Intro

12th October 2021

I’m writing this as BTC made a relatively small push above 57k USD, with an all-time-high above 64k, reached in April. Right now the crypto market cap is over 2.281 trillion USD, BTC taking up 1.044 trillion of this total.

Price-wise, any crypto is volatile. In the long term, some of them are going up, in such a way that they outperform any other asset. BTC has gone from around 1000 per dollar, to at least 50 times the reverse (so up by 50 million times). You could say it’s all hype, and there’s a non-zero chance it could go to zero. So far however, it keeps appreciating, and if you start looking into what Bitcoin (the protocol, I call BTC the currency) is, you’ll probably start believing that it’s gonna keep going up. 

You also see companies like Tesla, Microstrategy, Square (owned by the guy who owns Twitter) hold millions of USD in BTC as part of their treasury. Then there’s a small country that sets the precedent of adopting BTC as legal tender. In El Salvador you can go to Starbucks and buy a cherry pie frappuccino using BTC.

Buying coffee with “fancy internet money” was not the point really, at least not in the beginning. The fees associated with base layer Bitcoin transactions, which are arguably better than, say, cross-border or cross-currency bank transactions, are still not small enough to make low-amount currency transfers feasible. Some engineers came up with the Lightning Network, which works in the same way banks settle transactions in bulk, so that fees are minimized. It sums up all virtual transactions between two parties and performs the resulting real transaction once every whatever-longer-unit-of-time (week, month etc). Then it can be used as the money we’re familiar with, without the physical medium of course (unless you create say 1 million Satoshi electronic bills). 

The Lightning Network is a layer on top of the base Bitcoin protocol. The following parts of this entry focus on this base-layer protocol, and why it enables energetically (or thermodynamically) and economically sound money, and why that matters. I’ll also rant a bit on fiat.

Sound money.

Bitcoin is sound money because it has time, space and scale salability. This means it preserves its quality to be sold or marketable over time, space and at various scales:

• Over time - because it doesn’t decay and you can’t make more than its 21 million cap, which is set in the protocol.
• Over space - you can transfer it on the internet.
• At various scales - One Bitcoin can be divided into one hundred million Satoshis.

Fiat also has these, only it is lacking in terms of time salability. That’s a fundamental problem of modern-day nation-state economic systems. There used to be a gold standard, where a currency had a constant ratio to some amount of gold. Different nation-state currencies had their own constant ratios to gold and so had constant ratios to one another. Nowadays we have forex. If the gold standard would have gone on until today, you wouldn’t have had to worry that owning fiat would cause you, or the next generation of your family, to lose half of the purchasing power of that fiat over a number of decades. It’s a long time but still significant.

Yeah, it’s not like most currencies are suffering like in the Weimar Republic. After World War 1, the value in gold of circulating money in Germany had fallen from 300 million pounds to 20 million. The Reichsbank printed unlimited money, so “a loaf of bread in Berlin that cost around 160 Marks at the end of 1922 cost 200,000,000,000 Marks by late 1923” (Wikipedia)  In December 1923 the exchange rate was 4,200,000,000,000 (4.2 × 1012) Marks to 1 US dollar. The prices were doubling every two days, so going up 3.25 x 10^6 per month. People were using banknotes as wallpaper. This can’t happen with sound money.

In the US, EU and other, more or less dependent economies, inflation is slower but it’s still there. I don’t know if it’s 2, 5 or 7% in the US. Maybe it depends on the viewpoint, if it’s CPI inflation or versus certain scarce assets like gold or real-estate. The point is it happens, because the current economic system allows it to. In 2020 the US Treasury Department printed about 20% of the existing money in circulation. 

Even if inflation is just 2% a year, that’s still like taking away 2% of the energy in the air of the space you live in. The temperature drops, and if you don’t do something to increase it, or to insulate yourself, then you end up freezing and without energy. It’s also like reducing your food-to-energy conversion ratio by 2% a year until your food input becomes insufficient to keep you alive. It doesn’t make sense, it’s unnatural, it goes against nature (or goes with it but in a destructive way). This 2-or-whatever percent compounds over time, until some disaster happens, if left unattended. It’s just math.

Then there’s Bitcoin :)

Satoshi. Money is economic energy. 

15th October 2021

Most people aren’t aware of the flaws of the economic system, probably. Why would you care when you’re in the US (or EU) and you own a house or two, maybe some S&P 500 or some other asset. Either that or you don’t understand this stuff (I only do at the level currently presented), or you don’t know what “percent” means, or you just don’t care. Some people were aware of it, some of which had ideas for sounder money, and only some of these were engineers. Part of this last subset is someone who named themselves Satoshi Nakamoto, and they engineered a protocol that can create a sound economy because it doesn’t go against the nature of things.

Most of us go to work and sacrifice energy-over-time to get a currency that more or less represents the amount of energy-over-time that you spent in order to obtain it. That currency has a certain degree of purchasing power, maybe because it represents energy (work) divided by an amount of time, which gives you the equation for power we know from Newtonian physics. You’d like to think that it does represent the energy-over-time that you spent forever.

