Tag Archives: Competition

The End

finish-line

A strange thing happened after I finished my last post, The Joker. I realized that I was comfortable with it being my last article on this blog. It felt like my “mic drop.”

There were times when I stopped writing for different reasons. But I always left the door open. There was a part of me that knew there were things left to say, ideas left to express. I still feel that way but I realize that there is no longer anything left for me that needs to be expressed. I could continue on. But, like all good things, the end is a vital part of the experience. That moment has come for me with this blog.

I’m proud of what I’ve done here. For over three years, I personally explored a subject most people aren’t even willing to contemplate. My understanding strengthened and I discovered things that people immersed in the subject only learn through the writing of others. I haven’t been shackled by someone else’s understanding. I never read the books or papers of the experts. Instead, I wrote my own. It started with an essay, and it culminated with this site. This is The Currency Paradox, a single volume. I really don’t need anything more.

There are some who will be pleased that this day has come. “At last,” they’ll think, “his  self-importance has ended.” “At last, this idea can die while the serious work of Capitalism continues.” There may even be some who think that I fake these discoveries, that I regurgitate words written by those with greater understanding and eloquence. They won’t believe that I could have been able to cognize some of the most important works of economics and philosophy on my own. I was never going to earn their approval and I definitely won’t try now.

There are some who will read this site and see nothing but error and those who, due to their own arrogance, will not read it at all and assume error. I took this journey to learn. I have no regard for those who may know but will not teach, will not challenge, will not express. If you refused to engage, out of fear, or doubt, or spite, your judgment means nothing to me. I came for your ideas. I challenged you all in turn. None of you stepped up. So who truly failed?

As time went on, my original essay proved to be the very definition of “anti-fragile.” It has only gotten stronger as time has passed, has only been validated. Indeed, the vast majority of the ideas I’ve presented here have not only withstood the test of time but have invalidated ideas still considered sacred in other circles. The sacred cows may still be sacred but they no longer live; they’re “zombies,” dead ideas that will persist in the minds of people too afraid to let them go. That’s only going to make the transition to come that much more painful.

I want to end here with this quote:

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” – Adam Smith

Adam Smith missed the greater point. It is only by acting in good faith that the butcher, the brewer, or the baker can succeed. Therefore, it is not their own interest which guarantees their success, it is the morality imposed upon them by their need to serve others for their own benefit that does. None of them could prosper if they violated the trust necessary for them to benefit by offering their service to others. It is only by valuing the needs of others that they can prosper. What do they gain if their wares are poisoned? If their wares are inferior, economics states they will be supplanted by others who will provide better goods. It is only by servicing their clients greater needs that they can guarantee their own prosperity. It is only by respecting, valuing, and cultivating trust that they can actually satisfy their own self-interests. It is never a one sided exchange. It is always a symbiosis.

However, when there is monopoly power, it is easy to violate that trust. Without the check of arbitrage or competitors, the social contract of trust can be violated without regard. That is one of the main flaws of modern Capitalism. As a system built on the premise of the commitment of capital to ventures that may either succeed or fail, the elimination of arbitrage and competition is a fundamental force. It is only when those things are eliminated that markets are “captured.” By definition, that capture involves the destruction of the symbiosis of trust agents. In other words, monopoly destroys the need for social trust in the exchange of value. It becomes a form of coercion. That is why it is, ultimately, socially destructive. However, it is also the means by which Capitalism works best.

Our society cannot sustain this contradiction indefinitely.

Marx tried to prove that Capitalism’s contradictions would destroy it. What he didn’t factor in was technology’s ability to improve living standards so quickly and so pervasively. Many economists think that he was wrong. However, it is more likely that Marx just hasn’t been right yet. Capitalism is a system that fundamentally undermines social trust, particularly at its most efficient. It’s a feature of the system, not a bug. The complete elimination of arbitrage and competition is always in the best self-interest of those involved in commercial exchange, especially done on the scale which it is today.

I undermined that premise with The Currency Paradox. In a society where money is created by time/effort, it behooves those with capital to fund opportunities for competition and arbitrage, particularly in a world of seven billion people. The tremendous demand coupled with the direct value creation of the populace would spur massive innovation and scale without the destruction of social trust by monopoly. Indeed, monopoly would largely be impossible. Equitability of opportunity would be a built-in feature of the economy and greater equality would be a direct result. More importantly, those things would be achieved without sacrificing economic growth. The world would continue to become richer and more prosperous. Because time would become valuable, healthcare would become a global priority. As a result, poverty, and its attendant physical, mental, and emotional health risks, would be completely eliminated. As prosperity increased, the population would drop precipitously, tremendously lowering demand for natural resources. It is likely that almost all the major problems faced by our world would be eliminated within only a generation or two.

