themselves by lowering production costs and increasing quality. The state, on the other hand, has no such constraints. As the territorial monopoly of ultimate decision-making, it operates through coercive means. Individuals and firms are forced to pay for its existence through taxation and other forms of expropriation, an a priori demonstration that the state does not provide services actually demanded by peaceful market operations. Regulatory and tax expropriation does not only provide the state with an income, but also provides it with a mechanism to restrict competition.
However, as Hans-Hermann Hoppe explains, violence alone cannot account for the continued success of a state, and the state does face a different sort of constraint, that of public opinion.7 For a state to operate as it does,
…a firm must have public support in addition to coercive force. A majority of the population must accept its operations as legitimate. This acceptance can range from active enthusiasm to passive resignation. But acceptance it must be in the sense that a majority must have given up the idea of actively or passively resisting any attempt to enforce non-productive and non-contractual property acquisitions. Instead of displaying outrage over such actions, of showing contempt for everyone who engages in them, and of doing nothing to help make them successful (not to mention actively trying to obstruct them), a majority must actively or passively support them. State-supportive public opinion must counterbalance the resistance of victimized property owners such that active resistance appears futile. And the goal of the state, then, and of every state employee who wants to contribute toward securing and improving his own position within the state, is and must be that of maximizing exploitatively acquired wealth and income by producing favorable public opinion and creating legitimacy.
Because of this, the state has a natural desire to restrict competition that can threaten a state’s legitimacy, as well as redistribution of “some of its coercively appropriated wealth to people outside the state apparatus and thereby [attempting] to corrupt them into assuming state-supportive roles.” The state first targets monopolization of law and security, as a means to perform and enforce expropriation, despite its aggression against natural property rights. Another key target is education, so as to inculcate ideological support for the state and its actions among the citizenry.
Modern state power rests on monopolization of a particular industry: money and banking.
The monopolization of money and banking is the ultimate pillar on which the modern state rests. In fact, it has probably become the most cherished instrument for increasing state income. For nowhere else can the state make the connection between redistribution-expenditure and exploitation-return more directly, quickly and securely than by monopolizing money and banking.
If a state can establish a fully monopolized fiat currency, it can counterfeit at will. Through monetary inflation in the form of counterfeit (producing more currency units without an additional supply of the underlying commodity), they can indirectly redistribute wealth from the economy to themselves at low cost and without fear of bankruptcy.
However, Hoppe points out that there are barriers to the process of monopolizing money. First, commodity money is produced by the market, rather than state fiat. Second, while inflation is not as conspicuous as taxation, it will still be felt and noticed, especially by banks. Therefore, the state is constrained by its commodity money origins and public ideology, “and so it is also impossible for the state to get away with institutionalized counterfeiting unless it can be combined with redistributive measures which are capable of bringing about another favorable change in public opinion.”
With gold as the historical free market choice for money, the state sought to exploit its vulnerabilities, particularly in its lack of salability due to its physical qualities being unable to alleviate economic uncertainty.
Gold Didn’t Fix This
Hoppe begins to trace the process of monopolization:
In a first step the minting of gold must be monopolized by the state. This serves the purpose of psychologically deinternationalizing gold by shifting the emphasis from gold as denominated in universal terms of weight to gold as denominated in terms of fiat labels. And it removes a first important obstacle toward counterfeiting because it gives the state the very institutional means of enriching itself through a systematic process of currency debasement.
While gold has many attractive properties for money, verifying the gold received in trade is very costly. Given how valuable a good must necessarily be if it is a generally accepted medium of exchange, it is not only the state that wishes to counterfeit currency. All payments received should be suspect. While some basic tests can be done by a normal individual, none are automatic. At worst, and especially for large payments, very costly chemical analysis must be done to know that you truly have the gold you believe you received, requiring skilled professionals and expensive equipment. The highest standard method is the fire assay or cupellation, which requires melting the gold down to weigh and recast.8 This means both the buyer and seller cannot be certain that any exchange is settled. The seller of a good cannot be certain they are receiving the full (or any) sum of gold as payment, and the buyer cannot know they aren’t using counterfeit money after having been defrauded in a previous transaction.
