Dispelling The Myth That The Cypherpunks Were Looking For A Finitely Supplied Money

9 min readAug 22, 2018

Finally I came across the paper I was looking for: Possible Consequences of Digital Cash. The cypherpunks have notably never put forth their theory for the implications of Bitcoin in regard to our existing global economy. The closest that can be found (not by a cypherpunk mind you) is Hyperbitcoinization and as one can note there is no founded argument put forth in the writing-it is simply a denial of commonly held and understood concepts of economics.

Hyperbitcoinization is simply the ignorant belief that the people will love Bitcoin so much and banks will be helpless with no counter-strategies available that they will simply lay down and suffer from perpetually accelerating hyperinflation of their currencies.

This of course ignores the common and observable practice of inflation control.

“Bitcoin is Hashcash extended with inflation control”

I tried to source this and I can’t. In fact the search is riddled with conspiracy theorists quoting Adam Back saying it but giving no source. I do myself remember Back tweeting something about inflation and me immediately pointing out that he had conflated the two significant definitions of inflation (supply vs purchasing power etc.).

I couldn’t perfectly tell if he had conflated them but something was off in the way that he was using the word inflation (iirc). And that same sentiment is held on the quote above (so I thought it was the quote I responded to and yet I’m not sure he said it).

The Tacit Myth: Satoshi Solved the Problem of How to Finitely Supply a Digital Currency

A recent engagement I had with someone (nirvanadev on twitter) who claims to have been around since near Bitcoin’s inception and carries the tacit myth I wish to dispel in order for us to understand the re-orientation that Satoshi used to birth Bitcoin. This person tried to tell me that the history of the cypherpunks is a search for how to create a finitely supplied digital currency.

Here we can look at Nick Szabo’s design for bitgold, oft cited as a precursor to bitcoin (like Hash Cash is cited (also by Satoshi) but also did not have a proposed solution for a finite supply):

The main problem with all these schemes is that proof of work schemes depend on computer architecture, not just an abstract mathematics based on an abstract “compute cycle.” (I wrote about this obscurely several years ago.) Thus, it might be possible to be a very low cost producer (by several orders of magnitude) and swamp the market with bit gold. However, since bit gold is timestamped, the time created as well as the mathematical difficulty of the work can be automatically proven. From this, it can usually be inferred what the cost of producing during that time period was.

Unlike fungible atoms of gold, but as with collector’s items, a large supply during a given time period will drive down the value of those particular items. In this respect “bit gold” acts more like collector’s items than like gold. However, the match between this ex post market and the auction determining the initial value might create a very substantial profit for the “bit gold miner” who invents and deploys an optimized computer architecture.

Bit gold may provide us with a money of unprecedented security from these dangers. The potential for initially hidden supply gluts due to hidden innovations in machine architecture is a potential flaw in bit gold, or at least an imperfection which the initial auctions and ex post exchanges of bit gold will have to address.

It is very subtle but we can note bigold is not an attempt to make a finitely supplied digital medium. It is an attempt to make a money that doesn’t have value inflation problems because of the implication that there can in fact be supply gluts.

The search is for a money that cannot willingly have its purchasing power reduced; it is not a search for a finitely supplied money.

Let us look at B-money, also cited in the Bitocin whitepaper, and its issuance mechanism:

The creation of money. Anyone can create money by broadcasting the solution to a previously unsolved computational problem. The only conditions are that it must be easy to determine how much computing effort it took to solve the problem and the solution must otherwise have no value, either practical or intellectual. The number of monetary units created is equal to the cost of the computing effort in terms of a standard basket of commodities. For example if a problem takes 100 hours to solve on the computer that solves it most economically, and it takes 3 standard baskets to purchase 100 hours of computing time on that computer on the open market, then upon the broadcast of the solution to that problem everyone credits the broadcaster’s account by 3 units.

And the alternative proposal from the same writing:

So I propose an alternative money creation subprotocol, in which account keepers (everyone in the first protocol, or the servers in the second protocol) instead decide and agree on the amount of b-money to be created each period, with the cost of creating that money determined by an auction. Each money creation period is divided up into four phases, as follows: 1. Planning. The account keepers compute and negotiate with each other to determine an optimal increase in the money supply for the next period. Whether or not the account keepers can reach a consensus, they each broadcast their money creation quota and any macroeconomic calculations done to support the figures.

Again we can see that these proposals are not at all attempts to create a finitely supplied money. Rather they are attempts are creating a meaningful restriction to the issuance of the money such that it cannot be issued and created to the point that there can be no value held.

The Selginian Take on a Finitely Supplied Money

Although written post-Bitcoin George Selgin’s explanation of the limits of a finitely supplied Bitcoin are very relevant since 1) he is very often cited indirectly through Hal Finney’s statements about how Bitcoin might unfold in relation to our existing banking methods and 2) he was in fact involved in early related cypherpunk and mailing list discussions.

Here, in “Bitcoin: Problems and Prospects”, he explains the limitations of a finitely supplied money and notes that economy theory and observations do not consider it a sound policy:

It doesn’t follow, however, that either Bitcoins’ purchasing power or the volume of Bitcoin-denominated payments will be stable enough to make Bitcoins anyone’s idea of a sound money. Because it makes no allowances for changes in the real demand for Bitcoins, whatever 6 their source, the strict “protocol” that regulates the supply of Bitcoins — a protocol that raises Bitcoin “mining” costs in response to changes in mining activity and technology, but without regard to Bitcoins’ purchasing power — would allow fluctuations in the pure transactions demand for Bitcois to continue to influence their purchasing power. As the number approaches 21 million, mining costs will approach infinity, and Bitcoin output with cease once and for all. The transactions demand for Bitcoins will, in contrast, tend to go on increasing with economic growth. A Bitcoin standard would thus tend to result in a rate of deflation at least equal to the rate of economic growth, with occasional bouts of more severe deflation occusing with every cyclical increase in the demand for money. Although (as I’ve argued elsewhere) deflation needn’t go hand-in-hand with recession or depression so long as the rate of deflation reflects an economy’s (total factor) productivity growth rate, chances are that deflation in a Bitcoin economy would frequently exceed this safe limit.