As time has gone on, The Currency Paradox has only grown stronger. I end this particular journey with one final, likely unassailable argument:

Capitalism may create wealth but, ultimately, it destroys social trust.

Goodbye friends. Maybe I’ll have more to say. But, if I don’t, consider what is written here and use it to strive for a better world.

Advertisements

AlphaGo and the A.I. Apocalypse

terminator

AlphaGo, circa 2050

“After humanity spent thousands of years improving our tactics, computers tell us that humans are completely wrong, (and) I would go as far as to say that not a single human has touched the edge of truth of Go.” – Ke Jei

The above quote is from a man many consider the world’s best Go player. It was stated shortly after AlphaGo, an artificial intelligence (AI), thrashed him as well as many more of the world’s best players to win 60 straight matches, an unprecedented feat. Some marveled at the accomplishment, the creation of an artificial intelligence capable of defeating the best human players in the world at a game that not only requires skill but also tremendous creativity to master. It was painted not so much as a victory for machines but for Humanity, who created a synthetic limited cognizance that showed the first signs of being able to supersede its creators not only in technique but in “imagination” as well.

While taking a walk, something profound occurred to me about this development. There are some who think that we should not be particularly concerned with the prospect of AI achieving intellectual and creative superiority over Humanity; but there was something unsettling about the situation regarding AlphaGo as I pondered it in more detail. Consider that a computer has been created that has shown clear superiority over humans in a game that many thought was beyond a machine’s inherent capability to master. To me, the fact that a machine could establish mastery over humans in this fashion makes it clear that machines likely can gain mastery over humans in every fashion, at least when it comes to cognition.

While it remains to be seen if that’s the case, what really struck me was how AlphaGo was able to do it. This isn’t so much about the “machine learning” used by it but something more basic:

AlphaGo has perfect recall.

Yes, it learns but it also remembers more or less perfectly. In other words, AlphaGo is able to access its accumulated experiences, it’s history, in a perfect way. By being able to draw from all of its experiences in totality, it was able to formulate near perfect strategy to throttle the world’s best at a notoriously difficult game.

In my post “Efficient Markets” Eliminate Risks, I wrote about prescience and how perfect knowledge of the future would inform subsequent actions to either reap gains or avoid calamity. To put it another way, complete knowledge of the future would allow one to formulate a perfect strategy to deal with it.

Consider the prospect that not only can complete knowledge of the future eliminate risk and create certainty of action, but complete knowledge of the past likely can as well. If humans were able to successfully map every action of everyone everywhere in history with a machine, would that machine be able to successfully “predict” what we would do next?

AlphaGo was not just reacting to its opponents, it was using its history to shape its future. It was using perfect knowledge of its past to inform its actions to create a future outcome. Considering the fallibility of the human mind in accurately retaining past accumulated information, is it any wonder that we are prone to repeating the same errors of judgment? Maybe all human error is simply the result of our general inability to perfectly and efficiently access our complete past experiences.

Another thing to consider is that Go is a game with specific rules in which a specific outcome is sought. What are those rules and what is the outcome we seek as a species? Even if we perfectly mapped the past, using it to inform current or future actions would be meaningless if we didn’t know what outcome we were seeking. So is it possible that it is not only important, but essential that Humanity agrees on an overall purpose?

What I think I’ve come to understand is that, in order for Humanity to survive, it should strive for two things:

  1. As complete and unbiased an accounting of our history as possible and;
  2. A clear and continuous linear set of objectives, with each subsequent objective determined only when a previous objective has been met.

In theory, if Humanity were able to record all of its history perfectly, every event, in an AI, that AI likely would be able make very high-value recommendations regarding what our future actions should be.

What would a machine with perfect knowledge of our past be able to tell us about our future? Most likely that “not a single human has touched the edge of [T]ruth.”

How the West *Really* Got Rich

nina__pinta__santa_maria_by_barbedwings

Nina, Pinta, Santa Maria by BarbedWings

Yesterday, I got into an exchange on Twitter that made me simultaneously remember what I enjoy so much about the platform and why I have significantly decreased my presence on it. I responded to a blog post by economist Jared Rubin titled Why The Middle East Fell Behind; his premise, at least to my understanding, is basically that institutional stagnation resulted from the political and economic elite’s need to manage around the influence of the religious elite, who had the weight of the Quran behind them. The progressive economic improvements codified in the Quran had a major stimulative effect on growth in the Middle East; however, because they were indeed codified into the religion, they prevented economic innovation and thus impaired the region’s ability to progress through economic adaption. I don’t want to misrepresent Rubin’s work so please read his post.