In the past, this uncertainty was minimized by a mint, who could produce standardized gold coins of a certain quality and with a recognizable and familiar design that can even help a person know if it had been tampered with, such as ridges on the outside that would be smoothed if someone tried shaving the coin. These mints earned a seigniorage by setting the price of the coins higher than the true metal composition. At the same time, this trust in the mint could similarly be abused. Mints could take coins out of circulation, decrease the actual gold and silver composition, and then reintroduce the coins with the same price, thereby earning more seigniorage from the debasement of the same coins. They could then also issue more coins than the actual quantity of metal should allow. Centralized mints alleviate uncertainty about the quality of the good, but only by introducing a highly trusted centralized system, which introduces uncertainty about the true quantity of metal in the coins being held and circulated, and by extension about the real money supply of the whole economy. Because gold is decentralized as a commodity, there is no ability to audit the economy as a whole.
Second, the use of money substitutes instead of actual gold must be systematically encouraged and such a tendency backed up by the enactment of legal tender laws. The counterfeiting process thereby becomes much less costly. Instead of having to remint gold, only paper tickets must be printed.
Expensive storage and transportation of a good reduces its salability due to the uncertainty of whether a good will be secure until it is needed and whether it will be deliverable at the time of exchange. Because of gold’s weight, both storage and transportation grow in cost relative to the value of gold. Long-term storage is best provided by third parties who can afford the best vault technology to prevent theft. Physical transportation requires large vehicles and manpower. As theft also occurs during transportation, defensive measures must also be accounted for to deal with the risk of highway robbers, pirates, and other criminals. Transportation also takes time. Finally, gold’s physicality also limits its salability in smaller scales. If a gold-based economy becomes too wealthy, it would be difficult to settle physical atoms of gold.
Banks solved this by issuing money substitutes in the form of paper certificates. Once again, only through trusted third parties could gold become more salable. Banks could store gold safely, and people could transfer paper notes much faster, easier, and cheaper, no matter the value. However, this still leaves uncertainty about the validity of the paper notes as such, and whether these notes actually represent gold in a vault at all. Inflation becomes much easier and accessible to any supposed steward of gold. Banks can be audited, but not independently, so customers are always at the whim of trusting that their gold is being handled correctly if they choose to use a bank (which is practically necessary if they wish to engage in a certain level of commerce). Then, even with a solvent bank, access to gold remains dependent on a third party.
Once banks have adopted money substitutes for gold, states can begin to adopt legal tender laws to increase their capacity for counterfeiting. The next step is to cartelize the banking industry through the establishment of a central bank. Once this is done,
the state must require all banks to deposit their gold at the central bank and conduct their business exclusively with money substitutes instead of gold. This way gold disappears from the market as an actually used medium of exchange and instead everyday transactions become increasingly characterized by the use of central bank notes.
At this point, a gold standard is at best in name only. The people have a money that is more salable on many dimensions in space and scale. Theoretically these solutions could be done by private entities that respect the rights of their clients. However, the centralizing tendencies allow the state to exploit this for their own inflationary and counterfeiting gain. Banks are tempted by state control because of their own benefits from the counterfeiting regime. Now both the state and the banks become first recipients of newly printed money. Known as the Cantillon effect9, these first recipients get to spend the money before the economy can adjust prices to reflect the change in the money supply.
Public ideology in support of this fiat currency system then comes from two angles. First, the fact that the underlying technology is in many ways an improvement in creating a more salable money, despite the fact that its otherwise free market potential is now co-opted and monopolized by the state. Second, the state can use this as an advantage by crediting themselves as the source of the economic benefits we see from its effects, while papering over the costs of counterfeiting on the economy. Given banks are naturally one of the most powerful institutions in an economy, due to their vital role in facilitating economic activity, they provide yet more legitimacy and resources to the establishment of a public ideology that defends the state’s unjust role in the monetary order that allows it to continue. Thus, it is not surprising that few educated people can be expected to have even heard the name Ludwig von Mises during their studies.
