A Gentle Introduction

This writing is for casual readers, perhaps even economists or mathematicians, that are confused about what bitcoin is and yet would like to understand what it is, and perhaps also for those that have become more confused after having been explained what bitcoin is by bitcoin enthusiasts.

It won’t go into detail of the computer science involved, nor the mathematics, nor the economics.

We will also traverse an esoteric explanation of the significance and relevance of bitcoin that will affect all of humanity-not just those that have or hold bitcoin and stand to gain direct wealth from it.

Thus for the experts and bitcoin enthusiasts there will be details lacking; for the casual readers confused by the enthusiasts clarity should result from reading this article.

On the Genesis of Bitcoin

I’m sure that in 20 years there will either be very large transaction volume or no volume.

~Satoshi Nakamoto bitcoin’s pseudonymous inventor https://bitcointalk.org/index.php?topic=48.msg329#msg329

On October 31, 2008 a pseudonymous account “Satoshi Nakamoto” announced on a cryptography mailing list (think internet group chain letters) announced, “I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party.” along with posting a whitepaper explaining his project and then a few months later posted the associated software.

The basic idea was that if you run Satoshi’s software you offer your computing power (paid for by your electricity bill) in exchange for an (probabilistically determined) amount of newly created bitcoins.

These bitcoins could be saved, sent, or sold like digital internet money created from thin air.

A Brief History of the Success of Bitcoin

In the history of economics there is not really an argument put forth that a money medium, of ANY sort let alone digital, could bootstrap its own value based on scarcity alone. Thus May 22, 2010, Bitcoin Pizza Day, is widely celebrated by “bitcoiners” as a historical event that first publicly provided bitcoin COULD in fact bootstrap simply based on its scarcity and money properties. The event was the transaction of bitcoin for pizzas that answered this forum post request:

I’ll pay 10,000 bitcoins for a couple of pizzas.. like maybe 2 large ones so I have some left over for the next day. I like having left over pizza to nibble on later. You can make the pizza yourself and bring it to my house or order it for me from a delivery place, but what I’m aiming for is getting food delivered in exchange for bitcoins where I don’t have to order or prepare it myself, kind of like ordering a ‘breakfast platter’ at a hotel or something, they just bring you something to eat and you’re happy!

I like things like onions, peppers, sausage, mushrooms, tomatoes, pepperoni, etc.. just standard stuff no weird fish topping or anything like that. I also like regular cheese pizzas which may be cheaper to prepare or otherwise acquire.

If you’re interested please let me know and we can work out a deal.

Thanks, Laszlo`

~User Laszlo https://bitcointalk.org/index.php?topic=137.msg1141#msg1141

Since that day where two pizzas were worth, to Laszlo and his counterparty 10,000 bitcoins, bitcoin has become worth over $100,000 (USD) per bitcoin and has a market cap of over $2 trillion (US).

Understanding What Bitcoin Is-a Non Fanatical Explanation

Bitcoin is a decentralized digital currency that enables instant payments to anyone, anywhere in the world. Bitcoin uses peer-to-peer technology to operate with no central authority: transaction management and money issuance are carried out collectively by the network.

~https://en.bitcoin.it/wiki/Main\_Page

Thankfully for the casual reader (and perhaps even the economists, computer scientists, or mathematicians not very interested in bitcoin) we are not going to address the above explanation of what bitcoin is. Nor will we explain what the specialized words and phrases mean. We can understand bitcoin much better with a much simpler explanation and overview.

Here is the technical explanation of the security algorithm that governs the creation of new bitcoins (for the casual readers not specialized in computer science you might even skip this quote as we will explain it afterwards anyways):

To compensate for increasing hardware speed and varying interest in running nodes over time, the proof-of-work difficulty is determined by a moving average targeting an average number of blocks per hour. If they’re generated too fast, the difficulty increases.

~Satoshi Nakamoto Bitcoin Whitepaper https://cdn.nakamotoinstitute.org/docs/bitcoin.pdf

Bitcoin is a security CONJECTURE. The simple idea is that the system raises or lowers its security metric in proportion to the computing power available on the network (which could be used to attack it). If the computing power doubles then so does the level of security that guards the network (or if the computing power halves then so does the security). It’s conjectural because there is no mathematical proof associated that proves the proportional security will be sufficient, however, intuitively even the casual reader could agree such a system would be secure-albeit without understanding HOW the system works as such. This security conjecture also governs the supply schedule of newly created bitcoins:

As computers get faster and the total computing power applied to creating bitcoins increases, the difficulty increases proportionally to keep the total new production constant. Thus, it is known in advance how many new bitcoins will be created every year in the future.

