As with everything, underlying technology is based on the philosophy, not the other way around. I will show you what I mean with this:
If we have a car, for example, you do not need to understand all mechanics of the system in order to understand the value of a car. Fortunately not! So you do not need to understand its technology. The core value of a car is transport. The technology, in turn, is designed as such to meet this value. It is designed such that it can provide transport. If a car could not transport you, it could have everything you would dream of but you would not buy this product to transport you. The core value of transport holds for all cars. Yet, the philosophy of cars differs. Therefore, cars differ! The way it is designed is based on its philosophy.
Technology is a mere (though complicated) tool of translating the philosophy, given a core value.
This concept holds for everything, including Bitcoin. Bitcoin is a currency, this is its core value just like any other currency. Yet, Bitcoin is differently designed than other currencies. Which is a result of its philosophy: As a currency, Bitcoin’s philosophy differs from the philosophy of traditional currencies. Therefore, in order to understand Bitcoin, you do not need to understand the technical design, you need to understand the philosophy of Bitcoin.
Let’s first get familiar with the definition of Bitcoin first. For those not familiar with Bitcoin, in formal terms, Bitcoin is a peer-to-peer electronic cash system. That is a mouthful, indeed. In informal terms, however, it simply is a currency. “But we already have currencies,” you might say. Which is correct. But the deepest fundament of a cryptocurrency such as Bitcoin is different from currencies we know today. In other words: the philosophy of a currency such as Bitcoin is different from the philosophy from traditional currencies.
For traditional currencies, there is a banking system and a government acting as a third party. It is peer-to-business. The currency is backed by this third party and therefore dependent on its role. This third party has the role of mandating the rules of the game. In a democratic system, this third party should therefore be trusted to act in the interest of the values of the society. Economic activity depends on the mandate of this third party, which makes it a centralized system.
Bitcoin, on the other hand, is a decentralized system. Economic activity does not depend on the mandate of a third party because there is no third party. Making it a peer-to-peer system. It is self-sustaining and decentralized, which differs it from traditional currencies.
Whatever you may hear about the notion of Bitcoin, it cannot be denied that it is the biggest experiment to have occurred in our lifetime. A new dimension to value attribution (money) has been created. At the moment, we are still in the test phase to see how we value the philosophy this currency imposes.
So far, the exclusion of a third party has been a wild-west territory. If no governments and banks mandate the rules of the game, who or what does? It surely does make it feel like a territory for cowboys. To date, the peer-to-peer environment could be described as a survival of fittest where the ones on top of the food or blockchain have benefitted most.
The peer-to-peer territory can be referred to as the good, the bad & the ugly. The good coming from Bitcoin maximalists who argue that it offers a utopia to humanity, the bad coming from most traditional bankers who argue that there is no economic utility to it & the ugly coming from the blood bath of the burst of the Crypto-Bubble of early 2018. As a neutral and even as a professional it is hard to make your mind clear about the legitimacy of claims of either party. So what to think of it?
In order to get a better grasp on what to think of it, let’s rename the formal definition again:
A peer-to-peer electronic cash system.
This definition has two functions:
2. Electronic cash system.
1. Value of a peer-to-peer system
The value of a peer-to-peer system is that it can open up a new dimension to our value attribution. Value attribution that can align two extremes of societal values: left and right. A peer-to-peer system can unite the core value of the left spectrum and the core value of the right spectrum.
The left-oriented societal values have social equality at core.
The right-oriented societal values, on the other hand, have individual freedom at core.
Our democratic system of the Western World revolves around two opposites. So far, in the peer-to-business system, these tend to polarize. Policies in the current system seem like a zero-sum: any gains for more individual freedom are at the expense of social equality & any gains for more social equality are at the expense of individual freedom. In other words: Any gains for the left are losses for the right & vice versa.
Left and right polarize in this system. They polarize because both spectrums do not agree on the role of the authority. In a peer-to-business system, there is disagreement about the role of the “business.” This is where a special quality of a peer-to-peer system comes in. As you remember: a peer-to-peer system omits the role of the business, it omits authority. Therefore, within this system, there cannot be disagreement about the role of the authority, simply because there is none.