The Fiat World Order
Much has been written about what happened in and since 1971. In this year the American people, and anyone dependent on the Federal Reserve globally, was subjected to a full fiat monetary experiment. The reader is encouraged to read “Banking, Nation States, and International Politics” by Hans-Hermann Hoppe for a fuller study of the construction of this fiat world order.
In particular, the fiat world order encourages states to expand their power not only through military conquest, but also by engaging in monetary imperialism:
It is in a state’s natural interest to expand its territory militarily; and hence, one should expect a tendency toward a relative concentration of states. It is also in a state’s interest to engage in “monetary imperialism,” i.e., to extend its counterfeiting power over larger territories; thus, a tendency toward a one-world paper currency should be expected. Both interests and tendencies complement each other. On the one hand, any step in the direction of an international counterfeiting cartel is bound to fail if it is not complemented by the establishment of military dominance and hierarchy. External and internal economic pressures would tend to burst the cartel. With military superiority, however, an inflation cartel becomes possible. On the other hand, once military dominance has made such a cartel possible, the dominant state can actually expand its exploitative power over other territories without further war and conquest. In fact, the international cartelization of counterfeiting allows the dominant state to pursue through more sophisticated (i.e., less visible) means what war and conquest alone might not be able to achieve.
On a more individual scale, fiat bank accounts are routinely shut down and frozen based purely on political whim. Payments to some merchants and some countries are sometimes not permitted, even if the transaction itself is legal. Access to one’s own money is simply not a given.
Despite all of this, given the technological capacity available in the economy, the market still chose gold. But this same choice left the economy susceptible to counterfeiting. The same third parties that were needed to best make gold work as a money also made possible the fiat world order. Without significant technological advancement, no sound replacement could be possible, let alone win over public support.
Bitcoin Fixes This
Doing your own verifying and indexing is the only way to be sure your index data is secure. — Satoshi Nakamoto10
By 2009, the economy was well into the digital revolution. A number of key technologies had been adopted and widely dispersed, including hash trees, public key cryptography, P2P networking, and SHA-256.11 A brilliant pseudonymous programmer named Satoshi Nakamoto brought these technologies together to make bitcoin.
Bitcoin solves what is called the double spending problem without a central authority. Any other existing digital cash system, including the present-day fiat currencies and payment infrastructure relying on them as well as other digital currencies, require a central authority to maintain and dictate the true history of a monetary ledger, to make sure that the same units of money are not spent twice. Bitcoin instead decentralizes the bookkeeping and uses a proof-of-work system to maintain consensus between independent bookkeepers about the true history of the ledger.
A bitcoin full node is an independent bookkeeper. It connects to the bitcoin network, downloads the entire ledger history, and validates every block and transaction received against its adopted rules of bitcoin.12
Each full node independently operates according to its own instantiation of software and the rules therein. Transaction inputs must be cryptographically signed by the correct private key or keys. Those inputs must be traceable back to valid transaction outputs. The sum value of the inputs must be greater than or equal to that of the outputs.
Additionally, blocks must have valid transactions whose inputs have not already been spent. They must include a pointer back to a previous valid block. They must have an associated proof-of-work nonce that allows a partial hash collision of a certain computational difficulty. They must include only a single coinbase transaction, which does not have an input, but must have an output no greater than the current block subsidy plus transaction fees.
There are many more rules that are checked, automatically, each and every time a transaction or block reaches a bitcoin node.13 Together, the full node instantiates an automated bookkeeper that represents the will of the user, regardless of anyone else in the universe, based on a particular configuration of network parameters of their choosing.
The bitcoin network was architected in such a way that a full node can operate in a bunker, cut off from the rest of the world, save for a single internet connection.14 A full node can judge for itself any data it receives that claims to be a valid block or transaction. Proof-of-work allows the full node to properly order the data. It only takes a single block with a more difficult proof-of-work for the full node to know exactly how to reorganize its copy of the blockchain to get back into consensus. An eclipse attack, where a full node is only connected to adversarial nodes, can only sustain itself until that node manages to receive a single 80-byte block header payload that tells a different story. Once the full node receives a block and transactions and validates the data, it knows the state of the bitcoin network, and it knows it with certainty.
