Thoughts on the Antifragility of Bitcoin & Cryptocurrencies
Interpretation of the Antifragile, Convex Nature of Bitcoin and Cryptocurrencies.
This is Part 2 on Bitcoin and Cryptocurrency Antifragility. This is Part 1.
This is how I imagine the antifragility of Bitcoin to look like. This is the probability distribution of events and their effect on Bitcoin. Note how the probability of a negative black swan can’t be denied. The probability of systemic downside is minimized by resistance to change as will be discussed later.
Media Bitcoin-Bashing (Promotion)
Is Bitcoin as risky as portrayed in the Media? Satoshi, the creator of Bitcoin, left the project in very early days. What would happen if the founder of a startup left the company in the early days? Shit would probably go south. Bitcoin is different, it’s decentralized. It’s open source, so when Satoshi left, a new wave of skilled cypherpunks successfully took over development. Bitcoin is not dependent on any one person or group. It does not need to change much. Bitcoin is and that is enough.
The fake “bitcoin is dead” stories in mainstream media outlets only serves as promotion. When Bitcoin Ransomware was newsworthy, the media framed this as bad for Bitcoin and its holders. Ransomware is just another use-case. The media were caught in the narrative: “ransomware is bad, so it’s bad for bitcoin”. Good or bad for society, it’s a use-case. Not to mention the popular narrative: “nation states will ban it if it gets too popular”. Really? If a nation-state is stupid enough to ban the next technological frontier, their enemies will be thankful. Also, banning Bitcoin would very hard, if not impossible due to its peer-to-peer, distributed nature.
A common bearish Bitcoin narrative, lies in the framing of the current inability satisfy mainstream demands, as a permanent state. Portraying the failure of Bitcoin to satisfy demands of western institutions and individuals as permanent. Individuals and media outlets telling this narrative have a very shallow understanding of Bitcoin. They fail to understand the nature of the technology. Bitcoin is disruptive technology. Clayton Christensen defined disruptive technologies in his book “The Innovators Dilemma” and Bitcoin is a crystal-clear example: Bitcoin is gaining foothold in niche markets first, satisfying the needs of those not served by traditional finance. Drug buyers, gamblers, victims of inflation and sovereign individuals.
An example from the past of how disruptive technology evolves, is the internet as disruptive technology to the publishing industry. Imagine how newspaper managers could have dismissed the internet as being hard to use and too slow to ever compete with their papers. The internet was not fit for the average news consumer in early days. It did however, offer benefits to select groups of people early on. User-friendliness, speed and mainstream adoption came later.
Disruptive technology as Bitcoin, tends to become mainstream when user friendliness catches up to the level of the incumbent technology or product. At this point the disruptive technology will be user-friendly and technological superior to the incumbent technology. In the case of Bitcoin vs. finance and central bank incumbents, this means user friendliness and the technological superiority of decentralization, permissionless/ open, censorship resistance and immutability. Being in Bitcoin since early 2013, I’ve seen the user experience of Bitcoin applications improve dramatically. This trend will continue.
Journalists, uneducated on Bitcoin, have told narratives on why bitcoin can’t succeed for at least 5 years. None of them have been right and I bet few have been willing to stake any money on their bullshit narratives. Don’t be fooled. The sheer effort that have been going in to discrediting Bitcoin, is a testament to its viability. The effort by men in suit and tie to discredit Bitcoin, only sparks further interest.
Lindy Effect — Validity of Time
Through the past 8+ years, no one have been able to successfully attack Bitcoin. Additionally, even if a single Bitcoin miner had the resources to attack the system from inside, they have strong incentives not to do so. While eight years isn’t much for a new type of asset, it is a testament to its antifragility. Over eight years have passed with Bitcoin code being 100% open to public / hacker scrutiny. The probability of long-term success is far the highest among cryptocurrencies, applying the logic of the Lindy Effect. Bitcoin survived for almost nine years despite the fact that it is threatening the state monopoly on money. Despite the fact that the potential bounty for breaking it is billions of dollars. Almost nine years of Bitcoin survival is a testament to its ability of embracing disorder.
To understand what nation states thinks about challengers to their monopoly on money, you only have to look at the recent centralized experiments. Most were crushed by the state. Two of the most notable being E-gold in 2007 and Liberty Reservein 2013. I’m sure that the nation-state would have crushed Bitcoin by now if they knew how to.
Trust is a key concept of Bitcoin. In Bitcoin, trust is placed in math and unchangeable fundamentals while it’s removed from 3rd parties as governments and central bank. Trust in Bitcoin builds as people watch it successfully resist the power of hackers, nation states and other sources of potential disorder. Trust builds when people realize that it is impossible to change Bitcoin fundamentals. The latest example of this, is the recent hard-fork drama. People were arguing about which of the chains would be “the real” Bitcoin, after a fork. This whole debate was irrelevant in terms of defining Bitcoin. When Bitcoin forks, the most conservative chain will be Bitcoin. The chain most resistant to change will be Bitcoin. Digital gold doesn’t easily change. The Lindy Effect, or time proved fundamentals in action.
