Thought bubble: defending Bitcoin
Thought bubbles expose you to random, passing contents of my brain. Oh, did I say "bubble"?
Janet Yellen criticized Bitcoin for its environmental costs. The key idea of Bitcoin is that it has no central authority. Fiat currency is backed by the state apparatus — central banks, treasuries, the taxman et cetera; Bitcoin is like gold, it just exists. So a key question is “do currencies need authorities to defend them?” If they don’t, then the central authority is mostly a risk: it might misuse its power to inflate the currency. If currencies do need authorities, though, then Bitcoin is short one.
Now Janet Yellen’s statement is bad for Bitcoin, right? It probably lowered its price. It would be helpful if some person or body could say “hey no, you’ve got us wrong, we aren’t that environmentally harmful”. OK, some did say that, but a single central body who had Bitcoin’s interests at heart might have said it more forcefully, because there’s a public good problem here: defending BTC benefits everyone who owns it.
And in general, my intuition is that currencies do need defenders, because there are multiple equilibria in the choice of currency. There’s an equilibrium where we all use dollars, and the US gets an exorbitant privilege from that; there are equilibria where we all use Bitcoin, or Dogecoin, or cigarettes. One traditional role of a centralized power is to solve coordination problems, by saying things like “yeah, BTC is definitely going to be valuable: I for one will keep accepting it”. States do this when they demand taxes in fiat.
My suspicion is that currencies have more public goods problems like this, that a central authority can solve. Like, suppose BTC is in fact environmentally harmful, but you could improve it by technical changes, like moving from proof-of-work to proof-of-stake [links]. Making these changes takes research and implementation effort; it would be good if someone had the incentives to do that.
I’m not sure. Maybe Bitcoin’s consensus mechanism, plus the existence of a few whales with lots of BTC in reserve, is enough to create an oligarchy that can act to defend the chain. (But then couldn’t they get together and run 50% attacks?) Maybe the heavy hand of the state still outweighs its benefits as fiat’s defender. Like most BTC users, ha ha, I’m just speculating.
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