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In February, impossibly, we watched Bitcoin rise 50%. It reached a $1 trillion market cap. It flew past the emotional yardstick of $50,000 with investments from Tesla, Mastercard, and MicroStrategy. Corrections and all, it’s safe to say that something is happening.
It’s less safe to say that anything is happening for the first time. The novelty illusion—the tendency to believe that we’re witnessing an event that’s the first of its kind—seems to be one source of Bitcoin’s polarity, birthing some of its greatest enthusiasts and its heaviest critiques. But a quick cross-reference with the history of trade is enough to disenthrall ourselves with any sense of novelty. The rise of cryptocurrency, and Bitcoin as the current name brand, represents a return to, not the invention of, decentralized finance.
The Evolution of Money—From The Bottom Up
We understand intuitively that language has no author; it’s a relational tool that’s emerged, with modifications, over tens of thousands of years. It’s come into being because it’s been needed—to use sounds and symbols and arrive at mutual understandings has been significantly advantageous.
Money has a similar origin story (well-covered in Matt Ridley’s Evolution of Everything). Private currencies, built outside of the confines of regulating entities, have played a constant, continuous role. From cattle to shells to coins, we’ve moved incrementally closer to dependable, defensible systems of trade because dependable, defensible trade has been significantly advantageous.
A particularly profound development came around the 18th century. As more people moved into cities, the labor force transitioned from feudal duties paid in kind to employment relationships paid in wages. Soon, there was a shortage of coins. Independently, and all at once, employers started using private tokens as a kind of IOU. In 1794, a group of tradesmen picked a token and traded it as if it was a unit of value. In 1797, 600 tons of those tokens were circulating; somewhere, a currency had been born.
This example and others like it solve the chicken-egg dilemma. First came the unauthored language of money, then came the instinct to regulate it. Today, our coins wear the heads of founding fathers. Our money is a government monopoly. We have central banks, lenders of last resorts, and regulating entities. We also have massive inefficiencies, and no reason to believe in the finality of this form.
A Brief History of Regulation, Circa 2008
Let’s trace back to the example of language. Language works well because it’s a bottom-up system—its development is mostly unarbitrated, it’s allowed to become on its own. Bottom-up systems are generally more successful than top-down designs. It would have been hard for any ‘inventor’ to predict and enforce the rules of expression by which we currently abide.
Centralized finance is a top-down system. It’s served some purpose—we can generally defend our contracts, affirm our transactions, and (to some extent) manage our volume of coins. It’s also been a force of destruction, and we might look toward the regulated lending that resulted in the 2008 crisis.
Preceding the famous burst of the sub-prime bubble was a steady and deliberate increase in regulation. The incredible appetite for nonsensical loans wasn’t something that could’ve emerged into being, or at least not something that could’ve survived. Instead, it was created, encouraged, and enforced by a chain of regulation—lenders, mortgage brokers, underwriters, legal firms, and government enterprises were the direct beneficiaries.
The complicity of top-down systems in creating the 2008 crisis is a case that can be made without pointing fingers; the disaster was by no means designed. But it was an inevitable byproduct of the over-trust in institutions. This is what happens when we let things be decided instead of discovered, and when we let our governments play God for too long.
No One Knows Satoshi—Recovering Margins of Trust
Blockchain represents an independence from institution; we can increase the complexity of our exchange and minimize our margins of trust.
Let’s look at the example of language one more time. In order to communicate, we need to constantly agree on what our words mean. We use a dictionary like a communicational contract—to some extent, our words are defensible.
Blockchain technology is better than a dictionary. It’s like an untouchable record of everything that’s ever been said. Advanced cryptography makes it less disputable that a transaction has occurred. And the process of verification, which takes place in the cloud through a distributed network, renders the role of any middle figure completely obsolete.
Unlike language, currency also needs a source of scarcity. Blockchain again offers an improvement on our current process. Scarcity in the fiat currency world needs to be enforced. In the Blockchain world, it’s coded for.
The point of all of this is simple—no one needs to know Satoshi. The enigmatic group behind Bitcoin’s design asks no one to trust their judgement. Instead, they offer us a better system for defending transactions and implementing scarcity; a system with no reliance on a central domain.
Soon, to allow our government to stabilize our global markets will seem as outdated as accepting payment in the form of a fief. That we’d need a company to validate a digital transaction—to green light that the unit of value has left the sender’s account and arrived safely with the recipient—will seem properly ridiculous. And at that point, the future will have found us the way it always does: slowly, undeniably, and from the bottom-up.
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About Dave Sanderson
Dave Sanderson is the President of Red Jacket Capital, a boutique hedge fund that specializes in FX trading. Previously, Dave was the Founder of KFL Capital Management, winner of the 2015 CTA Newcomer of the Year Award for Commodity Trading Managers. To date, Red Jacket has placed over $3 billion worth of FX products with sophisticated investors.
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