How does the bitcoin source code define its 21 million cap?
Many of bitcoin’s staunchest critics have expressed doubt about its 21 million cap, but perhaps the most mindless criticism relates…,
If you have ever heard (or happen to believe) that bitcoin is primarily a tool used by criminals, stop and take a quick sample of your friends and family that you suspect may own bitcoin, and then ask yourself how many are known criminals. There have in fact been widely publicized cases in which criminals have used bitcoin, and because skeptics cannot otherwise explain why anyone else would use it, use for illicit purposes becomes the default assumption. It is generally founded on a view that bitcoin is inferior to the dollar, either because of the belief that it is too volatile or too slow, or because it is not widely accepted for day-to-day transactions; with a flawed mental framework, the logical explanation then becomes that, from a practical perspective, someone would only use bitcoin for the purpose of facilitating some illicit activity, generally as a means to evade law enforcement. Your favorite Senator or Treasury Secretary may occasionally make the claim, but thankfully, bitcoin is not for criminals; it is however for everyone.
“The clear ends of Bitcoin for either transacting in illegal goods and services or speculative gambling make me weary of its use.”
– Letter to regulators from Senator Joe Manchin (February 2014)
If bitcoin were principally used for illicit purposes, it may more logically follow that bitcoin is primarily used by criminals. Because it is not, the typical follow-on arguments that bitcoin should be banned in order to prevent such activity similarly do not hold water. The very foundation of the idea is based on the false premise that bitcoin is inferior to the dollar; when in fact, it is superior to any form of money that has previously existed, principally as a function of its fixed supply (see Bitcoin is Not Backed by Nothing or Bitcoin is Not a Pyramid Scheme). Bitcoin’s fixed supply forms the basis of the fundamental demand for bitcoin, whether it be related to criminal activity or otherwise. And regardless of how many point-of-sale transactions bitcoin may facilitate daily, it is used every day as a censorship-resistant and inflation-resistant form of savings. Without doubt, bitcoin is definitely used by the likes of drug dealers and nefarious characters on the dark web. However, it would be irrational to believe that is its primary use or to believe bitcoin should be banned because of it. It is logically inconsistent to form a view that bitcoin is sufficiently functional to be viable as a currency for criminals, while at the same time deny the implication that such a view would merely establish that bitcoin is functional for everyone.
But before turning the drugs narrative completely upside down, let’s all first admit that criminals rely upon any number of commonly-trafficked access points and not just bitcoin. Roads, the internet, the postal service, airports, the banking system, etc.? Yep, all used by criminals and often used to facilitate crimes. But then again, criminals also use all of the above not to commit crimes as well. And that is where the logic that bitcoin must be banned because it enables criminal activity completely breaks down. Crimes are crimes. There is nothing inherent about the tools used to facilitate crimes that makes them criminal in themselves. Using the mail to send a letter to mom is not a crime. But using the mail to send drugs is mail fraud. Similarly, using the dollar to purchase flowers for mom, perfectly fine. But buying narcotics with dollars (or bitcoin), that’s crime. Despite criminal use, no one is calling for the ban of roads, the internet, mail, etc. And you definitely do not see any prominent defenders of the public interest calling for a ban of the dollar, which just happens to be the preferred funding currency of criminals everywhere. Sure, fear of criminal activity has been used to infringe on the rights of law-abiding citizens seemingly everywhere, but believing bitcoin should be banned because drug dealers use it would be no different than calling for a ban on the dollar for the same reason.
Such a view becomes that much more untenable once it is understood that bitcoin is not actually for criminals, but in order to understand that, it must also be understood that bitcoin is for criminals. It’s a paradox. The very idea is turned on its head when viewed through the proper lens. The fact that criminals can use (and have used) bitcoin to facilitate commerce merely demonstrates that bitcoin can be used to facilitate any form of commerce. That a very early, and well publicized, use case for bitcoin involved the Silk Road website, which facilitated transactions involving drugs and other illicit goods using bitcoin as a means of payment, changes nothing about the broader implication: that bitcoin worked. But rather than focus here, bitcoin research often attempts to prove the counterfactual, that only a small percentage of bitcoin transactions are used for illicit purposes. For example, a headline from last year:
“A new study finds less than 1% of bitcoin transactions to exchanges are illicit.” (Coincenter, January 2018)
The substance may be true, but these counter-narratives fight the battle along the wrong lines. If the Silk Road demonstrated anything, it was simply that individuals would accept bitcoin as a form of payment in return for goods and services. It does not matter that the goods sold on the Silk Road website were generally illicit. The Silk Road, which is estimated to have facilitated in excess of a million transactions, was one of the earliest demonstrations of a mass real-world use case for bitcoin. So yes, bitcoin is (and was) used for drug deals but it is merely one use case that has helped prove bitcoin’s general utility, nothing more. And when it comes to buying drugs, the dollar remains far preferred to bitcoin among drug dealers despite them all generally being aware of bitcoin and capable of accepting it. Whether it be in response to the Silk Road or otherwise, anyone that comes away with the narrow conclusion that “bitcoin works for drugs” is failing to see the forest through the trees. The more consequential and assumption-shattering implication is simply that bitcoin works. Period.
