Editor's note: Originally appeared in Bitcoin Magazine, October 27, 2014.
Daniel Krawisz has made a name for himself as the philosophical opponent to competing currencies. He takes issue specifically with competing cryptocurrencies such as Litecoin, Dogecoin, and other alternatives to Bitcoin.
I have watched Dan grow as an activist for several years through our mutual presence at Austin's finest underground bookstore, Brave New Books. Naturally, I was thrilled to hear that yet another Central Texas activist was making national waves through his activism. Excited as I was, I must admit I became confused about his stance on altcoins once I learned the topic of his speeches and articles.
Over time I developed a total fascination with his viewpoint. Is it possible that altcoins are "dangerous" and unethical, as Dan has stated? I went back and forth about half a dozen times asking Dan questions about this concept. While he has not convinced me that altcoins are actually dangerous or unethical to promote, I do have a better understanding of where he is coming from.
In my personal experience, a diverse set of currencies has allowed me to work with a diverse set of individuals and organizations. It has not hindered me or my family in any way. In fact, competing currencies have benefited my family greatly. From Bitcoin to silver to eggs to barter, our family uses a diverse set of currencies in our everyday lives.
There are so many people on this planet that it seems entirely possible for thriving niche markets to exist for niche currencies. Not every cryptocurrency needs to be the most widely used to be successful. They simply must provide value to the users. Dan disagrees with me on this, but my real life experience tells me it is true.
Dan admitted that his philosophical stance may not line up with practical reality. If that turns out to be the case he would retract his words. The conversation we had was fascinating to me and I am very excited to share his ideas and my responses in their raw format. We may disagree fundamentally, but it has been an honor to discuss this with him.
Here is the interview in its entirety!
Catherine: Please describe the Satoshi Nakamoto Institute.
Dan: The Satoshi Nakamoto Institute is devoted to promoting the ideas of the original cypherpunks and to providing the Bitcoin world with economic commentary from an Austrian perspective.
We have collected a lot of the cypherpunk writing, some classic cryptography papers, and the best including the complete works of Satoshi Nakamoto which are publicly available. We are working on collecting more of his private communication and would greatly appreciate [anyone] who can send us private letters from him, as long as they come with a digital certificate.
Catherine: Cypherpunk? Please explain this to our readers.
Dan: The cypherpunks were a group that interacted through an online mailing list in the 80s and 90s. They came up with most of the ideas for the systems that use cryptography to protect our freedoms online today. They were the first to theorize seriously about digital cash. Bitcoin grew out of the ideas of the cypherpunks and most of the works cited in the Bitcoin white paper are to cypherpunk literature. Many of them were libertarians and anarchists, and Bitcoin is the culmination of their thought.
Catherine: Who are your crypto-world inspirations and roll models?
Dan: David Chaum, Tim May, Nick Szabo, Satoshi Nakamoto, and Ross Ulbricht.
Catherine: How did you first hear about Bitcoin?
Dan: I first learned of Bitcoin in 2010. This was before Mt. Gox. I was convinced that Bitcoin was for real when I observed the 2011 mania. That is when I first bought some. Late 2012 is when I decided to work full-time on Bitcoin.
Catherine: When did you first accept Bitcoin?
Dan: The Nakamoto Institute has accepted Bitcoin donations since it was created in late 2013.
Catherine: Did you have to overcome any obstacles to start accepting Bitcoin?
Dan: One of us had to copy and paste a Bitcoin address on the website. It was so hard he almost died of exhaustion.
Catherine: Has Bitcoin benefited your life in any way? (If so, please describe.)
Dan: I now speak at conferences and write books instead of doing homework.
Catherine: Why is Bitcoin so important, anyway?
Dan: Bitcoin is a major invention. It is the first digital currency without a third-party issuer. Right now, most world currencies are ultimately issued and controlled by governments, and this power enables them to manipulate the economy. Bitcoin is therefore potentially an extraordinary step forward for liberty. If it were to become widely adopted, the US government would no longer have nearly the same ability to manipulate the economy through inflation and controlling all the banks.
Bitcoin's growth is evidence that it will continue to grow. There is no reason to expect an end to this process. This means that its individualistic properties will continue to become more useful and to benefit more people. I think it is likely to replace the state-cartel banking system we have now. See my article "Why Bitcoin Will Continue to Grow."
Bitcoin is very individualistic because it enables people to trade with far less third-party trust. It allows for internationalism and mass production in the black market to a degree that has never been seen before. Furthermore, there is a corresponding difficulty for organizations to hold and control bitcoins. It is quite easy for members of an organization to steal private keys with plausible deniability. Addressing this problem requires organizations to commit to standards that make it much more difficult to mistreat customers or stockholders. When the government tries to use bitcoins, it's going to have a lot of trouble.
