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Lecturer: Jan Wüstenfeld

Does Bitcoin Fix This?

Regardless which of our society’s problems, you mention, Bitcoin maximalists respond with: “Bitcoin fixes this.”

This statement is often ridiculed by so-called “pre-coiners” (people who are not yet convinced by Bitcoin), and every so often Bitcoin enthusiasts are dismissed as crackpots, or Bitcoin is referred to as a “religion.”

For several years now, I have considered myself part of the circle of Bitcoin maximalists (people who see Bitcoin as more than just a cryptocurrency). In this book, I want to defend the thesis “Bitcoin fixes this.” with solid arguments.

More precisely, I will attempt to show that there are only two categories for the pressing problems of our time:

Bitcoin fixes this.

Only through Bitcoin can one begin to fix this.

This book is aimed at people with little or no economic background. The first part focuses on didactic aspects, while the scientific character takes a back seat. In the second part of this book, after having established a solid foundation, I want to provide even other Bitcoin maximalists with some food for thought.

Without giving too much away, in the latter half of this work we will discuss how a state built on Bitcoin could look like and whether such a “state” truly still deserves to be called a state.

Part 1: Money—Foundation of Society

Why do we use money?

Throughout the millennia, a lot has been written and talked about money. Unfortunately, the understanding of what money actually is remains regrettably low. Today, money is widely assumed to be bad, shady, or even dangerous.

One could rightly blame the church and the state as the originators of this miserable reputation. Both institutions controlled education for many centuries and had a vested interest in ensuring that the masses did not understand money. This allowed those in power to covertly increase taxes through inflation without finding citizens armed with torches and pitchforks at their doorstep. The Catholic Church, in particular, has often unfairly maligned money while hoarding gold themselves.

Nevertheless, the 20th century clearly demonstrated that most citizens have a broad disinterest in how money works and thus share the blame for their ignorance.

As early as 1921, Alfred Lansburgh, writing under the pseudonym “Argentarius”, warned of an impending financial disaster, which Germany would indeed later experience in the form of hyperinflation in 1923. He noted the population’s lack of interest in his warning along the following lines:

As long as money works well enough, people don’t want to think about it.

According to Argentarius, a major monetary crisis hits a country about every 100 years, or whenever those who experienced the last one have died.

Another aspect is that money is such a fundamental building block of our society that a single discipline is not enough to explain it. To fully understand money, one must be a universal genius, well-versed in all sciences. Therefore, I do not presume to provide a comprehensive explanation of all aspects and social implications of money in this book. Luckily, that is not necessary, as a basic understanding of money will suffice for most people. The aim of this and the following chapters is to make the aspects of money that are important to you in your daily life understandable. In doing so, I hope to give you a competitive advantage over all those who lack this understanding.

So, what is money?

Before we can understand that, we must first ask:

What does money do?

A core function of money is to be a medium of exchange. This means we do not use money directly but indirectly. Most goods are either consumed directly or indirectly by using them to produce other goods. In contrast, we do not consume money; we exchange it.

Such an exchange is necessary, as a pure barter economy is extremely cumbersome and impractical in a highly developed, specialized economy.

Let’s assume I am a farmer and you are a shoemaker. If I want to buy shoes from you, I could pay you the price in eggs all at once. However, 1000 eggs, with their limited shelf life, would hardly be an acceptable payment for you. So, you would either arrange installment payments with me or use the eggs as a medium of exchange and pay your suppliers with them.

In the latter case, the eggs obviously serve a money function for you, as you exchange them instead of consuming them. But even in the first case, the eggs serve a money function, albeit indirectly. Because if we agree on installment payments, one of us has to grant the other credit. Either I deliver the eggs to you first without receiving the shoes, or you deliver the shoes first without receiving the full number of eggs.

So, if you deliver the shoes first and then receive a daily breakfast egg for years, you have effectively granted me credit denominated in eggs.

We will delve deeper into the topic of credit later. At this point, we want to summarize the two functions of money we have identified so far.

Money is a medium of exchange. A medium of exchange is needed to trade with people who do not have a good that I need or do not want a good that I have to offer.

Money is a unit of account. If an exchange cannot be completed immediately, one side must grant credit, which is quantified in the thing used as money.

These two functions can be summarized by the fact that they enable a direct exchange in person, place, and time to be postponed.

Instead of exchanging eggs and shoes directly, we can agree that payment will not be made immediately (postponement in place and/or time). Alternatively, you can accept the eggs directly even though you don’t need them and exchange them further yourself (postponement in person). A combination of both is also possible. For example, if I pay you first, then you exchange the eggs for raw materials and deliver the shoes later.

Since, as we have seen, any good can function as money, Hayek also argues that money should be an adjective. So one should rather discuss how much “moneyness” a good has instead of money and non-money goods.

How high the moneyness of a good is at any given time depends on numerous factors. First, there are the physical properties of the good used as money. Six properties are usually mentioned:

Divisibility

Durability

Verifiability

Transportability

Fungibility

Scarcity

Eggs are bad money because they are not divisible without destruction and have a very short shelf life. Moreover, eggs usually have a low market value due to their generally low scarcity. Thus, larger transactions are difficult on an egg standard.

In contrast, gold has been the preferred money for millennia, as it is almost infinitely durable, reasonably divisible, verifiable, and fairly transportable. Above all, it is quite scarce.

Why, then, is gold no longer the world reserve currency?

Is there better money now?

Until 2009, the answer to this question would have been a clear no.

Since at least 1971, no major world currency has been backed by gold or anything else of value. Today’s state-issued fiat money (from the Latin “fiat”, meaning “let it be done”) is not scarce. States, central banks, and commercial banks can create it in virtually unlimited quantities at will.

Of the six properties mentioned above, scarcity is the essential one for a sustainable money function because only scarcity can allow money to preserve value.

Here we have discovered the third function of money: money serves as a store of value. As mentioned above, we need a method to shift transactions over time in our daily interactions. Let’s assume we have agreed that I will deliver one egg to you daily for 1000 days. Only after that will you deliver the shoes to me.

As a good merchant, you make the shoes one day before I make the final payment, avoiding storage costs. However, it turns out that the cost of raw materials, measured in eggs, has risen significantly. Your suppliers now demand 2000 eggs, which means you effectively make a loss on the sale of the shoes. In this example, the eggs have failed in their monetary function. The value was not transported over time, so it would have been economically better for you to demand 1000 eggs immediately.

As absurd as this example with eggs may sound, it has happened in reality many times. Argentarius describes in his works how entrepreneurs in the Weimar Republic fell into this trap shortly before hyperinflation. They agreed on a price in Reichsmarks for a future delivery. However, by the delivery date, the Mark had lost so much value that either production could no longer take place, leading to bankruptcy, or the inventory could not be restocked with the paper profit made after the transaction. Some companies went under, even though their balance sheet showed a significant profit.

But how does such a loss of value occur?

So far, I have simply stated that this has to do with the scarcity of a good.

This can be proven in two ways. I will briefly explain both, as understanding them is essential for understanding other monetary phenomena.

The first approach comes from praxeology, the science concerned with the logic of human action, developed by Ludwig von Mises and other representatives of the Austrian School.

Let’s first ask ourselves why people act. No matter what we consciously do, even if we decide to do nothing, it is always an action. “Man acts” is a universally valid axiom. We always choose the action that is best suited to satisfy our most urgent needs.

When we see a burning house with cries coming from inside, we can decide to either run in or simply watch the house burn down. Which of the two actions we pick depends on our preferences.

What is more important to us? The life of the person in the house or our own life, which we would risk?

You are probably more willing to run into the house for your child than for a stranger. In short, your child’s life is more important to you than your own, while a stranger’s life is less important.

However, you likely wouldn’t just give your life for your child for fun, but only because the situation requires it. How you prioritize your actions depends on both your preferences and the circumstances.

If you have a ladder at hand, you will likely save the unknown person you can see through the window, even if you are not willing to risk your life. This is because, in this case, while there is still a risk for you, you consider it so small that the indirect guilt of the person’s death seems more pressing than the slight risk of dying.

The interesting thing is that this assessment occurs without a unit of measurement. You won’t create a formula to weigh how many strangers your life is worth, and then compare it to the amount of guilt you would feel if the person dies.

Your preference hierarchy is purely subjective, temporally variable, and relational, so it is not absolutely quantifiable. That’s why it also eludes mathematics.

Your life is probably one of the things high up in your preference hierarchy. Therefore, one could assume that everything that sustains your life also ranks high and is valuable to you.

Since you would die within a few minutes without oxygen, one might expect that you would be willing to pay many units of money for oxygen. Surprisingly, oxygen is available for free almost everywhere on this planet. You would probably even be outraged if you suddenly found a bill for breathed air in your mailbox.

However, things are different in the example where you want to save your child from a burning house. Breathable air is hard to come by within the inferno. A bottle of compressed air would be very useful there and would significantly improve both your and your offspring’s chances of survival.

How many units of money would you pay to be able to enter the building with a compressed air bottle? Ten units? One hundred? Even a million? You would probably give away everything you carry with you, and in doubt, you might even promise a multiple of your wealth if you could only take this precious air inside.

As you can see, the price you are willing to pay for a good or service depends not only on how much you want or need it, but also on how scarce the good is at the particular location where you want to acquire it.

Mises explains this with the diminishing marginal utility of a good as its availability increases.

You urgently need air, but it is usually abundant. Therefore, you can satisfy your need to breathe air without taking it from someone else. Having more air than you need has no value for you, as you can’t store it and have no use for it.

If air is scarce in a situation, it will quickly rise to the top of your priorities, and you will take any action to get air.

If you are deeply interested in this topic, I recommend the book “Human Action” by Ludwig von Mises.

Another way to reach the same conclusion is the so-called quantity theory. It is often criticized or even ridiculed by modern economists, but in my view, it has its value.

Irving Fisher formulated the quantity theory using the following equation:

M·V = P·Q

M stands for “money supply,” which refers to the circulating amount of money in the economic area under consideration.

V is the “velocity,” the speed at which money circulates.

P represents the “price,” describing the general price level.

Q, for “quantity,” expresses the number of transactions.

Since this equation is difficult to understand at first glance and is frequently misrepresented or misinterpreted, we need to resort to examples again.

As a native Bavarian, I have been familiar with the interior of a beer tent since I was a child. The economically interesting thing about a beer fest is that a separate currency is usually used there. Beer and chicken are typically unavailable for the legal tender, but for tokens.

You can obtain these tokens either by purchasing them, exchanging the country’s fiat currency for them, or by earning them. Sometimes, of course, friends also gift them to you.

If you help the innkeeper set up tables, you will quickly be given a handful of beer tokens as compensation.

Let’s take a closer look at this small festival economy.

Say the innkeeper orders 1,000 liters of beer, and one token corresponds to one liter. Thus, the innkeeper can distribute 1,000 tokens. Since the tokens are invalidated after use, each can only be used once, resulting in a maximum possible circulation speed of one.