A bitcoin full node is a certainty machine. When a user runs a full node, they are granted a level of certainty about a monetary network that no human had prior to bitcoin’s existence. Every other monetary technology is riddled with uncertainties. Bitcoin fixes this.
Bitcoin’s core engineering purpose is to solve two problems: double-spending and issuance. The former is solved through proof-of-work timestamping. The latter is solved with the difficulty adjustment and coinbase transaction requirements. As we will see, solving these two problems, and solving them as bitcoin did, plugged the security holes that created uncertainties in previous monetary technologies that have been exploited for monopolistic political ends.
The first step towards state control of money was to monopolize minting, so as to introduce a trusted model for verification of coins. Bitcoin fixed this by introducing a cryptographically secure ledger where validity of a unit is checked automatically and instantly. Running a node allows a user to ensure the supply and quality of all units is mathematically sound. The supply is managed by strict subsidy rules for the coinbase transaction and proof-of-work difficulty requirements, and the schedule by the difficulty adjustment. Receivers of newly issued bitcoin units can only earn a profit insofar as they can continue to find cost-effective sources of energy and hardware subject to strong competitive forces, not simply by having been granted a legal monopoly to produce coins for a higher price than their melt value. Bitcoin fixes seigniorage.
The second step was to encourage the use of money substitutes rather than the commodity currency itself. This is not inherently malevolent, because money substitutes allow for transactions to occur that would be prohibitively expensive due to storage and transportation costs and a lack of divisibility. However, it introduces necessary counterparty risk in the bank that holds the currency, requiring users to trust them to have the commodity available for redemption.
Bitcoin, on the other hand, has storage and transportation costs that are orders of magnitude cheaper than gold. Storage of bitcoin only fundamentally requires the ability to store a 256 bit private key. The cost of storing bitcoin keys is independent of the value of the bitcoin, so this is true whether keys hold a few satoshis or a few thousand bitcoin. As pure software and information, innovative storage methods can be adopted. While any other incumbent currency requires placing units in a centralized vault or ledger, bitcoin full nodes recognize the use of multisignature transactions, allowing for decentralized storage that can even be multi-jurisdictional. Keys can also be stored in a user’s own memory, allowing storage to not require a physical location, which can be useful as a hedge against political uncertainty. Bitcoin also does not require a bank vault to be opened in order to deposit more funds.
Transportation and settlement is much cheaper than any existing monetary network, including digital fiat, because it can happen between any two keys anywhere in the world at any time for a relatively low fee. Settlement can occur in an hour, or instantly using the Lightning network. While gold suffered from a limit to its divisibility, making it hard to transact with small amounts of gold without money substitutes, bitcoin can be traded easily at small amounts, especially with the Lightning network, which allows for sub-satoshi amounts. Additionally, the costs for dealing with the base bitcoin currency is solely based on data consumption, so the value of bitcoin can scale infinitely without inherently incurring tremendously higher costs.
Running a full node allows a user to be their own bank, so that no third party bank issuing notes is inherently necessary, preventing any issue of counterfeit or double spending to occur unless a person willfully decides to take on counterparty risk. Any introduction of a money substitute, for instance, on an exchange, cannot affect the money at a systemic level, but only localized to users of that substitute. Insofar as one might consider a second layer such as Lightning a money substitute, a user can maintain their own full node and each unit is cryptographically linked to real base money, further ensuring that every transaction is valid according to their bitcoin full node’s bookkeeping. With the higher expectations of independently verifiable settlement of the base money and certain money substitutes, users can have much higher expectations and more stringent demands of third party services and more tools to identify bad behavior to be swiftly corrected in the market process.
This also allows the base money to be interfaced in a censorship-resistant manner. In a fully fiat banking system, all payments rely on money substitutes and require the use of counterparties, who can block transactions and close accounts. By being their own bank, bitcoin users can broadcast transactions as they wish, and assuming a large enough fee is paid, a miner can include the transaction in a block with sufficient proof-of-work, which in turn updates the blockchain on any node sharing the same ruleset. Provided you run a node, you can verify with the same certainty as any other transaction that the payment was successful.
