On Bitcoin and the Decentralization of Wealth and Power Simplified (1.0.3)

Abstract Those that predict bitcoin (and cryptocurrencies) to be a bubble, or some short-lived phenomenon, are inattentive to the existence of the mathematically-based historical trend there is toward decentralization.


Bitcoin and Decentralization

Economist Felix Martin calls Bitcoin “hard money” for the fact that there are a fixed number of bitcoins and claims that, since the usefulness of hard money “waxes and wanes”, its appeal will be short-lived (1)

An economy’s creditors – those who hold financial claims on other people, when everything’s netted out – lose when the standard monetary unit buys less stuff. Its debtors, by the same token, gain. The trouble is that… the distribution of creditors and debtors throughout society changes radically over time. As a result, the fairness and efficiency of a hard money standard waxes and wanes as well.

“That”, he says, “is not a statement of opinion. It is a statement of historical fact.” The objection that bitcoin is ‘hard money’ can be brushed aside. This is the result of an elementary misunderstanding of the cryptographic currency scene by Martin, who seems to be unaware of the relationship between bitcoin and other crypto-currencies called altcoins: an altcoin, whose value is derived from their proportion of a bitcoin, can be created at will and in any desired quantity. It is therefore no more difficult to create new digital money in spite of the fact that there are a limited supply of bitcoins than it is to create paper money in spite of the fact that there is a limited supply of gold or any other finite resource. Thus, bitcoin can serve either a deflationary or an inflationary economy. A more important objection to Martin’s reasoning is his assumption that the tension there is between creditors and debtors is following a random trend, that like the heads and tails sides of a tossed coin, the one is no more favored than the other. But we now make two observations that pose a challenge to his stance. The first is simply that the changing ratio of creditors to debtors corresponds to the changing ratio of centralizing to decentralizing economic influences. When a few individuals or groups hold the ‘purse strings’, this is a state of centralization. For example, the creators of the now defunct Isracoin observed that the majority of the wealth of Israel is controlled by 20 families and 5 banks. Conspiracy theorists maintain implausibly that the majority of the world’s wealth is controlled by a few families and banks… Suppose for the sake of argument that a society consisted of 100 individuals, and that the wealth of this society consists of 100 gold coins. An extreme state of centralizaton is a state such that all of these coins belongs to 1 person. An extreme sate of decentralization is a state such that each member of the society has 1 gold coin. In the latter case there can be no creditors and debtors because no one can afford to be creditor. The second more complex observation is that centralization diminishes as a function of time, meaning that we are headed toward a state such that there are no creditors and debtors.

The Paradox of Parliamentary Sovereignty

A simple argument for growing decentralization can be advanced by reference to the influential 3-part definition of Parliamentary Sovereignty given by A.V. Dicey (2):

1. Parliament may legislate on any topic

2. No Parliament can bind its successors or be bound by its predecessors

3. Nobody may challenge the validity of an act of Parliament

Principles 1 and 2 are contradictory: if Parliament can, as Dicey says, legislate on any topic, then it can legislate on the topic of its own future powers. Principles 1 and 3 are for essentially the same reason contradictory: if Parliament can legislate on any topic then it can legislate to challenge the validity of an act of Parliament. Suppose that Parliament makes a law. Does Parliament possess sufficient power that this law will stand for all time? If it does, then there is limit on Parliament’s power to re-shape the past. If it does not, then there is a limit on Parliament’s power to shape the future. In either case Parliament is not, and cannot be, sovereign in Dicey’s sense. The same can be said for the Supreme Court, the Court of Appeal, for any Court in the hierarchy of courts, or for any authority that makes or interprets the law. An authority that has little no power to make the law is strongly governed by restraining influences from the past (rigidity), whereas Parliament as a predominant law-making authority is free to a greater extent free overturn the past (flexibility). In practice there may be little difference between the code-based ‘civil’ legal systems of Europe, and the non-code-based ‘common law’ systems deriving from Britain, but in theory the former systems favour rigidity while the latter favour flexibility. This tension between rigidity and flexibility arises from the limits there are on the power of any leglisative authority. To be precise, there is an inversely proportional relationship between to the ability of an authority to influence the future, and the influences acting on this authority from the past. It follows that no one person or body is sovereign, but that sovereignty is shared between various people and bodies. There is we might say a spectrum of sovereignty ranging from an authority -such as the Magistrates Court- that is relatively constrained by past and by future authorities, to an authority -such as Parliament- that is relatively unconstrained. Although it lies towards the unconstrained end of this spectrum, Parliament holds a shifting and uncertain status, depending on the powers of the more or less subordinate legislators also occupying positions within this spectrum.