I decided to respond to his post because, while I generally agreed with his reasoning, it gave me the impression that he was making the case of a Middle East that had complacently chosen a path of stagnation. As someone who has read the Quran and learned a lot about Islam’s “golden age,” Rubin’s premise did not seem consistent with the dynamic cultures from that region of that era. The Islamic Empire from 600 A.D. to 1200 A.D. was arguably one of the most progressive and advanced in history; the Middle Eastern cultures of that time forwarded the disciplines of mathematics, science, literature, philosophy, and art to unprecedented levels and it seemed incongruous that such innovation would not touch their economics. Why would a region so advanced in every other endeavor of learning fall behind so dramatically when it came to finance and economics?

To me, history easily provides that answer: war. Between the Crusades and the Mongol invasion, the Middle East endured roughly 300 years of war in some form or another. The Mongol invasion was particularly devastating as it was routine for the Mongols to depopulate and destroy entire cities, including valuable libraries and scholars likely representing hundreds of years worth of technological advancement. My premise is that much of the stagnation of the institutions of that region in that era wasn’t by choice but by necessity. Civilizations at war tend to only progress in technology that facilitates fighting war more effectively versus making other societal improvements. With the destruction of some of its most valuable technological and philosophical resources as well as the ruthless murder of tens of thousands of its brightest minds, the Middle East was devastated beyond repair. The cultures that supplanted the Arab and Persian hegemonies, particularly the Mongols and the Ottoman Turks, were assimilators versus being innovators. Though many of the advancements of the Islamic Empires of the Middle East survived, the Mongols and Turks were cultures with very different motivations and histories; while they assimilated Islam, they were not its progenitors and thus likely could only respect its traditions rather than build upon them.

I advanced my (unoriginal) premise to Rubin and the result was this thread and adjacent related ones. All in all, I think it was a pretty interesting exchange but, once again, intellectual vigor slowly started to yield to tribalism and general suck-uptitude. Thankfully, my involvement reached a natural end before too many people jumped in to “put me in my place” for the apparently serious Internet crime of engaging someone with better bonafides than mine in a fashion that wasn’t completely fawning.

I think Rubin’s premise is well reasoned. His argument reminded me of economic historian Deidre McCloskey’s recent essay on the so-called Great Enlightenment and the rise of the West which I addressed in a rebuttal. Rubin’s juxtaposition of the Middle East with Western Europe seems to me like another angle on the concept of Western Europe’s apparent exceptionalism. A lot of words have been written regarding why Western Europe came to dominate the world economically, militarily, and socially; the basic thread is that, around 1800 A.D., Western Europe, particular England, embarked on an unprecedented technological advancement called the Industrial Revolution.

I don’t intend to challenge fact. However, I’d like to advance my own theory for why Western Europe came to dominate the world.

Let’s start from the period of Islam’s Golden Age in the timeframe of 600 A.D. to 1200 A.D. Around this time, Western Europe was pretty much a backwater. In every meaningful way, the dominant cultures of the Middle East and Asia were far more technologically, militarily, and culturally advanced.

Now consider this: In what direction could Western European culture spread at that time? In pretty much any direction east or south, the peoples of Western Europe were going to encounter a more advanced culture. Are they getting through the eastern Europeans or central Asians, who have already been exposed to the advances of Islam? Nope. Are they going through the Mongols, who have militarized largely from conflict with the Islamic Empire? Nope. Are they going through the Middle East or North Africa, the heart of the Islamic Empire, which at that time is likely the most technologically and militarily advanced in the world? Nope. And, if by some miracle, they make it to the Far East… are they going through India or China, also two cultures far more advanced than them? Definitely not.

The first thing that needs to be understood is that, for a great deal of history, conquest was not an avenue for Western European cultures, at least not on land. The Western European nations (if you could even call them that) were stuck fighting each other on their little, fairly undesirable plot of land. Any attempts at serious expansion would have put them directly in the sights of a more powerful culture.

So Western Europe spent most of its time stuck in Western Europe. However, it does have something that everyone else mostly doesn’t (with the exception of China and Japan): unfettered access to a great, big ocean. When going east isn’t an option and going west means traveling over a huge body of water, an enterprising people start trying to figure out how to travel long distances over that water. So they start innovating. Their ships get bigger, faster, and more capable. Then they start exploring. Yeah, it’s expensive but not as expensive as war (even though you still continue to indulge that pastime every now and again). Now here’s where it gets interesting… they send ships out into the ocean and start finding things. People, places. But, more importantly, they start finding riches. Even better, the cultures protecting those riches, while advanced in some ways, aren’t even close to them technologically and, more importantly, militarily. On top of that, their presence has the devastating effect of making massive portions of the indigenous populations terminally ill from disease, far more effective than any army. So now, Western Europeans are raping and plundering “inferior” cultures all over the globe.