Because a bitcoin full node is expected to be able to operate in a bunker, the marketability of bitcoin tends towards the production of software that is backwards compatible. If the rules were to change in a backwards incompatible way, a user would be required to consult with a trusted source of software to get the correct software and rules any time they wish to sync with the network. This strengthening tendency towards backwards compatibility creates a certainty for node operators that their understanding of the network, especially their own balances and ability to spend their coins, will remain intact. The same cannot be said for users of fiat monetary systems that wake up to find they are no longer able to access their money, often with no recourse.
Finally, running a bitcoin full node creates more certainty of individual control over the disclosure of identifying information with third parties. The bitcoin network itself operates pseudonymously, but in the context of trade, information may be shared about ownership of addresses, which can reveal identity, balances, and how bitcoin is stored. By using a full node, a user reduces what information must be shared in order to interface with the network, and thus can have less uncertainty about certain information being released publicly that can be used against them by bad actors.
Bitcoin’s novel and groundbreaking architecture, designed to allow independent ownership and verification, completely nullifies the key problems that led to gold centralization. Bitcoin fixed the money, and now it is simply up to individuals to figure this out.
Bitcoin Nodes and Methodological Individualism
The Austrian school employs methodological individualism as one of its tools for discerning economic theory. While some schools of thought profess that a group can have a will of its own, the Austrians recognize that that group is itself made of individuals, whose actions we can analyze. Ludwig von Mises writes:
First we must realize that all actions are performed by individuals. A collective operates always through the intermediary of one or several individuals whose actions are related to the collective as the secondary source. It is the meaning which the acting individuals and all those who are touched by their action attribute to an action, that determines its character. It is the meaning that marks one action as the action of an individual and another action as the action of the state or of the municipality. The hangman, not the state, executes a criminal. It is the meaning of those concerned that discerns in the hangman’s action an action of the state. A group of armed men occupies a place. It is the meaning of those concerned which imputes this occupation not to the officers and soldiers on the spot, but to their nation. If we scrutinize the meaning of the various actions performed by individuals we must necessarily learn everything about the actions of collective wholes. For a social collective has no existence and reality outside of the individual members’ actions. The life of a collective is lived in the actions of the individuals constituting its body. There is no social collective conceivable which is not operative in the actions of some individuals. The reality of a social integer consists in its directing and releasing definite actions on the part of individuals. Thus the way to a cognition of collective wholes is through an analysis of the individuals’ actions.15
And so it is with bitcoin. The bitcoin network itself has no will of its own. It is a collection of bitcoin users who operate, individually, on a shared set of network rules. Any individual is free to choose one set of rules or another, and the network itself is defined by the consensus about what those rules are. Any TCP/IP network between any two or more computers is an internet, but only one TCP/IP network is the Internet. Likewise, any network of bitcoin nodes is a bitcoin network, but only one is “the” bitcoin network.
When an individual turns on a bitcoin node, they express their will for what the rules of bitcoin should be, instantiated with robust software that allows for no exceptions. They need not turn the node on for any reasons other than those of pure self-interest. The node is not meant to add security to the network in an altruistic sense, where an additional node adds to a particular security metric. Instead, they add to the network an expression of what defines a unit of bitcoin its user will receive and spend.
Users do not choose purely based on the rules they personally care about. A user may wish that the network parameters were slightly different, perhaps with a larger block size limit or a new transaction type. Instead they choose how to instantiate their node based on what is most likely to allow them to engage in the most valuable economic trade. While a feature they desire might benefit them, and even if others might desire the feature if they had a better understanding of it, if the instantiation of that feature would prohibit a consensus with the network that gives them the most capacity for valuable economic trade, they may choose to accept such a trade-off.
Security of the network, then, is based not on merely running a node, but on marketability, as described by Carl Menger. As more people choose to run or interface with nodes that have only a particular set of network rules, that network gains more capacity for economic trade. As the network gains more capacity for economic trade, more people will choose to run or interface with nodes that express those rules. This feedback loop continues to strengthen the rules that best serve people’s market needs.