Ideally, 1,000 tokens (M) circulate once (V) and allow exactly 1,000 liters of transaction volume (Q) at a price of one token per liter (P).

As you can see, the equation works perfectly in this case.

Unfortunately, the world is not perfect. Suppose the conductor of the brass band had one too many drinks, and a roll of 100 tokens falls out of his pocket and is lost forever.

In this case, the innkeeper has several options. He can give away the remaining 100 liters of beer, consume it himself, or generously reprint a roll of tokens and hand it to the conductor.

What happens if the innkeeper chooses the latter option, and the lost roll suddenly reappears? In this case, some festival-goers will inevitably miss out despite having legitimately acquired tokens.

Now the resourceful innkeeper comes up with the idea to balance this discrepancy elegantly. He simply promises his supplier that they and their employees will receive an extra 200 tokens next year for the quick delivery of an additional 100-liter barrel this year.

He has successfully postponed the problem until next year, and since he wanted to retire anyway, his son will take care of the matter.

The son, equipped with his father’s cunning, continues the game the following year. Since tokens are bound to be lost one day, he simply promises everyone who missed out this time two tokens in the following year.

This works well for several years. Unfortunately, the young innkeeper eventually succumbs to gambling. All the tokens are quickly gone, and he has nothing left to pay the suppliers. Therefore, he prints more and more tokens every day until, one day, a high multiple of the available beer’s nominal value is circulating in tokens. Knowing that his guests will hardly be satisfied with the promise of future beers this time, he escapes abroad. A scandal that shakes the honest village population to the core.

To resolve the drama as fairly as possible, the mayor determines how many tokens are in circulation. It turns out that 100 tokens correspond to a liter of beer. Therefore, the mayor decides that instead of laboriously collecting tokens and issuing new ones, a liter of beer will simply cost 100 tokens this year.

As you can see, also in this example, the quantity equation could not be violated. If the money supply increased, either the circulation speed had to fall proportionally (not all tokens could be redeemed), the quantity of goods had to be increased, or the price had to be raised.

When we switch from the festival to the national economy, the quantity equation becomes difficult to apply.

This is partly due to the question:

What is the general price level P?

To stay with our example:

If one token buys one liter of beer, but five tokens buy a roasted chicken, today. And next year it’s still one token for a liter of beer but now ten tokens per chicken. Has the price level stayed the same or risen?

This question can only be answered individually. For the vegetarian, purchasing power has not changed. For the non-drinking alcoholic who enjoys eating grilled poultry, it has been halved.

So, when a central bank claims its goal is “price stability,” you should ask:

For whom?

Of course, this does not mean that the quantity equation is useless. Just because it is difficult to measure the price level of all products and derive individual purchasing power from the general price level, the mathematical consideration still has an essential application.

It allows us to estimate the possible effects of monetary changes and what cannot be affected. In addition, we can understand through Fisher’s equation under which conditions money can successfully fulfill its function as a store of value, that is, the postponement of a transaction into the future.

But what is this “value” that a saver seeks to store in money?

Value and Price

“I have a very valuable watch.”

What comes to mind when you hear this statement?

Depending on your personal experiences with timepieces, an image will likely appear in your mind that falls into one of the following two categories:

An expensive watch.

An emotionally significant watch.

The first category creates an image, such as a man wearing a suit with a gold Rolex on his wrist.

The second one evokes a picture of a boy receiving his great-grandfather’s watch, which was bought with his first salary after the war.

How can this one word “value” have such different meanings? How can something be valuable in terms of market price but completely worthless to you, and vice versa?

To understand this, we must recognize the difference between subjective and objective value.

We have already considered subjective valuation at the beginning of this book. It is characterized by its relationality, temporal volatility, and the impossibility of quantification, which is called “ordinality”.

Objective valuation arises from subjective valuation through the price discovery process of the free market. Whenever two individuals voluntarily exchange goods and services, two subjective valuations meet.

If we trade 1000 eggs for a pair of boots, we only do so because at that moment, I value the boots more than 1000 eggs, while you, conversely, want the eggs more urgently than the boots.

The objectively observable action does not reveal how we each value the goods, since I might have also paid you 2000 eggs, or you might have accepted 500 if one side had negotiated more persistently. We cannot verify this objectively. It is evident however that the intersection of our respective priorities is precisely at 1000:1.

If we make this observation across an entire economic space, it turns out that there is an equilibrium price for every good. This is also called the market-clearing price, as at this price, theoretically, all demanders can receive a good and all suppliers can receive money.

In short, when many individual transactions are made, misjudgments converge to zero on average. It should be emphasized that the “error” of judgement here is not necessarily an error from the perspective of the acting individuals, but merely that the person who paid more than the equilibrium price was not maximally economical with their resources. They could have apparently obtained the good from another trading partner at a better price.

There are many valid reasons why people pay “too much” for a good, such as the cheaper dealer being significantly further away.

People act to reduce their dissatisfaction. In doing so, it is natural for them to try to minimize their dissatisfaction using the means available to them.

This implies that although individuals subjectively perceive what reduces their dissatisfaction, it is universally true that people do what they think contributes most efficiently to their satisfaction.

If a pair of shoes costs 1000 eggs here and 500 eggs 100 km away, it is my subjective decision whether the expenses and travel time are worth saving those 500 eggs. However, if two dealers at the same location offer equivalent shoes at such different prices, I will always choose the cheaper option as a logical thinker.

The market price of a good thus contains concentrated information about the value judgments of all market participants. This information cannot be reverse-calculated to quantify individual subjective value judgments. Nevertheless, this information is important.

Just as the hash function in cryptography cannot be reverse-calculated but still carries essential information, such as proof of possession of Bitcoin private keys, the market price indicates how scarce and in demand a good is.

This is of course only true if the money in which this market price is expressed has not been manipulated beforehand.

But how do you know whether money is manipulated or not manipulated?

The sins of the central bank

For many people, the existence of fiat money and the central banks that control it is almost a natural law. They are often surprised to learn that less than 150 years ago, there was a time of free banking, where no central authority existed to control money. Even more surprising to many is the fact that the era of free banking was the time of the greatest and fastest increase in prosperity in human history. In the United States, the central bank was not established until 1913 and only since 1971 has it had complete control over the creation of base money.

So, how did we come to use central bank money in almost every country in the world today?

The causes lie in the physical properties of gold. As I mentioned earlier, gold was the best commodity to use as money for the longest time in human history.

Gold allowed for the exchange of great value across continents. Once gold coins were minted, they were – except for deliberate destruction – indefinitely durable.

That is why gold prevailed over barter or other currencies, such as voucher currencies, in most parts of the world early on. The latter were not so dissimilar to our beer vouchers from the previous example and while they worked well regionally, they had massive difficulties in international trade.

A voucher denominated in grain, issued by the largest trader in Mesopotamia, would be accepted within a day’s travel radius, as everyone knows the trader and he is liable for the voucher’s coverage with his reputation, wealth, and even his life if necessary. However, the voucher would hardly convince a trader who delivers goods from distant China. He does not know the issuer and would have to travel for months to redeem the voucher. Direct barter would be much more convenient.

But grain is a bad currency. It spoils easily and is so widely available that it requires whole shiploads to handle even relatively small transactions.

Over time, gold became the currency of choice because it combines the six aforementioned properties better than any other commodity. Of course, gold is not perfect. Its divisibility, for example, is limited. A coin with only a few micrograms is impractical in everyday life, but would be needed for buying bread. Most economies solved this problem by using silver – the second-best material for money – for small transactions.

Large and international transactions, on the other hand, have always been and still are the Achilles heel of gold. Due to its weight, it is very cumbersome to transport gold from one place to another, and the risk of robbery is enormous.

As a solution, history once again turned to the proven technique of vouchers. The Order of the Knights Templar, for example, used gold certificates nearly a millennium ago. They solved the problem of voucher acceptance by using an international association as a backer of the coupon. A Templar who deposited his money with the Order before leaving Europe received a certificate for his deposit. Later, upon arrival in the Holy Land, he could have the local branch of the Order pay him back in gold and silver.

This provided several advantages:

If a Saracen stole the gold certificate, they could do little with it, unlike a treasure chest. No Templar would believe that they were the European noble mentioned in the certificate. If the certificate holder died or the paper was destroyed, a relative of the unfortunate could go to the Order and request a new one.

However, the other disadvantages of vouchers still existed in the certificates. For example, a knight who had the misfortune of depositing money with the Templars when they were disbanded by the Catholic Church lost everything. The counterparty risk persisted.

This counterparty risk, and the methods developed throughout history to minimize it, explain why the last 5,000 years of monetary history have been an endless cycle of the same four stages. A gold standard, accompanied by an increase in prosperity, is followed by a creeping devaluation of money, leading to fiat money without backing, and eventually a collapse, starting a new cycle.

With variations, this cycle has always followed a nearly identical pattern. Usually, gold coins were introduced first, minted by a powerful merchant or state, enabling people to quickly verify the authenticity of a monetary unit. Standardization and centralization of coin minting were necessary compromises, as gold can be tested for authenticity with some effort, but an effort too high for everyday use.

This opened up an attack vector. A mint is a trusted party; all users of coin money must rely on the coins containing the stamped precious metal content.

Throughout history, however, this content has been successfully manipulated. The Roman Empire, for example, used various techniques to reduce the precious metal content of its coins from over 90% to almost 0% over several centuries. This allowed for the financing of wars and palaces that the population would hardly have been willing to finance through more transparent taxation.

Since coins, like certificates, carry counterparty risk, and certificates are also easier to transport and can be provided with a certain degree of theft protection, the latter gradually gained ground over coins.

Usually, it was either private banks or states that standardized and issued these certificates.

Sadly, like the clever innkeeper’s son from earlier, the certificate issuers quickly realized that they did not necessarily have to hold 100% of the certified precious metal amount.

Some certificates get lost, while others are not redeemed for a long time, either because they are used for saving or as a convenient substitute for gold in transactions.

Over time, more and more customer deposits were taken for personal gain, until one day all historical certificate currencies had as much precious metal backing as the late Roman Sesterce before them. Zero.

Once a currency is no longer backed by a scarce asset, it becomes fiat money. The issuer of the money is the one who controls the scarcity of the units and can simply create more with their command “Let it be done!”.

The incentive for the creator of the money is obvious. Why work hard to earn money when it can be created much more easily?

But why don’t the other market participants resist?

Pathology of hyperinflation

The death of a currency usually occurs through a so-called hyperinflation. There are various definitions, but today it generally means a price increase of over 50% per month. At the peak of hyperinflation, as in Germany in 1923, the devaluation of money even led to a doubling of prices every 24 hours.

Depending on the definition, over 50 hyperinflations have been documented in recent history. This raises the question, whether they are inevitable, or if people are simply crazy and keep making the same mistakes.

As is often the case, the answer to this question lies far beyond black versus white.

