How Bitcoin Solves the Limitations Of John Nash’s ICPI

(Note to readers: If my understanding of the technical workings and the economic implications of the bitcoin “system” have errors I would appreciate being corrected. I don’t mean to argue my understanding is correct, I mean to observe the system however it is commonly accepted that it works.)

From a view of an economic philosopher that believes in controlling prices through the control of the supply of money a gold standard is not ideal.

However, if our goal is to remove any politically induced noise in the prices of commodities etc. a system in which the money supply adheres to the increase or decrease of the price of gold would be auspicious.

It might be difficult to introduce, or to convince governments and politicians to enact and adhere to such a promise of non-intervention in the money supply. Nonetheless, it should be agreeable to suggest that to supply money in relation to some form of apolitical price would remove any political influence in the supply of money (provided the peg is trustworthy).

A relevant side note. Some counties will peg to a foreign currency and thus the national level political influence in the money supply is removed. But this is at the expense of giving control to the nation who issues the currency used as a price basis. To peg to the value of another country’s currency is to give sovereign control of the international value of your money to them.

Gold has this advantage over a peg to another currency. It also has limitations though. The apolitical nature of gold is arguable (geopolitics is relevant) and advances in technology threaten the predictability of the supply-a gold standard is possibly too centralized.

In his proposal “Ideal Money” John Nash conceives of an array of commodity prices that are used as an apolitical basis for conceding control of a money supply. An “Industrial Price Consumption Index”-ICPI.

The ICPI would serve better than gold since it would be less subject to geopolitical considerations and less affected by supply changes of a certain commodity.

In regard to an apolitical basis for money supply Nash notes that you could also consider using the cost of replicating a block used as a basis for the kilogram:

And here a side remark can be made, partially humorously, and just for illustration, that a POSSIBLE standard of value would be simply the cost of making a duplicate, of precisely the same composition and weight, of the “standard kilogram” located at Sevres near Paris.~Ideal Money

That is to say, provided the replicas are made of the same weight, size, and material, the cost to produce them is a great apolitical proxy (although subject to the same geopolitical mining related concerns gold would be).

In regard to bitcoin as a price discovery of the mining and transaction verifying process (eventually only the latter takes place) we can note the apolitical nature of the price created.

It has already been noted that bitcoin’s difficulty adjustment algorithm protects the process from supply shocks.

Furthermore the exchange value for bitcoin is an admission that the system is trusted at any given time. A non zero value for bitcoin suggests some non-zero degree of sufficient decentralization and trustworthiness of the keepers and updaters of the bitcoin ledger.

Consider Eric Voskuil’s observation that “stability implies that price is bounded”:

As fees necessarily rise with demand the utility threshold eliminates demand for transaction of value below the threshold. More generally, the fee level rises to the point where monetary substitutes are more cost-effective for a given value transaction. Stability therefore results from limiting demand directly, in contrast to relying on an increase in supply to do so. Stability implies that price is bounded, yet it can rise with increased effective transaction carrying capacity of the coin, and with increased utility relative to substitutes.

If bitcoin has, for example, only capacity for 7 tx/s we can expect a fee market to arise in regard to the demand for 7 tx spaces. In the global market there is some entity (or entities) willing to the pay the most for those transactions. We should expect the fees to rise that point.

The fees factor into the net cost versus profit to mine and therefore are relevant to the price of bitcoin.

If someone is willing to pay the fees they will necessarily put a floor on the price with what they are willing to pay. An attacker on the apoliticalness of the fees could not undermine the fees paid in such a way to control lower them.

An attacker might try to increase the fees by paying more than an honest market participant is willing to pay. Since fees are paid in bitcoin to the miners that create blocks of new transactions to be updated to the ledger the attacker’s money gets siphoned into the sufficiently decentralized mining network.

A subsidy for mining such as this would in turn make mining more lucrative. The excess profit would be sought by new mining power which would in turn be adjusted for by the difficulty adjustment algorithm. It becomes a very expensive attack, wealth is transferred from the attacker to the decentralized network of miners, and it’s all for naught as the system self-adjusts accordingly anyways.

(Conversely, if you COULD control the fee market at a whim you could have the system in perpetual adjustment in relation to the fees. It’s not really something that is plausible with bitcoin but we can note if the blocksize, and therefore transactional throughput, was adjustable the fees would be manipulable depending on the market for transaction space in relation to the space available. It’s not clear this is a reasonable scenario but it seems clear profit versus cost ratio would be manipulable.)

Thus it shown that bitcoin in its current form, as well as serving the population with censorship resistant semi private transactions, is able to serve as the basis for Nash’s argument. This is regardless of its limited transaction capacity on its base later or almost specifically because of the existence of this limitation.

We now have the “thing” that was needed for Nash’s proposal for Ideal Money to have a basis in reality.




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