But then, it gets even better. Some enterprising individual has learned on their travels of entire cultures that can be enslaved. The best part is that those cultures are so primitive in comparison that the moral dilemma solves itself. Now they’ve discovered a whole new concept: scale. Slavery allows them to take the first timid steps in understanding the value of economies of scale. Now, there is virtually unlimited manpower to grow their economies.

But they also reached a tricky part: slavery requires space. Using slaves in all that new stolen/conquered land is fine, but those slaves can’t come to Western Europe. There’s simply not enough room. On top of that, Western Europeans figured out early that slavery is expensive. Mouths to feed and all that, which is why they switched to serfdom. “Let the nouveau rich in ‘the colonies’ deal with that headache.”

Now we’ve reached the turning point. An interesting thing happened in the colonies: a man named Eli Whitney found a way to use a machine to do the work of many slaves. In other words, a new method for developing economies of scale was developed, one that was far cheaper and far more efficient than manpower. Now, the concept of substituting machines for labor takes root.

At that point, the floodgates open. The confines of using finite physical resources, particularly physical manpower, to create wealth are circumvented by turning to an unlimited, free resource to achieve the same end: human ingenuity. In the end, it was a combination of necessity and circumstance that allowed Western Europe to make the technological leap that gained it worldwide preeminence.

Is this all a gross simplification? Yeah. I’m definitely sacrificing nuance and detail for succinctness. And I’m also fairly certain this isn’t an original idea. But it is definitely more logically coherent than the concept of Western European exceptionalism, which is really just the intellectual forerunner to white supremacy.

It wasn’t “liberty” or superiority that created the dominance of Western Europe, it was necessity along with the proper conditions. At least, that’s what makes sense to me.

Your mileage may vary.

The Math Problem

What would you think of math if it was impossible to get the same answer from the exact same equation?

You probably wouldn’t take it seriously as a system.

How about this scenario:

In order to survive, everyone without exception, regardless of their math aptitude, has to solve a very intricate, complex math equation. Let’s toss in that some people may not even be given a pencil or piece of paper and must work out the equation entirely in their head.

If your life depended on getting the equation correct, how would you feel?

My guess is that people with high math aptitude probably wouldn’t be very intimidated, especially if they had pencil and paper.

People with math aptitude closer to average would probably have a high amount of stress regarding the situation, particularly if they didn’t have pencil and paper to help them figure the equation out.

People with math aptitude below average would probably become desperate on the verge of frantic. A mountain of pencil and paper wouldn’t matter to them. They may cheat or steal someone else’s answer, either by deception or force, anything to survive.

And last and, indeed, least, are the people with almost no math aptitude. I imagine that, for them, there would be just resigned acceptance that there was little they could do to change the outcome. Most probably wouldn’t even go through the act of attempting to solve the equation, they’d probably just fatalistically embrace their fate.

I won’t bother explaining the analogy. I’ll just make a few more points:

  • When a system suits your aptitudes, you are likely to agree that it’s rules are fair and just, particularly if it proves that you possess a rare skill set. It’s likely that succeeding in such a system will validate your feelings of superiority, especially if they come at the expense of others.
  • Conversely, if your aptitudes don’t mesh well with a system you are likely to reject it. For instance, you may not be great at math but a whiz at spelling. You may want a set of rules that suit your talents but would be satisfied with a set of rules that didn’t reward those with innately high math skills. You don’t know how it would happen but you just want a set of rules that suits everyone equally.

Both of the above positions are completely reasonable. However:

  • What if those who are gifted at math insist that the test is, indeed, “fair,” knowing that it favors their aptitude while disadvantaging others? What if they insist that those with less math aptitude just accept that the test is fair and it is simply a matter of getting better at math?
  • What if those with less math aptitude insist on a test that isn’t math based? What if they insist that the math whizzes agree to take an entirely new test that doesn’t allow them to leverage their natural talents?

It behooves those who benefit in the current test system to maintain it. However, what if they represented a group that was only 10% of the size of the total population? What happens if 90% of the people decide that, no matter what, they were no longer going to take the test and also completely outlaw math?

A smart math whiz may recommend lowering the stakes. Maybe, instead of putting everyone’s life on the line, everyone who solved the equation won an amazingly valuable prize but no one else actually suffered. Sure there might be jealousy and some would be angry that the game still favored the math whizzes but at least the penalty for not being good at math wouldn’t be so dire.

Some math whizzes may rebel at this idea because then there is less incentive to actually solve the equation. Some people, knowing that they won’t lose there lives if they don’t get the equation right, may not try their best to solve it. They may fear that lowering the stakes minimizes the value of the game.