Hyperinflation could be easily avoided if there were a currency with a strictly limited money supply. However, the technical and social introduction of such a currency is not trivial.

In previous chapters, we discussed why a gold or precious metal standard are so susceptible to manipulation of the money supply. But why does this remain undetected and seemingly without consequences for decades or even centuries? And why do people keep playing this fatal game?

To understand this, we must look at how new monetary units enter the economy.

Once a central authority, usually a state central bank, has forcibly and gradually established itself as the sole ruler over the currency of a monetary area, it can theoretically create money at will. In practice, however, the average citizen initially stands in the way. As limited as the general understanding of money may be, people are hesitant to accept something unfamiliar. Gold works, but paper money is new, and there is a vague collective memory that unbacked money has failed multiple times in history.

A central banker or politician who openly calls for the abandonment of the gold standard will quickly find themselves out of office, and sometimes even in danger of losing their life.

That’s why they must initially act in secret. In a coin-based system, copper is secretly mixed in, or taxes must be paid in new coins, while state expenditures are made in old, worn-out coins. In the case of certificate money, a so-called fractional reserve is employed.

The bank issues certificates that certify more value than is actually available in the vault. This practice has historically worked quite well as long as the reserve is above 50%. Even with 30% precious metal to certificate ratio, a bank is still relatively stable. With each percentage point fewer reserves, the risk of a bank run increases exponentially.

A bank run occurs when many people try to exchange their certificates for deposits at the same time. If the bank has covered less than 10% of its certificates and every fifth depositor wants their gold, the bank becomes insolvent.

A bank run can be triggered by many factors, often simply by competition between banks. One bank senses the weakness of another and demands all its deposits from the weak bank, while simultaneously leaking the liquidity problems to the local press.

Central banks have also historically used this tactic to assert their authority. If citizens don’t accept the central authority over money, attempts are made to target popular private certificates or note-issuing banks with bank runs, forcing them to their knees. This then gives the state a double opportunity to present itself as the rescuer, and create trust in its own currency. At the same time, it promotes acceptance of strict laws against the evil private banks that have deceived their poor depositors.

Subsequently, the central bank plays the same game as the private banks did before.

Central banks will fractional reserve with ever-increasing leverage, just as many commercial banks do. The sole difference is that in case the liquidity runs out, states can simply ban the right to exchange the certificates to gold. Thus, the central bank doesn’t have to admit its bankruptcy during the national equivalent of a bank run. Instead, it can pay off uncovered debts, by printing money, ultimately culminating in hyperinflation.

One could, of course, attribute ill will to both private and central banks and spin wild conspiracy theories about why they manipulate money and impoverish people. The sad truth is probably much simpler and at the same time more concerning.

Everyone sees themselves as the good person. Even mass murderers find an excuse to justify their killings. So, it’s not surprising that self-interest and a lofty goal are usually the cause of the fatal expansion of the money supply. A central bank might, for example, claim that the money printing is necessary to prevent economic collapse.

But how is it possible that many politicians and central bankers convince the general population that a fiat currency is a good idea and that inflation is acceptable, even necessary?

The oxymoron of price stability

Without a central bank, chaos would reign. The economy would collapse, the value of money would fluctuate wildly, and the population would become impoverished. Only a state central bank can guarantee price stability.

Arguments against free banking frequently sound something like the above. Hardly any economist dares to contradict these statements. But just because something is generally accepted knowledge does not mean it is true. On the contrary, it is a well-known psychological phenomenon that we believe false information if we simply hear it often enough. Sometimes, even when we consciously recognize the information as false, it gradually becomes ingrained subconsciously.

One such piece of information is the myth of price stability. In most economic fairy tales, it consists of two components:

A growing economy needs more monetary units.

Falling prices lead to an economic collapse.

The first part should appear obviously false to you with the knowledge you’ve already gained, but since it is such a popular fallacy, I still want to test your patience and briefly address it here.

The thinking behind it is based on the voucher concept. In our beer tent example, tokens were destroyed after being redeemed, so a maximum circulation speed of one could be achieved. In such an economy, a new voucher would indeed have to be issued for each new good or service. Luckily, hardly any monetary system works this way. Instead of destroying money when paying for an existing good and creating it again when a new good is produced, we simply pass money on. I can pay you 1000 units of money for my shoes, and you can use the same 1000 units to satisfy your suppliers, who in turn use it to buy something for themselves, and so on.

The circulation speed in money systems can thus be significantly higher than one. In the example just mentioned, 1000 units of money would already have been used for a transaction volume of 3000 money units once your suppliers spent it. These 1000 units can represent any number of transactions. The only limiting factor is that individual transactions can have a maximum amount of 1000 money units. However, if these 1000 units are infinitely divisible, for example into micro-money, nano-money, etc., they could easily represent today’s world economy.

At the time of this writing, the dollar money supply, including derivatives, is estimated at over 1 quadrillion, a number with 15 zeros. With a world population of 8 billion – 9 zeros – depending on the chosen estimate of the money supply, there is a 6- to 7-digit amount of dollars per person. Far more than necessary, especially since the dollar is already divided into 100 cents and can be digitally divided further. Thus, even the largest transactions and transaction volumes can be conveniently represented in dollars.

So, why does the money supply continue to grow steadily?

The pretext for this is reason number two. A constant money supply would inevitably lead to an economic collapse like the Great Depression of 1929 in the USA and the subsequent economic crisis.

But is that true?

The argument put forth for this is based on a similar fallacy as the first point. While the first point neglected the fact that the circulation speed is not constant and not limited upwards, the other side of the Fisher equation is neglected here.

It is assumed that the price level must logically fall with an increasing supply of goods and a constant money supply. However, here too, the circulation speed can react in a regulatory manner. It doesn’t matter whether one shoemaker offers a pair of shoes for 1000 units of money or 1000 shoemakers offer 1000 pairs of shoes for 1000 units of money each. If the economy grows to the extent that one person who can afford and wants shoes becomes 1000 persons who can afford and want shoes, the price of shoes remains the same since the production costs have not changed. If shoemakers find enough buyers to avoid stronger price competition, why should they lower their prices?

The real reason for the price decline, which goes hand in hand with economic growth, is technical deflation. Due to innovation and automation, the costs of producing most products decrease over time. This also lowers prices, as innovative companies secure more market share by lowering their prices below the competition’s costs, pushing them out of the market. So if prices fall due to technical deflation, it is not deflation in the monetary sense. Market participants are simply adjusting to the new equilibrium price that has shifted downward due to increased efficiency. When discussing price stability, falling prices due to technical deflation are stable prices from an economic perspective.

It is this process of technical deflation that has fueled the enormous increase in prosperity during the Industrial Revolution. The more efficient the economy, the more goods a worker can buy for their wages, and the more goods a worker can produce in their working hours, which in turn allows for higher wages.

Demanding price stability here – defined as constant prices without excluding technical deflation – is in truth a forced redistribution. The increased efficiency should not benefit workers and consumers, but shareholders and financiers of companies. A truly cynical demand, as it usually comes from those who claim to fight for the workers and the masses.

But that’s not enough. Since not all goods and services are subject to technical deflation to the same extent, price stability, as defined by central banks today, is a contradiction in itself.

We already discussed how, based on personal preferences, a person may not perceive a price increase while it can be a massive price increase for another. If a central entity defines a basket of goods to measure price stability, it pretends that these are the products that all citizens must consume and accepts that all citizens who consume products not included in the basket must pay higher prices to keep the prices in the basket constant.

This is not only a terrible paternalism but also a targeted redistribution from the bottom to the top.

One could argue that this is the necessary price to pay for a functioning economy, as without the 2% inflation target of central banks, the world economy would certainly collapse.

So we need to ask once again:

Is that true?

Anatomy of a Great Depression

Black Friday, October 25, 1929. The news of the great stock market crash in the USA shocked the world, and a long, deep recession begins. Historians today refer to it as the Great Depression. An economic shock from which the US economy would not recover until the outbreak of World War II. An event of such magnitude that economists still regularly warn against it almost 100 years later. Some even argue that risking a second Weimar hyperinflation is better than another 1929.

The seemingly logical conclusion that central banks and politicians draw from this is that some inflation is necessary. After all, every child knows that 1929 was a “deflationary crash” caused by the inflexible money supply of the gold dollar. Well, every child also knows that Santa Claus exists. In fact, Santa can probably be better historically substantiated than the connection between hard money and the crash.

A deflationary crash cannot occur in hard money, i.e., one with an almost constant money supply. As we discussed in the previous chapter, price competition between different producers of all goods would have to arise, forcing them to lower their prices to the point of bankruptcy.

Producers would only engage in such price competition in a free market if they could afford it. That is, if one market participant produces more efficiently or believes they can produce more efficiently and make up for losses if they only force enough competitors out of the market.

The likelihood of such competition suddenly developing across all product categories is extremely low. And if it should develop, a large part of the suppliers would go bankrupt after a short time, leaving only the innovative ones to survive. A gain for the consumer.

A deflationary crash requires a fractional reserve system. It is the Wall Street equivalent of a bank run. If stock prices are manipulated upwards with bets on margin and other methods, a hype can arise that even the average person eventually jumps on. Prices soar, more and more people gamble on the stock market instead of working. Companies are incentivized to shift their focus from production and innovation to their stock price. Instead of building reserves and investing, they buy back their own shares.

This leads to stock prices increasingly decoupling from reality until the frenzy eventually fades. The trigger for this sobering realization can be a crisis or just an uncomfortable newspaper report at the wrong time. Suddenly, major investors realize that their portfolio’s nominal value is backed by a tiny real value. They sell, and the price falls. This triggers panic among those investors who only joined to participate in the hype. Like in the game of musical chairs, when the music stops, all investors try to sell their shares quickly, but there are far fewer willing buyers than sellers.

As a result, prices usually crash significantly below the market value justified by productivity, and companies that have borrowed heavily on their shares or depend on liquidity from credit are eliminated.

Such deflationary disasters are typically short-lived. Like the hangover after a night of heavy drinking, there is a brief painful period, and then the economy continues as before. Often even much better than before, as primarily the strongest and most efficient companies have survived the crisis.

A deep, persistent crisis like the Great Depression requires another layer of madness that goes far beyond the price hype frenzy.

At its core, it is a combination of a bank run and a stock market crash.

Leveraged loans, or fractional reserves, allow banks to lend more money than they can cover with their deposits. To not appear over-indebted on the balance sheet, a bank requires collateral from its borrowers.

For example, if you buy a house that costs one million dollars, the bank will lend you a maximum of one million dollars. At the same time, it will demand that the same one million dollars plus interest be registered as the bank’s claim in the land registry. If you can no longer service the loan, your house will be foreclosed, and the bank will receive the portion of your debt plus interest and compound interest from the proceeds. As long as the house can be sold at a suffuciently high price, there is no problem. However, if this is not possible, the bank incurs a loss. The bank cannot reclaim the money you once paid for the house from the previous owner. It circulates in the economy and will perform its function as money many more times. Only the collateral behind it has disappeared.

