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Month: January 2024

Bitcoin Nation – BIRTH OF A NATION (Pt.2-Ch.3)

My new book “Bitcoin Nation” was published on the 15th anniversary of the Bitcoin Whitepaper, October 31, 2023. You can read it below, one chapter per week. Or buy it here:

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 rulingclass 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 nationssimultaneously, 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 easilyorganize 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.

Bitcoin Nation – WHY DO WE NEED STATES? (Pt.2-Ch.2)

My new book “Bitcoin Nation” was published on the 15th anniversary of the Bitcoin Whitepaper, October 31, 2023. You can read it below, one chapter per week. Or buy it here:

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 andpersonal 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 andplundered for their riches or entirely wiped out.

Since free societies require a large part of voluntarism and consent, they necessarily must besmallif organizedterritorially.Findingenough 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 membersspectacularly 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?


My new book “Bitcoin Nation” was published on the 15th anniversary of the Bitcoin Whitepaper, October 31, 2023. You can read it below, one chapter per week. Or buy it here:

“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?

Bitcoin Nation – THERE IS NO SECOND BEST (Pt.1-Ch.10)

My new book “Bitcoin Nation” was published on the 15th anniversary of the Bitcoin Whitepaper, October 31, 2023. You can read it below, one chapter per week. Or buy it here:

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.

Bitcoin Nation – MEXICAN STANDOFF (Pt.1-Ch.9)

My new book “Bitcoin Nation” was published on the 15th anniversary of the Bitcoin Whitepaper, October 31, 2023. You can read it below, one chapter per week. Or buy it here:

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 using 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:

  1. Block Subsidy
  2. Transaction Fee
  3. 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.