Some of those who aren’t good at math may complain that the test still favors those with high math skills and their chances of winning the prize are low. They may ignore that, with the stakes lowered, it’s okay to not win now. They won’t suffer for not having great math skills. Not to mention that the prize is still amazingly valuable; developing great math skills could lead to amazing riches.

In this scenario, there is still competition but it is healthy competition. The math whizzes are still incentivized by the prize and those who are ambitious among those who are poor at math are incentivized to improve their math skills for a chance at winning the prize. Those without the math skills or the ambition are free to deal with the equation however they see fit. They can mostly self-select out without extreme penalty, which improves the odds of everyone else who is committed to winning the prize.

The end result is that people will either be satisfied with the test or not really care about it. What they likely won’t do is hate the test and be particularly motivated to change it.

Not for awhile at least.

I Don’t Hate Bitcoin, I Just Don’t Like It

0ab2e699805277d8f0f27183d5528e6eI think I’ve developed somewhat of a reputation as a troll when it comes to Bitcoin (probably other topics as well but that’s not germane to this post). I’ve pissed off a few directly within the Bitcoin circle, particularly Marc Andreessen, Chris Dixon, and Balaji Srinivasan, all of whom have blocked me on Twitter (to be fair, I think Andreesen did it simply because he thinks I’m a dick). Bottom line, I think a few of Bitcoin’s most visible proponents have not been honest about their intentions with it. The fact is, I think they have drafted on the hype and excitement of Bitcoin to move it in a direction which is completely contrary to the stated intentions of Satoshi Nakamoto, Bitcoin’s creator. At least according to Nakamoto’s famous white paper, Bitcoin was originally conceptualized to challenge the fiat currency paradigm. However, the venture capitalists of Silicon Valley have a very different future for it in mind.

The story coming out of SV now is to think of Bitcoin not as a currency but as a protocol akin to TCP/IP and related Internet technologies. That’s pretty savvy thinking because it gives people something tangible with which to identify. There’s no denying that, if they could be accurately monetized, the value of the Internet’s essential protocols would be astronomical. What Silicon Valley VCs are pitching is an opportunity for people to get in on the ground floor of what essentially is a brand new Internet built with blockchain technology. The real value of this new network is that, unlike the original Internet, it is inherently very secure, an essential element for a system with which you would want to exchange sensitive personal and financial information, particularly currency transactions, on a global scale.

In this respect, I really don’t have a gripe. If Bitcoin had been initially presented in that fashion, I think I would have been far more enthusiastic about it. However, that wasn’t the case. By all accounts, Bitcoin was developed as an experiment in currency. It is that perspective from which I have evaluated its potential. With respect to it being a currency, the reality is that Bitcoin is seriously flawed.

I’ve written a number of articles regarding the fundamental problem of Bitcoin’s fixed limit, which I see as its Achilles Heel. Probably the most salient general explanation of Bitcoin’s structure from the standpoint of agents was recently written by Adam Ludwin titled “Why Bitcoin Apps and Bitcoin Speculators Need Each Other.” I’ll use some of it to illustrate my points. Let’s start with this:

“After all, new bitcoins aren’t the only thing that miners create.

Their competition with one another to mine the next block (and receive the current reward of 25 freshly minted bitcoins for doing so) also produces, by design, a secure financial network: one which is open, decentralized, programmable, and very inexpensive to use. The beekeeper gets honey, and the rest of us get flowers.

So here’s the other half of the story which completes the picture:

  • Miners create a secure network
  • Because it is open and programmable, apps and services are built on this network, driving demand for bitcoin
  • The price of bitcoin is affected
  • Miners with a marginal cost lower than the price of bitcoin keep mining”

tumblr_inline_ngltzt9YIF1skrfia

Honestly, this is brilliantly written. It provides a succinct explanation that pretty much completely expresses the value proposition for speculating in Bitcoin.

Now let’s draw that out to its logical progression, keeping in mind that only 21 million units of Bitcoin will ever be produced. First, for a sense Bitcoin’s scale in units relative to the world’s total population, please read “The Questionable Mathematics of Bitcoin.” It’s essential reading for understanding just how little 21 million units really is if the intention is for Bitcoin to act as a complete replacement for fiat currency. Now let’s take a closer look:

Miners are “by design, (creating) a secure financial network: one which is open, decentralized, programmable, and very inexpensive to use.” If you are a Bitcoin fan, this is a great development. As the network matures, its utility increases. Which increases demand for Bitcoin. Which increases the unit value (via exchange rate) of Bitcoin. Sounds good, right?