Let’s now look at the case of leveraged shares:

Suppose the fictional company X has a share value of 100 dollars and one million shares in circulation. It borrows 100 million dollars from the bank. The bank adds the 100 million dollars as collateral to the balance sheet and credits X’s account with a balance of 100 million dollars. This so-called creation of demand deposits is seemingly 100% covered, so it appears to be a full reserve.

What happens when a stock market crash reduces X’s market value to 1 dollar?

Suddenly, the bank has a fractional reserve of a factor of 100. The bank’s balance sheet liabilities of 100 million dollars are now only covered by 1 million dollars in assets.

If this crash occurs in a gold certificate-based currency, it will easily trigger a bank run, as informed investors recognize the bottleneck and quickly exchange their certificates for gold.

If this happens en masse while banks are highly leveraged, the financial system collapses. Banks can no longer redeem the certificates, people lose confidence and hoard gold. This erodes confidence in the demand deposits recorded in the banks’ books even further. A vicious cycle begins.

By hoarding gold, the velocity of money is reduced while the money supply simultaneously shrinks. Considering the Fisher equation, either the number of transactions – i.e., the economy – must shrink, or prices must fall. Usually, both happen.

A crisis becomes particularly severe and prolonged when a central bank or government tries to intervene through regulatory measures, such as distributing subsidies. These interventions prevent creative destruction. Strong companies have to draw on their financial reserves for longer than without intervention, while unprofitable ones are kept alive. Sometimes, innovative and efficient companies are even killed to keep zombie companies going.

This further undermines confidence in the money, driving smart investors even more into gold and tangible assets, leaving the economy with even less covered money. At this point in the cycle, states typically react by banning private ownership of gold, which only exacerbates the problem.

In the case of the United States, the gold ban was enacted in 1933 – four years after the collapse – and lasted until 1974 – three years longer than the gold standard itself.

Strictly speaking, the United States has not overcome the crisis of 1929 to this day, despite the massive war profits from World War II. The gold ban did not help and could only be “lifted” after the petrodollar was established, effectively making the use of any money apart from the uncovered dollar in international trade a capital offense.

Before we go into more detail about the petrodollar, we need to delve deeper into the topic of gold backing, we thus reserve this topic for another book.

The Emperor’s New Money

So far, we have used the terms “un-backed” and “backed” money quite loosely in this book. Most often, we spoke of “backed” when the money was deposited one-to-one in gold. However, this term, although frequently used, is misleading and, in my view, incorrect.

We previously clarified how market prices are formed from many individual value judgments, with the “error” of one individual always equally benefiting another person.

To elaborate briefly:

If I pay you 1000 eggs for shoes that have a market price of 750, you gain 250 eggs. If you ask for only 500, I save 250. In both cases, after the transaction, our combined purchasing power remains the same.

But what happens when the money supply expands?

Since it is nearly impossible to study economics empirically due to the many changing parameters that are difficult to measure and control, we must use a thought experiment to answer this question.

Let’s assume that all other individuals in the economy keep their demand and supply constant.

We conduct the shoe transaction with a money supply of 1 million dollars for 1000 dollars. As we shake hands on the deal, the money supply suddenly increases to 2 million dollars. Under the given assumptions, your purchasing power has suddenly been halved. But not only yours, the sum of our combined purchasing powers has also been halved.

Of course, in real life, inflation of the money supply usually does not manifest so directly, as money does not enter the economy evenly. Only in cases of hyperinflation, such as in Venezuela, where the state regularly decides to add or remove zeros from all accounts, can this effect be observed clearly.

In debt-based currencies – like the dollar since the abolition of the gold standard in 1971 – one must look more closely to understand this effect.

As previously discussed, a bank can use a borrower’s collateralized debt to create demand deposits. In a debt-based currency, the central bank does nothing more than grant a loan to commercial banks and, in return, take collateral on their balance sheet. We have already seen the problem with this. Just because collateral covers the debt today does not mean its market value cannot fall, leaving large parts of the debt uncovered.

This is particularly devastating in modern fiat money, as commercial banks create additional demand deposits based on central bank money. If a central bank mistakenly overvalues bank collateral by a factor of 10 and the bank itself leverages its capital by a factor of 10, the coverage shortfall multiplies to 100.

The risk of a deflationary crash is thus significantly higher than in the traditional gold-based fractional reserve system.

To make matters worse, the definition of backing becomes entirely arbitrary. In the gold standard, a fixed exchange rate between gold and certificates is agreed upon. This means the value of money can only fluctuate slightly around that of gold. The fluctuations themselves are primarily due to the difficulty of transporting gold.

The market value of gold in the gold standard arises from the individual value judgments of market participants.

When we trade the shoes in gold, only our subjective evaluations are relevant. To you, an ounce of gold is worth more than the shoes, while to me, the footwear is worth more than the yellow metal.

In an economy where gold is used as the only form of money, this means that the value of all transactions must be represented by the total circulating supply of gold.

Along with the realization that the market price of each individual good is formed solely by the efficiency of its production – when the supply-demand ratio remains constant – it can be concluded that the velocity of circulation is a self-regulating parameter.

In this artificial scenario, it responds to economic growth by increasing and to recession by decreasing. The value of gold is thus a reflection of the individual market values of all other goods. If the price of a good measured in gold decreases, it means that the good is now being produced more efficiently; if the price increases, the good must be more difficult to produce, for example, due to natural disasters.

Although in the real economy, demand for each good is not constant, this statement can be made about all market prices in total. After all, people can only act. Inaction is logically impossible. All market participants continuously express their value judgments, which through gold are transformed into a function of demand, supply, and production efficiency, which is expressed in the price of all goods.

If an economy solely uses gold as money, then the sum value of all ounces of gold must be precisely the sum of all individual goods times their market price.

In this case, gold is not backed by the number of gold atoms in each coin but by the individual decisions of all market participants. The purchase contract gives gold its backing. The physical gold atoms are merely a means to an end, to keep the money supply constant.

This would change abruptly, if someone had Midas’ ability to turn objects into gold by touch.

If all existing gold is in circulation, each market participant can only obtain gold by offering another participant a good or service worth at least as much as the gold. The voluntary purchase contract determines and backs the value of gold.

However, Midas can easily and effortlessly obtain gold. He can outbid any market participant without hesitation. The value of the gold that Midas brings into circulation is determined entirely differently than that of all the gold already in circulation. Its value is formed solely by King Midas’s judgment.

Since Midas can easily obtain abundant gold, he will drive up the price of all the goods he desires by outbidding competing offers. This leads to suppliers of these goods receiving disproportionately large amounts of gold, allowing them to pay more to satisfy their needs in turn.

Thus, the price increase caused by inflation gradually spreads from the source of money into the economy. Those who receive the new gold first gain unearned purchasing power, while those further away from the source of inflation lose purchasing power. The apparent winners are Midas and his court suppliers; the losers are those to whom the money trickles down to last. This is called the Cantillon effect.

Ultimately, however, everyone loses due to this inflation. The distortion of money prevents it from serving as a unit of account. The market price increasingly loses its meaningfulness, making it difficult for companies to calculate their economic performance and thus to allocate their resources efficiently. The economy becomes less and less performant over time.

Thus, while Midas and his courtiers get a larger piece of the pie, the capital stock erodes, and the pie becomes smaller and moldier with every new ounce of gold put into circulation.

A constant money supply is therefore in the interest of all market participants. But how can this be ensured?

The oldest problem of humanity

Ever since humans have lived in groups, they have collaborated and shared responsibilities. In the family, daily tasks are distributed among generations according to knowledge and abilities. In a village, one family specializes in food production, another in clothing. Without this division of labor, there would be no society, technology, nor prosperity.

But how can everyone be fairly paid for their work?

In the family, everyone usually contributes without compensation, expecting the family to help them in return to the best of their knowledge and abilities. Even in this small circle, unpaid labor often leads to frustration. The mother accuses the father of not taking out the trash, while the father replies that he works hard all day, while she “just” looks after the children. Besides that, the 15-year-old son could do it. The son in turn thinks that he already helps much more with household chores than his younger siblings. And so on…

The cause of these conflicts lies in individual value judgments. Everyone considers their work to be at least as valuable as that of others.

This uncompensated, nonspecific system of reciprocity obviously cannot be applied to an entire city, let alone a nation. Work must be fairly paid.

But what does “fair” even mean?

As we have seen, everyone values their work differently. One might consider payment based on working hours as a solution. Unfortunately, this leads to the question, of whether it is truly fair that a worker who assembles ten machines a day earns the same hourly wage as one who assembles fifteen. What if the assembly of one machine involves dangerous steps, and another does not? What about a farmer who works hard for a year but loses the entire harvest due to drought? Who pays him for his work?

You will surely admit that the value of work cannot be easily determined “fairly.” The best-known method to determine it is through the free market. What works for the price of goods is also an effective means for the value of services, including individual labor. But for this value to be determined “fairly”, the market must not be manipulated by altering the currency in which wages are measured.

Ancient philosophers concluded thousands of years ago that hard money, i.e., one with a constant amount, is the only means to achieve this goal. This insight has been derived and confirmed in previous chapters.

But how to maintain a constant money supply?

For about 5,000 years, the answer to this question has been gold.

Since gold is relatively scarce and difficult to mine, its quantity can only be slightly expanded each year. Still, even gold can experience inflation. For example, when vast amounts of gold and silver were looted from the New World and imported to Europe, it had the same devastating effect on ordinary citizens as if the nobility had developed Midas’ touch. With advancing mining technology and the development of new rockets, it is only a matter of time before an even worse wave of gold inflation from outer space or the earth’s crust arrives.

Moreover, gold has the previously mentioned disadvantages that lead to the cycle from full reserve to partial reserve to fiat.

Is there a better solution?

Let’s take a look at the alternatives:

Central banks and political control over money are one option. Albeit, one that can never work in the long term. The incentive to manipulate the money supply for one’s own advantage is too great for mortals to resist indefinitely.

At the beginning of the twentieth century, Henry Ford came up with the idea of tying money to energy. At first glance, the idea is appealing, as energy is the one thing in the universe that can neither be created nor destroyed.

However, there are many practical problems in implementing such a currency. Only the invention of computers and the internet made it possible. But on the internet, everything can be easily copied. How could a currency be created on the internet that could not simply be duplicated, thus expanding the money supply without cost?

The answer is the so-called distributed ledger. In short, if all transactions are made public and every user of a currency can verify all transactions, the money supply cannot be expanded unnoticed.

But who can write in this ledger?

Most email account owners are familiar with the phenomenon of spam. An open ledger could easily be crippled by a hacker flooding the servers with spam, such as in a DDoS attack.

To solve the spam problem, Adam Back invented the concept of Proof of Work (PoW) in 2002. Before someone could send an email to a user, the sender had to find a hash of the email that fell within a specified range.

