What developers of blockchains and cryptocurrencies have to keep in mind
Let us assume that cryptocurrencies are the money of the future. What political gains will they bring with them? What do we already know — and what is still in the balance? Such questions are difficult to answer because, with cryptocurrencies, technical details become big political questions.
What is the purpose of Bitcoin has been the subject of so much debate. Presumably, such discussions are pointless because the invisible hand of the markets makes its own decisions. Nevertheless, we are asking here to define the political coordinates of Bitcoin.
I would say that most people could agree that Bitcoin should be the perfect money for the digital space. The existing money — the Fiat money — is not made for the Internet. It can be fitted in by hook or crook, but in the end it remains a foreign body in cyberspace. Like a carriage to which you harness more horses to go faster, or a calculator in which you add more keys to open up new functions.
Bitcoin, on the other hand, is digital. The cryptocurrency lives on the Internet. It was born there. When you pay with the banks’ money on the Internet, you usually log on to a bank and instruct them to make a transfer. When you pay with Bitcoins, it’s more like sending a file to the other person. For one, IT is just a communication channel for something else. For another, it’s the money itself.
The political coordinates of crypto-currencies
Of course, the fish is far from being landed. Bitcoin — or another cryptocurrency — has the chance to reinvent money in the digital space. But so far digital money has not caught on. Not as a means of payment, not as a unit of account, and not as a store of value. But the chance is still strong. It seems almost surreal to imagine that in the future we will not use money that lives as bits and bytes on the computers of all people. It would be tragic to let this chance pass.
So it is still likely that we will find ourselves in a future where Bitcoin or other crypto-currencies are the dominant means of payment for humanity. What that future looks like in concrete terms is still uncertain at the moment. There are too many parameters, so many set screws to turn, and as David Chaum said in the 1990s, the code of today can determine whether we live in a democracy or a dictatorship in the future.
Will Bitcoin give humanity a new level of freedom? Will it herald devastating anarchy? Will it become the instrument of dictators and controlling states? Will Bitcoin empowers the citizen — or will it render him powerless? Will Bitcoin become a plaything of the markets? Or the basis of a new economic order?
So many questions. And each of them decides what future we live in. The difficulty here is that every technological detail in Bitcoin becomes political. There is hardly any other phenomenon where technology and politics are so closely intertwined. Here we try to present some parameters and show what political consequences technical details can have.
Privacy and transparency
As with all digital things, privacy is an important issue — but it is also double-edged.
If the digital money of the future does not offer its users enough privacy, there is a threat of financial mass surveillance. Those who claim they don’t care because they have nothing to hide anyway have missed the discussions since 2013. Every piece of information that a state has about its citizens is a piece of power that, in doubt, threatens to undermine civil rights. Privacy means that you control who gets what information about you. A cryptocurrency that does not give its citizens this opportunity could be dangerous for them and accelerate the trend towards mass surveillance.
At the same time, transparency in itself is also a value. If a crypto-currency gives the citizen the ability to track the financial transactions of states, large corporations, and very wealthy citizens, it is likely to have a value for democracy. It is not for nothing that transparency is right next to privacy in the demands on how to shape a digital future of participation and democracy. Furthermore, there is a social consensus that the state must be able to hold individuals accountable for their actions, which is why it is largely seen as positive that criminals can be tracked via the trail of money.
It is up to each individual to decide where to locate his or her position in this spectrum between complete transparency and complete anonymity. Some people place more value on a high level of privacy, while others also appreciate a certain degree of transparency. It is important here to understand the technological circumstances.
Basically, all transactions with cryptocurrencies are in a public blockchain and can be traced by anyone. However, they are not assigned to a real identity, but to pseudonymous addresses, i.e. long strings of characters. The private sphere behaves in the opposite way to banking: While in a bank transfer only the bank knows the transaction, in a blockchain, everyone knows it; and while the bank transfer contains the identity of sender and receiver, in Bitcoin transactions only pseudonyms are used, which at first have no connection to the real identity of the parties involved.
There are, however, considerable differences at the protocol level of cryptocurrencies. For example, UTXO-based systems such as Bitcoin have completely different privacy properties than account-based systems such as Ethereum or the almost completely anonymous Monero. The choice of wallets also has significant effects. Some wallets increase privacy, for example through mixing procedures, while others reduce it because they transmit data such as credit or IP address to a server. Wallets then take on a similar role to banks: they know more details than other parties.
The extent to which privacy can be achieved depends on both the technical competence of the user and the amounts involved. As a rule, smaller amounts are relatively easy to privatize, while very large amounts are impossible to hide. Competent users can avoid mistakes that reveal too much and use methods to improve their privacy.
Money creation and inflation
An essential political component of cryptocurrencies is the creation of money. They snatch it from the banks and central banks and hand it over to other parties. Who these parties are is as important as the mode of money creation.
