Bitcoin is a Capitalist Nightmare

A nightmare of capitalism, that is, not a nightmare for capitalism.

A nightmare of capitalism, that is, not a nightmare for capitalism.

Let me explain.

Throughout its history, Bitcoin has been lauded as a currency that can set us free. It seems as if every other week, someone discovers bitcoin’s decentralized nature, and concludes that this makes it the most democratic currency possible. Here’s one very recent such story.

It’s not that these views are completely wrong. On the surface, they’re quite correct. But they miss the deeper workings of the cryptocurrency, and thereby become inadvertently — and somewhat insidiously — misleading.

Bitcoin Recap

Bitcoin are mined, and bitcoin is a distributed ledger, called blockchain. Those two concepts need to be understood for the remainder of this text. Luckily, the level of understanding needs only be superficial.

The sticklers for detail might note that the following description is somewhat inaccurate; it is, however, accurate enough for the conclusions drawn in this text. I value the concept explanation higher than the precision here. Mea culpa.

Bitcoin mining refers to a computer solving a hard mathematical problem. Such problems take a long time to figure out, even for fast computers. But verifying the solution is fast, once it’s known. That’s a fundamental property of all cryptocurrencies, and it lets all participants ensure that the solutions other participants provided are correct.

Once such a hard problem is solved, the solution is attached to the distributed ledger, using a cryptographic hash method. The most important properties of these hashes for our purposes is that even small variations in input produce vastly different outputs, and that it’s very unlikely for two inputs to produce the same output. These properties make hashes useful for detecting tampering.

Attaching a solution to the distributed ledger means taking a hash over the entire ledger so far, and then also over the newly found solution. Then, the new hash is appended to the ledger. By including both the previous data and the new data in the hash, participants can:

  • Verify the solution to the hard mathematical problem, proving that some computer spent significant time in creating the solution.

  • Verify that this solution is “the next” in the ledger, by comparing the cryptographic hash to the ledger’s contents; if the hash matches, the contents are not tampered with.

And that’s how participants know that the ledger and all the transactions within it are valid and whom they “belong” to.

Or do they?

There is a crucial aspect to decentralized systems, which is also included in bitcoin, and that is consensus building.

The basic issue is this: what happens if two participants solve the same hard mathematical problem simultaneously? Who is credited with the solution? That sort of thing can easily happen, because there is no centralized authority distributing problem solving work to participants; instead, each participant can autonomously decide to pick a problem — potentially the same problem — to solve.

There are a number of possible ways to solve this kind of consensus issue, but bitcoin opts for the simple and democratic version: every participant “votes” by signing the ledger, and a simple majority decides.

And that’s a problem.

Who controls Bitcoin?

The simple answer is China. And that’s old news, but not often reported.

The more complex answer is that the voting process in bitcoin isn’t as democratic as it seems at first glance.

A few paragraphs ago, I wrote how every participant votes on the contents of the ledger. But what does that mean?

First, the term “participant” is a little misleading. It may sound like “human”. And for the majority of people interested in bitcoin, that might be true. But in reality, each “participant” is a computer — a machine that signs off on the ledger on behalf of a human.

If you’re like most people, you have a personal or family computer, and if you use that for bitcoin, then you are fully represented on the bitcoin ledger by that computer. But for some people that’s not true. They own loads of computers, dedicated to bitcoin.

What that means is that consensus building in bitcoin is not one person, one vote. It is one person, as many votes (computers) as they can buy.

But it gets worse.

The signing process is somewhat similar to mining, meaning it takes some time for a computer to complete. So the faster the computer, the faster the vote can be cast.

Bitcoin does not wait for all votes to be cast in order to declare consensus. Instead, it simply waits until 50% of the votes have been counted.

And that turns voting into a race. If you have a faster computer, your vote can be counted when someone with a slower machine is left out.

So bitcoin favours those with control over the largest number of fastest machines.

And that’s not individual human beings. It turns out that’s a handful of companies in China.

Capitalism

People can be a little bit confused about what capitalism is. And that’s because we don’t find capitalism in the wild without some checks and balances imposed on it by some kind of political system.

At it’s core, capitalism is essentially “you’ve got to spend some to earn some”. And that becomes easier, the more you have to spend. Capital attracts more capital.

Politics might not help here: depending on your political system, you might have tax breaks for the wealthy — which is giving an extra advantage to those who already have the advantage to begin with.

This “spend some to earn some” is directly reflected in bitcoin’s design. After all, it takes money to buy and run the amount of computers necessary to mine the most, and to hold the controlling number of votes in the consensus algorithm.

Politics

In 2012, Bruce Bueno de Mesquita and Alastair Smith published The Dictator’s Handbook—a book with a rather sensationalist title, but a much more serious background.

The book is the popular science version of a huge amount of research work the two undertook for years with colleagues around the world. In it, they examine political systems all over the world, and establish that political leaders in democracies and tyrannies aren’t all that different.

They meticulously lay out the rules by which leaders are driven to decision making based on how much money they have to distribute to their supporters — and related to that, how many supporters they need to appease.

The major difference between democracies and tyrannies appears to be whether the people need to be taxed to raise this money, or whether natural resources pay for it all.

There’s a great explanatory video. Watch it, I’ll wait.

Chilling, isn’t it?

The Tyranny of Bitcoin

So how does bitcoin fit into this?

It’s simple. Mining bitcoin doesn’t need all that many people, nor that many natural resources (other than energy). It utilizes a third resource, “compute time”, which we have seen earlier costs money to create.

That’s real money, in most cases. It could also be bitcoin that’s used to buy more computers. Why not? Although as we have seen, having real money to start with gives you the advantage.

By cutting most natural resources out, bitcoin cleverly disentangles itself from old wealth like land ownership. That’s the democratic looking part. By cutting out the need for people’s work, though, it also removes all political incentives for educating people and keeping them healthy.

So if the proponent’s vision becomes reality, and bitcoin replaces real money?

Then it becomes a monetary system that is based on a resource controlled entirely by the wealthiest individuals or companies, with no need whatsoever to rely further on natural resources, nor on the average individual for raising more.

It’s the perfect foundation for a globe-spanning tyranny, fueled by capitalistic principles.

I don’t know what to call this other than a nightmare.

You might also be interested in The New Cathedral and Bazaar, an opinion on how Blockchain gets consensus wrong.

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