This marketability is signaled through the economy via various prices. One example is the price of bitcoin units. A more marketable network will be in more demand, so units on that particular network will cost more. Empirically, we see units from a UTXO on BTC sell for orders of magnitude more than units even from the same UTXO on any of the other forks. Another example is the hash difficulty. Because units on “the” bitcoin network are more valuable, miners are willing to expend more computational effort to try to earn a reward. Once again, empirically, we see the difficulty of BTC is orders of magnitude greater than that of its forks.
What emerges is, as StopAndDecrypt calls it, “an impenetrable fortress of validation.” As more economic activity is defined by a ruleset, the fewer transactions and blocks that conflict with these rules are even able to enter the network, because they are rejected by nodes and not even relayed to other nodes.16 Out of the individual choices of first thousands and then millions of actors, a single bitcoin network, bookkeeping with extreme prejudice, emerges as the generally accepted medium and protocol of exchange. E pluribus unum.
Bitcoin is Not Optional
There is no bitcoin network outside of bitcoin nodes. Those who do not run their own full node are using someone else’s full node. When a person uses someone else’s full node, they are trusting that entity’s claims about the full node. The only way to know you are interacting with bitcoin the way you think is by running a full node.
Holding private keys is enough to enable someone to have individual ownership, but only with a node can that user have certainty the coins actually exist. Only through a node interface do they know the addresses associated with their keys have received UTXOs. Specifically, only through a node interface do they know the addresses received UTXOs on the network they think. Keys depend on a full node to have knowledge of their relation to the network.
The capacity for salability that bitcoin provides is unmatched by any other monetary technology. There are no meaningful private keys in a fiat system, nor is there any meaningful auditing of the fiat network. Any actor who wishes to benefit from the assurances of bitcoin must partake in the bitcoin network if they wish to hedge against a particular set of uncertainties. Only by holding bitcoin keys and running a bitcoin full node can one operate with any real assurances of ownership, scarcity, and censorship-resistance.17 This is true of a poor farmer in El Salvador, and it is true of the wealthiest people and institutions in the world, including the Federal Reserve.
The Establishment of a Bitcoin World Order
While it may seem at odds for a fiat-based state to have an interest in bitcoin, applying methodological individualism reveals that the state itself is made of individuals, rather than a large monolith. The individuals that make up the state still have their own monetary needs and interests. Even where bitcoin might limit state power, the individuals may themselves benefit, making them less likely to be interested in attacking bitcoin.18 States and superpowers themselves remain in a state of anarchy in relation to each other.19 They may still need to trade or stay competitive with other nations. Smaller nations that do not themselves have the power to print money, may look to bitcoin to gain a long-term advantage and independence, as seen in El Salvador. Anywhere that trade and savings may face uncertainties, a monetary asset is desired that can hedge against this. While states, then, may have an antagonism towards bitcoin, we can also see there are ways in which they are not omnipotent, and must navigate a changing economy and technological breakthroughs just like ourselves. If bitcoin can indeed become a global reserve currency, the Federal Reserve needs their full node and Coldcard as much as a random “toxic bitcoin pleb.”
This is not to say that all states everywhere, from the feeblest to the most dominant, will simply give into bitcoin tomorrow. It simply shows us that there is more at play in monetary competition than brute force alone. In discussing monetary competition, much has been written elsewhere about bitcoin’s economic potential to become a global reserve currency,20 but less has been said about bitcoin’s ideological growth potential.
Bitcoin at its core solves three problems in a decentralized manner: ownership through public key cryptography, double spending through proof-of-work timestamping, and issuance through proof-of-work difficulty adjustment. Because the system is built on extreme adversarial thinking, any successful attack is considered a fatal flaw to the bitcoin system. These problems, in turn, are merely subsets of larger problems: state expropriation and counterfeiting. Each time bitcoin strengthens its defenses against the petty versions of the problems, it has also built defenses against the most heinous versions of the problems.