Well, that situation creates two problems. The first one relates to the constriction of the amount of bitcoin available for any one person as a result of high demand; to understand more about why high demand for a fixed currency is a problem, please read “Bitcoin and Divisibility.” The second is that this dream scenario is also a nightmare; at some point, the tokens, even in minuscule denominations, are simply going to become too valuable to transfer for any purpose. Think about it… would the value of a network like Bitcoin ever drop? Has the Internet’s? To the contrary, Bitcoin would likely become the most secure and valuable asset class ever. What would be the motivation to trade them even in tiny amounts?

This doesn’t even take into account the fact that a small minority of Bitcoin holders already control a huge quantity relative to the current total available. In this situation, their investment goes through the roof.

But the knock on this scenario is that, after a while, transactional activity will only encompass a tiny amount of Bitcoin. The vast majority of it will be held and any transactions will likely involve dollar figures far beyond the financial capacity of the average person. This flies completely in the face of why Bitcoin was supposedly created in the first place.

“But Bitcoin won’t have to be exchanged with fiat currency forever!” As long as legal tender is in state-sponsored central bank generated fiat currency, yes, it will be. A worst case scenario that would change that dynamic would likely also challenge the viability of Bitcoin as well. For that matter, Bitcoin’s perceived value, ironically, is only measured in fiat currency. As of now, Bitcoin is not a unit of account and there is no realistic way most products could be priced strictly in bitcoin. Its relationship to fiat currency provides an essential point of reference.

Now, for most people, particularly those heavily invested in Bitcoin, that scenario really isn’t too bad. In fact, it might actually be pretty damn good. Between now and Bitcoin’s eventual heat death, there’ll be quite a few opportunities to get rich. Whether buying bitcoin or creating a start-up on a sidechain or various VC investment routes, Bitcoin looks like (pardon the metaphor) a “gold mine.”

That’s just it though. If you build it, they don’t always come. I’ve read about whole cities in mainland China that don’t actually have anyone living in them. Sometimes, the economics of a situation simply prevents an expected outcome. In the case of Bitcoin, there’s a major snafu with the concept of building a completely new, secure network…

Bitcoin’s core technology, the blockchain, can easily be either replicated or substituted.

The intention of the various VC interests in Bitcoin is, for all intents and purposes, to build a new secure Internet suitable for financial transactions. The claim is that Bitcoin isn’t simply a currency but also a protocol and, when approached from that standpoint, it has (according to them) tremendously high intrinsic value.

When discussing intrinsic value, I always make the point that one of the most essential elements of something with high intrinsic value is that, not only must it have very high utility, it must also be unable to be easily substituted. For instance, indoor plumbing… to date, no one has come up with a better system for moving water through a home or building and likely won’t. There are no practical substitutes for it conceptually.

This is where the thinking of Bitcoin fans falls short. We already have a pretty effective substitute for the blockchain… the Internet itself. Almost anything that could be conceived to run on the blockchain can also be done using off-the-shelf Internet technology. Maybe not as precisely or as securely. But, pretty damn effectively. Cases in point: Amazon AWS, Salesforce.com, Google, Wells Fargo, MasterCard, Visa, Apple Pay, etc., etc.

But, more importantly, the biggest issue when considering it from the perspective of Bitcoin being a protocol is that it is open-sourced, which means the blockchain core technology can easily be replicated and/or duplicated. While most people associate the World Wide Web with the Internet, the truth is that there are actually many private “internets”; the most important protocols gain value from their ubiquity. Right now, SV venture capitalists are attempting to build so much value into the Bitcoin ecosystem that alternatives become unattractive. While this may dissuade newcomers, large competitors have both the means and the motivation to create direct competitors to anything produced on the Bitcoin network with their own private blockchain networks.

Unlike with the open Internet, there’s is no real motivation for everyone to centralize on one platform. In other words, there’s absolutely no incentive for incumbents to accept a “World Wide Web” of Bitcoin, it’s more feasible for them simply to build their own blockchain “intranets.” Most of what can be built on top of Bitcoin competes directly with highly capitalized financial services; why would these entities just sit around and let Bitcoin steal their lunch when they can just build out their own blockchain infrastructures? Or just purchase mining operations outright?

This brings me to another topic: governments. While I had intended to write a section regarding Bitcoin’s shaky relationship with government, a recent article written by Henry Farrell titled “Bitcoin’s financial network is doomed” makes a more complete case for the challenges Bitcoin faces regarding government regulation. One point I would like to add is that, unlike market competitors, most 1st world governments and central banks have both the resources and motivation to execute a “51%” attack against any Bitcoin network should it succeed in significantly circumventing or marginalizing their control of their currency.

Technologists often poo-poo the capabilities of governments but fail to consider that many 1st world countries already have sophisticated surveillance and cyber-security apparatuses. The likelihood that countries such as China (which holds the majority of Bitcoin mining operations), Russia (which is awash with hacking talent), or the United States could not sufficiently compromise any relevant Bitcoin network is doubtful.

