Yanis Varoufakis was Greece’s finance minister during the Greek economic crisis. In 2012, he explored utilizing a blockchain-based system to help manage some of the crisis. Varoufakis has spoken critically about bitcoin publicly on many occasions, he understands the power of bitcoin but feels its economics is dangerous.
During a Twitter thread on Bitcoiners engaging with people outside of our usual circles, I suggested Varoufakis, who, as a Keynesian, has clearly seen value in some aspects of Bitcoin. Rather poetically he retweeted the thread.
I wanted to write a short letter bringing him up to speed on some of the changes that have happened in Bitcoin, and whether the functionality now available will impact his opinions.
Dear Mr Varoufakis,
For a long time Bitcoin has pricked your interest, but after analysis of its economics you have been left with serious and very valid concerns, such as its deflationary issuance, and its ability to disarm governments from using money to stimulate the economy.
“powerful tendency to underestimate the ill-effects of deflation on a social economy”
“there can be no de-politicised currency capable of ‘powering’ an advanced, industrial society.”
As a great supporter of your work, I hope to address some of those concerns. I know you explored implementing a blockchain-centric solution during the Greek crisis, and that you are no stranger to the technology of Bitcoin or its tenets, so forgive me if I cover a few things you already know.
One of the computer-science solutions that makes Bitcoin possible is that it is free and open-source software, a sort of cooperative for software development and a direct response to the privatization of computer science during the early 1980s. Suggestions for improvements to the Bitcoin protocol are developed publicly. Anyone can contribute to Bitcoin, but for their contribution to be successful they must go through the arduous task of proving scientifically why a change is necessary, and trying to find consensus amongst Bitcoin’s users. Changes are accepted by the network through the software the users choose to run, and in this way the users of Bitcoin decide how it is defined.
Bitcoin is always in flux, forever changing, so our judgements about Bitcoin must also change.
It is important to note a number of impressive advancements that have happened over the past few years, namely the second-layer solutions pegged to Bitcoin made possible by a malleability fix in 2017. The most popular of these second-layer solutions is the Lightning Network, which is based on a concept first suggested by Satoshi Nakamoto, that a transaction can be securely held open for a period of time, and updated, before being committed to the blockchain. These “held” transactions (payment channels) can have value move within them quickly and easily. The Lightning Network is a bunch of payment channels all networked together. I can send value to you securely, privately, very quickly and for almost no cost through the network without having to have a direct channel to you, a bit like people passing information between degrees of separation.
Pegged protocols such as the Lightning Network mean on-chain Bitcoin transactions can be used for much more than just moving value from one person to another. The underlying blockchain should be seen as an irrefutable timeline, to which truths can be pegged. This extends beyond value transfer, and many further commodity uses for the world’s most digitally-secure and scarce data are being explored.
While we can question the ability of Bitcoin’s deflationary curve to make a good system of money, its ability to bootstrap a community of users, businesses, investors and those willing to secure the network (miners) has proven successful.
The question for Bitcoin in the future will be, do the users want to keep its deflationary curve or update the protocol to a more natively usable rate of inflation, or do they want that functionality outsourced to a pegged second-layer protocol?
Changing the Bitcoin protocol would involve that scientific and democratic method of seeking consensus from its users, which could prove impossible in this scenario, but that doesn’t mean the functionality can not be achieved through a second layer.
For example, your “fiscal money” suggestion of debt tokens for use by insolvent companies, as a second layer could leverage the security of Bitcoin’s blockchain, but not be limited by its many design or throughput limitations. By including a technology called “atomic swaps,” different fiscal monies could even be interoperable with each other. Utilizing the Lightning Network alone, society could create complete openness and transparency for public spending and, at the same time, privacy for its citizens. The Lightning Network’s capacity for transactions per second is practically limitless, and far outcompetes networks like Visa, so now suddenly money streaming for services is made possible. Even VAT could be collected at the point of sale, and users could configure precisely where those taxes go, streamlining tax collection from merchants and empowering tax as a democratic tool.
Another second layer to Bitcoin that has had some traction is the Liquid Network, a federated, much faster additional blockchain. The Liquid Network is currently being used as medium of account for a number of bitcoin exchanges, who are each nodes in the federation and can validate transactions and vote on changes such as inflation, not unlike Keynes’ bancor. The Liquid Network’s federation model would translate well to a representative democracy, with nodes geographically spread across regions. The Lightning Network can also run on top of the Liquid Network, if super fast/cheap throughput is needed for everyday transactions.
Yes, Bitcoin is an apolitical money, in that not one country can control it. Rather, control is in the hands of all the users within those countries via a very public agora, but a politicized money can also exist as a second layer, and one resistant to cronyism.
Boom/bust buffering such as fair weather surplus recycling is possible with Bitcoin and all of its protocols, using multiple signatures to securely lock up rainy day surplus, or second layers for stimulus such as inflation and issuing debt tokens. Bitcoin is a direct response to cronyism, and although it enriched a few lucky enough to be there early on, more bitcoin does not equal more power over the ability to produce bitcoin, unlike the current neo-liberal apparatus of wealth disparity. Disparity in bitcoin wealth allocation continues to decrease, as those made rich by the bootstrap effect burn through their funds. There is no reason why this trend would not continue.
Bitcoin is a commons regulated by the community as a whole, and like any healthy commons is being nurtured and developed by its users, who in turn have a duty of care over it. Bitcoin’s functionality has no bound, and its usefulness is only limited by the efforts we the users put into it.
Hopefully I have addressed some of your concerns, and that for you, Bitcoin can move from a catalyst of despair, to one of hope.
All the best,