Bitcoin: The End to Fiat Serfdom
Bitcoin: The End to Fiat Serfdom
PROLOGUE
PROLOGUE
September 15, 2008. The climax of the Global Financial Crisis – the most serious financial crisis since the 1929 Great Depression. Lehman Brothers, at the time the fourth-largest investment bank in the U.S., filed for bankruptcy involving US$600 billion in assets.
October 31, 2008. The pseudonym, Satoshi Nakamoto, penned the Bitcoin whitepaper and released it for the world to see. The paper, titled “Bitcoin: A Peer-to-Peer Electronic Cash System”, singlehandedly birthed a new trillion-dollar movement propelled by the collective desire of the people for a more transparent and decentralized financial system — one that is impartial and devoid of prejudice, where credible-neutrality is enforced by math running on immutable code.
The genie’s out of the bottle. The day of reckoning for the world's financial system, is here.
PROLOGUE
PART II: IN DEFENSE OF PROOF-OF-WORK
PART III: THE ANTIFRAGILE TEST
PART IV: THE PATH TO ENLIGHTENMENT
PART V: A WHOLE NEW WORLD
EPILOGUE
Fiat is good, until it isn’t.
Fiat has played the role of the abominable no-man for most people in this industry — the root of all evil, so it seems. Truth is, fiat money isn’t always inherently bad.
Cultivation of public goods suffer from the tragedy of the commons: a certain infrastructure (e.g., highways) would present a net benefit to a society’s quality of life upon its completion, but nobody is willing to be the one to step up and assume this initial risk.
Since reaching economies-of-scale entails a lengthy breakeven period, no profit-motivated lender would be willing to lend for such a risky endeavor at low interest rates considering the high risk of failure, while for the public good to have any hopes of scaling up in the first place, it needs cheap credit, even if its interest rates doesn’t reflect the true risk of the project.
A debt-fueled financial system (aka fiat) would be able to extend artificially cheap credit to help kickstart public good development. To illustrate, let’s imagine a scenario where a neighborhood wants to build their first power plant:
Under “hard” money (i.e., gold), people would have to save up enough capital, have them pool it together, and lend it under high interest rate (to reflect true risk) to finance the power plant. Once the plant is built, the neighborhood is able to increase energy consumption, leading to further productivity gains.
Under “easy” money (i.e., fiat), a state-sanctioned extension of artificial cheap credit allows the power plant to be built in advance (debt compensates for the capital shortfall). With the power plant ready earlier than it’s supposed to be, the neighborhood is able to generate more economic output from the get-go, repay the debt from this “extra” productivity gain, then continue to compound societal advances on top of this “built too early” power plant.
Singapore is an impoverished nation after its abrupt independence. Fiat imbued the highly competent Lee Kuan Yew with the means to finance his initial public housing programs as well as overseas education subsidies for Singaporeans, which played a big part in bringing Singapore from third world to first within a single generation.
The same goes to Japan’s post-war boom, and South Korea’s own economic miracle. None of the above would have happened if it weren’t for fiat.
However, fiat is a double-edged sword: a competent government might be able to fast-track societal progress with it (via good debt management and allocation), but incompetent heads of state would also be able to decimate everything just as fast, if not faster.
The main culprit? Short-term political interests. This story might ring a bell:
Incumbent administration is sworn in with rosy promises and agendas that seemed too good to be true (e.g., a booming stock market, eliminating college debt, etc.);
Despite the heavy debt burden carried over by the previous administration, the incumbent doesn’t want to be the one to foot the bill. Kicking the can down the road, the incumbent engages in reckless government spending fueled by more debt (e.g., quantitative easing, forgiving student loans, etc.);
Eventually, reality sets in. The asset bubble pops, and college prices increase to reflect market reality. A few overleveraged “too big to fail” firms collapse.
Not wanting to be the scapegoat, the incumbent would greenlight even more debt to “fix” the mess that they themselves (or the previous administration) have caused. This is usually salted with more rosy promises and agendas, in which, you guessed it, will be financed by even more debt issuance.
Once this monetary soap opera has started, it becomes very hard for the incoming administration to stop the music during its tenure.
The longer the soap opera has been going on, the harder it will be for any incumbent to refrain from participating in this dance. Nobody wants to be the black sheep for something that is done in the past and is not their wrongdoing — it would be political suicide.
We now live in the regime of late-stage fiat money, one where people are deprived of financial sovereignty for increasingly non-existent societal benefits. Governments, out of political necessity, indiscriminately devalue their currencies to finance their self-preserving agendas, often times fundamentally misaligned with the interests of the very people they’re supposed to represent.
Wars that the people never signed up for, corporate bailouts that the people never approved of, bloated governmental bureaucracies seemingly of no use to public function, and infrastructure projects with heavily inflated cost estimations that lead to nowhere and took ages to complete.
It is evident that technological and societal advances have lowered the overall cost of food production over the past few decades, so you should ask yourself: why, in nominal terms, is the price of a Big Mac cheaper in 1990 compared to now?
