Today’s code decides tomorrow’s policy

23. May 2021 News

Let’s assume that cryptocurrencies are the money of the future. What political achievements will they bring? What do we already know – and what is still up in the air? Such questions are difficult to answer because when it comes to cryptocurrencies, technical details become big political questions.

purpose of BitcoinSo much has been discussed about what the purpose of Bitcoin is. We alreade wrote about it in this article. Presumably, such discussions are idle because the invisible hand of the markets makes its decision all by itself. Nevertheless, we request here to stake out the political coordinates of Bitcoin.

I would say most could agree that Bitcoin should be the perfect money for the digital space. Existing money – fiat money – is not made for the Internet. It manages to fit in by hook or by crook, but in the end it remains a foreign body in cyberspace. Like a carriage that you hitch more horses to in order to go faster, or a calculator that you add more keys to in order to unlock new functions.

Bitcoin, on the other hand, is digital. The cryptocurrency lives on the Internet so do all Altcoins. If you are looking for a reliable broker to trade with Altcoins, take a look at this site. When you pay with banks’ money on the Internet, you usually log in to a bank and instruct them to make a transfer. When you pay with Bitcoins, it’s more like sending a file to the other person. With one, computing is just a communication channel for something else. With the other, it is the money itself.

 

The political coordinates of cryptocurrencies

Of course, the fish is far from landed. Bitcoin – or any other cryptocurrency – has a chance to reinvent money in the digital space. But so far, digital money hasn’t caught on. Not as a means of payment, not as a unit of account, and not as a store of value. But the opportunity remains strong. It seems almost surreal to imagine that in the future we won’t use money that lives as bits and bytes on everyone’s computers. It would be tragic to let this opportunity pass.

So it remains likely that we will find ourselves in a future where Bitcoin or other cryptocurrencies are the dominant means of payment for humanity. What that future will look like in concrete terms is uncertain at this point. There are too many parameters, so many adjusting screws that can be turned, and as David Chaum said back in the 1990s: the code of today can decide whether we live in a democracy or dictatorship in the future.

Will Bitcoin give humanity a new level of freedom? Will it usher in a devastating anarchy? Will it become an instrument of dictators and control states? Will Bitcoin empower citizens – or render them powerless? Will Bitcoin become a plaything of the markets? Or become the basis of a new economic order?

So many questions. And each of them will determine what kind of future we live in. The difficulty is that with Bitcoin, every technological detail becomes political. There is hardly any phenomenon where technology and politics are so closely interwoven. Here, we try to introduce some parameters and show what political consequences technical details can have.

Privacy and transparency

Privacy and transparencyAs with all things digital, privacy is an important issue – but one that is also double-edged. If the digital money of the future offers its users too little privacy, mass financial surveillance looms. Those who claim they don’t care because they have nothing to hide anyway have missed the discussions since 2013. Every piece of information that a state has about its citizens is a piece of power that, in case of doubt, threatens to undermine civil rights. Privacy means controlling who gets what information about you. A cryptocurrency that does not give its citizens this option could be dangerous to them and accelerate the trend toward mass surveillance.

At the same time, transparency in itself is also a value. If a cryptocurrency gives citizens the ability to track the financial transactions of states, large corporations, and very wealthy citizens, this should have value for democracy. It is not for nothing that transparency is right next to privacy in the calls for how to shape a digital future of participation and democracy. Furthermore, there is a social consensus that the state system must be able to hold individuals accountable for their actions, which is why being able to track criminals through the trail of money is largely considered a positive.

Where one places one’s own position in this spectrum between complete transparency and complete anonymity is up to each person. Some place more value on a high level of privacy, while others also appreciate a certain degree of transparency. The important thing here is to understand the technological circumstances.

Basically, all transactions with cryptocurrencies are in a public blockchain and can be traced by anyone. However, they are not assigned to a real identity, but to pseudonymous addresses, i.e. long strings of characters. Privacy behaves in the opposite way to banking: While in a bank transfer only the bank knows the transaction, in a blockchain everyone knows it; and while the bank transfer contains the identity of sender and recipient, Bitcoin transactions contain only pseudonyms, which initially have no connection to the real identity of the parties involved.

However, there are significant differences at the protocol level of cryptocurrencies – find out more on this page. UTXO-based systems such as Bitcoin have completely different privacy properties than account-based systems such as Ethereum or the almost completely anonymous Monero. The choice of wallets also has a significant impact. Some wallets increase privacy, for example through mixing processes, while others reduce it because they communicate data such as the balance or the IP address to a server. Wallets then take on a similar role to banks: they know more details than other parties.

The extent to which privacy is achievable depends on both the technical competence of the user and the amounts involved. As a rule, smaller amounts are relatively easy to privatize, while very large amounts are impossible to hide. Competent users can avoid mistakes that reveal too much and use methods to improve their privacy.

Money creation and inflation

Money creation and inflationA key political component of cryptocurrencies is money creation. They snatch it away from banks and central banks and hand it over to other parties. Who these parties are is as critical as the mode of money creation.

