Bitcoin Centralisation

Bitcoin is a fascinating thing.

Bitcoins are in my opinion commodities. Essentially they are special codes that must be generated by expensive and time-consuming calculations, and using peer-to-peer electronic distribution they can move from one digital ownership to another. These properties allow them to be used as a currency or means of exchange. Today there is a bitcoin economy of about USD270m and growing (http://bitcoinwatch.com/)

Sometimes bitcoin is presented in the context of a polemic against central banking, the finance sector, or fiat currency in general, and presented as the antithesis to central control of the means of exchange. For example, see this document proposing  bitcoin. Also, see this http://bitcoin.org/ . At the time of writing their header caption read “Bitcoin is an experimental new digital currency that enables instant payments to anyone, anywhere in the world. Bitcoin uses peer-to-peer technology to operate with no central authority: managing transactions and issuing money are carried out collectively by the network. Bitcoin is also the name of the open source software which enables the use of this currency.”  I would say this is slightly inaccurate, or promotional perhaps, but it does emphasise ‘peer-to-peer’, avoiding central authority, and collective, network operated behaviour.

From time to time something new comes along and upsets the old system. Whichever red-coats, aristocrats or bourgeoisie happen to be around get replaced by some new red-coats, aristocrats or bourgeoisie.  Today we happen to be graced by the presence of a complex, global system of financial institutions, which for an increasingly aware public is being considered the ‘central authority.’ For the general public, today, post-crisis and post real-estate debt-boom, the retail bank is the equivalent of a Stalinist totalitarianism. If you need an education, you better have a good credit rating. If you want a car, you better be on good terms with your bank manager. If you want a home, you need to spend your life in debt-slavery to The Man, who just happens to wear a suit and work behind a desk down town.

It would not be surprising if in this ongoing context of an over-indebted private sector that Bitcoin continues to gain popularity. If credit cannot enter circulation, then Bitcoin presents a method achieving money that increasingly makes more sense. There is even the possibility that eventually, despite the best efforts of governments and other interested parties, that Bitcoin achieves such market depth and liquidity, that it becomes an alternative mainstream currency.

No doubt, Bitcoin proponents would love to see this.

However, my view is that all new systems tend to centralise and contract. It is only the emergence of some new, alternative system that decentralises and redistributes things (the revolution), and many revolutions have happened in the system of humanity we call ‘Society.’ The very process of centralisation is a sociological change that gives birth to an exclusive elite group, and as a consequence an excluded minority group, which with sufficient volume, allows the new paradigm to germinate and evolve.

Whenever a system has incentives in communication, its elements exhibit the behaviour of gravity. They try to grow closer together. It is this that causes centralisation, as a society or system will acquire multiple centers and areas of sparsity between them, instead of collapsing upon themselves like black holes.

The Bitcoin paradigm already shows where some of the new centers would form if it were to become mainstream. To generate Bitcoins, it is easier to join a ‘mining’ pool. ‘Mining’ Bitcoins involves using dedicated computing power such as graphics cards or programmable gate arrays to run difficult calculations until something is solved. However, blocks of solutions in a sequence are necessary for the award of Bitcoins. The chances of this happening as a sole miner is quite low. For this reason, it is recommended to join a mining pool, which allows miners to combine their computing resources, and Bitcoins are awarded continuously, though in smaller units, given the distribution of probable mined blocks.

It is easy to imagine that if Bitcoin was a mainstream commodity, a prime source of credit would ultimately be some super-datacenter, in which a credit-issuing elite minority would be main stakeholders. The end result is not much different than what we have to today, except that a different group would be the stakeholders, and a different datacenter would be running the Fed.

Bitcoin exchanges (shops) would further escalate the importance of telecommunication providers. Bitcoin use in the mainstream would create greater demand for trusted backup providers (Bitcoin users have all their assets in bitcoin data files), and other IT infrastructure and security. Again, this is not much different than what we have today with digital money, and I wonder if a rise in popularity of Bitcoin would not merely have the effect of converting IT infrastructure providers into the social equivalent of financial institutions, instead of the current situation, where financial institutions find themselves turning in to IT service providers.

Because Bitcoin is a commodity, it could eventually result in a financial system akin to the gold backed system we had in place before around 1970, before the introduction of floating exchange rates and pure fiat money. There would still be demand for credit, bank credit would still exist, only that those trusted Bitcoin backup providers, datacenters, and mining conglomerates would be running the banks, and reserve fractions would be perhaps in the 90% area, instead of today’s 0% in some cases. In my opinion this setup would still be preferable than today’s and would put an end to global trade imbalances.

All systems tend to centralise because the basic nature of the individuals to interact and mutually gain through exchange result in a cost if they don’t do so. I wonder if one day quantum physicists will find that there is some equivalent explanation in terms of information exchange for the phenomenon of gravity. Bitcoin can’t defy the laws of gravity forever, and it is interesting to guess where the new centers will form, but it can help to pull down what’s in place today.

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