Jonathan Johnston's Blog

I don't consider myself a bitcoin maximalist as I believe in the concept of a diverse market of currencies rather than viewing bitcoin as the ultimate monetary solution. I believe that markets serve as an excellent mechanism for identifying and eliminating products with inherent issues while selecting those that prove to be more effective. Money, in this regard, is no exception and should be subject to market dynamics.

The distinctive advantage offered by cryptocurrencies lies in their permissionless and uncensorable nature. Unlike traditional financial systems, cryptocurrencies provide individuals with the ability to transact without requiring permission from any central authority. This characteristic ensures that no single entity has control over the flow of funds or can dictate how transactions should be conducted.

While it is true that governments can impose regulations on cryptocurrencies, potentially hindering their efficiency and ease of use within a specific region, it is important to note that the inherent nature of cryptocurrencies allows for portability across borders. If you possess cryptocurrencies and are able to leave the jurisdiction, you have the ability to securely store your private keys as a word phrase in your mind, rendering them undetectable by anyone else. This feature grants individuals a level of anonymity and control over their funds, making cryptocurrencies a viable option for those seeking financial sovereignty.

Bitcoin's global reach and decentralized nature make it extremely resistant to being shut down, even under unprecedented global tyranny. In fact, in such a scenario, even traditional safe-havens like gold may not offer any greater security.

While some refer to bitcoin as "digital gold," it is important to note that it is currently more volatile than gold, largely due to the difference in market capitalization. However, cryptocurrencies do share some similarities with gold, particularly in terms of being a store of value with a set inflation rate.

However, I believe that people tend to place too much emphasis on simply storing value. This scarcity mindset may limit potential growth. Instead, it would be more beneficial to focus on increasing value.

Value that remains uninvested holds little worth. Money serves the purpose of purchasing goods and services. Failing to utilize money effectively is akin to having a tool that is used only once. While it is true that some purchases may lead to a decrease in value over time, such as certain consumable items like food, there are also opportunities for value appreciation. This can include investments in education or starting a business. Skills and knowledge cannot be taken away and tend to retain value regardless of location. Essentially, anything that generates value and fulfills the needs and desires of people holds significance.

The culture of hyper-consumerism often arises due to unsound monetary systems that incentivize short-term thinking and make it difficult to accumulate surplus for investment.

A sound money system, on the other hand, encourages investment by providing a sense of stability and confidence. While prices may still exhibit volatility, the likelihood of long-term value decrease is reduced, allowing for short-term savings and surplus that can be invested according to one's risk tolerance.

The debate over whether cryptocurrencies like bitcoin are considered money or currency is complex and involves historical definitions put forth by scholars like Mises or Rothbard. However, as a new technology, cryptocurrencies can be seen as a currency with money-like properties. The specific definition may not be crucial when considering its utility.

Bitcoin offers greater transportability than gold, making it easier to move across borders and store securely.

In terms of durability, unless we face an apocalyptic economic collapse, bitcoin generally holds up better than gold as it is not susceptible to physical deterioration. However, in the event of such a collapse, a diverse market of currencies becomes essential, as no single form of money can perfectly satisfy all standards of being a good money.

Bitcoin also exhibits greater fungibility compared to gold, which can vary in quality and be susceptible to counterfeiting (although counterfeiting gold is still not easy).

While gold currently exhibits less volatility than bitcoin, as the market capitalization of bitcoin continues to increase, the gap between their volatility levels will likely narrow.

Although I may have missed some points, it can be concluded that bitcoin largely meets the requirements for being considered a good form of money. However, it is worth noting that even gold, which has been historically used as money, proved insufficient in protecting us from the rise of fiat currencies. Hence, we must acknowledge the need for a diverse range of currencies to address the limitations of any single monetary solution.