If bitcoin could work for drug dealers to facilitate commerce, could it not “work” to facilitate any other form of commerce? It does not require much imagination to carry forward the logic. If Person A would accept bitcoin for Good B, is it possible that any person might be willing to accept bitcoin for any good regardless of who or what? In the case of the Silk Road, drug dealers may not have fully understood why bitcoin “worked,” but it worked sufficiently well that they were willing to trade drugs for it. What they seemingly understood was that there was sufficient market demand for bitcoin to make it viable as a medium of exchange. And because it provided an electronic mechanism to facilitate transactions, it opened up a market and market mechanism that may have otherwise been unavailable. Love it or hate it, it was just a market taking advantage of new technology.
Despite the existence of bitcoin, drug dealers have not magically stop accepting dollars as their preferred funding currency. Nor have they stop laundering dollars back into the banking system. Drug dealers on the Silk Road did not use bitcoin merely to evade law enforcement nor did the dollar drug trade suddenly disappear; they used bitcoin because it was functional and because it satisfied a market need. If bitcoin were not functional and if it were not expected to hold a certain threshold of value over a particular time horizon, it would not have been used as a medium of exchange on the Silk Road. Drug dealers are not in the money losing business after all. But more importantly, anytime anyone decries that bitcoin is used by criminals for illicit purposes, whether it be a U.S. Senator or Treasury Secretary, the default question to ask should be: why does bitcoin work as a medium to facilitate commerce in the first place?
Focusing on criminals distracts from the more fundamental question and consequence. If bitcoin could work for a criminal, it could work for anyone, and in order for bitcoin to be viable as a currency, it has to work for everyone, including criminals. However, this is not a promotion of criminal activity using bitcoin as a funding mechanism; it is merely a recognition of the properties that allow bitcoin to function in the first place. Think of criminal activity as a litmus test. If bitcoin does not work for drug dealers, it doesn’t work for anyone. But if it works for drug dealers, it can work for everyone. If it were possible to censor (or prevent) bitcoin transactions related to certain activity or certain individuals, it would be possible to censor any activity and any individuals. And if there were a prime target of activities or individuals to censor, it would be that of a criminal enterprise. The attempts have already begun.
“The U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) has sanctioned three Chinese nationals and their cryptocurrency addresses, alleging they violated money laundering and drug smuggling laws […] The agency also listed a number of bitcoin addresses […] that the agency claims belong to the Chinese citizens.” (Coindesk, August 2019)
Recognize that in this context, bitcoin “working” is specifically a reference to the network protocol layer. Whether a company or individual is willing to accept bitcoin from an address sanctioned by OFAC, or whether a third-party financial institution freezes an account associated with such an address is of little consequence to the long-term viability of bitcoin. What is consequential is whether the network would validate a transaction originated from a sanctioned address or validate a block that includes such a transaction. Stated another way, whether bitcoin miners or nodes would reject such a transaction despite it otherwise being valid based on the network’s consensus rules. Bitcoin is only viable as a currency because it is decentralized. But decentralization is not an end in itself. The end game is censorship-resistance. And it is not an end game to protect criminals. It is an end game to protect the very root level functioning of the currency system.
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Censorship-resistance is the network’s most critical property because it ensures that the rules of the network will neither change arbitrarily or be enforced inconsistently, without which the system would be inoperable. Most important of these rules is the finite scarcity of the currency itself. Censorship-resistance reinforces scarcity and scarcity reinforces censorship-resistance. Bitcoin becomes more resistant to censorship as it scales because the network becomes more decentralized over time. As adoption increases, each individual (on average) controls an ever-diminishing share of the network’s fixed supply, and it is the scarcity of the currency which primarily drives adoption. As the network becomes further decentralized, it becomes increasingly difficult for any individual or business to censor the network. However, at any point in time, whether bitcoin is sufficiently censorship-resistant is ultimately unknown and practically unknowable. Instead, censorship-resistance can only be measured through the test of time and through each failed attempt to censor the network.
From a practical perspective, the risk of censorship principally comes in two forms: forcing changes to the network’s consensus rules, or invalidating (or preventing) otherwise valid transactions. By design, anyone can access the bitcoin network on a permissionless basis by running a bitcoin full node. Each node can broadcast transactions to the rest of the network, and every node validates a full history of the blockchain with each passing block based on a common set of rules. Through this operation, nodes distributed throughout the world are able to come to a common consensus regarding the valid state of bitcoin ownership across the network, on a decentralized basis and without anyone trusting any other participant. The consensus rules of bitcoin are the common language that coordinate all peers within the network, but no single party dictates the rules; everyone opts in voluntarily. If it were possible for any single party or central authority(s) to force a change on to the network or to influence activity within the network in such a way that would invalidate an otherwise valid transaction, it would demonstrate that the network was not sufficiently decentralized to prevent censorship.