Any attacker, present or future, technical or ideological, is up against a system that has already built its defense mechanisms against it. Any successful attack that does not kill bitcoin only serves to teach the rest of the network how to better defend against it and anything like it in the future. No amount of hash power can force an invalid block onto the network, so when SegWit2x proponents threatened to mine a hard fork chain, more bitcoiners learned the importance of relying on their own node, rather than someone else’s.21 When exchanges have been hacked or lending platforms liquidated, more bitcoiners learned the importance of holding their own keys. These were done out of prudent economic motives of having more certainty about their money, but in turn it also bolsters defense against larger actors who wish to make the same attacks on a larger scale.
Meanwhile, bitcoin offers a uniquely capable and salable monetary technology to alleviate uncertainties that have haunted man for centuries, and further offer possibilities that make it even more suitable for an increasingly internet-connected age. Additionally, due to being pure software, bitcoin has become even more capable and promises to continue to do so. Any actor who is in need of money that works, which is any actor in a developed division of labor, needs bitcoin. As adoption continues, more people place more reliance on the network, encouraging increased seriousness from every participant about the solution set offered through self-sovereign participation, as well as patching any potential vulnerabilities to future attacks.
In the end, anyone who needs good money is drawn to bitcoin, and anyone who is drawn to bitcoin is drawn to defending bitcoin. The economic growth and the will to secure and defend bitcoin are intertwined. In a brilliant essay, “The Will To Be Free: The Role of Ideology in National Defense,”22 Jeffrey Rogers Hummel considers the question of how a hypothetical future stateless society would provide defense against external attacks:
By the very act of overthrowing the domestic government (whether peacefully or forcibly), the former subjects will have forged powerful tools for protecting themselves from foreign governments. The same social consensus, the same institutions, and the same ideological imperatives that had gained them liberation from their own State would be automatically in place to defend against any other States that tried to fill the vacuum.
At each step of bitcoin’s growth, a new set of individuals have to measure up the uncertainties they deal with in the world, and consider whether bitcoin can solve their problems. Thus, even if at first they don’t acquiesce, everyone must begin discussing any change to the bitcoin status quo of sovereignty requiring a full node and custody of private keys through the lens of “bitcoin or shitcoin?” Bitcoin becomes a forcing function in pure economic discussions of what asset to choose for monetary purposes. Those who begin to choose bitcoin for any reason, find themselves going down a path that by necessity strengthens their resolve to keep bitcoin exactly how it is, which by its very nature is an implicit or explicit stance against any and all double spending and counterfeiting.
Those who adopt bitcoin see a dramatic long term increase in the purchasing power of their savings. They increase certainty about the state and value of their money and their monetary network, access to their funds, and ability to liquidate. Each growth signals a success that serves to increase the credibility to others, and each order of magnitude growth sends an equal if not larger signal of capacity. Starting with a single user, this process has led to a global network with thousands of nodes, hundreds of billions of dollars in value, and entire nation-states onboarding. Over time, there is only one answer to “bitcoin or shitcoin?”
Having laid the groundwork to solve ownership, double spending, and issuance at all attack levels, the bitcoin network had to grow economically strong enough to encourage people to value it as money. And the very capacity for bitcoin to withstand these attacks enough to become a global reserve currency must have required enough people holding keys and running full nodes to maintain such an order.
A Bitcoin Strategy for World Peace
Having created a new global reserve currency, built on a monetary technology superior in its salability on all dimensions, humanity will have upgraded to a fundamentally better economic operating system. Gold’s deficiencies will have been patched, and the ease and benefits of fiat will have been adopted without necessitating trusted third parties. The economy would grow at a faster rate, thanks to a larger and more cooperative division of labor, which in turn may even be compounded by further software innovations that strengthen bitcoin’s technological abilities.
In such a future world, dependence on bitcoin will necessarily grow, entrenching economic actors in a culture that does what is needed to ensure bitcoin’s security.