For the arguments on intrinsic value, this is a bad Austrian argument and Austrians should know better (Peter). The contention revolves around the concept of intrinsic value, which is often invoked erroneously. Intrinsic value suggests that something possesses inherent or objective worth, independent of subjective valuations. However, value itself is inherently subjective, as espoused by the Austrian School of Economics. According to this perspective, value is not something inherent to an object or asset; rather, it is derived from the subjective preferences and assessments of individuals. Therefore, the notion of intrinsic value is flawed and runs counter to the fundamental principles of Austrian economics. It is important to recognize that value is not an objective property of an object; rather, it emerges from the interactions and subjective judgments of individuals. A more charitable interpretation of the intrinsic value argument could be that it pertains to intrinsic utility. While physical properties may grant certain objects innate capabilities, the subjective value attributed to that utility still remains contingent upon individual perceptions and preferences.

For example, a cellphone has significant utility, but the Amish community and many others may not value it highly, and its value may diminish over time. Similarly, Bitcoin possesses intrinsic utility as an intermediary exchange of value.

The claim that Bitcoin is a pyramid scheme is simply unfounded. A pyramid scheme refers to a fraudulent system where the sole product being sold is the promise of monetary returns, with no other tangible product. However, the perceived value and utility of Bitcoin are subjective and can vary among individuals. While some people may use it for speculation or as a store of value, especially in the current market, the primary utility of money is its ability to facilitate the exchange of value, a role that Bitcoin fulfills. Arguments branding Bitcoin as a pyramid scheme, even though they do not align with the actual definition of a pyramid scheme, could be applied to any market.

The price of all assets is determined by what people are willing to pay for them. Just because gold can be used for plating conductors does not mean that individuals value gold primarily for that purpose, and they are unlikely to do so. If someone owns gold, they will most likely sell it for something else since gold cannot be consumed as food or used directly for shelter or defense. The price obtained for gold is based on the fact that there is someone on the other end of the transaction who deems it valuable and is willing to pay for it.

This is how markets function. The argument of a pyramid scheme is inherently anti-market, as it fails to recognize the voluntary exchange of value that occurs based on subjective preferences and utility.

People often raise concerns about the potential hacking of Bitcoin. While it is true that hackers can target Bitcoin, it is important to note that securing well-protected Bitcoin is considerably more challenging than stealing well-secured gold. This perspective may be difficult for some to grasp due to a lack of understanding.

It is worth highlighting that the majority of stolen Bitcoin has been pilfered from insecure custodians, particularly crypto banks. These entities do not represent the inherent security of Bitcoin itself. It is essential to differentiate between custodians and the technology of Bitcoin. Furthermore, while governments have a history of confiscating gold, even in the United States, where citizens were required to surrender their gold coinage in exchange for dollars, one can conceal Bitcoin even more easily. The technology behind Bitcoin itself is highly resistant to hacking attempts, even by governments equipped with the most powerful supercomputers.

Some individuals raise concerns about future technologies, such as quantum computing, in an attempt to argue that Bitcoin is or will become insecure. However, it is important to note that these technologies do not currently possess the capabilities being attributed to them. Additionally, quantum-resistant encryption already exists, although it may be less efficient and costlier to implement at this time. Nevertheless, there is currently no urgent need to introduce quantum-resistant encryption into Bitcoin's infrastructure.

If the need were to arise, implementing quantum-resistant cryptography and forking the blockchain would be a straightforward solution for Bitcoin. In fact, it is possible that someone has already implemented this measure, although adoption of the new chain would likely occur only when there is a tangible incentive, such as the emergence of a quantum computer capable of breaking the current cryptography.

There are claims suggesting that governments initiated Bitcoin as a centralized digital currency to transition people away from cash. However, this argument does not hold up when considering the decentralized nature of Bitcoin. Even if there were an attempt to introduce a backdoor or security vulnerability, Bitcoin's open-source nature would enable the community to identify and rectify the issue. Furthermore, even in the unlikely event that the government gained control over Bitcoin, the Bitcoin community could simply patch the vulnerability, fork the chain, and continue using the secure version. Therefore, any potential crisis could be swiftly resolved.