~Satoshi Nakamoto in email to Ray Dillinger https://satoshi.nakamotoinstitute.org/emails/cryptography/5/

Bitcoin Maximalism, Hyperbitocoinization, and the Nakamoto Institute

It’s very attractive to the libertarian viewpoint if we can explain it properly. I’m better with code than with words though.

~Satoshi Nakamoto https://satoshi.nakamotoinstitute.org/emails/cryptography/12/

After bitcoin’s inception “Bitcoin Maximalism” was soon born-a philosophy that bitcoin is to replace all other currencies in the world. Bitcoin Maximalists refer to all non-bitcoin money as feces-shitcoins!

Furthermore, bitcoin was quickly adopted by a libertarian faction (think tax evaders!) as well as proponents of Austrian economics (a branch of economics which abhors government mandated money). One such libertarian and proponent of Austrian economics Daniel Krawisz (a writer for the Mises Institute a school dedicated to one branch of Austrian economics) coined and defined the term “hyperbitcoinization” as an event in which bitcoin supplants all other competing currencies:

…hyperbitcoinization, which is what would happen to any hapless currency that stands in Bitcoin’s path of total world domination. If this happens, the currency will rapidly lose value as Bitcoin supplants it.

~Daniel Krawisz https://nakamotoinstitute.org/mempool/hyperbitcoinization/

Krawisz and others such as Parker Lewis are bitcoin maximalists are highlighted on the Nakamoto Institute website (a site dedicated to the bitcoin maximalist and libertarian perspective of bitcoin-note from the initial quote in this section Satoshi spoke as if NOT himself a libertarian):

Bitcoin obsoletes all other money because economic systems converge on a single currency, and bitcoin has the most credible monetary properties

~ Parker Lewis, Bitcoin Obsoletes All Other Money https://nakamotoinstitute.org/mempool/bitcoin-obsoletes-all-other-money/

Parker makes the unfounded claim that economic systems converge on a single currency (something never observed in the history of mankind). We should note for future reference in this writing Parker ends his essay with a citation of Friedrich Hayek whom we will show to be relevant later:

I don’t believe we shall ever have a good money again before we take the thing out of the hands of government, that is, we can’t take it violently out of the hands of government, all we can do is by some sly roundabout way introduce something that they can’t stop.

~F.A. Hayek. https://www.youtube.com/watch?v=CBIidtaUCzs

The Bretton Woods Conference and the Triffin dilemma

The Bretton Woods arrangement of the global economy was the outcome of a conference held near the end of the second world war. The purpose was to design a framework that ensured global economic stability and thus global peace. Its workings was like a neo-gold standard in which the United States would peg the USD exchange rate to a certain ratio of gold and that participating countries would then accept the USD as if it were equivalent to gold.

This system was criticized by a notable economist “Robert Triffin” under a complaint now known as the “Triffin Dilemma” since the role of serving the world with the “reserve currency”, which has associated long term international demand, directly conflicts with the short-term domestic wants of the nation that serves it.

Sure enough in 1971, Triffin was vindicated, and the US massively disrupted the global economy when then US President Nixon announced the Bretton Woods arrangement of pegging the USD to gold would no longer be in effect. This was an event now known as the Nixon shock.

F A Hayek, the Fatal Conceit, and the Denationalisation of Money

We now jump to understand Hayek’s works and its significance and relevance to the problem of the Triffin Dilemma with respect to the Bretton Woods arrangement and the Nixon shock. Hayek has written extensively on the problem of the central-planning of economies (whether local or global). He calls the attempt to do so the “Fatal Conceit” (here conceit refers to the definition ‘excessive pride in oneself’):

To understand our civilisation, one must appreciate that the extended order resulted not from human design or intention but spontaneously: it arose from unintentionally conforming to certain traditional and largely moral practices, many of which men tend to dislike, whose significance they usually fail to understand, whose validity they cannot prove, and which have nonetheless fairly rapidly spread by means of an evolutionary selection — the comparative increase of population and wealth — of those groups that happened to follow them.

~F A Hayek, The Fatal Conceit

Rather than approaching an economy with the question of how to organize it, especially politically, Hayek explains and warns, that an economy’s function is organization-therefore any exogenous attempt to organize an economy precludes it from performing its own function.

An economy that is not left to self-organize is thus run by totalitarian authority that deprives the participating agents or citizenry of the benefits of the self-organizing function. Hayek saw our world as a perpetual slide towards this authoritarian driven inefficiency and deprivation of natural order and rights:

It will be necessary that the problem and the urgent need of reform come to be widely understood. The issue is not one which, as may at first appear to the layman, concerns a minor technicality of the financial system ‘which he has never quite understood. It refers to the one way in which we may still hope to stop the continuous progress of all government towards totalitarianism which already appears to many acute observers as inevitable. I wish I could advise that we proceed slowly. But the time may be short.