A hash is the value that a certain type of algorithm outputs when it receives a sequence of bits and bytes at the input. The interesting thing about hashes is that they cannot be reverse-calculated (as far as mathematically known). Having a hash, I cannot reconstruct the originally input bits and bytes. But conveniently, the same input always produces the same output, so a hash provides an unfalsifiable proof of the input without revealing the input itself.

If I were to publish a hash of this book on the internet, the timestamp of when I uploaded the hash would be proof that I wrote this book and no one else. Yet, the content of the book could not be stolen by copying the hash.

Modern hash functions, like SHA-256, are designed to be very sensitive to the smallest changes in inputs. If I remove just one whitespace from this book, it is impossible for anyone who does not have both unhashed versions of the book to recognize that both hashes belong to the same book.

A hash function can also protect against counterfeiting. A PDF document or even a printed contract can be easily manipulated. In court, thus, your deposition stands solely against that of the counterparty. There is, in the worst case, no reliable way for the court to determine which contract is real and which the forgery. Suppose the parties to the contract have also signed the hash of the original document. In that case,it’s next to impossible to falsify both the contract and the corresponding hash in an undetectable way.

Proof of Work uses these properties to make spam costly. By accepting only a certain range of correct hashes, the sender must add characters to the meta-data of the email to obtain a hash that falls within the specified range. Since the hash cannot be reverse calculated, the sender can only do this by adding random characters and testing various hashes, until they find a hash function with a fitting output. Thus, a certain amount of computational effort is required to contact the recipient. Since computation requires electrical energy, spam becomes expensive and is reduced.

This could create a currency structured in a way that the next entry in a distributed ledger is always made by the person who first constructs a transaction with a hash which falls within a specified range. Then, all users who read the ledger would verify whether this transaction is allowed. That is, if only money was spent that previously existed, and if the owners of the money initiated the transaction.

David Chaum proposed Such a concept in basic terms in 1982 called Blockchain.

But something was still missing for a functioning digital currency.

Mexican Standoff

An open blockchain alone does not make good money. It is merely a method for all users to verify that transactions have not been altered afterwards, and no new money was illegitimately put into circulation. A mechanism is needed to ensure that the blockchain is protected from attacks and that the damage from a successful attack can be remedied.

Imagine a wealthy entity investing enough computing power to find a whole series of hashes that fit the target range usings this to paralyze the blockchain or flood it with false transactions, or, worst of all, take control of the network.

The solution is as simple as it is ingenious, relying on two pillars. Firstly, the difficulty adjustment. Here, the target range is adjusted by an algorithm every 2016 blocks to maintain an average time of 10 minutes between blocks.

If an entity were to provide enormous computing power, the blockchain would still not grow infinitely fast.

Secondly, this breaking mechanism would give other network participants time to sort out false blocks and increase their computing power to find valid blocks again.

This is where the second pillar comes into play. In addition to validating blocks by each network participant, they must agree on the correct blockchain in case of ambiguity due to an attack or coincidence (two blocks are found simultaneously).

In case of doubt, the longer chain is always taken. Since each new block is cryptographically linked to the previous valid block, a valid chain will always be longer than an attacking chain, as long as 51% of the computers in the network are working on the honest chain.

This mechanism was described in 2008 by Satoshi Nakamoto and is therefore called the “Nakamoto Consensus.”

The unique feature of this consensus is that an attacker must not only achieve 51% of computing power once to attack the blockchain. They must maintain this superiority permanently; otherwise, honest participants could jointly build a new chain from a block before the attack, replacing the attacker’s false chain as the longer one.

In principle, this is a Mexican Standoff between all miners searching for valid hashes to continue the blockchain. If one misbehaves, all others will immediately attack them, and their computing power would be spent in vain.

Miners have the incentive to do this for three reasons:

Block Subsidy

Transaction Fee

Nodes

The Block Subsidy is a fixed amount of new Bitcoin that each miner can pay themselves for finding a valid block. If someone attaches an invalid block, other miners can build a longer chain of valid blocks that exclude this block and thus receive the fee. Of course, it is much more likely that a valid block proposed by a miner to the network will be linked with other valid blocks and thus become the longest chain. To build on a false block, the majority of miners would have to conspire.

In addition, miners collect transaction fees for all transactions they include in their blocks. Miners who frequently produce invalid blocks would quickly receive no more transactions from network participants, as the risk of a chain rollback would be too great.

The last bastion is the nodes, which are all network participants who do not search for blocks themselves but validate them and store a copy of the entire blockchain. Bitcoin was designed, unlike other cryptocurrencies, to grow the blockchain slowly, allowing every Bitcoin user to check all Bitcoin transactions using affordable hardware (a full node can at the time of this writing be set up for under $200).

The nodes alone have real power over Bitcoin. A miner is just a service provider. If they build invalid blocks, nodes can refuse to accept them and freeze the blockchain until a new valid block is attached to the last valid block.

If someone wants to change the rules or the code in the Bitcoin network, they must convince a super-majority of nodes to accept the change.

In the so-called Block Size Wars, the power of nodes became apparent. Almost all major companies in the then young Bitcoin industry and most miners wanted more storage space in Bitcoin blocks to allow more transactions per second. However, a large part of the node operators did not want this, as it would have driven up the costs of operating nodes, possibly leading to centralization.

Such centralization would be a significant threat to Bitcoin. The self-interests of node operators ensure that the money supply can never grow beyond the almost 21 million BTC that Satoshi originally set in the code.

Each node operator can ensure with their node that only the rules and code they have installed are used in the network. If some participants use incompatible code, the network splits. The new network has the same transaction history as Bitcoin but is no longer Bitcoin.

There have been several such hard forks, including during the Block Size Wars. However, since the majority of nodes stuck to the old code, the alternative Bitcoin copies quickly lost value and support. Miners could not cover their electricity costs and returned to mining valid Bitcoin blocks. One can thus say that the more individual node runners there are, the harder it is for a central entity to change or control Bitcoin.

Bitcoin’s innovation is not just a single line of code, but a combination of technology, network effects, and game theory. Every Bitcoin user can operate their full node, as long as they can afford the hardware and a few watts of power consumption, and by that, ensuring the Bitcoin network remains unmanipulated, and that no one can take away or inflate their Bitcoin.

Bitcoin uniquely links energy and money supply. No matter how much energy is used to mine Bitcoin, there will never be more than 21 million in circulation. More energy expenditure means the network becomes more secure, and each user has an incentive for the network to become even more secure over time.

The further Bitcoin’s adoption progresses, the more nodes and miners there are in the network, the more effort an attacker must put forth even to falsify a single block.

Today, an attack on Bitcoin is no longer possible by any single country. This is also the reason there can never be a second Bitcoin.

There is no second best

To recap, so far, we have learned, why money works optimally when it has a constant supply. We then discovered that gold had been the best technology for money during the last 5000 years and that Bitcoin now mitigates the key downsides of gold.

The obvious next question is:

What will be the next money after Bitcoin?

As you may have guessed from the title, of this book, the author’s position is that there will not be a better Bitcoin for millennia to come. I do not want to just postulate this; however, I want to give you a few key arguments for why I think this is the case.

As history shows, besides brief transition periods, every local economic system tends to use one single money only. This is due to the strong network effects money has. To be the optimal medium of exchange and unit of account, it’s best to not have to convert between different moneys. And since network effects grow exponentially with the number of users, once a certain user threshold has been passed, any new monetary technology has to be significantly better than the dominant one to replace it. A little better is not enough.

This is why platinum couldn’t challenge gold as money and why copper was always only used as a sneaky replacement for gold and silver, not a market choice.

Now, you may think:

“Gold and silver were two competing moneys for thousands of years.”

This is a fair, yet incorrect point. Silver was just a substitute for gold on small transactions due to gold’s lack of divisibility. The truth is, it was merely one bi-metallic money standard.

Countries like China, who tried to remain on a silver standard, when the rest of the world was on a bi-metal standard, got wiped out economically for using inferior money.

The economic ping-pong between the gold standard and Fiat money is not a free market phenomenon, but has always been one of manipulation and force, which was possible due to gold’s monetary flaws.

Thus, the question you need to answer, when wondering whether Bitcoin will succeed, is:

Is it better enough to overcome the power of incumbency in gold?

It is a moot point, though, since we are currently in a global Fiat standard. So, even if you are unsure, if Bitcoin could have outcompeted the network effect of gold 100 years ago, today it just has to outcompete Fiat.

Bitcoin will succeed if it’s better money than gold, which I think I have argumentatively proven in the previous chapters. And since Bitcoin is already dominant in the cryptocurrency space and has amassed an estimated 200+ million users worldwide, it is larger than most Fiat currencies already.

I think it is thus fair to say that the next Bitcoin would have to be significantly better money than Bitcoin. And such a money is unlikely for two reasons:

The primary reason is that Bitcoin maximizes the security of its stable monetary supply, so a better money on the key parameter is not even theoretically possible.

A money that is not only better on other monetary parameters, while simultaneously as secure in its scarcity as Bitcoin is hard to imagine. One that is so much better on these parameters to overcome Bitcoins network effect is getting exponentially less likely with every new Bitcoin user.

On top of this problem, any next-gen money would have the issue that Bitcoin already happened. While Bitcoin could grow into scale in a decentralized way, it was possible only because those in power didn’t take it seriously.

Any money trying this now would not have this benefit of flying under the radar, and would thus likely be usurped by centralized powers.

Far more futile to such a money would be if it was successful, however. Because if money became a technology replaced every couple years by a better one, it would mean that it lacks the properties of transposing a transaction over time.

Digital scarcity can be discovered once and implemented in a technology once. Every copy must necessarily just be a copy, and as such subject to being copied itself. If it can be copied, it is not scarce.

Bitcoin is the one shot we have. If we screw Bitcoin up, there is little hope that we will ever have sound money again.

Luckily, I think the chances of Bitcoin succeeding are excellent, as long as all Bitcoiners stay vigilant and informed. Bitcoin truly is hope. Not just for a better money, but for a better, more sustainable society.

If you don’t believe this, yet, I hope to convince you of this vision in the next couple of chapters.

Part 2: BITCOIN NATION—BUILDING A STRONG SOCIETY ON SOUND MONEY

Beyond representative democracy

“Many forms of Government have been tried, and will be tried in this world of sin and woe. No one pretends that democracy is perfect or all-wise. Indeed, it has been said that democracy is the worst form of Government, except for all those other forms that have been tried from time to time.” — Winston Churchill

Modern democracy is a better form of government, compared to most historical forms of government. Still, most sane people will admit that it has many flaws.

Unfortunately, most people deny the possibility of fundamental improvement. It is, in my opinion, deplorable that most Western countries have enshrined a version of representative democracy into their constitutions without any mechanism to improve it over time and incorporate new technologies.

Most constitutions in place today were created before the internet, some even before electricity was widely used. If one looks at how much everything in our society has changed in the past 200 years, how can one conclude that we cannot organize our society better?

