Considering the Bitcoin Digital Currency as a Commons

From P2P Foundation
Jump to navigation Jump to search

* Article: Other Values: Considering Digital Currency as a Commons. By Rachel O'Dwyer.


Source: RGS-IBG Panel: From Co-production to Alternative futures (1): Creating Cracks: Value, Commons and Alternative Economy, London, September 2014


"This paper analyses the implications of digital currency and specifically Bitcoin as a monetary commons that both challenges and facilitates money power. Bitcoin has recently been presented as a key ingredient in the development of alternative anti-capitalist value systems; as a decentralised digital currency that manages transactions through a network of peers, it is thought to eradicate the need for third party credit instruments in the regulation of transactions. However, a closer examination of the technical functionality and application of Bitcoin demonstrates that while various theoretical aspects of the digital currency provide welcome thinking points for the development of alternative value systems, the philosophy and exercise of Bitcoin is driven by a strong neoliberal agenda, where once more sentiments of the commons are used to obfuscate the new forms of accumulation that thrive on digital networks."


Bitcoin as a Currency of the Common

Rachel O'Dwyer:

"Let’s quickly look at some of the reasons Bitcoin is thought to support a commons: First of all, the peer-to-peer topology of Bitcoin produces a decentralised architecture that evades a sovereign social structure, allowing instead for a communal and ‘democratic’ production of consensus, trust and authority. The ‘peers’ in the network collectively manage control over money. The peer-to-peer nature of monetary production suggests a relational and community-invested monetary form that is ideally situated to support and guarantee a commons. Secondly, the design of Bitcoin seems to address some of the issues associated with money power and the enclosure of monetary infrastructures. As Thomas Greco points out, we are subject to a capitalist enclosure of the credit commons. The outcomes of these enclosures are significant. They include overarching facts such as the control that money currently exerts over labour power. They include the crippling consequences and socialisation of private debt following the bailouts in 2008. They also include transactivity-based forms of rent applied by banks and third parties: these might be in the form of high-interest and risk intensive streams of credit, in the form of profits from transactions fees or through the monetisation of user-data across payment platforms. Finally, they include the political heft of companies such as major credit cards and PayPal who can effectively prohibit and stall the flow of money to organisations or institutions at a moments notice. Because money is produced and guaranteed through a distributed structure, Bitcoin does not imply any central entity responsible for the guarantee of transactions or for the regulation of the value or volume of existing monetary units. Instead, these functions are delegated to the user network itself. This removes the necessity of public or private intermediaries in the transaction process. This in turn has significant political and economic consequences: Bitcoin represents a real assault on money power’s stranglehold over money supplies. We can make our own money that supports the commons and eases debt and provide access to financial services and credit. We can potentially evade transaction fees and instead transact directly with others. This is very significant – in parts of the Global South fees for domestic and international remittances can represent an interest of as much as 20% of the original transfer or even more for small amounts of money. Not only do we evade fees, Bitcoin mining, as a clustered participation in the transparent transaction verification process is also seen as providing an antidote to third party surveillance across proprietary payment platforms. Finally it suggests a measure of resistance to the political control of transaction networks by large credit card corporations or intermediaries such as Stripe and PayPal. In this way, Bitcoin arguably democratises money & financial transactivity in the way that Wi-Fi and VOIP did for cellular communications. This brings us to the second key aspect of Bitcoin as a commons – the question of communal relations underpinning the network itself. Here the peer-to-peer nature of monetary production suggests a relational and community- invested monetary form that is ideally situated to support the Common. Bitcoin is also open source. Contribution to the blockchain doesn’t only produce money, it also reproduces the community, strengthening a network of trust and strengthening the currency by making Bitcoins less likely to be counterfeited. As Jaromil argues “when talking about Bitcoin, of its inherent qualities of networked creation of value…we can’t ignore the fact that this technology relies on community dynamics to the point where one can state that Bitcoin makes it possible for money to become a common and no longer a top-down convention imposed by a sovereign and its liturgy of power”.