~F A Hayek, The Denationalisation of Money

Notably in contrast the bitcoin maximalist view, the hyperbitcoinization event, and Parker’s (who somehow cites Hayek!) claim that economies tend to converge on a single currency, in his proposal The Denationalisation of Money Hayek calls not for a destruction of the old order but the introduction of competition of currencies:

What is now urgently required is not the construction of a new system but the prompt removal of all the legal obstacles which have for two thousand years blocked the way for an evolution which is bound to throw up beneficial results which we cannot now foresee.

~F A Hayek, The Denationalisation of Money

Re-evaluating Hollywood Movie A Beautiful Mind

Curiously perhaps we now turn to a hollywood movie that most (western) people of its time have seen “A Beautiful Mind”. The plot is a true story of a famous and highly regarded brilliant mathematician John Nash (played by Russell Crowe) that apparently descended into madness.

Here we are thinking of a scene where Nash, confined in a mental institution, was visited by his wife Alicia. In this scene Nash whispers to his wife (played by Jennifer Connelly), “Alicia I’ve been doing top secret work for the government…”

She promptly cuts him off and places a stack of letters on the table between them and frantically tries to convince him to understand he’s falling victim to mental delusions, “They’ve never been opened. It isn’t real. There is no conspiracy John… It’s in your mind.”

Years later however the NSA declassified one such set of letters of which expert and world renown cryptographers Ron Rivest and Adi Shamir have said, “In his letters, Nash anticipated the birth of complexity theory a decade later, and the birth of modern cryptography two decades later.”

These letters alone disprove the plot of the movie and there are many more known correspondences and programs with various US intelligence agencies Nash was involved with that prove him to have been working on significant projects with these institutions.

Truth be told Nash, only in his 20’s at the time, put out multiple groundbreaking academic papers spanning a wide range of fields, of what significance would only be understood decades later and he eventually decided to flee to Europe to exchange his USD for the Swiss because of an insight that we will explain in the proceeding sections.

John Nash’s Proposal for Ideal Money and Its Parallelity With Hayek’s Denationalisation of Money

I learned of the work and publications of Friedrich von Hayek. I must say that my thinking is apparently quite parallel to his thinking in relation to money and particularly with regard to the non-typical viewpoint in relation to the functions of the authorities which in recent times have been the sources of currencies (earlier “coinage”).

~https://web.math.princeton.edu/jfnj/texts\_and\_graphics/Main.Content/IDEAL\_MONEY.../Older/PENN\_STATE/babu.money.b.pdf

Nash received a nobel prize in 1994 based on a paper he wrote in 1950 (he would have been about 22) and immediately thereafter began giving lectures around the world on his proposal he called Ideal Money.

In his lectures and writings on the subject Nash defines and uses a device he called the “ICPI” (“industrial consumption price index):

A possible non-political basis for a value standard which could be used for money would be a good “ICPI” statistic where this acronym refers to “industrial consumption price index”. That could be calculated from the international prices of commodities, such as copper, silver, tungsten, etc. that are used in industrial activities.

~John Nash Ideal Money Southern Economic Journal Vol. 69, №1 (Jul., 2002), pp. 4–11 (8 pages) https://www.jstor.org/stable/1061553

The ICPI was to be a globally held basis for a standard of value that all major currencies would peg to. This is similar to the Bretton Woods arrangement or a gold standard but instead of pegging to the USD or to Gold currencies would be pegged to a politically agreed upon basket of commodity prices (for the economists of today reading this writing this is an easy to understand concept because all the centrally banked currencies of today inflation target a LOCALLY chosen and observed basket of prices). This would remove the problem of the Triffin Dilemma from the global financial system.

This device, the ICPI, is the part of Nash’s proposal that most perfectly fits with Hayek’s proposal for “The Denationalisation of Money” where Hayek introduces (to his reader’s imagination) his currency he calls the “Ducat” which is itself like in Nash’s proposal, tied to a chosen basket of globally observed commodity prices (the casual reader is encouraged to trust our comparison and skip this paragraph/quote):

It might be expedient that the issuing institution should from the outset announce precisely the collection of commodities in terms of which it would aim to keep the value of the ‘ducat’ constant. But it would be neither necessary nor desirable that it tie itself legally to a particular standard. Experience of the response of the public to competing offers would gradually show which combination of commodities constituted the most desired standard at any time and place. Changes in the importance of the commodities, the volume in which they were traded, and the relative stability or sensitivity of their prices (especially the degree to which they were determined competitively or not) might suggest alterations to make the currency more popular. On the whole I would expect that, for reasons to be explained later (Section XIII), a collection of raw material prices, such as has been suggested as the basis of a commodity reserve standard,l would seem most appropriate, both from the point of view of the issuing bank and from that of the effects of the stability of the economic process as a whole.