The question of how to better organise a nation has plagued me for many years. And while I offered several suggestions in my previous works, on how to better our governance, today, I do not stand behind these ideas anymore.

Not because I believe that they wouldn’t be an improvement, but rather because I doubt that any enshrined solution is a viable one.

What is needed is a form of governance that continuously improves over time, not another cast in stone system like the current one.

The difficult question is:

How to achieve continuous improvement?

A process to do so is known in other fields. It is called the market. In the free market, products and services adapt to the needs and zeitgeist of each era and usually get better over time.

What we will thus try to accomplish in this chapter is an investigation on how a nation’s governance could be subjected to free market processes.

In the first step, we will flip the question at hand on its head:

Why is national governance not subject to market forces today?

The answer to this question will surprise many socialists:

To a certain extent, they are.

If I am unhappy with the state services my home country provides, I can leave and apply for citizenship elsewhere.

There are several big showstoppers to doing so, which inhibit the market forces to a point where they are barely visible.

The first one is the fact that, unlike your internet provider, you cannot switch your sovereign without moving. Since most people, like me, are deeply rooted in their birthplace, moving is not an option.

The second obstacle is immigration and emigration policies. For many nationalities, it’s next to impossible to move to another country of their choosing. And even if you are lucky to have a passport that opens you many doors, the wealth taxes inflicted if you leave can be devastating.

To put it in a nutshell:

States have a territorial monopoly on violence. And this monopoly all but blocks free market choice of nationality from occurring.

For most contemporary people, this answer is where they stop their investigation. Since a state is defined by this monopoly, and we obviously need states, too bad, nothing can be done, move on.

One group of thinkers has gone further, however. Namely, the Libertarians, most famously Austrian Economist Murray Rothbard.

He envisioned a society where only market forces and natural law rule. Unfortunately, his and most other libertarian thinkers failed to put up a practical plan on how to get there. Rather, they wanted to enshrine a libertarian society the same way representative democracy is enshrined today.

To make matters worse for the libertarians, their ideas have been usurped by Ronald Reagan in the US and under the name neoliberalism by Margaret Thatcher in the UK. Under the free market flag, they implemented cronyism via their policies. They did this to such an extent that it tainted the words “libertarianism” and “liberalism” so heavily that in most people’s minds they mean almost the opposite of what Rothbard or Mises meant with these words.

From my perspective, the original libertarians had many good ideas, but made one fatal mistake, which, if corrected, may make their dreams a reality.

For a society where governance is subject to the free market, you don’t need to first abolish the state, nor create a new territorial form of governance. The only outcome this would have is a mob rule, which to end states were invented in the first place.

The real way to get there, in my mind, is that the territorial monopoly of the state must be broken inside the current system and that the rest will follow automatically.

How to achieve this?

My proposal is simple:

Allow people to choose their state services provider, like their internet provider. Why should your nationality be any more tied to the place you live at than your internet service?

At first glance, this thought might seem ridiculous to you, please hear me out. Not so long ago, in my home country, Germany, phone and internet services were monopolized by government run companies. This was justified by the fact that it supposedly is not economically viable to have more than one infrastructure in place, and thus the state needs to provide it. After the monopoly was broken, however, it turned out that not only can having more than one telecom infrastructure be economically viable, but the existing infrastructure can be rented out to newcomers in the market. Today, the ownership of the telephone wires to my house does not limit my choice of providers.

Why should it be different for the state?

Why do we need states?

Without states, we would live in a dog-eat-dog world, where the strongest takes what he wants from the weak, where murder, rape, and chaos would reign.

Along these lines, most people argue why a state in its current form is necessary.

Let’s have a very brief look at why and how states evolved.

Our understanding of the history of the early days of pre-civilization humans is very limited. As far as we know, they lived in small family tribes, hunting and gathering for survival. When times were good, they’d live in abundance. When times were tough and food was scarce, some tribes would murder other tribes for food and other contested resources. The weaker or more peaceful tribes would either be wiped out or move to less contested territory.

Over time, some weaker tribes figured out that they could band together and fight off the smaller strong tribes. This triggered a feedback loop, with peaceful and aggressive tribes banding together in ever larger groups to conquer and fend off the other tribes. The larger groups were less mobile, thus requiring the development of new tools, like agriculture, to continuously sustain large groups of Homo Sapiens in one static location.

It can thus be said that the state developed not to get rid of the dog-eat-dog world, but rather just to breed ever bigger dogs. If you look at the history of military conflicts, states have never been peaceful for extended periods. As states got bigger, the wars got bigger.

You might object to this analysis, by pointing out the fact that at least the citizens inside the states experience less violence than without a state because the government peacefully resolves conflicts among citizens and fights crime.

This is not accurate from my perspective. As long as the state is successful in gaining resources for its elites from the outside, it is peaceful to its citizens. When it is not successful at procuring resources from abroad, it turns on its citizens. The conflict “Right vs. Left” is not really a political conflict, these are simply two different positions of a continuously swinging pendulum.

Over time, most states first turn to robbing the outside to grow and when this is not possible anymore, they then turn against their citizens to enrich the elites. This process can be observed in the USA today.

This process is reversed, if a state is newly created out of the rubble of a state that militarily failed. It thus cannot hope to gain resources from the outside, and will first turn inwards and exploit the mass of citizens, to enrich a small elite. This happened in post-WWI Russia and post-WWII China. Once such a state gets powerful enough, it will again turn on the outside to procure resources.

In the end, as we saw when discussing the impact of expanding the money supply, the violence, and free market restrictions imposed by both types of states do not really make anybody richer. They make a small elite comparably richer, but overall, they hinder economic growth and cause inefficiency.

This can be clearly seen, when you look at historic examples of states that tried a different, more liberal, more market-oriented approach. Be it historic Venice or the Hanseatic Cities. These small city states, focussed on free trade and personal liberties, having their law codes mostly created on a voluntary basis by merchants. This allowed them to amass untold riches and, despite their small size, afford enough military power to fend off bigger states for centuries.

Unfortunately, a small territorial size, in the end, is fatal. As soon as these states made a tiny mistake or competitors had grown enough in sheer relative population size, the small free cities would be forcibly integrated into larger empires and plundered for their riches or entirely wiped out.

Since free societies require a large part of voluntarism and consent, they necessarily must be small if organized territorially. Finding enough like-minded individuals in one geographic area is just too hard. Thus, when a small free state grows, even if it is organized democratically, the more it grows, the less it can stay democratic. It may still claim to be, but in reality, democracy will at some point turn into a dictatorship of the masses, which will then quickly be usurped by elites. Within a couple of hundred years at most, every democracy in history has turned into some form of authoritarian state. A trend unfortunately currently being witnessed in most Western countries.

There is one counter example, however. The Jewish Diaspora may not have left their homeland voluntarily, but it is a great example of how a small nation could organize itself in a non-territorial way, grow prosperous and survive millennia of persecution. I greatly admire the achievements of the Jewish nation.

Long before modern telecommunication technologies, the Diaspora managed to organize itself, have a law and education system largely independent of territorial host states and create a trade network that made some of their members spectacularly wealthy.

Of course, this wealth has triggered envy, so just like the small free city states, Jews were continuously attacked, and many conspiracy theories created to discredit them. Unlike the territorially organized free nations, the Diaspora could not be conquered and assimilated or eliminated. Whenever one territorial host started persecuting the Jewish people, the decentralized governance network allowed the diaspora to organize and get as many of their nation out of danger as possible. Thus, while they suffered unspeakable tragedies, as a nation, they survived.

In light of this success story, my proposal for future nations is to organize in such a decentralized way. Which of course raises the next question:

What is a nation?

Birth of a nation

State, country, nation. These words are often used synonymously in modern English. An unfortunate circumstance, created by teachers emphasizing creativeness over precision when teaching to write and grading essays. Combined with the fact that some encyclopedia writers seem to have mistaken the warnings in Orwell’s 1984 for instructions, modern English and most other languages have been mushed to the point where precise communication is nearly impossible. Thus, any discussion must necessarily devolve into an argument about definitions. So, since every word nowadays means everything and its opposite, let’s try to agree on differentiating definitions for the remainder of this book.

With “state”, I mean a territorially organized country, with a government that claims a monopoly on violence.

With “country”, I mean any territorially organized form of governance, not necessarily with a monopoly on violence.

And when I write “nation”, I refer to any group of people that voluntarily bands together under a governance structure, regardless of whether it’s organized territorially or with a monopoly on violence for a governing body.

Based on these definitions, you may understand why I posed the question in the first chapter, whether a state on a bitcoin standard still deserves to be called a state. While I am not opposed to a nation organizing as a state per se, in the following few chapters, we will discuss why I think a nation should organize neither as a state nor a country. In fact, we will discover that there seem to be only two options for the long-term future. Either nations without states, or states, where the ruling class is its own nation, suppressing the citizens whom they consider inferior to themselves.

While writing these lines, I can almost physically feel the discomfort my definition of nation will give some of my readers. Nationality is something people deeply identify with and consider as immutable as the color of their skin or who their parents are.

Especially in my home state of Germany, this discussion about “true nationality” can take grotesque dimensions. When foreigners migrate to Germany, they, their children and often even grand-children, will be considered and commonly consider themselves foreigners, no matter if they have a German passport or don’t even speak the language in their supposed home country.

If I consider my own family, some of it migrated from Eastern Prussia after WWII, an area that is now and historically mostly was Polish. So, is this branch of my family Polish or German?

The bulk of my bloodline has been in the same area for centuries. Still, just the last five generations had four different nationalities. They were considered Austrian, Bavarian, citizens of Salzburg and lastly German.

In essence, the concept of conflating nationality with country of residence is the underlying issue. As mentioned previously, humanity started as family groups that were not necessarily bound to a single territory. So that a nation had a strong component of shared bloodline, shared values and interests is natural. After nations settled in countries and later even became states, people who most accurately can be described as one nation, were spread over different states and countries. With the loss of distinction between these words, the nationalist conflicts arose. In essence, nationalists weaponize the emotional bind one has to their nationality and home turf to confuse people into killing their fellow nationals on behalf of a state.

So, how can we detangle this dilemma and properly define our own nationality?

In a nutshell, I think nationality always is and always was a choice. You decide who you are and with which group of people you identify. Bloodlines are for biological reasons a common ground often chosen, but not necessary in my opinion.

As Balaji explains in “The Network State”, a nationality can be any group of people that bind together out of a shared interest. This overlap of interests can be very broad or very specific. Maybe everybody who considers Bitcoin the best money can be part of a giant “Bitcoin Nation”. Perhaps this nation will split into sub nations because the “Atheist Vegan Bitcoin Nation” cannot stand the “Christian Carnivore Bitcoin Nation”. And perhaps people can belong to several nations simultaneously, just like myself, who currently considers himself European, German, Bavarian and a Bitcoiner.