A final interesting feature of Bitcoin, one which I do not yet fully understand, is that it somehow causes everyone who should be opposing it to dismiss or misunderstand it. The government will remain years behind in their response to Bitcoin.
Catherine: You are known for your debates against alternative cryptocurrencies; how did you develop this standpoint?
Dan: It is a theorem of Austrian economics that competing currencies on a free market are unstable. This was first written about by Karl Menger. When I first heard about Litecoin, I thought it was such a stupid idea that it would never take off. I began to write about altcoins because I realized Bitcoin people don't understand the economics of media of exchange very well.
Catherine: Can you summarize your feelings about altcoins for us?
Dan: No currency is useful unless it is liquid. Currencies must have demand in order to be spent and used as a means to transfer value. Thus, every new currency must be a viable investment if it is to be viable as a currency. However, because the value of currencies is explained by the network effect, it is always to be expected that the currency with the biggest network will win.
It is therefore irrational to create altcoins and unethical to promote them. I write about altcoins because I do not like watching people get scammed by them. They waste a lot of time and resources.
Catherine: Why is competing on an open market a bad ideas for currencies?
Dan: In a free society, people are able to compete with one another for business. However, a person who thought clearly about whether to create a competing currency would observe that the value of a currency is in its network, not in its intrinsic properties, and would conclude that only under very rare circumstances is there any chance of success. For example, Bitcoin can succeed because it is so much better than the dollar that it draws people into its network, whereas none of the altcoins are able to compete with Bitcoin like that. It is irrational, therefore, to buy them or to depend on their future value, and it is delusional or deceptive to tell people otherwise.
Just as competing standards of measurement and competing languages are a hindrance rather than a help, competing currencies produce inconvenience and error until one standard emerges. Competition will occur within the Bitcoin network rather than without.
Catherine: Does your stance on altcoins and competing currencies being unethical consider the payment systems, file sharing, data storage, escrow, and other non-currency related uses of Bitcoin and some altcoins?
Dan: Bitcoin should be our ultimate means of transferring value. Everything that can be done with a currency should be done with Bitcoin. A distributed system that provides some other service should know how to take Bitcoin payments rather than inventing a new currency.
Catherine: How do you feel about the potential success of a small niche group who is excited to use a coin, thus providing a network and a market, although not the BIGGEST network or market?
Dan: There is no potential success under that circumstance. Currencies are networks that are always in competition with one another, and there is no stable equilibrium between currencies on the free market. Every currency other than the one which succeeds will shrink down to irrelevance.
Catherine: I use various currencies in my life with ease. Silver, eggs, Bitcoin, cash are all frequently used as mediums of exchange by our family. We have faced little to no problems doing this. Nothing seems to be shrinking out of existence or reality. There are so many people just in central Texas, let alone the world, with so many preferences that we have found moving away from the dollar and toward other currencies (yes, plural), has been a great benefit to our lives!
What if this theory about multiple currencies being a bad thing doesn't actually work out as a bad thing in practical application?
Dan: Then I'll have to revisit my argument to understand where I went wrong with it. It is impossible to know the future, so that is always possible. However, I think that the underlying economic logic is sound and it is hard to imagine what sort of false assumption I am making. Furthermore, I think that the logic is well within the means of most people to understand. I have written articles like "The Comic Demise of the Altcoins" and "Why Bitcoin Will Continue to Grow" to explain the logic in a Bitcoin context.
Right now we are in the middle of a depression. People are becoming less specialized and more similar to one another, and consequently find it more easy to barter directly. Furthermore, people are rightly apprehensive about the future value of the dollar and are more interested in trying out other possibilities. Both of these reasons create opportunities to experiment with alternate currencies. However, standardization to a single currency, especially one free of the weaknesses of the dollar, will promote economic recovery. There were also experiments with local and alternative currencies during the Great Depression, but to my knowledge none of them remain in use.
In the cryptocurrency world, it is quite easy to see that no altcoin is likely to defeat Bitcoin because Bitcoin is so much bigger. This is acknowledged by every altcoin proponent I have spoken to; what they do not wish to acknowledge is that this implies that their altcoin should eventually fail entirely and that the economy as a whole would be better off if it didn't exist.
Catherine: As Bitcoin 2.0 arises, the token based altcoins built on top of Bitcoin are starting to pop up. What are your thoughts on this? Is the way tokens relate to Bitcoin similar to college campus tokens like "Bevo Bucks" at UT as they relate to the dollar? Or are these coins a competing altcoin?
