Sunday, July 10, 2016

Bitcoin and the Future of the World

This blog was started as a way of putting together an internally consistent, secular philosophy of ethics with an eye toward how to build a social structure that upholds these secular values. The primary social structure discussed to this point was a hierarchical government structure, but a lot has changed since this blog's inception.

At the forefront of these changes is Bitcoin. Many have heard of Bitcoin in passing, but only the indoctrinated actually understand how it works, why that is interesting, and how that is valuable. I'm not going to spend too much time talking about how it works because you can read that anywhere, but there are a few key things that Bitcoin does that make it the first step toward the future of government. A future where all is governed by a decentralized code base that people opt into in the same way that you subscribe to Spotify, one that hires people to do things that they are good at and pays them as individuals, all without any agent anywhere in a position of power to take resources. This is the future of companies, the future of cities, the future of countries.

Bitcoin and Why It's Valuable
First and foremost, Bitcoin is a decentralized public ledger of transactions moving small "b" bitcoin (coin for clarity going forward) from one address to another. The code is open source and being run all over the world. The ledger gets updated every ~10 minutes by a "miner" who wins a calculation lottery, collecting all of the transactions it can fit into the "block" since the previous block, preferring blocks with the highest coin per byte ratio.

In addition to the transaction value of coin flow, you have room to include other data into Bitcoin transactions as long as you can pay the fee to get your transaction into the block. What this means is that you can create a scripting language in the transaction and post it publicly and immutably to the blockchain where it will be forever.

The soon-to-be legal inheritance
Imagine that you are the favorite son of a billionaire, and he's on his death bed, you're there by his side taking care of him. His will is drawn up and all of the assets are distributed, but he appreciates your care so he calls you to his side one day to tell you he has a special gift. He has an industrial grow house of marijuana and wants to give it to you. Of course he can't leave it in the will because it is illegal, but he wants to protect you in case it becomes legal someday and his other sons want a piece. So you draw up a contract, you both sign it, and rather than having it legally notarized, you decide you are going to hash the digital file and post the hash to the Bitcoin blockchain. There are services that will do this for you very cheaply, and if you have the know-how you can do it for yourself for mere cents of coin for the transaction fee.

So you've been running this grow house for a couple of years, supplying your heir and heiress friends with the best bud out there. All of the sudden, weed is legal in your state and you want to go big with this thing. You incorporate and get your ducks in a row, now your siblings are coming for your weed farm saying they own an equal share. They take you to court and you show the contract, but the siblings say it's fake. Signature analysis confirms your dad signed it but it's not 100% reliable.

All of the sudden you bring out the Bitcoin transaction. The hash matches the contract. The PGP signature on the contract is a known signature of your father. The court rules that the farm is yours and every Bitcoin transaction is officially legally admissible, every contract notarized on the Bitcoin blockchain legally binding.

Bitcoin is digital land
People like to call coin digital gold because it has a strong store of value property to it with the total supply being controlled by the mining process and a cap of 21,000,000 coin at the end of mining in 2140 or so.

For my money, the better analogy is digital land, Each coin is a 1/21m plot of the Bitcoin blockchain that you can build whatever you want into (a contract notarization in the above thought experiment). Each of these plots can be broken into as many sub plots as the transaction fees will allow, and in the future the limit to this will be 10^8 pieces. Right now it costs 0.0001 coin to send such a transaction and in the future it will be more like 0.0000001 to send such a transaction, with that value being worth maybe $10 in today's dollars. That would be roughly $1.67 million in today's dollars per coin and maybe $35-36 Trillion total market cap.

Darwin Money and the Death of Finance
Where will $35T come from? It will come from USD, GBP, EUR, gold, stocks, real estate. Bitcoin has a survival advantage that will cause it to become the world reserve currency and the default store of value for the majority of the world's wealth. This advantage is that it is decentralized and open source. No longer does China have to trust USD, or any country trust the printing presses of any other country, there is an impartial public option.

The world of finance exists because of inflationary money. If you have savings, you cannot hold it and watch it grow because your money is devalued by the printing press and treasury issuance. Those in power would call this a "feature" of the economy, it stimulates the economy by forcing people to spend. But what it really does is cause the poor to get poorer as their cost of living goes up.

Think of the implications if you could park your wealth in a deflationary asset and watch it grow over time. All of the wealth that would be moved out of the stock market, treasury bonds, real estate, every investment vehicle out there. Maybe a small portion of that money stays in and some of the banks survive, but most of it comes out, because parking your money in the S&P 500 is no longer the best way to protect it.

An "Uber" for Everything
The sharing economy is here, with AirBnB and Uber paving the way. All these services do is match private citizens who provide a service with private citizens who need that service and keep a ledger of trust. In the future, all of these services will be open source decentralized, out-competing the Ubers of the world by saving on fees. Government is just a set of services at the end of the day.

The future of government is decentralized code that triages tasks and wages in a way that runs a functioning society transparently and free from corruption.  All government functions will be carried out by people hired ad-hoc by these services based on reputation and availability

Decentralized is the Ultimate Economies of Scale
In a previous post I talked about the move toward centralization as the natural progression as our communication and transportation improve, because this allows for a increased economies of scale that benefits everyone. On the surface, it may seem like this move toward decentralization will fly in the face of that rule, but in fact it's quite the opposite. Centralizing control on decentralized code actually comes with it massive economies of scale, while also preserving personal freedom that allows us to continue our lives as we see fit.

Decentralization was barely conceivable when I wrote that first post, because no one had done it successfully (or at least, I didn't know about it at the time). Now that it can be done, it will be done, it's just a matter of when.

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