How such a nation based on shared interest could get started, is explained thoroughly in “The Network State”, so I will make it very short here. Essentially, Balaji’s thesis is that thanks to the internet, people with shared interests can easily organize and band together, regardless of where they primarily reside. If such a group gets large enough, it can lobby itself into being recognized as an entity in international diplomacy, maybe even acquire land and create a sub-state in an area of a host state.

I agree with the first portion. People can organize easily via the World Wide Web and possibly even get recognized as a nation by the UN. What I don’t understand is why this nation should become a state. Quite the opposite, a globally organized nation turning itself into a new Venice or new Hanseatic City, will likely suffer the same fate as these small states did.

Much preferred, in my mind, would be that such a group gets states to recognize it as a decentralized nation. Whether this is possible and how economic incentives and game theory may strongly favor this option shall be discussed in the following paragraphs.

The legal basis for people splitting into their own independent nations is clearly stated in the UN resolution 1514 of 14 December 1960. People have the right to self-determination, including ethnic groups and nationalities in colonial or amalgamated states (e.g., Yugoslavia) being able to vote for their independence. In practice, this right has been applied rather arbitrarily, unfortunately. While the Scottish people were able to vote on independence, Catalans were refused to do so, or rather their vote was not recognized.

The underlying issue, for this right, lies in what I explained above. The words “nation” and “ethnic group” are not well-defined. And for any given geographic region, you will always be able to say “This is a mixed population, not one nation, they have no right to vote”. Thus, the only real path to getting recognized as a nation, is by getting a group big enough, to be too big to ignore.

Over the internet, this shouldn’t be a problem. The more authoritarian states turn, the more people will want to opt-out. No matter, if these people want to create one giant new nation or many small ones. Initially, they all share the interest in getting this wish recognized. The best strategy for them seems to be a unified fight to get recognized as a new, decentral nation. Then, once this nation is officially recognized by major states, to sort out the details and split further if necessary, or organize the big nation into smaller federated nations.

This is only one part of the road to success for new, decentralized nations. They might also arise from existing states, for self-interest reasons of these states’ elites.

The demographic bomb

Population statistics indicate that sometime in the 2030s, most Western states will experience the effects of the demographic bomb. Namely, over half of the population will be over 65 and out of the workforce.

This situation is impossible to overcome for the current Western social security and welfare systems. Especially in light of the enormous debt levels, states have racked up already.

The only way out for states is to acquire skilled workers from other regions. Naturally, the only continent that still has birth rates higher than the replacement rate comes to mind, Africa. Unfortunately, the education system in most parts of Africa is far from the quality and capacity needed to sustain the Western high-tech industrial output. A problem that is next to impossible to fix in time to educate enough highly skilled workers to replace retiring boomers and gen-x. So, unless Elon Musk’s Tesla Bot is ready and capable by the end of the 2020s, Western states will have to face harsh competition trying to recruit skilled labor from other declining populations or from India.

Especially the United States of America is in trouble if they want to keep their position as the dominant military and economic power. Their advantage is that right now, they are still the most popular target for skilled ex-patriots. It is unlikely that the small minority of people willing to uproot themselves and move across the globe will be enough to spare them from the demographic bomb, however.

At some point in the near future, it is probable that the US will join the movement of digital passports and starts offering their state services to people abroad.

At first, this will look innocent enough, so other states do not feel threatened. For a payment of a flat tax, high earning individuals will get a US passport and all the benefits it brings with it. Later, when the tax situation gets more and more desperate, the portfolio of state services for digital citizens will expand. If US citizens get into trouble with the law in host states, the US will use its diplomatic and military might to claim jurisdiction and bail them out. At some point, the United States likely will push for a UN resolution that expands the right to self-determination to the individual and the property they inhabit. With that move, the US of A would not only gain access to the most productive workers, but also to the land and resources owned by high-net-worth individuals.

Of course, from the perspective of the early twenty twenties, such a fundamental change in the organization of states may sound far-fetched, but I think it is far more probable than guessing a coin flip. The pressure to gradually implement such a system is extreme, thanks to the demographic bomb. Furthermore, the incentive structure is so strong for both states and individuals that by the time the USA would push for an individual right to self-determination, other large states would likely already have copied the digital citizen model. Maybe they would have even tried to outcompete the US in terms of digital citizen benefits.

If you are still unconvinced that my predictions are not lunatic, consider the alternatives.

One possible alternative is a society of ever waning social nets. Such a society would drive unproductive people to flee to countries that still offer a social security system, collapsing the state finances of such countries. This would leave these states with only two options. Either, they would need to attract productive workers even faster than unproductive ones. Or fend off unproductive immigrants militarily, again requiring a surplus in young, productive citizens.

Another alternative is a society that avoids the demographic bomb by totalitarian measures, either killing off or deporting aging citizens. Killings, would likely alienate the citizenship, causing young people to flee while they can. Deportations, on the other hand, again require enough young, productive citizens to fend off immigration.

So, regardless of which of the above approaches a state takes, if any other big nation chooses to offer digital citizenship and credible protection against totalitarian governments without the need to uproot oneself, it would outcompete.

Really, the only scenario I can see, where territorial states remain without having at least limited digital citizen programs is one, where robotics and AI offset the loss of productive workforce caused by the demographic bomb.

Even in such a scenario, a nation that offers digital citizenship, will have an advantage, since it can attract the most successful AI and robotics talent, even if these people or companies are not willing to physically move to the country that nation originates from.

Let’s recap:

There is a strong incentive over the next couple of decades for states to create digital citizenship models. By market competition, digital citizens will likely receive more and more services. Ultimately, the remote digital state service providers will likely offer a similar portfolio as today’s territorial states.

Totalitarianism or a technological miracle are the only alternatives to the digital citizenship approach.

Does this mean that the end of states for the benefit of decentralized nations is inevitable? No. While the competition between states ultimately may lead to a fine-grained patchwork map, this is far from certain.

While I see a chance that all state services may be digitizable, and a nation might thus consist of different nationalities houses, it is unlikely in a city where every single street houses multiple nations.

Not so much because it is impractical, but rather because humans like to surround themselves with like-minded individuals.

Thus, I consider a world of nations that consists of tiny decentral countries the size of cities or counties much more likely than a nation-only world, where every household chooses their nationality willy-nilly.

The beautiful thing about the likely occurrence of digital citizenship and free market competition between nations is that it must over time lead to better and better outcomes on average.

Even if this disruption of traditional state structures may cause a lot of chaos and confusion in the first few decades, in the long run, the game theory of free markets guarantees that the outcome improves over time.

This means nothing less than that we have nothing to fear and should loudly advocate for digital citizenship models, before totalitarianism takes over even more states.

If today’s territorial representative-democracy states truly are the best form of government humanity can construct, they will win out in the end.

Yet, even if in the end we find ourselves where we started, we’d be better off, since states would have proven their business model and their representatives would have a far greater claim to legitimacy.

This will never work

Despite my argument that we cannot end up in a worse place than we are today, I know some will object to the vision of nationality independent of territory, for various reasons. Let me address the two most common concerns, I have encountered when presenting this concept so far:

Corporations will abuse this to not obey laws and avoid taxes.

Today, big corporations already have essentially freedom to choose in which jurisdiction they pay taxes and to lobby the laws in any way they want, often barring small competitors from the market. Before I came in contact with the idea that territorial states may not be the only option available, I thus advocated for a world government.

Unfortunately, such a world government would have the enormous downside of being easily corruptible by large corporations and the corruption or totalitarian takeover of the world government would be recoverable only by global civil war, if at all.

The real question is thus not, whether big corporations could influence the law, but whether their influence would be less than today.

I see an excellent chance that this is the case, and that the influence of big business would wane over time in a world of bitcoin nations. The reason for this is simple. If a nation wants to attract citizens, it needs to provide superior state services. These state services would likely depend a lot on the size of the nation and how strong its contractual network with other nations is. This means that the incentive to have contracts between nations in place that exclude or punish businesses who engage in regulatory arbitrage is forceful. Indeed, much stronger than it is in the current system.

No territorial monopoly means anarchy.

The most common objection to transforming states into nations is that of impending anarchy. Firstly, this is a mistake in definitions, since anarchy – i.e., the organization of a society based on voluntary cooperation – is not the same as anomy – lack of moral standards in a society. Furthermore, a world of bitcoin nations would likely start from the exact same legal framework as is in place in our territorial state society, today. This is due to two main reasons:

First, and foremost, bitcoin nations will most likely arise by states offering digital citizenship, not from the ashes of a broken-down society. Secondly, a society that allows its people to switch nationality at any time, will only have citizens if it effectively guarantees the rights of these citizens, including providing them with protection from amoral actors.

This again leads to the conclusion that a decentralized society of nations would likely improve their moral standards over time, thanks to the incentive structure.

Now, many might object that there even is something akin to “improved” moral standards. So to fully resolve this counter-argument, we will need to discuss the fundamentals of ethics.

The foundations of ethics

A thorough discussion of morality and ethics would fill entire libraries, so I cannot hope to do it justice here. Rather, we will focus on pointing out the most fundamental popular misunderstandings and point out a way to create a framework of continuous improvement for ethical standards.

The first misconception about morality is that it is postulated either as subjective or as objective. This is a false dichotomy. In reality, ethics is grounded in objective reality, but since objective reality contains individuals capable of subjective value judgments, these need to be accounted for in any objective ethical framework. The result is necessarily a framework of objective outlines, with subjective nuances.

A second major falsehood is the notion that ethical frameworks offer a moral guidance that results in people being able to decide whether they are “good” or “bad”.

In reality, it is theoretically and practically impossible to be 100% good or 100% evil. So any ethical framework that tries to win over people by soothing their conscience and telling them “Atta boy”, is really just a marketing scam and not any moral standard.

Third and most importantly, most modern ethical textbooks confuse two different concepts. They try to simultaneously describe what are the most “good” behaviors and which behaviors lead to the optimal outcome for human society. While often aligned, the two concepts in numerous instances couldn’t be more diametrically opposed.

If you don’t take anything else from this chapter, please try to internalize the following:

Ethically correct, aka “good”, behavior is a luxury.

Your interests are often conflicting with the interests of other persons. Only those who have met all their basic needs are free to engage in ethically correct behavior. Those who are not can only be “good”, if they sacrifice themselves. And that is also bad.

At this point, you are probably asking yourself where my judgments on what is positive and what is negative come from. As mentioned, a full ethical framework cannot be deducted here, nor am I claiming to have one. There is a lot of serious scientific-philosophy work yet to be done.

What I can give you is the basis of my ethics, which is objective and which can be your starting point if you’d like.

What is objectively valuable?

Austrian economists would likely deny that there is anything objectively valuable in the universe at all because value is subjective.

While this consideration is true for things, it is not true for conscious beings. Even though we have not fully understood, what consciousness is, beyond the fact that it exists, its basic properties are not only known, they are the only thing in the entire universe we can absolutely be certain of.