Key Criticisms of Bitcoin

"A closer examination shows us that while some theoretical aspects of the currency provide welcome thinking points for the development of alternative value systems, Bitcoin is also driven by a strong liberal and rent-seeking agenda. My first criticism analyses how instead of building on a community or democratising the means of monetary production, new forms of algorithmic regulation and new spheres of informational control overlay the supposedly peer-to-peer topology of the Bitcoin network. My second recognises that rather than producing a monetary form that supports the commons, the design of Bitcoin is aligned with a strong liberal agenda: based on individual sovereignty, private property, rent-seeking and the free market. To tease this out, let’s start with the question ‘What kind of sociality and community does Bitcoin produce?’. This begins with a question of trust. Bitcoin is a proposal to construct a monetary form where social institutions are delegated to technical processes. With Bitcoin ‘trust in the code’ substitutes for other kinds of trust – trust in individuals, friends, institutions and governments. If gift economies are predicated on trust in others, and money proper in trust in the state, Bitcoin is built on an architecture of trust embedded in the code itself.

As Satoshi Nakamoto outlined in the inaugural whitepaper for Bitcoin, Proof-of-work is not a new form of trust so much as a technical negation of the social institutions that underpin money “an electronic transaction that does not rely on trust…based instead on cryptographic proof’.”

Instead of speaking of the construction of complex social relations, laws and institutions, then, we are speaking of an algorithmic regulation. Trust is delegated not to the people but to the Bitcoin protocol. It’s true that this distributed form of cooperation has allowed the cryptocurrency to scale beyond local communities of cooperation and exchange because it removes the need for interpersonal trust and consensus between users. But to what extent can this system of regulation and accountability be described as a form of peer-production? Placing ‘trust in the code’ is endemic not only of a new form of sociotechnical cooperation with others, but of a strong liberal agenda where the Bitcoin user is self-sufficient and independent from any public functions or accountability whatsoever. This arrangement suggests not so much a monetary commons where technology stands in for negotiation and trust and all the messiness of human transactions but a new kind of capitalism without supporting social institutions. But money is a fundamental social institution and can’t be provided by a market or automated systems alone without serious problems. Which brings us to another consideration: ‘Who are the ‘peers’ in the peer-to-peer network?’. In the shift from a juridical law to an algorithmic regulation, power resides not with the financial institutions and not with ‘the people’ but with the proprietors of network infrastructure. The peers in the Bitcoin network are non-human, not ‘people power’ in other words, but processing power, which is subject to a logics of scale and scarcity that prohibits any equal entry into the payments space. In a true peer-to-peer commons-oriented currency, the peers must be humans, not computers. In Bitcoin the computers are the peers, but some humans may have access to thousands of computers and others none. A consequence is that authority and benefits are unevenly distributed. This has led to what’s sometimes referred to as a ‘Bitcoin aristocracy’. Bitcoin mining is thus a competitive endeavour based on access to computational power and resources. This is the logic that has spawned the development of extremely powerful Bitcoin mining ‘pools’ or ‘rigs’ that control the vast majority of hashing power. This is not just a question of individual investment, therefore, but an asymmetric investment of capital and computational resources where whoever can corral to most gear reaps the greatest benefits. Powerful actors (those with more resources) extract unearned money from the energetic investment of less powerful actors within the network. And so too, third-party control re-emerges: new third party intermediaries are already emerging who control the mining process; the Blockchain; the storage of value and the gateways to transactivity, with all the economic and political chokepoints this suggests. Instead of public authority, the proprietary relations of computers and communications networks are significant, as control of the ‘rail’ or infrastructure and control of value production and accumulation go hand in hand. Rather than an egalitarian space of social production, then, we have a ‘netarchical’ form of capitalism where production is socialised but the benefits are unequally distributed. Bitcoin is situated in scarcity and property relations that are anathema to the commons. The primary philosophy is grounded in the Austrian school of economics – where hyperinflation is seen as a major threat (here the emphasis is placed on money acts as a reliable store of value rather than as a means of exchange). In response, Bitcoin is made to be scarce; it is designed as a fiat currency and its supply is limited to 21 million Bitcoins, more than 13 of which have already been minted at a time when not many services are denominated in Bitcoin. In a centralised economy, currency is issued by an authority such as the Central Bank at a rate that ostensibly matches the growth of goods that are exchanged so that these goods can be traded with stable prices.