“You know that the idea will fail if it is not useful, and can be therefore vulnerable to the falsification of time (and not that of naive falsificationism, that is by some government printed black-and-white guideline). The more an idea has been around without being falsified, the longer its future life expectancy.” — Taleb, An Expert Called Lindy
Bitcoin has proved and well-guarded fundamentals. Bitcoin forks are legit in the way that they’re products of free speech in the form of code. They’re a product of the free crypto markets spawned by Bitcoin. However, forks start anew, with new fundamentals. Each fork throws away the trust Bitcoin has built and starts all over. Meanwhile Bitcoin keeps building trust, in the form Lindy Effect-like resistance to change.
While few people have the skills to code Bitcoin, understanding the philosophy of Bitcoin and how it reflects on its development, is beneficial to all Bitcoin holders.
Probability of collapse in complex systems tend to increase with time, size and speed. Applying this thinking to Bitcoin. Big and fast is the exact opposite of the philosophy around Bitcoin core protocol development. Bitcoin core protocol development will be trust preserving and conservative for the reasons stated above. Bitcoin is long volatility. Bitcoin is convex/antifragile. Bitcoin is small in the way that the blockchain does not do much. Its task of time stamping ownership is simple. Bitcoin is slow as development and upgrades are extremely conservative/ trust preserving. Blackswan logic makes what you don’t know much more important than what you do know. This logic argues for conservative and lean core protocol development. The opposite of Bitcoin is a public Blockchain that does many things with high-speed and increasing complexity.
The philosophy of Bitcoin: it doesn’t mean that everyone agree’s — only that the ones who disagree are unable to change anything. They seem to be quitting to Ethereum, a corporate Blockchain or forking Bitcoin, creating a knockoff compatible to their individual vision. This is key to the Bitcoin Value proposition of censorship resistant store-of-value. Resistance to change.
You can’t force Bitcoin in your direction. You can’t change it, as it would diminish trust — and stakeholders wont allow that.
Bitcoin is a Risk Manager
“An idea survives if it is a good risk manager, that is, not only doesn’t harm its holders, but favors their survival… More technically, it needs to be convex and reduce fragility somewhere.” — Taleb, An Expert Called Lindy.
Bitcoin is an excellent risk manager as it isolates the fragility of individual experiments in the 2nd and app layers above, from the holders of Bitcoin. By holding Bitcoin instead of 2nd layer application specific Cryptoassets, you’ll be exposed to potential upside from individual experiments using the rails of the Bitcoin network. This is without suffering the downside from application specific experiments. Bitcoin hodling is a convex strategy leveraging “The Anti Fragility Edge”.
Experimentation and the inevitable fatal failure of 2nd layer apps and businesses is ergodic to Bitcoin. It’s contributes to the survival of Bitcoin. The app will die and investors will lose their money, but to Bitcoin it’s a win. By trial and error Bitcoin finds ways to grow. Future Bitcoin 2nd layer innovators will be more likely to succeed as a result. Fatal failure in the core protocol layer is not ergodic to Bitcoin. Fatal failure in the core protocol would by definition, be the end of Bitcoin.
2nd layer experimentation, innovation and failure fits a type of probability Taleb calls “ensemble probability” as it is concerned with a group of independent experiments. Risk is spread across multiple projects and does not increase systemic risk.
Experimentation, innovation and failure in the core protocol layer fits what he calls “time probability”, as it is concerned with a single project over time. Here risk is systemic. Experimentation in core protocol development increases the risk of fatal failure. Probability of fatal failure increases with time. With every experiment, the life expectancy of Bitcoin decreases. Even if it works out fine.
Bitcoin minimizes risk of fatal failure by pushing experimentation and innovative solutions to the layers above the core protocol layer. Experiments and risk taking in the 2nd layer minimizes the risk to the Bitcoin hodler. Bitcoin allows people to build, innovate and fail while not hurting the underlying system.
If Blockchain features are easily copied, one could even argue that experimentation in competing cryptocurrencies is ergodic to Bitcoin. Take the best from other experiments when risk of blowup fades. More on this below.
The belief that Bitcoin will be unseated by a better version and “new features” is common. Something marginally better comes along and steals the show.
The likelihood of this is very small. To understand why, ponder the question: What makes the winning Blockchain when features are easily copied and added in layers/apps on top (these projects are open-source after all)? The properties mentioned above. A conservative, risk averse core protocol layer. Resistance to change and the increased trust coming from this. Bitcoin will scale and add many altcoin features in the layers above. It might not be now and the speed of execution might not satisfy all people. Security and trust preservation will be prioritized.
“Not advice. Just my thoughts.” — Jay