Over the course of several months, I’ve attempted to articulate why I’m not a Bitcoin supporter. The following is a recap of my main criticisms:

  • Divisibility is moot: Dividing bitcoin into smaller fractional units by its very nature is inflationary. The only way this isn’t the case is if there is a direct relationship with a growth component. Currently, the growth component correlated to Bitcoin is fiat currency via exchange rate; when demand increases, the value of bitcoin as measured in fiat currency grows, which makes division into smaller units feasible. However, dividing bitcoin into smaller units when demand decreases would be obviously inflationary. In a pure bitcoin economy, resources themselves would have to expand in order to make dividing bitcoin into smaller fractions feasible. This process has a natural limit because the Earth itself, like Bitcoin, is a fixed resource. In almost every scenario in which demand for Bitcoin is high, the most likely outcome is that the percentage of Bitcoin’s total average purchasing power decreases in a manner similar to hyperinflation.
  • There’s no “goldilocks” zone for scaling it: Right now, Bitcoin is a blip on the radar of governments, central banks and major financial institutions. However, it’s impossible for it to “fly under the radar”; once Bitcoin grows to sufficient size, its advantages will either be competed or regulated away. Even assuming that it could get past those entities, Bitcoin’s own strengths guarantee its destruction; a financial network of its nature would become an asset class unlike any other. Token values would quickly escalate to a point that trading them would become practically unfeasible. Bitcoin can only be “too cold” or “too hot,” there is no plausible scenario in which it can build value without facing financial and regulatory interests that are far more powerful or destruction from its own value.
  • It can’t overcome governments’ monopoly on authority/force: As long as governments require taxes to be paid in their issued currency, Bitcoin will always have to be exchanged so there is no probable reality in which it can itself become a unit of account. So the prospect of there ever being a pure Bitcoin economy is practically nil. Bitcoin will always be playing someone else’s game, namely the central banks’. Its most powerful entrenched opposition has the advantage of both laws and guns.
  • Its competitors are highly capitalized and highly motivated: Bitcoin isn’t just challenging a bunch of stodgy old incumbents ripe for market disruption, it is literally challenging the businesses that make the markets possible. Bitcoin is facing a financial and economic apparatus worth trillions of dollars. The people who run these institutions are so powerful, they can rape the economy and not only not go to jail but actually have governments step in and bail them out when they screw everything up. These guys are not just going to allow their apple cart to be upset. They will protect their institutions by any means necessary, up to and including buying, re-creating or otherwise co-opting blockchain technologies and companies. The one thing these entities won’t have a motivation to do is invest in the Bitcoin ecosystem. They aren’t interesting in making anyone else rich. It’d be easier for them just to create their own blockchain infrastructures and rob Bitcoin of its value.
  • Bitcoin’s core technology is open for any of its competitors to use: The hope of Silicon Valley is to create such a comprehensive infrastructure that a significant barrier to entry is built. That’s a good strategy when dealing with new entrants but useless when dealing with highly capitalized incumbents. See “Netscape vs Microsoft.” If Bitcoin is indeed simply a protocol, then there is no reason it cannot be adopted by other companies just like any other Information Technology. Companies invest heavily in infrastructure that enables their Internet efforts; why not make similar investments in blockchain technology? The protocol sword cuts both ways. If Bitcoin is simply a new protocol akin to TCP/IP, SMTP and other core Internet technologies, then it’s not much of a logical leap to think that others will also adopt it for any advantages it may offer. Once again, under these circumstances, there is no motivation simply to adopt Bitcoin as those tokens are, more or less, already spoken for.
  • A pure Bitcoin economy likely won’t work anyway: Markets are very elastic. Bitcoin is fixed. By its nature, higher transactional increases based on greater demand in some markets will distort the amount of money available to others. A pure Bitcoin economy would be like a balloon squeezed from different angles, certain market values would become distorted simply from activity in others. The very concept of supply and demand would no longer truly apply.

Here’s the thing… I could be dead wrong. Maybe Bitcoin overcomes these factors and gets huge. The one thing of which you can be sure is that it won’t be the Bitcoin of today. It’ll look much more like an asset class and be much more highly stratified. Whatever libertarian sentiments associated to it will be long gone. That’ll be a great outcome for some, particularly VCs and early adopters, but not so much for anyone who thinks of Bitcoin in terms of liberty and anonymity.

My ultimate issue with Bitcoin is that it doesn’t solve what I’ve referred to as “the currency paradox.” If you want to learn more about it, please read the essay. My hope is that the next major economic innovation is one that will improve the lives of everyone, not just a few lucky adopters.