So what about it losing 75% of its value? Doesn't that prove bitcoin is over? The broad consensus among bitcoin chart analysts is that this price drop, or something close to it, was expected. While the exact price point may not have been predicted due to the non-linear resistance line, the occurrence of a bear market around this time was anticipated. Those who closely study bitcoin were well aware of this possibility.

To be fair, bitcoin did experience a significant dip below that resistance line, and it is important to acknowledge that charting is more of an art than a science. This is not unique to bitcoin but applies to all ETFs (Exchange-Traded Funds). Bitcoin's current volatility stems from its predominant use as a speculative asset rather than widespread adoption as a medium of exchange. However, it is worth noting that speculation is not exclusive to bitcoin; volatile currencies and commodities are also subject to speculation. A substantial price drop in oil, for example, does not imply the end of oil as a valuable resource.

A mass sell-off is unlikely to spell the demise of bitcoin because the majority of sellers are motivated not by completely exiting bitcoin but by seizing the opportunity to re-enter the market at a more favorable price. This behavior is common among speculators who exit positions as prices decline, intending to buy back in when prices are lower, thereby driving the price back up. Engaging in speculation does not imply a lack of belief in the underlying technology of cryptocurrencies. Basic trend following analysis can yield significant profits with relatively minimal effort, so it is not surprising that more people are involved in such activities. While debates with long-term bitcoin holders (HODLers) persist, it is important to recognize that individuals have a personal interest in playing the market to some extent, given their knowledge and capabilities, while still maintaining their engagement with bitcoin. Many individuals primarily focus on bitcoin in their trading endeavors.

Although bitcoin has not yet achieved widespread usefulness as a form of money on a large scale, the rise of authoritarianism increases the incentive to allocate value outside of government control, and bitcoin presents itself as one of the viable options. As bitcoin's market cap increases, its volatility is likely to decrease, making it more appealing for use as a medium of exchange. This, in turn, will attract further investments aimed at enhancing its user-friendliness and expanding its potential as a widely adopted currency.

This aligns with Rothbard's historical understanding of the evolution of money. Money does not start out as money; rather, commodities become money due to their commonality and wide acceptance. Commodities become common because many people value them, and they evolve into money because they function well as a medium of exchange. In the case of bitcoin, it has the characteristics of making for good money, and people value it. The reasons behind why people value it may vary, but as it gains wider acceptance, it will increasingly be used as a form of money. In fact, some countries already embrace cryptocurrencies as a medium of exchange.

Gresham's law, a well-known principle, states that bad money tends to drive out good money. Due to fiat currencies having an artificially determined (rather than market-set) and insecure value, people are more inclined to spend fiat before spending bitcoin. They tend to save bitcoin with the expectation that its value will likely increase in the future. This historical pattern has repeated itself in various contexts. For example, when kings would debase currencies by diluting gold with a cheap metal like tin and reminting the coins, individuals would distinguish between the pure and debased coins, saving the more pure ones while using the debased coins for transactions. This behavior emerged from market incentives rather than a coordinated decision. Similarly, when the United States shifted to fiat currency, people began saving their gold and silver while spending the fiat currency. This behavior stems from sound financial practices.

The only reason bad money continues to circulate is due to legal requirements. If there were no legal coercion to use bad money, it would quickly lose its value and become worthless. Therefore, for bitcoin to be widely adopted as a currency, it would require a situation where there is no worse money being mandated for circulation. In the meantime, bitcoin is likely to be used predominantly as a form of savings, alongside other assets such as gold, food storage, and collectibles.

Cryptocurrencies have a broader range of applications beyond serving as a currency. Even if bitcoin never becomes a dominant medium of exchange, the technologies being developed in the crypto industry are driving the next evolution of data and internet technologies. The industry is valued at trillions of dollars, and the potential for innovation is far from being fully realized. Cryptocurrencies are part of a larger set of technologies collectively referred to as Web3. While the field is still evolving, and numerous ideas are being explored, the core principle behind these technologies is openness. While proprietary players exist, the foundational technologies' code is available for evaluation and can be modified using standard open-source consensus protocols.