But what about the criminals and what does this have to do with that? If it were possible to censor criminal-related activity within the network, either by inhibiting access to the network or by preventing otherwise valid transactions from being confirmed, it would demonstrate that the network is not sufficiently decentralized to ensure censorship-resistance. The bitcoin network has no understanding of criminality or who defines it. It is amoral and apolitical. All bitcoin understands (when validating transactions) is its consensus rules; it is a closed loop system. A bitcoin transaction is valid if it is consistent with the network’s consensus rules; if it were not, all bets would be off. If criminal activity could be censored, it simply would prove that any activity could be censored. But that is not where it ends. If any activity within the network could be censored, the network as a whole would be censorable. By demonstrating that a single transaction could be prevented or censored, it would establish that the network’s consensus rules would also be at risk.
Bitcoin can’t be a little bit censorship-resistant, just like you can’t be a little bit pregnant.
Censorship resistance is an all or nothing proposition. It either is or it is not. And if it is not, then everything is at risk, including bitcoin’s fixed 21 million supply. That number and the reliability of its scarcity underpins every other economic incentive that allows the bitcoin network to function and accumulate value, including the mechanism by which the network comes to consensus. Accepting that the bitcoin network will always to some extent be used for illicit purposes is not some libertarian bent. Instead, it is a recognition that in order for bitcoin to be functional and viable as a currency system, it has to be so for everyone. If anyone could prevent anyone else from utilizing the network, whether an individual, an organization or a nation-state, bitcoin would be at risk of failure. Censorship within bitcoin at the protocol layer is not the equivalent of PayPal de-platforming an individual or company; nor is it the equivalent of Bank of America shutting down a checking account or Visa not authorizing a transaction. Bitcoin is a currency issuer and settlement layer. Any effective form of censorship would undermine the system as a whole, which is why the activity most susceptible to censorship forms a litmus test for the rest of the network. If it were not possible to censor the most at-risk activity, it reinforces that bitcoin reliably works in all cases.
Ultimately, bitcoin represents a technological advancement in the global competition for money; it is the superior successor to existing fiat monetary systems, even if not well or widely understood today. And as an extension of an idea discussed in Bitcoin Cannot Be Banned, anyone who calls for a ban on bitcoin due to the belief that it enables criminal activity is concurrently admitting that bitcoin is functional as a currency. Consequently, if bitcoin is functional in facilitating commerce associated with illicit activities, and despite the best efforts of a powerful regulatory authority, ipso facto, it can be functional in facilitating any other form of commerce as well, including by law-abiding citizens. Practically, operating within that reality and recognizing that bitcoin is a finitely scarce resource, it does not logically follow that it will be confined to the dark web, nor is it today.
The competition for bitcoin is global. Over time, those that produce the most relative value will accumulate the greatest share of bitcoin. To think that those involved in illicit activities will account for a larger share of the future bitcoin economy than today’s dollar economy is not rational. And calling for a ban on bitcoin is somewhat like being scared of your own shadow. Not only would it not be practical to enforce, but the activity such a policy would seek to prevent is enabled today in far greater proportions by the dollar. It would be analogous to throwing the baby out with the bath water. We accept the good with the bad, recognizing that due to the very nature of bitcoin, we do not get to decide. There are always trade-offs, and in this case, that bitcoin will unavoidably be used for illicit purposes is the trade-off we gladly accept in exchange for the economic stability that an unmanipulable global currency will provide. As with every technology, value will accrue to those that utilize bitcoin in its highest and best use, a function which only the market can determine. The net benefit will not be zero-sum and just as the internet is not for drug dealers and terrorists, bitcoin is not for criminals. It is for everyone.
“It is more important that innocence be protected than it is that guilt be punished, for guilt and crimes are so frequent in this world that they cannot all be punished. But if innocence itself is brought to the bar and condemned, perhaps to die, then the citizen will say, ‘whether I do good or whether I do evil is immaterial, for innocence itself is no protection,’ and if such an idea as that were to take hold in the mind of the citizen that would be the end of security whatsoever.” – John Adams
“Govern wisely, and as little as possible” – Sam Houston
Final thought (stealing a page from @martybent’s playbook): History will look back far more favorably on Ross Ulbricht, the alleged founder of the Silk Road, than central bankers everywhere. Not for the drugs but for the bitcoin.
Next Edition: Bitcoin Obsoletes All Other Money
Views presented are expressly my own and not those of Unchained Capital or my colleagues. Thanks to Phil Geiger and Will Cole for reviewing and for providing valuable feedback.
Many of bitcoin’s staunchest critics have expressed doubt about its 21 million cap, but perhaps the most mindless criticism relates…Ted Stevenot, Stephen Hall
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Originally published in Parker’s dedicated Gradually, Then Suddenly publication. Bitcoin is often described as a hedge, or more specifically, a…Parker Lewis