All crypto-currencies have in common that the creation of money is essentially static. It is defined by the protocol and is not changed afterward. This distinguishes it from the central bank money that is created according to the economic situation. Anyone who believes that a central bank needs this flexibility to maneuver economies through crises will have little sympathy for this part of all crypto-currencies. For him, a stablecoin, which depicts a fiat currency as a token on a blockchain, might make more sense. But that’s not what this is about.
There are several modes of money creation under cryptocurrencies. Economically important is the rate of money creation. A tight, decreasing and ultimately seeping rate like Bitcoin introduces hard, long-term even deflationary money — and thus a monetary base that is either very old or completely new. In the worst case this could lead back to a more feudalistic model of society, and in the best case create a truly sustainable economy. Closer to the model of central banks are cryptocurrencies with a continuous but low rate, about one percent. Just as central banks define an inflation rate of just under two percent as stability, protocol developers, in creating the currency, set a certain rate of inflation as perfect.
A third model is a little more flexible. Crypto-currencies like Stellar, Ripple or IOTA created all units of the crypto-currency in the beginning. A central entity — usually a foundation — then distributes these units over time. Like a central bank, it can adjust the money supply to economic performance. However, this creates an immensely powerful central party, and it is already apparent that the distribution of coins is being massively abused, for example by Airdrops.
In most crypto-currencies, monetary units are created over time. The way in which this happens is also politically significant. In proof-of-work currencies, these are the miners. They invest in hardware, such as graphics cards or Asic-Miners, to generate new coins through them. In proof-of-stake currencies, on the other hand, the “Stakers” deposit coins in their wallets to create new coins. Technically both methods serve the same purpose — they create a kind of scarcity of conditions — but politically there are big differences.
For a miner is like a producer: He invests his income in means of production in order to generate further income. A staker, on the other hand, is like a reindeer: he puts his income into a kind of bank account in order to increase it. The miner’s system is much more dynamic; it is more prone to disruption. A miner who finds the ideal location can earn more than another miner; a miner who performs less because he doesn’t maintain his plants’ losses. Stakers, on the other hand, are much more static. Once you have deposited coins, you can just sit back and wait for interest.
Autonomy, dependence, and user-friendliness
The autonomy of the users means their independence. To what extent do cryptocurrencies empower them to use money without the help of a third party? User-friendliness is as important as the technical basics. A cryptocurrency that is not so user-friendly that 99 percent of the population can use it will never give autonomy to 99 percent of the population in practice, even if it were theoretically possible.
What autonomy means is not easy to say. Complete autonomy is an illusion. You need an internet provider to send transactions, a stock exchange to change coins, and so on. But an essential part of autonomy is the possession of private keys through which you can issue your crypto coins. Only those who exclusively own these keys are the real owners of the coins. The vast majority of wallets of all currencies allow you to manage the keys yourself, although of course there are wallets that delegate this task to a server. But in essence, it is an essential feature of all cryptocurrencies that users can manage their keys themselves.
This autonomy is one of their basic services, and this makes it impossible to confiscate cryptocurrencies from a distance. Electronic mass expropriation of crypto-currencies is not possible, unlike with bank money.
But how can users interact with the network? The most autonomous form of this is the Full Node: a user is a full peer in the network. This authorizes him to send transactions and receive money without the help of a third party. This kind of autonomy — not needing any help to send transactions — could also be called censorship resistance: Nobody can stop you from sending money to anybody.
However, such a Full Node is “heavy”. It has to synchronize for about a day with Bitcoin — much longer with Ethereum -, needs a lot of disk space, and if you turn it off, it takes some time to load when you restart. Even though there are now full nodes “out of the box”, such as Casa, Nodl or RaspiBlitz, which you simply plug into the router, the user-friendliness is probably too low for 99 percent of the population. A network that, like Bitcoin, keeps the scalability low to keep the requirements for a full node low pays a price for this through low capacities and high fees. It excludes large parts of the population.
Most users use wallets that are not directly a peer in the network. The most autonomous form of these is the so-called “SPV” wallets. These communicate directly with the full nodes, which makes them almost as autonomous as the full nodes. However, such wallets are rather the exception. Most interact with a server, for example, the popular hardware wallets or most multi-coin wallets, or, like Electrum, with a network of servers. In this case, users are dependent on a third party to send transactions. However, the failure of the third party would be bearable. This is because most wallets allow the private keys to be exported and imported by a seed. If one server fails, the coins can be sent with another wallet.
As long as the user holds his private keys, the autonomy of the crypto-currency is on a high level throughout.
The tracks are laid, but not yet the route
We have identified three characteristics of cryptocurrencies where technology and politics go hand in hand: privacy, money creation, and autonomy. It is obvious that cryptocurrencies in all three areas have the potential to improve the world of money for the benefit of citizens. However, the details are far from fixed. How they are fixed will have a decisive influence on the political coordinates of the money of the future.