@ Bitcoin Infinity Media

This is a part of the Bitcoin Infinity Academy course on Knut Svanholm's book Bitcoin: Sovereignty Through Mathematics. For more information, check out our Geyser page!

An Immaculate Conception

Some concepts in nature are harder for us humans to understand than others. How complex things can emerge out of simpler ones is one of those concepts. A termite colony, for instance, has a complex cooling system at its lower levels. No single termite knows how it works. Completely unaware of the end results, they build complex mounds and nests, shelter tubes to protect their paths, and networks of subterranean tunnels to connect their dirt cities. Everything seems organized and designed, but it is not. Evolution has equipped the termite with a pheromone receptor that tells the termite what task he ought to engage himself in by simply counting the number of neighboring termites doing the same thing. If there’s a surplus of workers in an area, nearby termites become warriors, and so on. Complex structures emerge from simple rules. The fractal patterns found all around nature are another example. Fractals look complex, but in reality, they’re not. They’re basically algorithms — the same pattern, repeated over and over again with a slightly modified starting point. The human brain is an excellent example of a complex thing that evolved out of simpler things, and we humans still have a hard time accepting that it wasn’t designed. Religions, which themselves are emergent systems spawned out of human interaction, have come up with a plethora of explanations for how we came to be. All sorts of wild origin stories have been more widely accepted than the simple explanation that our complexities just emerged out of simpler things following a set of rules that nature itself provided our world with.

Complex systems emerge out of human interactions all the time. The phone in your pocket is the result of a century of mostly free global market competition, and no single human could ever have come up with the entire thing. The device, together with its internet connection, is capable of a lot more than the sum of its individual parts. A pocket-sized gadget that can grant instant access to almost all of the world’s literature, music, and film, which fits in your pocket, was an unthinkable science fiction a mere twenty years ago. Bitcoin, first described in Satoshi Nakamoto’s whitepaper ten years before these words were written, was designed to be decentralized. Still, it wasn’t until years later that the network started to show actual proof of this. Sound money, or absolute digital scarcity, emerged out of the network not only because of its technical design. How Bitcoin’s first ten years actually unfolded played a huge part in how true decentralization could emerge, and this is also the main reason why the experiment cannot be replicated. Scarcity on the internet could only be invented once. Satoshi’s disappearance was Bitcoin’s first step towards true decentralization. No marketing whatsoever and the randomness of who hopped onto the train first were the steps that followed. Bitcoin truly had an immaculate conception.

The network has shown a remarkable resistance to change over the last few years especially, and its current state might be its last incarnation given the size of the network and the 95% agreement threshold in its consensus rules. It might never change again. In that case, an entirely new, complex life form will have emerged out of a simple set of rules. Even if small upgrades are implemented in the future, the 21 million coin supply cap is set in stone forever. Bitcoin is not for humans to have opinions about — it exists regardless of what anyone thinks about it, and it ought to be studied rather than discussed. We don’t know what true scarcity and a truly global, anonymous free market will do to our species yet, but we are about to find out. It is naïve to think otherwise. Various futurists and doomsday prophets have been focused on the dangers of the impending general artificial intelligence singularity lately, warning us about the point of no return, whereupon an artificial intelligence will be able to improve itself faster than any human could. Such a scenario could, as news anchor Ron Burgundy would have put it, escalate quickly. This may or may not be of real concern to us, but meanwhile, right under our noses, another type of unstoppable digital life has emerged, and it is already changing the behavior and preferences of millions of people around the globe. This is probably bad news for big corporations and governments but good news for the little guy looking for a little freedom. At least, that’s what those of us who lean towards the ideas of the Austrian school of economics believe. This time around, we will find out whether this is the case or not. No one knows what it will lead to and what new truths will emerge out of this new reality.

Unlike the termite, we humans are able to experience the grandeur of our progress. We can look in awe at the Sistine Chapel or the pyramids, and we can delve into the technicalities and brief history of Bitcoin and discover new ways of thinking about value along the way. Money is the language in which we express value to each other through space and time. Now, that language is spoken by computers. Value expressed in this language can’t be diluted through inflation or counterfeiting any longer. It is a language that is borderless, permissionless, peer-to-peer, anonymous (if you have the skills), unreplicable, completely scarce, non-dilutable, unchangeable, untouchable, undeniable, fungible, and free for everyone on Earth to use. It is a language for the future and it emerged out of a specific set of events in the past. All languages are examples of complex systems emerging out of simpler things, and Bitcoin evolved just as organically as any other human language did.