So, does this mean that I think Bitcoin is “doomed”? Hardly. I think the blockchain will eventually grow up and be integrated in a way that is generally beneficial. A more reasonable outcome is that miners will eventually be subsidized or purchased outright by financial services companies. Under the current system, Bitcoin tokens must have significant value for miners to be incentivized. However, in order for mass adoption to occur, those same tokens likely should themselves have no value. My guess is that, sooner or later, the value of Bitcoin tokens will eventually be zero. That is the only realistic way its competitors will become motivated to invest time, effort, and money into the ecosystem.

My advice to Silicon Valley is to find an alternative to the mining incentive. The only way that can be done is to build a value proposition attractive enough for other financial, health and personal service companies to want to invest into one unified platform. With a token value of zero, Bitcoin as a protocol and platform is no longer a threat to entrenched interests but a new frontier. I think VCs will find that there is still an amazing amount of value to be unlocked with Bitcoin, likely billions, even trillions, of dollars worth. But, in order for that to happen, the tokens themselves will have to be worth nothing.

As for fans of Bitcoin as a currency, there is still the “altcoin” community. My guess is that virtual currency innovations and competition will still continue to take place in this particular area, providing many opportunities to build a community money that is convenient, inexpensive to use, and anonymous. I think this area still holds the greatest potential for addressing the problems of the “unbanked.” New blockchain currency innovations still hold a lot of business opportunity potential, particularly in mining and speculation. I fully expect the “altcoin” scene to remain the “Wild West” of virtual currency creation and speculation.

So I don’t hate Bitcoin, I just don’t like it… yet. I think it’s obvious that it will not fulfill Satoshi Nakamoto’s dream of disrupting the fiat currency paradigm, at least not in its current incarnation. But, that doesn’t mean that it isn’t an amazing achievement. The key is in finding a way to properly unlock its potential. And that starts with finding a way to get its token value to zero.

The Paradox of Competition in an Abundant World

Image: Capitalism by Fabrizio Pucci

Image: Capitalism by Fabrizio Pucci

If there is one thing that for which Thomas Piketty’s book, Capital in the Twenty-First Century, can unequivocally be given credit is bringing the subject of economic inequality to the forefront. Some question the relevance of the subject; after all, it’s logical to conclude that a system like Capitalism would produce economic inequality simply as the result of different outcomes related to both skill and luck. Isn’t it reasonable that a small group of people are bound to be wildly successful while the rest enjoy varying degrees of lesser success? In a system built on incentives, doesn’t it stand to reason that an exceptionally small handful of people would exhibit the rare combination of ambition, determination, drive, talent, and intelligence to reach the pinnacle of success as determined by wealth?

To me, it’s kind of odd that we accept this reasoning. In a world of abundance, why is it reasonable that some people have gross excesses of resources while others barely have any? Why are the Darwinian themes of competition and scarcity still playing out in a world in which those concepts have been rendered obsolete by technological advancement?

Capitalism encourages us to think in terms of winners and losers, “haves” and “have-nots.” This type of backwards thinking keeps people starving to death in a world that can easily produce plenty of food for all. It keeps people dying of exposure and disease in a world that can easily produce plenty of shelter and provide plenty of medical care for everyone. Why, as a species, are we still engaged in competition for resources when there are plenty to go around? What drives us to continue to engage in a system that produces a polarity of outcomes when it is no longer necessary to do so?

How can we advance as a species if we aren’t willing to overcome our most base instincts? How can we progress as a society when we are unwilling to overcome our animal impulses? There are some, particularly in the world of technology, who tout the ability of technology to provide for all yet relentlessly champion a Capitalist system that is built on the very premise of ensuring that the resources of our planet are accumulated by a select few at the expense of many. How can the conflicting concepts of abundance and competition co-exist?

The answer is that they can only exist artificially in a system maintained by coercion. Our economic and financial systems along with the legal systems protecting them are maintained by monopolies of force. The wealthy will say that the true monopolies are governments and that government bureaucracies are the cause of the distortions that allow the disparities in economic outcomes in our world. While that may be true, what they will not say is that they are the direct beneficiaries of those monopolies. Capitalism cannot exist without the benefit of arms. It is only with the threat of force that people will tolerate existing in a system that robs them of their time, effort, and passion.

The Currency Paradox is essentially about a fundamental contradiction in our economic system which is unsustainable. But what is truly unsustainable is maintaining an economic system built on the concepts of competition and scarcity in a world that has defeated those concepts. We live in a world of abundance now. When will our economics reflect that? More importantly, when will people wake up to this realization and stop accepting the flawed thinking that allows a select few to benefit at the expense of the many?

When will we, as a species, wake up?