With no more capacity for double spending and counterfeiting, the state’s monopoly over money will cease to be, as no one will have demand for their services. Without their most profitable means of redistributing wealth, this will create more productivity in the economy by siphoning fewer resources away from productive ventures. This growth will be compounded by the fact that the same resources are not being redistributed towards people and institutions who use those resources to create ideological support for the redistribution itself. Military conquest will be diminished, as the costs of war must be paid for more directly, and monetary imperialism will have no purpose, as no people will be willing to adopt a shitcoin.
Those who previously had an inclination to fund their enterprises through counterfeiting and inflation will now have an alternative mechanism to guide their actions. Especially as the productive capacity of the economy increases at a faster rate, the increasing purchasing power of each bitcoin unit means any would-be inflationist must now choose between hodling bitcoin and putting up a fight against a monetary system that cannot lose.
Since bitcoin’s genesis block, humanity no longer needs to place its trust in third parties to manage as vital of a tool as money. The people can now run their own nodes and hold their own keys, maintaining perpetual vigilance over their money and using it as they see fit. The Industrial Revolution freed humanity from the Malthusian trap. Bitcoin, having put an end to counterfeiting once and for all, frees us from the fiat trap.
This essay was originally published in The Bitcoin Times, No. 5: The Austrian Edition, now available digitally and in a limited collector’s edition print here. Use the code “Bitstein” for 40,000 sats off.
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“The Return to Sound Money” from The Theory of Money and Credit by Ludwig von Mises
See “From the Malthusian Trap to the Industrial Revolution: An Explanation of Social Evolution” from The Great Fiction by Hans-Hermann Hoppe.
See Capitalism by George Reisman, p. 621. Also see “Prices, Wages, and Labor” in The Church and the Market by Thomas E. Woods, Jr., and “How Capitalism Enriched the Working Class” in How Capitalism Saved America by Thomas J. DiLorenzo.
“Slavery, Profitability, and the Market Process” by Mark Thornton
For more on money as a hedge against future uncertainty, see “‘The Yield from Money Held’ Reconsidered” by Hans-Hermann Hoppe. For more on how the quality of a money affects its purchasing power, see “The Quality of Money” by Philipp Bagus.
Also see On the Origins of Money by Carl Menger, and The Fiat Standard by Saifedean Ammous.
“Banking, Nation States, and International Politics: A Sociological Reconstruction of the Present Economic Order” by Hans-Hermann Hoppe. See also “How is Fiat Money Possible?—or, The Devolution of Money and Credit” by Hoppe and “What Has Government Done to Our Money?” by Murray Rothbard.
See “The gold standard” in Chemistry World for a look into the work it takes to figure out if gold bullion is really made of gold.
See “How Central Banking Increased Inequality” by Louis Rouanet.
Posted on Bitcointalk on November 25, 2010
See “Bitcoin is Worse is Better” by Gwern Branwen.
A pruned node can discard data that has already been verified and is not needed for further verification, but archival nodes retain entire copies of the blockchain for permanent record keeping.
For a more detailed breakdown of validating transactions and blocks, see “Protocol Rules” on the Bitcoin Wiki.
See “Proof That Proof-of-Work is the Only Solution to the Byzantine Generals’ Problem” by Oleg Andreev. Note that additional connections to the bitcoin network would be advantageous in preventing certain kinds of attacks.
“The Principle of Methodological Individualism” in Human Action by Ludwig von Mises
“Bitcoin Miners Beware: Invalid Blocks Need Not Apply” by StopAndDecrypt
See this Reddit post by Pieter Wuille on the importance of running and using your own full node.
See “Bitcoin’s Shroud of Subtlety and Allure” by Daniel Krawisz.
See “Do We Ever Really Get Out of Anarchy?” by Alfred G. Cuzán.
See “The SNI Mempool Crash Course in Political Economy”, The Bitcoin Standard by Saifedean Ammous, and “The Bullish Cash for Bitcoin” by Vijay Boyapati.
See The Blocksize War by Jonathan Bier.
Republished in The Myth of National Defense: Essays on the Theory and History of Security Production edited by Hans-Hermann Hoppe.
Excellent piece. Thanks!
Bitcoin is the way.