The source of currency and social inequality. How I hope bitcoin will revolutionize economics, forever freeing us from the bondage of central banks and perpetual debt.

The intent of this article is really to convey both my frustration with the current economic model (and its tragic consequences) and my fascination/excitement with emerging alternative currency models.

So disclaimer, I am not an economist.. I’m a barely adequate programmer and wanna-be revolutionary. I have a strong distaste for the existing power structure and openly admit I do not emotionally support ‘the state’. I have though, put a tremendous amount of mental energy into trying to understand the world, and why things are the way they are. In that, I have come to some fuzzy/general conclusions that I feel are pretty robust in their limited scope. I don’t pretend to speak with authority or expertise, and everything expressed is purely my opinion.
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Virtually all modern currency is government-backed fiat currency. There is a central bank which has a unique-authority to print money at its discretion, presumably for the general good of whomever is ultimately using that currency.

Some central banks are operated by the government. Indeed, until the last hundred years or so the government was the overwhelming source of currency. Since, there has been something of a trend toward privatization of central banks (eg the Federal Reserve). In theory a privately run central bank should have the same mission as a government one; though some may argue privately run things are generally more ‘efficient’.

In practice, this may not be the case. However to me it doesn’t appear that whomever is in power is any more or less likely to abuse their privilege whether or not they are a state or private employee. So long as the ultimate direction is theoretically coming from the same source (hopefully a best-faith attempt at making an ideal currency for a population), the difference between a government owned and a privately owned central bank seems to fall down to philosophical differences. For our purposes, it really doesn’t matter, as the model is virtually the same, and the downsides virtually identical.

We don’t generally think about “where” money comes from outside of it’s immediate previous possessor. We are paid by our bosses or customers (or victims I suppose), and that’s as far as we get. There is just generally money in existence, and it trades hands.

Of course though, there is an origin to each spendable buck.

The origin is the central bank. It prints cash (or increases values in a computer somewhere) to put money into the supply. The gotchas come from the distribution of this cash.

Instead of equally dividing all the newly minted currency among all participants in the economy, banks are loaned (at a small interest rate) the money from the central bank based on their credit-worthiness.. and they in turn lend it out (or invest it) to their customers. As the money trickles down the line, each person is expected to make a profit with the extra capital they are borrowing, for which to pay back their loan.

The perhaps not-so-obvious ramifications of this model is a perpetual cycle of debt for the entire economy. Since literally all money in circulation is loaned at interest in varying degrees up the tree, all the way back to the central bank, there is always more money owed than money in circulation. The solution of course, is to print even more money! This perpetual expansion of the money supply is a fundamental aspect to these types of fiat currencies; and when the status quo is an exponential increase in the money supply.. it’s easy to get an intuitive feeling for why a contraction of the money supply is so devastating to our markets; and hence, peoples’ lives.

I want to take a quick moment to point out that this is not an inherently evil model. Much like fossil fuel consumption.. it has served its purpose, done a tremendous amount of good for people but has started to have more negative consequences than they’re worth. Neither is ideal, but a historical absence of alternatives left them the best game in town. Being literally at the dawn of a new age, it appears better alternatives are starting to sprout, and the hope is that we will adopt better practices for the good of everyone.

So anyway, we are left with an economy whose balance sheet is always in the red. From a macro level this is a non-problem as there is a constant increase in money supply. At the human level however, there are often tremendous problems. The underlying debt-based economic model runs deep into the lives of working people and manifests itself as a constant rat race of payment-making.

Each level from the central bank has to take its profit, thus money is literally more expensive for those who are the ‘farthest away’ from the central bank. That is, (quite tragically) the poorest people have the most expensive access to capital.

Presumably we can take a peek into history to see how bankers have lavished wonderful, capital-intensive lives upon themselves, and draw some conclusions about how proximity to the central bank may have helped them do so, and how the interception of the capital has affected those farther from the source (ie poorer people).

So clearly, this model is not ideal.