The exclusion of authority can overcome the disagreement between the left and the right. The peer-to-peer system allows meeting the demands of both left and right spectrum: The peer-to-peer system allows obtaining both social equality ánd individual freedom. Social equality because there is no authority; Freedom because there is nothing governing. The construction of a peer-to-peer system allows both left and right spectrum to unite since it omits the role of an authority. It allows both left and right (social equality and individual freedom) to go hand in hand.
This is the value of a peer-to-peer system, the first function of Bitcoin. But what about the value of the second function: electronic cash system?
2. Value of an electronic cash system.
The value of the electronic cash system is that it is immutable. The electronic cash system refers to the underlying technology of Bitcoin, the blockchain; A highly technical network that is only understood by a few. This technology is designed such that no flaws can occur. It is proven to be that rock-solid, that there is no possibility for the technology not to work. It has also been referred to as the trust-protocol. It is that safe, we do not even need to trust it to work. It simply works.
But there is a hidden bug in this theory. Trust can be a fairly irrational notion. This irrationality is the current obstacle of the trust-protocol to work.
In order to trust a trust-protocol, you have to trust (make the assumption) that this trust-protocol is valid. Rationally speaking, we should. Behaviourally speaking, we do not. People to make use of Bitcoin is unlikely to happen if there is no trust that this assumption holds. From a human behavioural point of view, this makes sense. To ask someone to trust something that as far beyond our reach to understand is tough. But does this really matter?
I mean, haven’t we all been doing that from the moment we earned our first cash? The amount of technology that has gone into the production of a bill of even a simple coin is also far beyond our reach to understand. But it works! And that is what matters. For example, we simply trust a bill not to dissolve the moment we touch it with a wet hand, we trust a coin not to break if we drop it, and so on.
Point is: We already trust systems that we do not understand. We trust systems by accepting assumptions. So why do we not trust Bitcoin? Paradoxically, despite Bitcoin being the ultimate trust-worthy currency, the one thing it needs to obtain is trust. That is the status quo.
If the underlying technology does what it promises to be doing in the future, it is all a matter of our own value attribution. It is an experiment of whether our values are aligned with the values Bitcoin’s philosophy proposes.
Theoretically, do we value a peer-to-peer environment (individual freedom and social equality)? Probably. Practically, does the peer-to-peer protocol of Bitcoin sustain such an environment where two opposites (left and right) might align and find equilibrium in a monetary system? Possibly.
It is no coincidence that Bitcoin came to birth just after the financial crash of 2008. It was a matter of “action, reaction.” The action was a misaligned financial system where the third party (banks and financial institutions) acted on its own short-term interest too much. The crash showed the existent cracks of a peer-to-business system. The reaction was a public distrust with regard to banks in this system and the birth of an alternative system that omits this third party, a peer-to-peer environment of value attribution.
Where Bitcoin maximalists claim to have found the Holy Grail and the peer-to-peer system will change any aspect of society from top to toe, traditional economists claim that there is no fundamental value to Bitcoin. In current debate, it is hero versus zero.
But what if neither of both is a hero or zero? A peer-to-business environment cannot be as bad as Bitcoin maximalists claim. Look at how far we have developed under this system. We are that well off, we have time enough to worry about which movie to pick on Netflix. But also a peer-to-peer environment cannot be as bad as traditional economists claim. It is a new piece of technology that disrupts our perception of value attribution. As mentioned before, we are currently just in a test-phase. It is still an experiment.
Only time can tell what the results of this experiment will imply. What is very striking is how the peer-to-peer system might align the core values of both the left and right political spectrum; it offers both social equality and individual freedom since it omits any role of a third party. The challenge seems to be whether our value attribution works in such way, that left and right can go hand in hand. Besides, a challenge is found in trusting the trust-protocol that Bitcoin offers. Without trust, a trust-protocol is useless.