Cryptocurrency: Verifiable Information Exchange and Decentralized Timestamping

Innovation is the whim of an elite before it becomes a need of the public.

– Ludwig von Mises

Most chatter pertaining to Bitcoin reveals two parties: a taurine advocate with faith in computer science and an ursine adversary suffering from an aversion to mathematics. For some, the nascent cypherpunk cash system seems incompatible with traditional theories of money, and this group makes bold comparisons to Madoff and the South Sea, but they remain ignorant of Satoshi’s alchemy. This comes as no surprise as economists rarely practice hard science, but if we examine the whitepaper published by Nakamoto, the value of this protocol seems clear. Bitcoin increases the division of labor through the decentralized exchange of verifiable information by using cryptographic hashing to timestamp transactions shared on a peer-to-peer network.

Money arises from commodity markets with a value affixed by the participants’ perceived utility. In this sense, provable fact acts as a transferable good so long as it appears practical to do so. Even the oldest profession requires knowledge of location, price and quality, hence we can note the demonstrable value of material intelligence in even the earliest markets. Unlike a dubious dependence on pimps and madams for the settlement of services, Bitcoin enables the transfer of demonstrable┬ádata without requiring blind trust in a third party.

Testable knowledge has served as a store of value for over three millennia in the form of gold. Resistance to corrosion allows persistent worth through time and the known density ensures the purity of gold money is easily ascertainable. Malleability allows divisibility and scarcity prevents noticeable inflation, features that promote usability through ease of distribution and a natural defense against counterfeit. In time, certificates exchangeable for gold and other precious metals arose and derived value from the difficulty of carrying sufficient bullion for large transactions. Even though physical redemption has ceased for all except the major international powers, fiat currencies like the dollar, euro, renminbi and yen remain the global standard, but they have an inherent weakness due to the lack of democratic accountability.

Bitcoin’s design provides greater transparency than traditional forms of value exchange due to the verifiable public transaction ledger and open source code. This seems radically different from the industrial process of gold exploitation and central banking, both of which require enormous political influence and closed door meetings. In all fairness, the nascent experiment in decentralized cryptocurrency does not have totally democratic properties, it takes a degree of priestly knowledge to understand and attaining coins remains elusive for many. Moreover, the energy requirement and problem of the commons that results from the current protocol present genuine hurdles (see PPCoin). As Kip Warner, founder of Avenaya, points out, “things don’t improve if a computer gets more capable at solving a useless self-assigned math problem, fiat currency means anything in no way causally related to the life support systems the economy relies upon.”

Nevertheless, rather than hoping for honest bankers, relying on a network of interdependent nodes to securely store and verify the history of transactions can give rise to wealth in the tradition described by the 18th century Scottish economist Adam Smith. The classic formula suggests that the specialization of cooperating individuals who perform specific tasks seems conjoined to the growth of trade and productive output. In this spirit, participants who use Bitcoin trust in code for disintermediating the representation, distribution and transfer of value between parties. This commodification of data coupled with the decentralization of verification and exchange has profound implications for society, expect remarkable things to come.

All money is a matter of belief.

– Adam Smith