But in a decentralised monetary system such as Bitcoin, no central authority regulates the monetary balance. The Bitcoin algorithm defines how the currency will be created and at what rate it is mined. Because of the limited supply of Bitcoin and its rising market value, Bitcoin is subject to strong deflationary tendencies; the value of one Bitcoin is set to increase while the currency remains in circulation, providing a strong incentive for hoarding, as purchasers hold on to their investment in the hopes that prices will keep rising. This is evidenced in an analysis of blockchain transactions: a comprehensive study released in 2013 found that 78% of mined Bitcoins were out of circulation and that a large number of transactions stored on the blockchain could be attributed to a small number of actors. Similarly, most Bitcoins are in the hands of very few people and according to one survey the majority of Bitcoin transactions involved transactions to and from shill accounts.

This suggests that the majority of Bitcoin proprietors do not see Bitcoin as a currency or means of exchange at all, but simply as a stock, a store of value that they speculate will grow in value in the coming years. This is also in keeping with the IRS decision in March 2014 to designate Bitcoin as a form of property as opposed to currency. It would seem that Bitcoin, far from representing a monetary commons, is instead an ideal financial asset for rent-seeking capitalism. Because of its design there is also no possibility for cheap credit in the Bitcoin system and if the unit matures, a banking system will be necessary to provide credit based on deposits.

Finally the co-production of ‘virtual coinage’ overlooks the computational and energetic expenditure of the mining process, a system that through it’s profligate waste of natural energy resources. We can also say that the proof-of-work concept that Bitcoin is implemented on, far from working towards the reproduction of a natural/material commons produces negative externalities in the form of environmental degradation. We might not be used to thinking of equations as producing energy but this is the case. Proof of work requires processor-intensive equations that are made to be increasingly arduous and computationally expensive as more miners join the pool. According to the figures on this is currently at a rate of 196,153,203.88 GH/s."

Alternatives to Bitcoin ?

"One proposal has been to modify the ‘proof of work’ production process in favour of a community-orientated approach grounded in social cooperation. We can see, for example, currencies such as Ripple and Document coin that are built and implemented through social networks of trust and reputation. Ripple is a monetary system based on trust that already exists between people in real-world social networks. Document coin, a prototype currency in development at the time of writing, also relies on reputation to keep transactions in order. Different values assigned to currencies and situational and subjective factors determine worth. Other proposals suggest ways of encouraging monetary circulation in cryptocurrencies and inhibit hoarding and rent-seeking. Building on the concept of demurrage developed through Silvio Gesell’s Freigeld, the makers of Freicoin suggest a cryptocurrency that has incentives to encourage use and circulation as opposed to hoarding and speculation. Freicoin is also based on the proof of work – it’s a fork of Bitcoin, but it includes a demurrage fee to encourage circulation; users pay a holding fee for coins that are taken out of circulation. Freicoin also distributes 80% of all coins through the foundation rather than through the mining process. Demurrage means that capital money behaves a lot more like other material goods than an ideal store of value. In such a situation, if money could spoil, it would be more beneficial to circulate money, creating an outwards flow to the broader community that will continuously flow back to you than to withdraw money and only circulate it when it begets more money (through interest). The Piraha saying, “I store my meat in the belly of my brother” seems to sum this up. While the mechanics are not obvious, from here we could imagine a money form that is backed not by gold but by shared assets we all benefit from - the commons. Similarly there are cryptocurrencies that reward those who contribute to a commons. The cryptocurrency Solarcoin grants those who own solar generating devices one coin per megawatt-hour of energy created, thus rewarding those who provide this source of energy. Namecoin is a fork that also acts as an alternative DNS, helping to avoid domain name censorship and contribute to underpin a digital commons. In a similar vein, Cloudcoin users earn coins by offering bandwidth and disk space to a distributed cloud storage system – think an open source dropbox."