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

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):

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:

And the alternative proposal from the same writing:

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:

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:

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:

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:

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.