Dan: This depends on what you mean by a token. There should be no digital assets other than Bitcoin. However, there should be ways of trading liabilities online under some smart contract framework. You could have a token that represents a real good, such as a car or a house, or something more abstract like a stock or bond. My favorite way of doing this is with Open Transactions. We should not use systems that attempt to introduce new digital assets, such as Ripple, Mastercoin, or Ethereum because that is a design flaw which will tend to make them far less useful than if they had just been made to incorporate Bitcoin payments.
Catherine: Isn't Mastercoin built on top of the Bitcoin network? Aren't they essentially using Bitcoin even if it has another name? For example, the Let's Talk Bitcoin Network has come out with LTBcoin which is being used to pay content creators as a proof of work. It can be redeemed in BTC, but used exclusively by and for their network. Thoughts?
Dan: There is an ambiguity in a previous answer I gave that I have to resolve. Bitcoin needs to be thought of as two networks at the same time. One is a network of computers running a p2p protocol, transmitting information to one another, and developing a consensus as to the state of a distributed database. The other is a social network of people who all believe that Bitcoin has value. The reason that we need the p2p computer network is because of the double-spending problem. If people were all perfectly honest and could be expected never to attempt to cheat one another, then we would have no need of the p2p computer network at all. I could simply tell you, "I give you .02 bitcoins," and we would both update our balances in our minds and that would be that.
From an economic standpoint, the p2p computer network can be abstracted away and the social network is what actually matters. That is what I was talking about earlier when I mentioned the Bitcoin network and the disutility of more than one currency network. I was talking about a human social network, not a computer p2p network. It is true that Mastercoin (and LTBCoin) are implemented using the Bitcoin protocol, but from an economic standpoint this is irrelevant. They are different social networks, and they are in competition with one another in the same way that Bitcoin and Litecoin are, and they are bad ideas for the same reason.
Catherine: What if the coins function as a token that represents X amount of BTC, like the Ithaca Hours in New York that are based on the FRN [Federal Reserve Note]?
Dan: I checked on Wikipedia, and although Ithaca Hours are supposed to be worth approximately $10, they actually have a freely floating exchange rate and are an independent currency. According to Wikipedia, "While the Ithaca Hour continues to exist, in recent years it has fallen into disuse. Media accounts from the year 2011 indicate that the number of businesses accepting Hours has declined."
To answer the question that I think you were trying to pose, however, you could imagine that there were some token whose value was pegged to Bitcoin. This would be a Bitcoin substitute, not an independent currency. The only way that its value could be pegged to Bitcoin, as in your question, is if it were easily converted into Bitcoin and all units of it were backed by Bitcoin owned by the issuer. This is basically how people have been talking about using sidechains. For example, you would create a new Bitcoin transaction with an irredeemable output that specifies a given sidechain. The sidechain is then allowed to issue new amounts of its own currency proportional to the amount you specified. This is just like depositing gold into a bank and getting a bank note redeemable for the amount deposited.
Catherine: I do want to ask, though, real social networks compete. MySpace and Campus Hook were devoured by Facebook, but Twitter, Yelp, Instagram, etc., thrive. I believe that there are so many people on the planet that any form of niche market could do well with its own niche currency. Thoughts on that idea?
Dan: A currency is useful because lots of people use it, not because of its intrinsic properties. A niche currency is inherently less useful than one that is used by everyone. There is no added value to having a niche currency. It only makes things less convenient. Remember, currencies don't have intrinsic value. It is only because they are widely used that they can function as a store of value and a unit of account. Niche currencies are not as liquid, and therefore don't serve those purposes very well.
As to the social network analogy, there are some real differences between social networks and currencies that make the analogy fail.
It is true that there is a network effect for social networks, but because it is possible to enjoy more social networks at lower marginal costs, it is possible for social networks to coexist in ways that currencies can't. For example, I can write one status update and have it automatically sent to Facebook, Twitter, and G+. This means I can have a presence on all three social networks without much more effort than on a single social network. Currencies are not like that because you do not get discounts when you buy more. This means that currencies are always absolutely in competition with one another.
Furthermore, the value of a social network profile is highly dependent on the effort that you put into your profile and also on the efforts that your friends put into theirs too. Cultures on a social network can drastically change over time. This is how one social network can suddenly be overtaken by another for reasons that are hard to pin down. There is no similar effect for currencies. They just need to be liquid.
Catherine: Can you link to any good audio of you speaking on Bitcoin or altcoins?
Dan: Here is my talk Cryptoanarchy from the Liberty Forum.
Catherine: What's next for you and the institute?
Dan: In a few months I will complete my book Cryptoanarchy and hopefully that will help people to learn about Bitcoin and cypherpunk ideas. We'll continue to collect old material and publish new articles as needed. For example, I have written a series of articles on Bitcoin fallacies. Eventually we would like to start featuring cypherpunk projects on our blog to promote them.