In the second part of this series, we looked at Bitcoin as a new social and economic institution. However, the next question arises – who will use it? Is there a place for Bitcoin among other institutions, and if so, where is it? Is it true that Bitcoin is simply an incredibly weak competitor to PayPal and Visa, as they want to convince us of this media, or is Bitcoin something more?
In order to understand the place of Bitcoin among other social institutions, it is necessary to find out why humanity creates them.
A person cannot be scaled. Of course, we can learn, but we can not update the brain or body, as we do with hard drives and processors in computers and machines. Our physical and mental abilities have remained virtually unchanged from the moment we wandered the earth as hunters and gatherers. However, we can scale through collaboration. All scientific breakthroughs, performance surges and prosperity are related to our ability to cooperate with each other.
The problem of cooperation and scaling
Since the world is full of unknown, cooperation is given to us with difficulty. We spend tremendous efforts, thinking about how other people will react to our actions, whether these actions will have a negative impact on us.
When we cannot predict the behavior of other people with sufficient confidence, our life becomes a prisoner’s dilemma. Go hunting down a deer with someone else or go hunting for hares alone? How do we know that this particular person will not hit us on the head with a club and will not steal a deer? In order for a person to “scale” and flourish, he needs to find a way to destroy these prisoner dilemmas and decide on cooperation.
Game Theory offers two solutions to the prisoner’s dilemma. The first is to turn a one-time game into a repetitive one (or a game with iterations). If you and your potential hunting partner meet again tomorrow, you will most likely cooperate, as none of you wants revenge from the other. However, such repetitive social interactions or experiences are possible at the same time only in limited groups of people, as suggested by anthropologist Robin Dunbar.
The Dunbar number is the intended cognitive limitation of the number of people with whom a person can maintain stable social relations. Proponents of this theory argue that a large group of people need stricter rules, laws, and strict rules to maintain a stable, holistic group.
Cooperation with institutions
The second rule to which Dunbar refers is to “tie your hands” and limit yourself from taking negative actions that can harm others. This can be done by creating general moral rules and ensuring their implementation in society. However, for groups whose number of members exceeds the number of Dunbar, we need institutions.
One of the main institutions is the monopoly of violence. By transferring responsibilities for the protection of the city to a special group of people, you can safely engage in a productive economy, because the need to protect the grown fruit disappears. By creating a strong and benevolent monopoly on violence, general moral rules can be strengthened and a formal legal system can be created. In the end, laws become more reliable if there is a group of individuals that has more power than any single person and who can enforce these laws.
On the shoulders of a monopoly on violence and the legal system lies the foundation of all the higher-ranking institutions: markets. Markets are the coordination systems of buyers and sellers that provide specialization and the division of labor, while money allows you to create accurate prices for producers and consumers.
We need a monopoly on violence to create a legal system, we need a legal system to create property rights. We need property rights to create markets and enterprises, we need markets and enterprises to create capitalism. Thanks to the invention of new institutions on the basis of old civilization develops. Here is a simplified example of an institutional tower:
By simplifying the interaction of people, social institutions break the prisoner’s dilemma, and we are less worried that others can harm us. As a result, mutual predictability is enhanced, which allows you to trust strangers more and to collaborate more people than indicated in Dunbar’s restriction.
Bitcoin Institute
What rights does Bitcoin give as a new institution? Recall the rules social contract bitcoin: everyone can use the Bitcoin network without permission (no censorship) and only the owner of the money can spend it (no confiscation). In addition, Bitcoin does not have a central authority that can print more money ahead of time and steal the purchasing power of others (no inflation). Finally, anyone can verify compliance with the rules before making a payment (no fakes).
Do these rules pass a reality check? In the remarkable work “Bitcoin as a law on property”, Eric D. Cheysen states the following: “Satoshi Nakamoto created a form of ownership that can exist independently of the state, central authority or traditional legal structures”.
I will go a little further and say that the Bitcoin network, and therefore the bitcoins themselves create one of the highest property rights of any socio-economic institution in the history of mankind.
New era of property rights
The key innovation of Bitcoin is: it separates property rights from the legal system and the monopoly on violence. For the first time, we have property that does not depend on the local authority that would control and protect it. This property is easy to hide, protect, share, move and verify – all this can be done directly by its owner, which creates the highest level of personal sovereignty.
Previously, property rights depended directly on other levels of social institutions, especially the monopoly on violence and the legal system. If the lower part of the tower is unstable, then it is impossible to create strong property rights. However, Bitcoin exists by itself, it can provide the highest level of property rights to anyone in the world, regardless of the quality of lower institutions, government or legal system.
Bitcoin opens a new level of values. Boats allowed us to travel by water, airplanes – by air, and Bitcoin offers a new alternative way to store and move valuables as the first real digital asset. All these properties Bitcoin has due to the fact that it can exist only in the digital world. It cannot be cracked in the physical world, like ordinary physical assets.
All these advantages of Bitcoin will be revealed over time, but now you can imagine who Bitcoin will bring great benefits:
- Anyone who lives in places with weak local property rights.
- Anyone who suffers from discrimination of the existing financial system.
- Anyone who lives in places with weak currency and high inflation or the risk of inflation.
- Anyone who is looking for a way to store or move large amounts of values (higher values require a higher level of security).
Using Bitcoin, people can cooperate more effectively, increase their productivity, and hence their prosperity. Bitcoin allows you to store money for the future, create capital that can be invested in more productive enterprises and used in trade with other people around the world.
Progress through competition
Bitcoin also benefits those who never use it. Bitcoin insures against the mistakes of the central bank, makes the global financial system more stable. No matter how ironic it sounds, it also improves the system of money and property around the world. How so? Yes, exactly this effect is created by competition in the market. If you are a consumer of Apple, the release of the new Samsung phone is good for you, because Apple has to improve the quality of its product in order to remain competitive.
As a result, we can observe a qualitative improvement in the monetary system and the property system, as Bitcoin opens the door to competition and creates a market. It also helps to understand what Bitcoin is NOT: a competitor to VISA or PayPal. It competes with local authorities, legal systems and property rights, that is, the fundamental levels of the existing tower, and not with payment processors that are located on top.
It is thanks to cooperation that civilization develops, but cooperation between strangers is very difficult to achieve. Social institutions solve the prisoner’s dilemma and allow them to cooperate on a larger scale. At the core, a stable and benevolent monopoly on violence must be created, which would enforce the rules of the legal system and establish property rights. Until now, weak local governments could not secure reliable property rights. Bitcoin does not depend on any of the existing systems and can provide the highest form of property rights for all, regardless of the status of a person or his place of residence.
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