This was logically proven by Descartes, in his 1641 book “Meditations on First Philosophy”. Specifically, in his famous statement “Cognito ergo sum.” (lat. I think, and therefore I am). By sheer logic, he formulated the apodictic proof that even if the whole universe was a demonic hallucination – or in modern interpretations a simulation – you could still be certain that your consciousness is real and that you as an individual exist.

So, if consciousness is real, and one of the fundamental properties of consciousness (at least mammal consciousness) is the ability and mandatory habit to subjectively judge value, what can we deduct from this?

Let’s explore this with a thought experiment:

For an unknown, unlucky reason, you are the only consciousness left in the universe.

How valuable is the universe? Well, obviously as valuable as you subjectively judge it and yourself to be.

If you die, how much value is left in the universe? Zero, since there is nobody to perceive value. In conclusion, the value of your life must have been as high, as your valuation of yourself and the universe.

So, while we cannot quantify nor objectively measure your value judgements, we still can say with the same certainty that we can claim “cognito ergo sum” that objectively your life must have value.

Starting from this basis, we now know that any thorough ethical framework must include the desires, concerns, and value judgements of all conscious entities, while it can exclude all non-conscious things.

As a rule of thumb, we can then also deduct, that whenever your interests do not conflict with other conscious entities that pursuing these interests is morally neutral. If your actions help another conscious being, i.e., perceive a benefit from your actions, they are morally good. And when your actions conflict with the interests of other individuals and are perceived as hurting them, they are bad.

Obviously, most of your actions that affect other individuals will be perceived as beneficial by some and as detrimental by others. So the morality of your action is seldom purely good or bad. In the end, you make the value judgement, which portion of good and bad actions you are comfortable loading onto your consciousness.

An absolute hierarchy of objectively more good and more bad actions is hard to construct, although there exists a way to at least determine an outline to make statements on some aspects of morality objectively. For example, murdering a person is worse than slapping them in the face because the latter is a brief discomfort, and the other removes all the subjective value this person perceived from the universe and deprives all the individuals valuing that person of said value.

I will leave further discussions on objective versus subjective aspects of morality to later books or other authors for now, and try to shift your attention to the translation of ethical baselines into societal frameworks and laws.

The discovery of law

Since at least the time of the ancient Greeks and Romans, law codes were public documents, with the purpose of giving people guidelines to live lives that do not create conflicts. If conflicts still arise out of violation of the law codes, the ancients tried to compose comprehensive processes to resolve the conflicts.

In this sense, Roman law was an evolution from previous purely religious law codes, in that it assumed that laws were not to be dedicated by a god and interpreted by prophets. Instead, the Romans recognized that there is natural law, which can only be discovered and is ingrained in the nature of our universe and man made-law.

Natural law is essentially what I described in the previous chapter as “ethics”. Every action that conflicts with the ethics – which result from the properties of consciousness – conflicts with natural law.

An ideal law code would be in complete harmony with natural law. Unfortunately, this is not practically achievable. To understand why, we need to take a look at the praxeological aspect of inter-person conflict.

Let’s say Person A accidentally or intentionally destroys Person B’s favorite art piece. To reverse the violation of B’s natural property rights, A would have to replace the art piece to B, plus pay B for the damages that occurred to him while he was devoid of his property.

Let’s assume the artist who created the work is long dead. Thus, necessarily A can only reimburse B with another good or service, not an exact replica of the artwork.

The conflict is unresolvable if A and B don’t find a good or service that B values as high or higher than the artwork, while A values it lower or as high as the artwork. If no good can be found, where the valuations meet, one of the two will always feel betrayed. So, while in theory every person has their individual ordinal valuation of goods, in this conflict, a man-made law is required on how to resolve such unresolvable subjective valuation conflicts in a manner that is most satisfiable.

Another aspect is the practical consideration of preventing repeat offenders. From a purely natural law perspective, it would always be enough, if the offender restores the damage he has done. Since crimes are not always discovered and not always justly resolved in practice, it is necessary to oversize the compensation in cases where intent is suspected.

Now here again multiple problems arise. Intent is only known to the individual and cannot be proven or disproven beyond doubt. Furthermore, the exact proportion of crime to punishment is hard to determine.

Let’s assume a thief is caught stealing 1 Bitcoin. Should he be fined 1 Bitcoin, 2 Bitcoin, 10 Bitcoin?

Well, obviously this depends on multiple variables. One is, how much Bitcoin the thief already has in possession and how often he gets away with crimes.

A first-time offender, who steals out of boredom and opportunity, might be prevented from becoming a repeat offender, when sentenced with a fraction of his net worth.

A professional thief who stole 100 Bitcoin before being caught, stealing another, will laugh about any sentence less than 100x his latest catch.

The mother who is trying to feed her starving child will likely not be stopped by any fine.

As you can see, there are several hurdles one needs to overcome to create a “just” law code:

The discovery of natural law through scientific philosophy is incomplete.

Valuations are subjective and some conflicts thus unsolvable.

Intent and crime detection rate need to be taken into account to prevent repeat offenders.

If you agree with the logic of the previous chapters, then you surely have a hunch, what my suggested solution to these issues is?

Of course, the free market.

In a society comprised of Bitcoin Nations, law will likely improve over time for two reasons:

Firstly, people can easily switch legal systems, if they are not satisfied with their current legal framework.

And secondly, competing legal systems will need to find arbitration methods to resolve conflicts that arise from differences between people who subscribe to incompatible law codes.

This necessarily forces each legal system to continuously outcompete others and requires that any nation who wants to grow their membership numbers negotiates treaties with other nations, where it is specified how conflicts between their members shall be resolved.

To see how all the market processes described in this book could play out in real life, let’s have a bit of conjecture time.

The dawn of a new era

In the following chapter, we will take a mental journey through the next decades and centuries, under the premise that Bitcoin Nations become a reality. This journey will obviously not happen as predicted, it is meant as an inspirational exercise. If I do my job well, you will hopefully return from this trip burning with excitement for Bitcoin Nations and ready to work hard on making them a reality.

It is the year 2042. The United States of America have just announced that they will now be extending their digital citizenship program with a real estate option.

Citizens paying for the top-tier membership will now have the option to convert any landownership they have to US territory. Shortly after, the UN ratified a note clarifying that the US move is covered by the right to self-determination.

Any citizen who converts property in countries who signed the UN note will be able to convert the land to US soil. Upon payment of a small fee, the title will be transferred within 30 days. Property taxes, will be guaranteed to be less or equal to the current property taxes for the first 20 years.

For “national security reasons”, it is agreed that conversions between nationalities are only possible for territory outside the US mainland.

As a result of this last addendum China, Russia and many Brics nations refuse to ratify the UN note and instead propose their own digital citizenship concept. They do not enable to fully transfer territory between each other, but rather allow to rent territory for max. 99 years for private and 50 years for commercial use. Rented property is essentially treated like a consulate of the digital citizenship nation.

Over the next decade, the competition for skilled labor and investment forces more and more nations to allow territorial sovereignty. The big states, China and US, gobble up more and more digital citizens until they encapsulate over 60% of the total population.

In 2062, the growing tensions between the two giant nations results in a crisis, with more and more digital citizens moving into the competing mainland. Pressure is mounting that the mainland exception clauses are deprecated.

With the danger of WWIII increasing daily, diplomats are desperate for a resolution. In an unexpected turn of events, a delegation from the Bitcoin Nation sends an offer to both territorial market leaders.

The following deal is proposed:

All 2 billion members of the Bitcoin Nation, whether they already have any other digital citizenship or not, offer to subscribe to a digital citizenship by whichever of the big nation offers it certain privileges.

Since, the Bitcoin Nation accounts for only 20% of the world population, but 51% of global GDP, this deal is irresistible and the United States make an offer. This offer is quickly followed by a better Chinese counteroffer.

After several weeks of negotiations, the UN note is updated to now allow all digital citizens to switch their territory to a nation of their choice. To prevent a new colonialism, where nations coerce their citizens to let the government inherit property, a market solution for property ownership is found. Private residential property can be only passed on to heirs that also inhabit it. Otherwise, every property is put up for auction regularly, where corporations, citizens, and nations can bid on a property ownership, limited to a max term of 99 years.

This moment will later go down in history, as the moment when large-scale wars were finally ended.

This new system greatly favors the Bitcoin Nation, which by the year 2140 has acquired 80% of the population. It is not a giant super state, however.

The Bitcoin Nation only offers a very basic human rights protection service and diplomatic services with all the small independent nations.

All other topics are federally organized in location and preference-specific clusters that have not much in common at all.

Show me the incentive

Let’s return to the present. Regardless, whether you consider my vision utopian or dystopian. No matter whether you agree with my analysis that totalitarian governments are the only possible alternative. There is likely one question burning in your mind:

“Why would states agree to this?”

The incentive structure for the bigger states is obvious. They can only gain by allowing citizens from other states to join. Especially as long as they can keep the monopoly on their heartland.

Why on earth should a small state allow its citizens to leave, though?

As Charly Munger once said:

“Show me the incentive, and I’ll show you the outcome.”

While not obvious at first glance, there is still a strong incentive pressure on small states to agree to the increasing digital citizenship invasion.

The first one is simply “might is right”. The so-called “rules-based world order” is only propaganda. If you speak privately to any politician in poorer nations, they are all aware that they serve purely on the grace of the United States and other big military powers. Whenever a leader tries to rise up against the US, he’ll either face assassination, invasion, or a coup. The only alternative for them is to ally with another nuclear power, e.g., Russia or China. Small and poor countries have no choice, but to accept a dictate by the superpowers.

Of course, other incentives exist as well. Already today, some countries offer services to ex-pat citizens. If you have a US passport, then you are liable to pay taxes, even if you live abroad. As a compensation, you receive all the freedom of movement this passport grants you and often, the US government will try to bail you out if you get in trouble.

US basketball star Brittney Griner is a prime example. She was imprisoned in 2022 in Russia for possession of marijuana. After 10 months in prison, US diplomats negotiated a prisoner exchange, freeing her.

Furthermore, the US already has tax treaties in palace with several countries, clarifying which portion of the taxes a US citizen pays will go to the United States treasury and which to the host state.

Such tax treaties are not simply brute forced on “third world” countries, but are voluntarily accepted by top 5 economies like Germany. The benefits of such tax deals are usually mutual. Germany has higher taxes than the US, so businesses and high net-worth individuals have a reason to hold their assets offshore. Thanks to the treaty, the US will report German citizens who try to hide their profits in the US of A, to German tax authorities.

The treaty is thus profitable for both governments, but to the detriment of the citizens.

As you can see, the first miles on the road to Bitcoin Nation have already been travelled. The next steps will likely happen purely out of governmental self-interest as well.

To put it in a nutshell:

State governments don’t plan to create Bitcoin Nations, nor to voluntarily give up their territorial monopoly. They will gradually progress to this end because they want to keep the wealth and power for their elites as long as possible. In a world, where the demographic bomb is making this exponentially difficult to do in traditional state structures, Bitcoin Nations are unavoidable, unless states are willing to commit horrific crimes.