The current socio-economic setting allows for a party, called a central bank (I think - or federal reserve banks), to reduce the currency’s energy, and so subtract from the numerator of that fraction. The result is you lose purchasing power of the paper you got in exchange for endless hours of work. They do that by injecting low energy particles into the economic system your currency is part of. Through basic laws of nature, those particles will reduce the overall energy of the system, and thus also reduce the average energy value of every particle or currency unit. This means that, if you don’t get paid more units, you get less energy for the same amount of time. You lose power.

Bitcoin is an energetically sound money. Proof-of-Work.

Bitcoin prevents this by making it impossible to go above the 21 million BTC cap, and also by requiring energy in order to make more BTC up to that cap, or to change the state of the network. It then becomes a much better candidate for preserving the energy that you put in for most of your adult life. Bitcoin is secured by a transaction mechanism based on proof-of-work. You get money because you work, and hence it has value, otherwise we’d all be making money out of nothing like the central banks. You can’t hack into work, because of thermodynamics. You can’t get energy out of nothing. Money printed without thermodynamic cost is worthless, because it’s not storing any energy, so it needs to steal the energy from the existing money that does.

Gold is used as a store of value because it doesn’t decay and it preserves its energy. Bitcoin is designed to replicate this behavior, as a digital store of, or representation of, stored energy. We all agree gold has value because it’s an energetically sound material. Even so, if we don’t  attribute it any economic quality, it’s just dumb metal. It’s dead anyway, without dynamic logic built into it. There’s the chemical logic that makes it up, put into it when it was “designed”, but that’s static. Bitcoin is designed to have these same non-decaying properties, and so can be used in the same way as gold, only digitally.

When you buy BTC, you store the energy (or representation of it) that you spent for the fiat you exchanged it for. Fiat, in the current setting, loses its energy and storing that in the Bitcoin system preserves it, in the same way gold preserves its energy (if not even better, as long as there is a computer in the universe running the protocol).

Any change in the state (transaction or minting) of the Bitcoin network requires energy. The more value stored in the network, the more energy is required to make changes in the system state. This replicates mass, which is stored energy. The more massive the object, the harder it is to alter it. This is because of those fundamentals that give Bitcoin its value by replicating natural/universal principles. The energy requirement is set by the difficulty adjustment mechanism. Bitcoin adjusts itself whenever it senses that the energy spent for changing the state is too low or too high. Concretely, it checks if the block approval time (so transaction approval time) is lower or higher than 10 minutes. If blocks are approved faster than that, then it’ll make it harder for the machines running proof-of-work to approve blocks, thus making them spend more energy. This also works in reverse. The difficulty adjustment, block time, block size and maximum supply make up the universe constants and rules of the Bitcoin system. It’s a natural economic system, a living thing.

Wrapping things up with other topics. The rabbit hole goes on forever..

There’s also the topic of security, in the sense that it can’t be stolen physically, or confiscated or taken away as spoils of war. You don’t need armed guards around bank vaults. You just need encryption and a good design that uses the laws of nature.

From a morality perspective, if you keep injecting money in an economic system - for the purpose of facilitating production, spending and consumerism - then production will behave like it has infinite resources. It will thus create redundant or harmful products. It’s enough to go to the supermarket, or to the mall, and ask ourselves how many of all the things there we really need or are healthy for us (physically or mentally). We live in a post-industrial-age era and there are many of us that need to be fed and tended to, but I’d say that in many cases there’s too many things lying around: products, trash, physical or digital waste, unbalancing our senses and the world :) Fiat money has to move around a lot (cause otherwise it sits and loses value), so production and spending goes crazy. We end up amassing things, including some harmful or useless things.

With sound money, some malicious or too-rich-or-powerful-for-their-own-good actor has to sacrifice precious resources to create said redundant or harmful or useless products (security ensured by resource requirements - sound familiar?). Kings, emperors or nation-states used to be able to wage war as long as state resources allowed. Then money printing showed up and gave them the means to make everyone poorer so war could be funded.

In the Bitcoin Standard, Saifedean  Ammous talks about time preference, which is a fundamental metaphysical concept, only this time manifested in economic terms. It represents the amount of time we are willing to wait/invest/sacrifice so we can get something of higher value. People with high time preference prefer to get gratification sooner and get quick, poorer gains. People with low time preference think long-term, go through the pain of being patient and amass value before reaping the fruit of their sacrifice :) They prefer to compound, add quality, and thus get something better. The book also talks about a marshmallow experiment. Some kids were given the choice to eat a marshmallow, or not eat it for 15 minutes and get another marshmallow, in addition to the first. The kids who waited ended up being more successful in their lives, the others were more likely to become drug addicts, or alcoholics etc. It’s better to think long-term, and today's economic system is designed by people who don’t.. it seems. I’ll stop here for now :)

BTC reached above 60k USD. Will hopefully reach a million in 2025 :)