Sovereignty through mathematics CHAPTER TWO

CHAPTER TWO — FINANCIAL ATHEISM

“Don’t trust, verify” is the slogan of a prominent Bitcoin company. The saying represents a sound attitude towards not only Bitcoin, but all human power structures. In order to understand Bitcoin, one must admit that everything in society is man made. Every civilization, every religion, every constitution and every law is a product of human imagination. It wasn’t until as late as the 17th century that the scientific method started to become the dominant practice for describing how the world actually worked. The repeated testing and peer-to-peer reviewing of a hypothesis is still quite a young human practice. Before this, we were basically just guessing and trusting authorities to a large extent. We still do this today and despite our progress in the last couple of centuries, we still have a long way to go. Our brains are hardwired to follow the leader of the pack. The human brain is born with a plethora of cognitive biases pre-installed and we have to work very hard to overcome them. We evolved to survive in relatively small groups and our brains are thus not really made for seeing the bigger picture. Bitcoin’s proof-of-work algorithm is constructed in such a way that it is easy to verify that computational power was sacrificed in order to approve a block of transactions and claim its reward. In this way, no trust in any authority is required as it is relatively trivial to test the validity of a block and the transactions it contains. This is nothing short of a complete reimagining of how human society ought to be governed. The beauty of mathematics governs the Bitcoin system. Everything that ever happens in Bitcoin is open and verifiable to everyone, even to those that are not yet using it.

After the tragic events of 9/11 2001, Sam Harris started writing his book “The end of faith” which happened to be released around the same time as Richard Dawkins’ “The God delusion”, Daniel Dennett’s “Breaking the spell” and Christopher Hitchens’ “God is not great — How religion poisons everything”. These books kickstarted what in hindsight has often been referred to as the new atheist movement, even though there has arguably never been anything new about atheism. Atheism must almost certainly have preceded religion since religious ideas require the person holding the idea to believe a certain doctrine or story. Atheism is nothing but the rejection of ways to describe the world that are not verifiable by experimentation. A fly on a wall is probably an atheist by this definition of the word. Atheism is often accused of being just another set of beliefs, but the word itself describes what it is much better — a lack of belief in theistic ideas. It is not a code of conduct or set of rules to live your life by, it is simply the rejection of that which cannot be scientifically verified. Many people, religious people in particular, have a hard time grasping this. If you believe that a supernatural entity created everything in everyone’s life, you might not be too comfortable with a word that describes a complete rejection of what you believe created everything, including the very atheist that the word describes. The amount of different religious world views that exist is probably equal to the sum of all religious people on the planet, but all world views that reject these superstitious beliefs require but one word. Atheism is not the opposite of religion but is simply the lack of it.

In 2008 another sub-culture movement of unbelief was born. Let’s call it Financial Atheism — the rejection of un-verifiable value claims. With the invention of Bitcoin a way of rejecting fraudulent expressions of a token’s value was born. Those of us fortunate enough to have been born in secular countries all enjoy not having the ideas of religious demagogues dictating our lives on a daily basis. We can choose which ideas to believe in and which to reject. What we still have very limited means of choosing though, are the ways in which we express value to each other. We’re told to use a system in which we all have a certain number of value tokens assigned to our name, either as a number on a screen or as digits on paper notes. We all live in the collective hallucination that these numbers are somehow legit and that their authenticity is not to be questioned. A Bitcoin balance assigned to a certain Bitcoin address might seem just as questionable to a layman but, if you have a basic understanding of the hashing algorithms and game theory behind it, it’s not. The hash of the latest block on the Bitcoin blockchain at the time of writing, begins with eighteen zeros in a row. These zeros represent the Proof of Work that ensure that this block is valid, and that every transaction in it actually happened. If you can grasp the concept of a hashing algorithm and if you have an intuition about mathematics you realize the gargantuan amount of calculating effort that went into finding this particular hash. It is simply mind blowing. To forge a false version of a hash with eighteen zeros in the beginning just wouldn’t be economically viable. Of course, you can never actually know that a 51% attack or some other attempt at corrupting the blockchain hasn’t occurred, but you can know that such an attack would require more than half of the network acting against their own economic interest. Bitcoin is not something to believe in. You don’t need to trust any authority because you can validate the plausibility of its authenticity yourself. It’s the financial equivalent of atheism, or unbelief. Satoshi wasn’t Jesus. Satoshi was Brian of Nazareth telling his followers to think for themselves.

The first law of thermodynamics, also known as the Law of Conservation of Energy, states that energy cannot be created or destroyed in an isolated system. The second law states that the entropy of any isolated system always increases, and the third law states that the entropy of a system approaches a constant value as the temperature approaches absolute zero. In the Bitcoin network, participants known as miners compete for new Bitcoin in a lottery with very fixed rules. The more hashing power (computing power) a miner contributes to the network, the higher his chances of winning the block reward, a specific sum of bitcoins that is halved every four years. The difficulty of this lottery, in other words the miners chance of winning it, is re-calibrated every 2016th block so that the average time it takes to find the next block is always roughly ten minutes. What this system produces is absolute scarcity, the number of bitcoins in existence at any moment in time is always predictable. The more time that passes, the slower the rate of coin issuance, as the block reward slowly approaches zero. By the time it does, around the year 2140, the individual miner’s incentive to mine for a reward will, at least theoretically, have been replaced by an incentive to collect transaction fees from the participants of the network. Even now, fees make up a non trivial part of the miners revenue. As the Bitcoin network scales up through layer 2 solutions such as the Lightning Network, fees are still very low and are expected to stay low for a long time ahead.

