Five pieces of original research that changed how I think about bitcoin
1. Bitcoin Behind the Veil
For anyone who spends more than an hour or two honestly trying to understand bitcoin, it quickly becomes clear that this thing is interdisciplinary.
To appreciate it fully, you need a bit of math, macroeconomics, cryptography, monetary policy, behavioral economics, programming, incentive structures, philosophy, environmental studies, law, privacy, security, and psychology.
Thinkers across disciplines are working on where to place this disruptive new technology within their respective intellectual frameworks.
In no particular order, here are some of the best attempts I’ve found so far.
1. Bitcoin Behind the Veil (philosophy)
In this thought provoking paper, Craig Warmke asks readers to don the veil of ignorance, a philosophical concept where you imagine that your memory has been erased. Along with all your worldly possessions, identity and status.
You retain the ability to read, research and form opinions, but you shed everything else you have accumulated in your life, and all the cognitive biases they imbue.
This, Warmke argues should be a prerequisite for thinking about bitcoin.
Because whether you’re for it or against it, removing your own experience from the equation and thinking objectively is critical if you want to have any chance of making good decisions going forward.
Warmke acknowledges that this can be extremely difficult, perhaps most difficult for intelligent people.
“Given the enormous returns of early bitcoin investors, we’d expect many early critics to double down as critics after seeing that being a critic early on cost them millions. As someone who has lost some money on options-trading, I know first-hand how painful it is to admit such mistakes. So I can’t imagine how painful it must be to admit publicly that, despite being in the right place and the right time, with all the requisite background knowledge, you cost your family generational wealth by being wrong not just once but continuously over several years. Before these critics could address bitcoin without bias, they’d need one or two rounds of industrial- grade desalination.”
It’s interesting to consider the no-coiner bias as equally if not more distorting than the long term holder bias.
But getting over the fact that you didn’t make millions is hardly the extent of the veil of ignorance.
Under the veil, you could easily be one of the four billion people on the planet that doesn’t even have access to a bank account.
Once outside the blinders of your own life experience, you’re presented with two different worlds: One with bitcoin (a means for the unbanked to access credit markets and send value to anyone in the world), and one without bitcoin (where only the privileged few have access to the global financial system).
There’s a bit more to it than that, very worth a read.
2. The Constitutional Argument for State Adoption of Bitcoin as Legal Tender (law)
Appellate attorney and legal scholar, Arron Daniels penned a series of articles that make the case for bitcoin as legal tender in the United States.
Part I begins with the political movement that has been brewing over the last few years, with interests groups forming, high profile politicians declaring their support for bitcoin, and a number of states officially beginning work on bitcoin related laws (including legal tender laws).
It then goes into the definition of legal tender as defined by the US Constitution, and the sober recognition that a strict text-based reading of Article 1, Section 10 might be bit of a hurdle:
No State shall . . . coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any. . . law impairing the Obligation of Contracts.” - U.S. Const. art. I, § 10.
Undeterred, he spends the bulk of Part II methodically peeling back the layers of the Framers’ intent when it came to specifically enumerating gold and silver as the only forms tender permitted to be created by the states.
He concludes:
“Like gold before it, Bitcoin solves the problems identified by the Founders with state legal tender laws… The Founders understood gold as the best form of money in existence. Bitcoin has incorporated those properties that made gold the “preeminen[t]” money at the Founding (scarcity and unforgeable costliness), and elevated them through the use of modern communications and computing technology.”
“With an understanding of the history of legal tender laws in America… Article I, Section 10’s allowance for “gold and silver coin” as state tender can be said to fairly encompass digital gold — Bitcoin.”
In Part III, Daniels constructs an equally compelling counter argument, doing his best to refute many of the points he lays out in Part II.
His ultimate recommendation for how states should proceed in updating their legal tender laws is nothing short of brilliant.
Although maybe a bit of let down to bitcoiners.
3. Crypto, clearing and credit (finance)
I’m going to expand the tent for this one to include other types of “pristine collateral,” not just bitcoin.
Renowned columnist and expert on all things finance, Matt Levine wrote a fascinating piece that sheds light on how traditional finance professionals think about crypto assets with regard to the extension of credit.
I went much deeper in a previous article:
[Spoiler] There is no credit in crypto.
According to Levine, a bitcoin is an entry in a decentralized ledger. Because no one controls the ledger, and the unit is immutable and unconfiscatable, and since there’s a fixed supply of bitcoin, owning bitcoin is like owning physical gold. Assuming of course, you self-custody your coins.
In traditional finance, however, the base unit (the US dollar) is itself a debt instrument. The dollars in our bank accounts are nothing more than debits on the bank’s ledger. Those liabilities are covered by the bank’s reserves, which are fractional and backstopped by the Federal Reserve.
But since the US left the gold standard in 1973, the Federal Reserve is just yet another balance sheet, and it’s practically household knowledge at this point what the Fed balance sheet looks like.
Basically, we collateralize liabilities with other liabilities, which is why Lyn Alden says, “it’s turtles all the way down.”
This fundamental difference between crypto and traditional finance has resulted in two very different approaches to lending.
4. Greening Bitcoin with Incentive Offsets (environment)
Perhaps the most incisive criticism of bitcoin (and the one that concerns me the most personally) is the energy consumption.
That’s why I found this paper from philosophers Andrew Bailey and Troy Cross to be absolutely mind blowing.
In it, Bailey and Cross make a compelling case that the best way for governments to incentivize green energy production anywhere in the world would be to support, or better yet subsidize bitcoin mining.
There are many layers to this. I actually learned more about the mechanics of renewable energy production in this paper than I did about bitcoin.
The first point to grasp is that renewable energy production is intermittent. The power from wind mills, solar panels or hydro-electric dams comes and goes, and the battery technology necessary to capture that power at scale does not currently exist.
Bitcoin mining however, can capture intermittent energy at scale. Not capture it per se, but monetize it. And it can do so anywhere in the world.
That brings us to the second point: Most renewable energy sources are located in far-flung, isolated regions. Industry experts call this “stranded energy,” because it’s too far away from any population center, and therefor not usable.
These stranded energy sources could however be used for bitcoin mining and they would be far cheaper than grid power. According to Cross, bitcoin mining is the perfect solution to monetize green energy production and incentivize its development.
According to the paper, as more green miners come online, the ones with a more generic energy mix almost instantly become less competitive, and are forced to either find sustainable power sources or shutter their operations.
This is an incredible feature of bitcoin. It exists only because it is a singular market where miners compete for the same exact finite resource (new bitcoins).
Few other industries are this directly open and competitive.
And few other industries would be so easily influenced by government subsidy. Investment in mining operations that are provably sustainable lowers their cost of capital, directly advantaging green miners relative to their dirtier competitors.
Beyond that, the paper details a way for bitcoin holders (both private individuals and institutions) to use mining as a way to offset the environmental impact of their holdings, which would also accelerate the greening of bitcoin.
Amazing read.
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Thanks for reading until the end. I work in crypto and think about it non-stop. You can find me on Twitter @danajwright_