From the failure of Dicey’s definition we see that there are two limiting principles governing the exercise of power. The first principle is that an actor’s power to influence the future is inversely proportional to the influences that flow from the past.

This principle creates an ineliminable and unbalanced self-tension between rigidity and flexibility familiar in the jurisprudential context from the contrast between civil and common law, and disputes within the UK common law system concerning the question of how strictly the doctrine of precedent should be applied. We may picture this tension as a series of waves oscillating about the an axis which represents the half way mark between the impossible extremes of complete rigidity and complete flexibility, sometimes crossing the axis towards rigidity, and sometimes crossing it in the other direction towards flexibility. The second -related- limiting principle is that an actor’s power to influence the future is inversely proportional to the number of other independent actors with whom they share power. The greater the number of independent powers, the less power can be wielded by any one actor. The effect of adding powers is to limit the size of the shifts of the overall system between rigidity and flexibility. These shifts might be dramatic ones if a single man or group of men held the majority of the power, but they are reduced with the addition of independent powers. This analysis allows us to see that the failure of Dicey’s Legislative Supremacy and the loss of occurs with application of Baron de Montesquieu’s Separation of Powers (3) and are aspects of the same thing, the difference being that the loss of power that occurs in first case is caused by the self-opposition of past and future parliamentary bodies. The unifying idea is that shared power is diminished power.

Clearly there are, not 1 or 2 or 3, but numerous powers, but it is possible to capture this entire complex of relationships with a simple model:

We start with an idealised balance of rigidity and flexibility that is perpetually tipped in one direction or another, but never either to the extreme that change ceases or becomes infinite. Every change is a shift, however small, in rigidity/flexibility, and so the model contends with anything that can happen in a political state, or indeed in any physical state. We go on to observe that the strength of these shifts in the balance of rigidity and flexibility is inversely proportional to the number of independent powers, some of which are past and future incarnations of the same actor. The greater the number of independent powers, the lessor the potential for dramatic shifts, and conversely. The second principle is a restatement of the idea behind the Separation of Powers.

The Future of Crypto

Given merely that the number of independent powers increases over time, it follows that Martin and all of the critics of bitcoin and cryptocurrecnies have failed amongst things to realize the irreversibility of the historical trend there is toward the decentralization of wealth and power, and so they have failed to realize that cryptocurrencies are aspects of an arrow of time pointing in the direction that we are -whether we like it nor not- going. Ironically, the analogy Martin draws between the birth of the modern banking system and bitcoin supports the existence of this decentralizing trend:

Sovereign governments everywhere are petrified. An ingenious new invention that allows people to make payments across borders without leaving a trace in the official monetary system is spreading like wildfire. Its workings are so clever that few understand them. It’s backed by some of the leading entrepreneurs of the day. The embattled establishment is warning that the state’s right to regulate finance is being undermined.

That may sound a lot like bitcoin in 2014. But, in fact, it’s the story of a much earlier episode of monetary innovation: the birth of modern banking in sixteenth century Europe.

The banks at that time played a decentralizing role, and took power away from the governments. Today cryptographic currencies are playing a decentralizing role and taking power away from the banks. But this power is not merely swapped from the control of one broker to another. Rather, it is shared amongst a larger number of independent brokers. With the execution of Charles 1, and the rise of Parliament as the supreme authority in Britain, the power of the royal Stewart line was not thereby transferred to an alternative central authority in the way that one king inherits the power of his predecessor. Rather, the outcome of the conflict between the Royalists and the Parliamentarians was that power was shared between a larger number of brokers. It was more equitably distributed. Bitcoin and cryptographic currencies may be seen as a further step on the way toward a state of decentralization. Any single cryptocurrency may fail (although bitcoin is unlikely for its foundational status to be amongst the failed coins), but all bets against the ultimate replacement of fiat by one and/or another cryptocurrency may be seen as bets against the right horse.

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(1) Martin , M (2014), Bitcoin is Pointless as a Currency, But it Could Change the World Anyway

(2) Dicey, A (1885), Introduction to the Study of the Law of the Constitution

(3) Montesquieu, Baron de (1748), The Spirit of the Laws