Enter bitcoin. An indepth discussion of what bitcoin is outside the scope this article. For a high level description see http://youtu.be/Um63OQz3bjo . For a technical description (written by ‘Satoshi’ himself) see this pdf http://bitcoin.org/bitcoin.pdf

Generally, it’s a peer-to-peer (like bittorrent it’s a swarm model rather than a client-server model) ‘internet currency’ that uses cryptographic proof-of-work for each node to be confident in the integrity of the network. What it’s really doing is providing a mechanism by which all participating nodes can agree who has the right to spend a currency that the protocol implements, while not allowing any particular node to cheat.

Unless/until society is ready for a rationally directed resource based economy, one where instead of a model of individuals in beneficial competition with each other, you have groups of people collectively utilizing resources; we are going to need some sort of currency.

Bitcoin is attractive because once it reaches a certain critical mass, it’s virtually immune from government regulation and unfair manipulation. History is a long series of corrupt governments and failed currencies. Central banks have a tendency to over-print money when those that control the central banks need access to more money (shocking); inflating the currency at the expense of everyone who holds the currency.

Also, try sending a dollar from San Francisco to a kid in an internet cafe in Brazil. Or, even 30 bucks to a friend in any other country. Never gonna happen, at least not without overhead fees comparable to the amount in question.

Bitcoin allows you to send small amounts instantly with very tiny transaction fees. (Verification of payment is not instant [akin to a check clearing], and can take from a couple minutes up to a couple hours.)

Bitcoin does unfortunately suffer to some degree from the same problem as central banks, in that bitcoin accumulation tends to pool disproportionately toward the origin of the currency. In this case, the miners (a computer running a mining program) that are solving the cryptographic problems which bitcoin relies on.

This is actually far less of a problem though than it might appear, especially when we are comparing bitcoin against inflating currencies. In an inflating fiat model, the central bank creates more money every year than the year before (assuming a healthy economy). In bitcoin, the bitcoin miners create less and less coins over time (eventually creating no more than 21M coins).

What this means is that over time bitcoin becomes more evenly distributed (at least with respect to miners).

Imagine it this way, going back to the implied history lesson where we see that bankers and those close to the supply of money in the central bank model intercept that capital to some degree and live lavish lives with it:

That stream of capital, which originates at the central bank, and gets filtered (and multiplied by fractional reserve banking) by bankers becomes higher and higher volume over time. This means there is more money each year for them to filter from than the previous year.

Bitcoin has the opposite situation.. where that stream of capital actually decreases over time, and eventually dries up completely.

That, if it ever happens, will be a good day for the world. Of course, if you are of the opinion that the banking industry is already fair/ideal.. than everything I say here is moot.

But, if you see a world where those near the source of money live lavish lives, and those farthest from it suffer almost unimaginable misery; I think it’s hard not to want to find an alternative model.

Bitcoin appears technically sound; has been gaining more and more momentum, and is contributed to by a community of people who genuinely want a fair currency for the world.

There has been a thousand-fold increase in the buying power of a bitcoin in the last 14 months (our bitcoin shirt costs 1/10th of what it did in btc from when we launched five weeks ago); and more than two-thirds of the 21M bitcoins have yet to be mined. (Current circulation at time of writing is ~6.2 million btc)

All signs point to increased adoption; and you can start mining bitcoins for as little as a couple hundred dollars (or a couple dozen bitcoins).. and any serious computer gamer can probably start immediately with hardware they already have.

Perhaps more importantly, in a time of resurgence of limitations of free speech, political prisoners, and desperate governments.. an unstoppable form of global exchange only empowers those who are being repressed and marginalized by their governments.

You can trace the supply of a dollar in your wallet, like strings from a puppeteers hands, back to the central bank. Bitcoin is rejection of that model, a viable alternative which empowers the individual at the expense of a central authority. Since, as far as I can tell, concentration of power begets corruption again and again and again; anything which aims to pull power back to the hands of individuals is something I can get behind.

Bitcoin has a real shot of creating a functioning economy which doesn’t contain more debt than capital to pay that debt, which doesn’t allow a central authority to inflate the currency to buy bombs to kill people with, which doesn’t depend on bureaucratic steps in order to participate in the economy, which doesn’t allow arbitrary seizure of assets by a decree of government, and doesn’t encourage frivolous spending.

comments at hackernews: http://news.ycombinator.com/item?id=2599739
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