One of the key features of cryptocurrencies is their trustlessness. Users don't need to rely on a third party to handle their data or honor agreements. When the algorithms and protocols are accurately coded, they can execute with flawless logic. However, it is crucial to note that if there are coding mistakes or exploitable bugs, the potential exists for significant losses. Fortunately, AI auditing is making significant progress in identifying and addressing these issues more effectively than human auditors.

Cryptocurrencies are also characterized by their permissionlessness. No one's approval is required to participate, and exclusion or censorship based on factors such as race, sexual preference, gender identity, religion, or political preference is nearly impossible. Access and participation are open to all.

Many of these technologies share underlying fundamentals with cryptocurrencies, such as encryption, digital signatures, hashes, distributed ledgers, peer-to-peer networking, consensus protocols, and digital identity. These foundations have enabled the development of standardized, secure, and open-source solutions, including smart contracts, decentralized computing and file storage, oracles, currencies, and tokens.

While there is currently a gold rush of short-term cash grabs and scams, with centralized startups raising significant amounts of funding and occasionally absconding with the funds, these technologies have the potential to foster greater and more competitive endeavors after the bubble bursts. It is important to remember that even in perfectly free markets, bubbles can occur. Markets are driven by human decision-making, and people can become enthralled and follow trends as a group.

Decentralized Autonomous Organizations (DAOs) can be built, functioning without a centralized authority. When we say "no one is in charge," it does not mean there are no leaders or champions propelling the organization forward. It means that these leaders do not possess unilateral authority to make changes as they would in a traditional company or many governments. In fact, they are unable to modify the code, as there are no secret passwords or closed-door meetings. It simply isn't possible. The only way to influence the project is by acquiring a controlling stake, and if other users disagree with the new direction, they can easily fork the project at minimal cost. Ultimately, the market determines which version gains favor.

There are various ways to structure a Decentralized Autonomous Organization (DAO), but in general, they operate as follows. Participants "buy in" to the project, investing their resources and having a stake in the organization. This mechanism, known as Proof-of-Stake, makes it costly to manipulate or exploit the system for unfair advantage since one's investment is at risk.

A governance protocol, often involving voting, is used to determine changes and decision-making within the organization. This process can be likened to shareholders in a traditional company.

Stakers, the participants who have invested in the DAO, vote on proposed features that should be implemented. They may also vote to allocate compensation to individuals who will work on implementing these features, or it may be a voluntary open-source project. The code undergoes cross-checking, auditing, and implementation. Once the Stakers believe the code is ready, they vote to implement it.

If the organization generates profits, the voters determine the percentage of profits distributed, much like receiving dividends in a cooperative or shareholder model. They have an incentive to allocate some profits to the participants but avoid excessive amounts that could lead to bankruptcy. The aim is to strike a balance that keeps the organization competitive and ensures the sustainability of participants' investments.

Cryptocurrencies have the potential to outcompete governments in the market, as they can address many functions traditionally associated with governments more effectively in the long run. I believe it's likely that cryptocurrencies will replace governments and provide market-based solutions for the services governments claim to offer. However, this transformation will take time, and we are currently in the early stages, comparable to the dot-com bubble.

How would a DAO government function? Here's one example from a particular perspective: A person purchases property in a city, and the square footage of the city entitles them to shares in the DAO, representing their stake. They participate in voting on the governing principles of the city. A flat-rate income tax is collected to fund infrastructure, expansion, enforcement, and dividends to the stakeholders. It's important not to confuse this with the concept of "stakeholder capitalism" that is currently being discussed; this approach is more akin to shareholders in a company. Stakeholders are motivated to maintain low taxes to stimulate the city's economic growth, attract immigration, and increase the number of stakeholders. However, taxes must be set at a level that encourages further investment, funds additional infrastructure, and supports the city's expansion by acquiring more land.