Decentralization is hard to achieve. Really hard. When it comes to claims of decentralization, a “don’t trust, verify” approach to the validity of such claims will help you filter out the noise. So, how can the validity of Bitcoin’s decentralization be verified? It’s a tricky question because decentralization is not a binary thing, like life or death, but rather a very difficult concept to define. However, the most fundamental concepts in Bitcoin, like the 21 million cap on coin issuance or the ten-minute block interval as a result of the difficulty adjustment and the Proof of Work algorithm, have not changed since very early on in the history of the network. This lack of change, which is arguably Bitcoin’s biggest strength, has been achieved through the consensus rules, which define what the blockchain is. Some special mechanisms (for example, BIP9) are sometimes used to deploy changes to the consensus rules. These mechanisms use a threshold when counting blocks that signal for a certain upgrade. For example, the upgrade “Segregated Witness” activated in a node when 95% or more of the blocks in a retarget period signaled support. Bitcoin has displayed a remarkable immutability through the years, and it is highly unlikely that this would have been the case if the game-theoretical mechanisms that enable its decentralized governance model hadn’t worked, given the many incentives to cheat that always seem to corrupt monetary systems. In other words, the longer the system seems to be working, the higher the likelihood that it actually does.

Satoshi set in stone the length of the halving period — a very important aspect of Bitcoin’s issuance schedule and initial distribution. During the first four years of Bitcoin’s existence, fifty new coins were issued every ten minutes up until the first block reward halving four years later. Every four years, this reward is halved so that the issuance rate goes down by fifty percent. This effectively means that half of all the Bitcoin that will ever exist was mined during the first four years of the network’s life, one fourth during its next four years, and so on. At the time of writing, we’re a little more than a year from the third halving. After that, only 6.25 Bitcoin will be minted every ten minutes as opposed to 50, which was the initial rate. What this seems to do is to create hype cycles for Bitcoin’s adoption. Every time the price of Bitcoin booms and then busts down to a level above where it started, a hype cycle takes place. Bitcoin had no marketing whatsoever, so awareness of it had to be spread through some other mechanism. When a bull run begins, people start talking about it, which leads to even more people buying due to fear of missing out (FOMO), which inevitably causes the price to rise even more rapidly. This leads to more FOMO, and on and on the bull market goes until it suddenly ends, and the price crashes down to somewhere around, or slightly above, the level it was at before the bull run started. Unlike what is true for most other assets, Bitcoin never really crashes all the way. Why? Because every time a hype cycle occurs, some more people learn about Bitcoin’s fundamentals and manage to resist the urge to sell, even when almost all hope seems lost. They understand that these bull markets are a reoccurring thing due to the nature of the protocol. These cycles create new waves of evangelists who start promoting Bitcoin simply because of what they stand to gain from a price increase. In a sense, the protocol itself pays for its own promotion in this way. This organic marketing creates a lot of noise and confusion, too, as a lot of people who don’t seem to understand how Bitcoin works are often very outspoken about it despite their lack of knowledge. Red herrings, such as altcoins and Bitcoin forks, are then weeded out naturally during bear markets. Every time a bull market happens, a new generation of Bitcoiners is born.

The four-year period between halvings seems to serve a deliberate purpose. Satoshi could just as well have programmed a smooth issuance curve into the Bitcoin protocol, but he didn’t. As events unfold, it seems that he had good reason for this since these hype cycles provide a very effective onboarding mechanism, and they seem to be linked to the halvings. They certainly make Bitcoin volatile, but remember that in this early stage, the volatility is needed in order for these hype cycles to happen. Later on, when Bitcoin’s stock-to-flow ratio is higher, the seas will calm, and its volatility level will go down. In truth, it already has. The latest almost 80% price drop was far from the worst we’ve seen in Bitcoin. This technology is still in its infancy, and it is very likely that we’ll see a lot more volatility before mainstream adoption, or hyperbitcoinization, truly happens.

About the Bitcoin Infinity Academy

The Bitcoin Infinity Academy is an educational project built around Knut Svanholm’s books about Bitcoin and Austrian Economics. Each week, a whole chapter from one of the books is released for free on Highlighter, accompanied by a video in which Knut and Luke de Wolf discuss that chapter’s ideas. You can join the discussions by signing up for one of the courses on our Geyser page. Signed books, monthly calls, and lots of other benefits are also available.