Absolute scarcity is a concept that mankind has never encountered before. Arguably, this makes it the first man-made concept to ever be directly linked to the laws of physics. Everything anyone does requires a certain amount of energy. The very word doing implies that some type of movement, some type of energy expenditure, needs to occur. As mentioned earlier, how we value things is an entirely subjective thing. Different actions have different value to different people. How we value different things is also inevitably linked to the supply of that thing. Had the trapped-under-ice winter diver mentioned in chapter one been equipped with a scuba tank, he probably wouldn’t had thought of his next breath as such a precious thing. The price a person is willing to pay for a good, in other words the sum of one or more people’s actions, can be derived from two basic variables — the highly subjective demand for the good and the always constrained by time and space supply of that same good. Note that there only needs to be a minimal amount of demand for a good, in order for its price to increase if its supply is sufficiently limited. One could argue that no one needs Bitcoin and that therefore Bitcoin would have no intrinsic value. One could also argue that there’s no such thing as intrinsic value since demand is always subjective. In any case, there will always be a cost to mine a bitcoin and the more mining power in the network, the higher that cost. This cost, ensured by the Bitcoin network’s Proof-Of-Work algorithm, is probably as close to a pure energy cost as the price of a human activity will ever get. Once the mining rig is in place, a simple conversion process follows. Energy in, scarce token out. Should the cost of production exceed the current price of the token, the miner can just choose to not sell, thereby limiting the supply of bitcoins in circulation even more and eventually selling them for other goods, whenever he so sees fit. In this sense, Bitcoin is a battery. Perhaps the best battery ever invented. Storing and moving electrical energy around has always been costly and wasteful. Bitcoin offers a way of converting energy into a small part of a specific number. A mathematical battery, if you will. It is important to remember that it does not convert energy into value directly, but rather electricity into digital scarcity. Digital scarcity which can be used to express value. Energy cannot be created or destroyed in an isolated system as the first law of thermodynamics clearly states. Bitcoin can express how much energy that was sacrificed in order to acquire a share of a total sum. You can of course, also acquire bitcoins by buying them rather than mining them, but in doing so you also spend energy. You somehow acquired the money you bought the bitcoins with. You, or someone else, sacrificed time and energy somewhere. Bitcoin lets you express that you see that there’s a connection between value and scarcity, by letting you sacrifice effort to claim a part of the total sum of them.

The excitement we so called Bitcoin Maximalists feel about bitcoin is not primarily there because of the enormous gains, that the maximalist attitude has granted those that hopped onto the freight train early enough, have been blessed with. Nor is it there because we’re “in it for the technology” which opponents of the viewpoint often sarcastically accuse us of claiming that it is. Those of us that are preaching the near divinity of this invention, do so primarily because we see the philosophical impacts of absolute scarcity in a commodity. The idea of a functioning solution to the double spending problem in computerized money is an achievement that simply can’t be ignored. By solving the double spending problem, Satoshi also made counterfeiting impossible, which in turn makes artificial inflation impossible. The world changing potential of this invention cannot be understated. Not in the long run. The more you think about it, the more the thought won’t give you any peace of mind. If this experiment works, if it’s real, it will take civilization to the next level. What we don’t know is how long this will take. Right now, debates in the Bitcoin space are about bitcoin’s functionality as a medium of exchange and its potential as a good store of value. We might be missing the point. We cannot possibly know if a type of monetary token for which you’re completely responsible with no third party protection will ever become a preferred medium of exchange for most transactions. Neither can we know if the price of Bitcoin will follow the hype-cycle path that we all want it to follow, so that it can become the store of value that most maximalists claim that it already is. Maybe we’ve been focused on the wrong things all along. Maybe Bitcoin’s greatest strength is in its functionality as a unit of account. After all, this is all that Bitcoin does. If you own 21 Bitcoin, you own one millionth of the world’s first absolutely scarce commodity. This might not make you rich overnight but it just might have something to do with what opportunities that might open themselves up to your great, great grandchildren in the future.

Whenever a person in a prehistoric human tribe invented ceremonial burial, that tribe started to expand rapidly. Why? Because as soon as you invent belief in an afterlife you also introduce the idea of self sacrifice on a larger scale. People that held these beliefs were much easier for a despot to manipulate and send into battle with neighbouring tribes. Religious leaders can use people’s fears and superstitions to make them commit all sorts of atrocities to their fellow man, and they still do today. A belief in a “greater good” can be the most destructive thing that can pop up in a human mind. The Nazis of World War II Germany believed that exterminating Jews was for the “greater good” of their nation’s gene pool. Belief in noble causes often come with unintended side effects which can have disastrous consequences. Religious leaders, political leaders and other power hungry sociopaths are responsible for the biggest crimes against humanity ever committed, namely wars. We Europeans often question the United State’s constitutional second amendment, the one about gun rights, whenever a tragic school shooting occurs on the other side of the Atlantic. What everyone seems to forget is that less than a hundred years ago Europe was at war with itself since its citizens had given too much power to their so called leaders. The Nazis came to power in a democracy, never forget that. Our individual rights weren’t given to us by our leaders, we were born with them. Our leaders can’t give us anything, just force us to behave in certain ways. If we truly want to be in charge of our lives we need to find the tools necessary to circumvent the bullshit ourselves.

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