While the previous explanation didn't delve into the technical aspects, smart contracts and cryptocurrencies play a vital role in this system. The entire codebase is open source, and the city's budget is recorded on the blockchain, enabling anyone to audit the expenditures.

Smart contract code would be responsible for various functions, such as:

• Property deeds: Immutable proof of a digital identity purchasing a specific parcel of land worth a certain number of shares.
• Permits: Verification of a digital identity having completed an approved driving class and being authorized to operate a motorized vehicle in specific regions.
• Employment: Confirmation that an employee has undergone specific training, demonstrated the necessary skills, and is eligible for the corresponding pay, which is deposited into their account.
• Utilities: Reporting the meter readings for power usage, automatically paying the power bill, and initiating the power supply.

As the stakeholders are the citizens themselves, complaints are addressed through voting, and solutions are determined through collective decision-making. Instead of encountering dismissal when voicing concerns to utility companies or resorting to community-run social media platforms to gather support for grievances, this system allows complaints to be raised and voted upon. When submitting a complaint, individuals may find existing similar complaints to vote on, preventing the creation of duplicate issues with no engagement. They can also provide their input in the comments section.

If a complaint garners enough votes to indicate a high priority, either through increased participation or the resolution of higher-ranked issues, proposed solutions are presented, voted upon, and subsequently implemented.

While some may envision this process as potentially leading to constant voting and the need to review numerous complaints, the reality is quite the opposite. Current cities governed through traditional means already face similar challenges, often resulting in unresolved issues for extended periods. Frequently recurring problems can be addressed by reusing previously successful solutions and automating and systematizing processes wherever feasible. This approach also incentivizes proactive resolution of problems to minimize their frequency or eliminate them entirely.

There will be individuals hired to handle most of these issues, and they will be motivated to perform their duties to the best of their abilities within the allocated budget. Their aim would be to minimize complaints and address problems promptly. For instance, a person assigned to fix potholes on their block might simply be an individual equipped with a shovel and asphalt, using the allocated budget to purchase materials and fill the potholes on weekends. They would engage with their neighbors to ensure satisfaction. As long as no complaints arise, both parties would be content, and the automated code aspect of the organization would not need to be invoked due to the successful handling of the task.

Bureaucratic bloat is a common issue that can arise when certain roles become obsolete or no longer provide sufficient value for their compensation. Yearly independent audits and community tipping mechanisms can help identify and address these flaws. Independent audits can detect inefficiencies, while community tipping allows individuals to receive recognition and compensation for bringing attention to problems or offering solutions. This incentivizes active participation and helps maintain the efficiency and integrity of the system.

The example presented in this discussion is intentionally structured to resemble a traditional city, incorporating features that people typically expect. Just as the widespread adoption of on-screen software keyboards on cellphones was unforeseen, predicting the specific features and forms of governance that individuals would desire in a city can be challenging.

What Web3 technology accomplishes is reducing bugs and corruption through inherent openness and transparency. It operates in a trustless and permissionless manner, eliminating backroom deals and embezzlement. Rules are explicitly consented to, and signatures are securely kept on the blockchain.

This framework enables the design of various social structures and forms of governance, whether for companies or governments, with complete visibility. It allows for genuine informed consent of those being governed.

When considering the broader scope of cryptocurrencies, such as bitcoin, gold-backed cryptos, ethereum, or the multitude of private tokens traded by AI systems behind the scenes, it becomes clear that debating which one is superior is akin to arguing between Windows and Mac. Cryptocurrencies will undoubtedly play a pivotal role in the future of money and numerous other applications.

The future holds promising prospects, as the transformative power of cryptocurrencies and Web3 technologies continues to unfold. Thank you for reading this essay expressing my thoughts on bitcoin, and I hope it has helped compensate for my previous lack of posts on the topic. Peace out! ✌️