The decline of Bitcoin shows you can’t engineer past government

One consistent idle daydream on the American right is somehow living outside of government. From Ayn Rand’s “Galt’s Gulch,” where a bunch of plutocrats secede from America to gleefully watch society collapse without its job creators, to nutty Silicon Valley plans for “seasteading,” somebody is always working on a government-free society.

Over the last few years, many technology-minded thinkers and programmers have made such ideas a reality. Perhaps most notable is Bitcoin, the first fully decentralized currency and payment system. With big government interference all but impossible, surely this virtual money would be the dawn of a new age of freedom.

Nope! The Bitcoin system has all but seized up, and people are abandoning it in droves. The reason is simple: poor governance. It turns out one cannot engineer one’s way past politics.

The actual mechanics of Bitcoin are extremely complex, but its major innovation was the block chain. This is a ledger of all Bitcoin transactions, distributed across the internet to remove the need for a central authority, such as the Federal Reserve. It’s totally anonymous, and protected with cryptography such that it’s nearly impossible to create fraudulent transactions. Make no mistake, this was a truly genius idea, and, as actual experts tell me, a brilliant piece of programming and mathematics.

The initial Bitcoin system was cheaper than credit cards for stores, but had zero protections for fraud. As a result, its primary use was for criminals. Henry Farrell wrote a brilliant essay detailing the collapse of the criminal marketplace Silk Road, created by a fan of libertarian Murray Rothbard who dreamed of being free of government coercion. It was a website where one could buy everything from drugs to stolen credit card numbers using Bitcoin. It has since been shuttered by the FBI.

The basic problem with Silk Road was cheating. Without some sort of system of regulatory authority, theft and fraud was a chronic problem — forcing the site’s operator, Ross Ulbrich, to invent increasingly elaborate regulatory systems; he ended up re-creating a much more coercive government in miniature.

As the site grew, so did the attraction to increasingly bold criminals. Eventually Ulbrich resorted to the ultimate coercion — the attempted assassination of a blackmailer — and was nabbed by the FBI. It was like watching the evolution of the modern state out of feudalism on fast forward. Silk Road is dead, but many other sites have cropped up to take its place. Most of them also use Bitcoin.

Now Bitcoin is succumbing to similar problems. It’s not the corrosive distrust of a criminal marketplace, but the inherent contradiction of a money and payment structure without any obvious method to control it. Without some sort of control mechanism — in other words, a government — Bitcoin is inherently vulnerable to hostile takeover from deep-pocketed bad actors.

Mike Hearn, who has been a Bitcoin developer for 5 years, lays out the crippling problems. Payment fees are rising fast, and payments themselves are fast becoming unreliable. New Bitcoins are created through complex mathematical calculations (called “mining” in the trade), which now require so much computing horsepower that the new coins can barely pay for the electricity required to create them. The result is miner centralization, mostly in China. Now, a handful of Chinese miners effectively control the block chain, which is running out of space for new transactions. They refuse to increase the file size to ease a payments backlog, because it would threaten their control of the system. Making everything worse, the bandwidth limitations of the China’s Great Firewall have further clogged the system. And without some sort of system to resolve conflict (like, say, an election), disagreements between Bitcoiners have decayed into flame wars. Hearn has sold his Bitcoins and quit development work.

All this shouldn’t take away from the real genius of the block chain idea and implementation. It could be potentially transformative. But the Bitcoin failure does illustrate that human institutions must have politics in addition to technical expertise. Try to engineer around politics, and it will flood back in the most atavistic and unscrupulous forms. As Steve Randy Waldman has said:

Much of my thinking on economic and social issues comes back to T.S. Elliot’s proposition, “It is impossible to design a system so perfect that no one needs to be good.” Once upon a time, I chose to disagree. I thought it was the challenge of our day, and the grand project of modern economics, to build a system in which people pursuing their own self-interest would provide all social goods, in which the benevolent invisible hand would rule all and we’d have no need to rely upon ideas as shifty and manipulable as “virtue.” I have done a full 180 on this question. Economic self-interest and formal legal frameworks are simply insufficient to regulate a decent society. [Mortgage Calculator]

Galtian fantasies can thrive only under conditions of relative peace and prosperity provided by stable governance. But, as the vaccine-denying mother who abruptly reversed course when all seven of her children got whooping cough discovered, hard-won truths have a way of reasserting themselves.

mm – leading Bitcoin News source since 2012

Virtual currency is not legal tender, is not backed by the government, and accounts and value balances are not subject to consumer protections. The information does not constitute investment advice or an offer to invest.