The answer? Currency devaluation, not taxes, is the number one net drain to your fiat-denominated wealth — channeled haphazardly to “initiatives” that you have no say in, or worse, corrupted out of.
And yet, most of the populace remain oblivious to it, to the delight of the ruling class whose primary goal is to kick the debt can down to the next incumbent — until the music inevitably stops.
The cardinal sin.
Is the fate of every modern state set in stone? To eventually be drowned in debt and collapse under the weight of a hyperinflationary currency? Is the fiat playbook a matter of who messes up first, and that who will be the unlucky government to get the short end of the stick?
It is clear that fiat can be useful for governments to leapfrog the tragedy of the commons. It is an important lever bestowed upon the head of state to ensure that critical public goods and services are properly cultivated and adequately maintained, for the collective well-being of the people.
Fiat, if appropriately embraced for this purpose, will present a huge net benefit to society. Hence, the problem lies in the lack of accountability from the ones controlling the debt levers of fiat money — in other words, the absence of checks-and-balances.
Gold has historically served as the check to fiat’s potential to indiscriminately balloon debt. For millennia, gold has always been the world’s store-of-value instrument of choice: it’s rare and difficult to extract (averaging 3-4% supply inflation annually), malleable enough to be easily worked, resistant to tarnish, and is virtually indestructible.
However, its physicality means that it is not salable across space: an ounce of gold sent across the world will arrive having lost a significant portion of its value to pay for its movement.
To address gold’s lack of space salability, gold-backed paper notes exist where denominations are pegged to amounts of gold, held in custody by its issuing bank or government. For the most part of modern history, the world has run on this gold standard — with the exception of certain periods where governments justify the need to take on debts and spend beyond its means (i.e., the Great Depression, WW1 and WW2, etc.).
But naturally, in the aftermath of these periods, the rate of gold convertibility would spiral dramatically as the effects of currency devaluation from the government’s massive debt issuance revealed itself to the people. The weight of gold as a check to debt issuance ultimately proved to be suffocating towards the grand spending ambitions of the U.S. government.
And so, in August 1971, the U.S. stops gold convertibility for the dollar – effectively removing the only check to fiat money and bringing the world to the age of floating exchange rates — welcome to the monetary soap opera!
This time is different.
Gold’s physicality constraints proved to be the bane to its role as the world’s neutral reserve asset. Its lack of salability across space, the difficulty of verifying a gold’s purity (you need specialized knowledge to melt gold), the heavy burden to safely custody gold (you can only hide gold ownership to a certain extent), and its susceptibility towards government confiscation, proved to be its undoing.
The fragility of a “won’t be evil” system is apparent: what can be abused, will be abused. The rise and fall of empires throughout centuries all tell the same tale — and for the gold standard, the writing is on the wall. Its abandonment has always been a matter of one “urgent national security” event — in most cases, merely a convenient excuse for governmental greed driven by political folly.
The need for checks-and-balances to fiat money has never been greater, as the world plunges into the final stages of the fiat soap opera — the climax to a century-long monetary world order, with the U.S Federal Reserve as the stage director.
“The root problem with conventional currency is all the trust that’s required to make it work.
The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve.”
—Satoshi Nakamoto
Bitcoin will reinstate this check to fiat, but better. Not bound by gold’s physicality constraints, Bitcoin is salable across space, is transparently verifiable by anyone with an internet-connected device, and is easy enough for anyone to self-custody. Most importantly, owing to its purely digital form, Bitcoin is immune to state-sanctioned seizures, no matter how powerful the government.
With Bitcoin, the pendulum has potentially swung back to the hands of the people. For instance, war financing: governments can’t just print their way to finance a war, lest they risk opening the floodgates to Bitcoin for their fiat tax base.
No more mindless wars that only serve the government’s agenda: to convince the people of a nation to willingly part with their hard-earned money to finance a war of grave proportions, the cause must present itself to have existential levels of justification for the people who financed it in the first place.
“I don’t believe we shall ever have a good money again before we take the thing out of the hands of government, that is, we can’t take it violently out of the hands of government, all we can do is by some sly roundabout way introduce something that they can’t stop.”
—F. A. Hayek
Bitcoin is the almighty guardian of fiat, the seal to suppress the allures of debt tempting the greed of our fiat masters.
Bitcoin is the impregnable check to fiat’s unlimited power of leverage, instilling urgency amongst the ruling class to be accountable to the people first and foremost.
Bitcoin renders all sorts of monetary dances to be irrelevant — fiat has now become an opt-in system necessitating the winning of the people’s trust, a far cry from its glory days of being the omnipotent force for governmental tyranny.
Bitcoin is, an insurance policy for your wealth — the decentralized nature of Bitcoin ensures that as long as the internet exists, no entity, state or non-state, can shut it down.
As long as the internet exists, anyone with an internet-connected device can use Bitcoin to transact and store wealth, no matter who and where you are. As long as the internet exists, everyone in the world is afforded a permanent lifeboat to save themselves at any point in time whenever they feel there has been a breach of power by their fiat overlords.
If the internet ceases to exist? We’ll probably have bigger things to worry about.
PART I: THERE IS NO SECOND BEST
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