That is to say, from a traditional and common accepted and understood standpoint, an economist is always going to note the weakness in Bitcoin’s supply schedule and ask if an equivalent can be made with an elastic schedule:

Which brings us to the nifty thing about Bitcoin-type cybercurrencies. In principle, the same sort of people who came up with the Bitcoin supply protocol could also come up with a much more macroeconomically “smart” protocol that could be the basis for an exceptionally stable and well-behaved cybermoney. The new protocol might, for example, allows for long-run growth of the money stock, consistent with increased real output (or perhaps with increased labor and capital input), while also allowing for cyclical adjustments based upon feedback from transactions volume. The supply of such a “smart” cybercurrency would therefore remain beyond the power of anyone to manipulate, yet would also be “elastic” in a macro-economically desirable way. You really couldn’t ask for anything much better.

Satoshi’s Re-Orientation and it’s Compatibility to John Nash’s Ideal Money

Bitcoiners will usually state that current economic theory simply isn’t advanced enough to understand why we can just have a finitely supplied money. Almost always these people simply aren’t familiar with the theories they are referring too. Then there is a group of Bitcoiners that will cite only Austrian theory and declare they refuse to address currently held and observably utilized theories (ie Keynesian) and claim that ever increasing purchasing power of a money is simply a good thing.

I make the argument that if I can show a resolving perspective between the two differing views of economics, Austrian and Keynesian, that it should be considered to be stronger than a view that simply hand waves the other away. And I have presented such a view in many of my recent writings that show exactly where the conflict and confusion lies.

In Money Blockchains and Social Scalability Nick Szabo notes Satoshi’s brilliance of a certain computational trade-off and in regard to scaling:

We need more socially scalable ways to securely count nodes, or to put it another way to with as much robustness against corruption as possible, assess contributions to securing the integrity of a blockchain. That is what proof-of-work and broadcast-replication are about: greatly sacrificing computational scalability in order to improve social scalability. That is Satoshi’s brilliant tradeoff.

I make the observation that what (also) ultimately brought Bitcoin about and what I think Adam Back was trying to suggest was that Bitcoin was birthed on the realization that a finitely supplied money, although not considered to be ideal by an conventional understanding, would still be relevant and reliable enough to retain value.

From the Nashian view he would call this “good” money (and say good in the Gresham’s sense) yet not necessarily “Ideal”. Satoshi seemed to realize the trade-off was worth something (whereas some claim he was simply not an economist and didn’t know his mistake in this regard).

The Missing Inquiry

Returning to the paper cited in the into of this writing it is a great and balanced inquiry into the implications of digital currency in regard to the existing global economy. It notes favorable effects that could happen but also the impossibilities or difficulties that digital transnational currencies might imply.

The paper cites Szabo (and Jon Matonis) and so there seems to be an implication that there is connection to the network of people that became known as the cypherpunks.

But notably missing from the inquiry is the concept of a finitely supplied international digital currency.

A Re-Turn to Bitcoin As a Basis for John Nash’s Ideal Money

I went over this central bank research paper that considers the effects of a Bitcoin standard on monetary policy of existing national and major centrally banked currencies.

What is interesting and should be noted first is the author denies the possibility of such a standard based on two reasons in the conclusion:

Nonetheless, in my opinion it is unlikely that the Bitcoin standard will come into existence, because governments and central banks will take actions to prevent it.

Even if the Bitcoin standard were to come into existence, it is my opinion that it would not last long. The payments world is changing so rapidly that there will be a technological innovation that provides a potential medium of exchange with the same or greater benefits of Bitcoin or with lower costs. Such an innovation could come either from the private sector or from the government.

Those that are quite familiar with Bitcoin already know that Bitcoin already only exists because it cannot be shut down by governments (and many nations governments and finance ministers are already starting to declare a want to use crypto-currencies as a way to escape control of other nations and USD etc as a reserve currency used for international settlements).

The second observation is that layer 2 technology already trumps the suggestion that a lower cost alternative to Bitcoin is necessary and could replace Bitcoin.

Thus the actual conclusion of the paper is found earlier as it showed through formula that as the international cost of arbitrage of the settlement or reserve medium asymptotically approaches zero the corridor in which the effects and intention of monetary policy shrinks.

This suggests an approach to what Nash defined as the ultimate end called Ideal Money which is the inter-relational stability of all the major currencies.

Satoshi’s Blunder Becomes Nash’s Genius

So here we have re-solved and understood the different significant and relevant meanings of the usage of “inflation” and “ideal” (or Ideal in Nash’s sense). What Nash’s argument is, and what the centrally banked paper shows, is that you can introduce a finitely supplied money, and although it cannot be considered “ideal” in the traditional sense Selgin explains in regard to needing an elastically issued money that fluctuates with the underlying global economy, you can still use such a limited design to inspire our existing centrally banked currencies to approach value stability.

This re-solves all of the traditional economists and central bankers complaints because you could then have centrally controlled national (or international such as the Euro) monies that are both inter-relationally stable but also that ultimately have reasonably stable local purchasing power.