~F A Hayek The Denationalisation of Money

Hayek as the manager of what we could call the “Bank of Hayek” manages his Ducat currency in the same way Nash prescribes central banks should in his proposal:

I would announce at the same time my intention to regulate the quantity of the ducats so as to keep their (precisely defined) purchasing power as nearly as possible constant. I would also explain to the public that I was fully aware I could hope to keep these ducats in circulation only if I fulfilled the expectation that their real value would be kept approximately constant. And I would announce that I proposed from time to time to state the precise commodity equivalent in terms of which I intended to keep the value of the ducat constant, but that I reserved the right, after announcement, to alter the composition of the commodity standard as [46] experience and the revealed preferences of the public suggested.

~F A Hayek The Denationalisation of Money

And Hayek reconfirms our claims that such a mechanism and prescription is rather conventional central banking practice:

This will cease to seem shocking when we remember that this is precisely what practically all central banks have been doing for nearly half a century-their notes were of course redeemable in precisely nothing.

~Hayek The Denationalisation of Money

Nash’s Ideal Proposal as an Enthymeme

Enthymeme-noun an argument in which one premise is not explicitly stated.

~Oxford Languages

Interestingly to note Nash defeats his own basis to his proposal noting that technological advance (such as a dramatic reduction in the cost to produce commodities chosen for the ICPI) would necessitate changes in the composition of the basket of prices politically agreed upon. This reintroduces the problem of political difficulty the ICPI was meant to remove:

We can see that times could change, especially if a “miracle energy source” were found, and thus if a good ICPI index is constructed it should not be expected to be valid, as initially defined, into all eternity. It would instead be appropriate for it to be regularly readjusted depending on how the patterns of international trade would actually evolve. Here, evidently, politicians in control of the authority behind standards COULD corrupt the continuity of a good standard, but depending on how things were fundamentally arranged, the probabilities of serious damage through “political corruption” might become as small as the probabilities that the values of the standard meter and kilogram will be corrupted through the actions of politicians.

~John Nash Ideal Money Southern Economic Journal Vol. 69, №1 (Jul., 2002), pp. 4–11 (8 pages) https://www.jstor.org/stable/1061553

In a subsequent writing Nash furthermore removes the ICPI as a premise for his proposal:

It seems possible and not unlikely, however, that if two states evolve towards having currencies or more stable value as measured locally by national CPI indices that then also these distinct currencies would tend to evolve towards more stable comparative relations of value.

Then the limiting or “asymptotic” result of such an evolutionary trend would be in effect “ideal money” but this as a result achieved without the adoption of anything like an ICPI index as a basis for the standard of value.

~John Nash Asymptotically Ideal Money https://fermatslibrary.com/p/213f2919

The Nashian Orientation of Bitcoin (Which is Also the Hayekian Orientation)

We can prepare to appropriately respect the functioning of such an agency (conceivably like the IMF or BIS or ECB) and concede to the effective agency some discretion about the specific form of a guiding index of prices.

~John NashIdeal Money and the Motivation of Savings and Thrift https://github.com/jalToorey/IdealMoney/wiki/Ideal-Money-and-the-Motivation-of-Savings-and-Thrift-(Honesty))

Hayek and Nash both argue that if the major centrally banked currencies were put on a stage of competition with a comparatively “good currency” such a scenario would not result in a single currency that supplanted the rest but rather the optimization of all of the major currencies with respect the otherwise superior one:

The scheme would, to all intents and purposes, amount to a displacement of the national circulations only if the national monetary authorities misbehaved

~F A Hayek, Denationalisation of Money

Nash notes that the evolution to a higher order of comparatively ideal currencies is not one that can necessarily be politically constructed nor simply decreed out of reason and logic:

…one cannot logically feel confident of the adoption internationally of an ideal system of currency or currencies in an achievement analogous to the achievement of the metric system or of “the euro”. Such a result would necessarily have a political content since it is the states that control and supply the various currencies that are in use at the present time.

~John Nash Asymptotically Ideal Money https://fermatslibrary.com/p/213f2919

However he sees that if there can be some evolution towards “inter-relational stability” then at some point along the timeline of such a future trend there could then be the possibility of a global initiative and political framework to “let it be done”:

So it occurs to me to think that that which is not achieved by a grand action of establishment by “fiat” may alternatively tend to come into existence as a consequence of a process of evolution. And of course, after a certain degree of progress by “evolution” the rest of the progress could possibly be realized by a convention or a process of “fiat”.

~John Nash Asymptotically Ideal Money https://fermatslibrary.com/p/213f2919

These sentiments seem clearly concordant with Hayek’s:

The purpose of this scheme is to impose upon existing monetary and financial agencies a very much needed discipline by making it impossible for any of them, or for any length of time, to issue a kind of money substantially less reliable and useful than the money of any other

~F A Hayek, Denationalisation of Money