Thoughts on the economics
and philosophy of Bitcoin

Bitcoin is a Reflection on Human Nature

Why should you trust Bitcoin? The short answer is: you shouldn’t – in the same way you shouldn’t trust your government. You should rather put trust aside and verify yourself. With your government, providing it is part of a constitutional democracy, you can refer to your constitutional rights. In Bitcoin, there’s an immutable code and a transparent blockchain. The comparison is interesting because both Bitcoin and constitutions share a common root – a distrust in human nature. The roots of this line of thinking go back to the days of the Enlightenment.

The “trust” issue is one of the many misconceptions about Bitcoin. People criticize it for its lack of “backing” by a central government, organization or humans in general. The argument follows the logic that you can’t trust something that’s not run by human institutions because trust is human, but it misses the point: because it’s a feature, not a bug.

While the traditional financial world is built on the notion of relying on and believing in institutions, Bitcoin is based on mistrust. It works on the assumption that humans are fallible, corruptible and greedy, and will sooner or later steer towards catastrophe. This is why the Bitcoin protocol dictates and executes a fixed set of transparent and rational rules. The Bitcoin ethos is: don’t trust, verify.

Bitcoin – Decentralized Monetary Cybergovernment

Although Bitcoin is a digital network and thrives on network effects driven by users, it’s completely unlike Facebook, Wikipedia or Airbnb. It’s not centrally controlled. There’s no CEO of Bitcoin who explains himself in congress. There’s no board of directors on the payroll. And there are no shareholders expecting revenue for the upcoming quarter. It’s more like a super-intelligent form of monetary cybergovernment that keeps its engine running on a peer-to-peer basis.

The odd idea of building on mistrust isn’t new. When the age of enlightenment introduced a more rational approach to society, it changed the way people thought about government and human nature. Pure reasoning could be used to discover truths. Everything was to be subjected to testing and rational analysis. At the same time, it was a form of skepticism of received wisdom and emotions. It also raised the question of trust and human fallibility.

Constitutions: A Rational Way to Control Human Nature

Because the perceived necessity to keep human nature “in check” was a key takeaway for enlightenment thinkers all around Western societies, it was translated into the political reorganization of the epoch. This resulted in a list of basic human rights to be respected and also in the political layer that we call Constitution, which included the conception of the basic political powers as organized in a system of checks and balances, as well as many other now-familiar features of our democracies.

“Constitutions should only consist of general provisions; the reason is that they must necessarily be permanent, and that they cannot calculate for the possible change of things.”

Alexander Hamilton (1787)

Unlike today, the politicians of the 18th century openly discussed these topics. Being versatile polymaths, they were well versed in philosophy, exchanged letters with leading thinkers and even published essays. The movement took place simultaneously in many different countries, including Scotland, England, France, Germany and, of course, in the colonies that were to become the United States. There were no boundaries between political traditions or disciplines. Politics, philosophy, economics or natural sciences were all connected to people like Franklin, Jefferson Montesquieu, Smith, Locke or Newton.

The Founding Fathers at the Constitutional Convention: Understanding human nature as a key to create political systems and institutions.

What began with the scientific revolution, completed by Newton with the publication of his major work “Principia” in 1687, changed the way society was organized. When David Hume published “A Treatise of Human Nature” in 1739, he intended to be explicitly “scientific” in his reflections on human nature as well.

Hume figured that human behavior wasn’t caused by reason but by “passions”. One of them was greed, which he considered the most destructive. This led him and many contemporaries to pose fundamental questions concerning political governments, such as: If human nature was so fallible, how could their “passions” be kept in check? Constitutional systems were the answer as they exile emotions and operate on an entirely rational basis – just like Bitcoin.

“Men are ambitious, vindictive and rapacious”

The American Constitution is a great example here. The Federalist Papers, which were published in defense of its ratification, discussed the fallibility of human nature at length. Madison said that “if people were angels, no government would be necessary, and if angels were to govern people, no controls on government would be necessary”. Likewise, Hamilton reminded us not to “forget that men are ambitious, vindictive and rapacious”.

The distrust in human nature is reflected in several aspects of the Constitution. The division of power into a legislative, judicative and executive branch was introduced to share power and prevent corruption. These “checks and balances” were an attempt at finding a solution to the problem. Interestingly enough, the concept was directly derived from the laws of physics, which dictated that three forces were more likely to be in equilibrium than two. It was a system built on mistrust.   

When the Founding Fathers came up with the division into three independent government branches, they were inspired by science and the equilibrium of forces, which is demonstrated here.

A System Run by Smart Algorithms and Rational Principles

Bitcoin is the extension of this system of checks and balances. It replaces a centrally controlled institution such as a central bank with a decentralized peer-to-peer network. Instead of a constitution that keeps human nature in check, Bitcoin creates an immutable algorithm and defines what humans can and cannot control. Participants, for instance, can run a full node, keeping the network running by validating payments and blocks which permanently store the transaction history. It also helps by accepting transactions and blocks from other full nodes. But no participant can make decisions outside of the predefined scope – and no superuser can overrun decisions.

Nakamoto designed this system on his central assumption that a trustworthy financial system needed to be based on mutual mistrust. No human decisions are necessary because everything is decentralized.

“The root problem with conventional currency is 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.”

Satoshi Nakamoto (2010)

Bitcoin is trust minimized at every level of its operation. Transactions are instant and final. The participants need no permissions and don’t have names. Everyone is represented by their public key. There’s no such thing as credit in this new system. Either you own Bitcoin or you don’t. The governing rules are set in stone and can only be changed when a big majority agrees to implement technical improvements.  

Mistrust as Bitcoin’s Founding Principle

Distrust in human nature is part of Bitcoin’s DNA and genesis. It’s no coincidence that Satoshi Nakamoto launched the protocol at the peak of the financial crisis in 2008. Having worked on his concept of cyber money for years, he had been waiting for the right moment to publish it. A timestamp in the first block, the “Genesis Block”, cites a headline from the British TIMES newspaper: “Chancellor on brink of second Bailout for Banks”. It was a nod to the corrupt financial system that saved banks after they made bets on risky assets and even paid bonuses when everything came crashing down.

Bitcoin as a critique of the financial system. The image shows the Bitcoin Genesis Block with the famous Times quote from January 3rd, 2009: “Chancellor on Brink of Second Bailout for Banks”

Nakamoto’s rational system and the way he treated trust was no coincidence. It was a firm conviction. Many aspects of his concept and writings reveal that he was a polymath himself. He had a deep knowledge of every discipline, from mathematics, economics, psychology or philosophy to history. He knew that he wasn’t able to change the financial system from within.

Instead, he was on a mission to fulfill a cypherpunk dream that had existed since the early days of the Internet: to build free digital cybermoney and to finally take money out of the hands of governments. It was the launch of a new economic system, run by smart algorithms and rational principles. In this new world, human fallibility didn’t matter. Greed made no difference. Because humans were no longer in control.

Share post