What all cryptocurrencies have in common is that money creation is static at its core. It is defined by the protocol and is not changed thereafter. This distinguishes it from central bank money, which is created depending on the economic situation. Those who believe that a central bank needs this flexibility to maneuver economies through crises will have little sympathy for this part of all cryptocurrencies. For him, a stablecoin that maps a fiat currency as a token on a blockchain is likely to make more sense. But that is not the point here.

Among cryptocurrencies, there are several modes of money creation. The rate of money creation is important in terms of economic policy. A scarce, declining, and ultimately percolating rate like Bitcoin introduces hard money, even deflationary money in the long run – and thus a monetary base that is either very old or completely new. This could lead back to a more feudalistic model of society at worst, and create a truly sustainable economy at best. Closer to the central bank model are cryptocurrencies with a steady but low rate, around one percent. Just as central banks define inflation of just under two percent as stability, protocol developers set a certain rate of inflation as perfect when creating the currency.

A third model is a bit more flexible. Cryptocurrencies such as Stellar, Ripple or IOTA created all cryptocurrency entities in the beginning. A central entity – usually a foundation – then distributes these units over time. In doing so, it can adjust the money supply according to economic performance, just like a central bank. However, this creates an immensely powerful central party, and it is already visible that the distribution of the coins is being massively abused, for example through airdrops.

In most cryptocurrencies, monetary units are created over time. The way this happens is also politically significant. For proof-of-work currencies, this is the miners. These invest hardware, such as graphics cards or Asic miners, to create new coins through them. In the case of proof-of-stake currencies, on the other hand, the “stakers” deposit coins in their wallets in order to create new coins. Technically, both methods serve the same purpose – they create a kind of scarcity of terms – but politically, there are major differences.

This is because a miner is like a producer: he invests his earnings in means of production in order to generate further income. A staker, on the other hand, is like a reindeer: he puts his earnings into a kind of bank account to grow them. The miner’s system is much more dynamic; it is more prone to disruption. A miner who finds the ideal site can earn more than another miner; a miner who performs less because he doesn’t maintain his equipment loses. Stackers, on the other hand, are much more static. Once you deposit coins, you can just sit back and wait for interest.

Autonomy, dependency and user-friendliness

User autonomy means their independence. To what extent do cryptocurrencies empower them to use money without the help of a third party? User-friendliness is as important as technical fundamentals in this regard. A cryptocurrency that is not so user-friendly that 99 percent of the population can use it will never, in practice, give autonomy to 99 percent of the population, even if it were theoretically possible.

What autonomy means in this context is not easy to say. Complete autonomy is an illusion. You need an ISP to send transactions, an exchange to change coins, and so on. But an essential part of autonomy is owning the private keys through which you can spend your crypto coins. Only those who possess them exclusively are the real owners of the coins. The vast majority of wallets of all currencies allow you to manage the keys yourself, although there are of course wallets that delegate this task to a server. But at the core, it is an essential feature of all cryptocurrencies that users can manage their keys themselves.

This autonomy is one of their basic services, and this makes it impossible to confiscate cryptocurrencies from a distance. Mass electronic expropriation of cryptocurrencies is not possible, unlike with bank money. But how can users interact with the network? The most autonomous form of this is the full node: a user is a full peer on the network. This empowers him to send transactions and receive money without the help of a third party. This kind of autonomy – not needing help to send transactions – could also be called censorship resistance: No one can stop you from sending money to anyone.

However, such a full node is “heavy.” It has to synchronize for about a day in Bitcoin – much longer in Ethereum – it needs a lot of disk space, and if you ever turn it off, it takes some time to load when you restart. Even though there are now full nodes “out of the box”, such as Casa, Nodl or RaspiBlitz, which you simply plug into your router, the user-friendliness is probably too low for 99 percent of the population. A network that keeps scalability low, like Bitcon, to keep the requirements for a full node low, pays a price for that through low capacity and high fees. It excludes large segments of the population.

Most users use wallets that are not directly a peer in the network. The most autonomous form of these are so-called “SPV” wallets. These communicate directly with the full nodes, making them almost as autonomous as the latter. However, such wallets are rather the exception. Most interact with a server, for example the popular hardware wallets or most multicoin wallets, or, like Electrum, with a network of servers. In this case, users depend on a third party to send transactions. However, the failure of the third party would be bearable. This is because most wallets allow the export and import of private keys through a seed. If a server fails, one can send the coins using another wallet. So as long as it is a given that the user holds their private keys, the autonomy in cryptocurrency is consistently at a high level.

The tracks are laid, but not yet the route

We have identified three characteristics of cryptocurrencies where technology and policy go hand in hand: Privacy, money creation, and autonomy. It is clear that cryptocurrencies have the potential to improve the world of money for the benefit of citizens in all three areas. However, the details are far from fixed. How they are fixed will have a significant impact on the political coordinates of money in the future.