There’s a meme propagating throughout Crypto Twitter at the moment, courtesy of Bankless, that “Eth is Ultra Sound Money”. Ethereum creator Vitalik Buterin even weighed in positively after listening to the Bankless podcast with Justin Drake from which the meme was birthed.
Drake, an Ethereum core developer, makes a very compelling case that Ether should be considered “ultra sound money”, building on the concept of “sound money” frequently lauded by Bitcoiners. The idea here is that the deflationary mechanics of EIP-1559 and the transition to Proof-of-Stake in Eth 2.0 will respectively add both scarcity and security to Ether as a monetary base.
Eth has until now been (and indeed, still is at the time of writing) an inflationary asset. Ethereum was created to be a “world computer” and has since evolved to become the underlying substrate of Web 3.0 and the “value layer of the internet”. It hosts the vast majority of DeFi projects and is poised to become the settlement layer for what will hopefully be the system to replace the traditional banking sector.
Justin Drake and the Bankless boys, however, want to go a step further. They want Eth to take the scalp of not only the banks, but also the central banks.
Gold is good
This is, I suppose, admirable. The whole point of Bitcoin, and dare I say it, the decentralisation movement itself, is to dismantle the predatory institutional power embodied by the central banking system. It comes as no surprise, then, that Vitalik and his developers are keen to take up the mantle and lead their own crusade against dispossessive monetary policy and debt slavery.
There are problems with this approach, however.
At the centre of an economic system sits its monetary base. At the moment, this is a turgid swamp of debt and fraudulently-obtained equities upon which is issued fiat money ad infinitum. Bitcoiners want Bitcoin to fill this role. It’s disinflationary, fulfils all the criteria of sound money, and essentially mirrors the mechanics of gold, which has been used successfully as a monetary base in many cases throughout history.
Justin Drake criticises Bitcoin in this regard. He decries this supply mechanic and philosophy as archaic and outmoded and presumes that his untested monetary thesis will yield better results than would a ‘Bitcoin standard’ economy.
Herein lies the first bit of hubris.
The philosophy of pragmatism induces us to evaluate a proposition based primarily on its actually-felt implications for the real world. In this case, gold works. It’s imperfect, hugely, but it’s worth noting that gold works so well as a store of value that it’s become part of our collective psyche.
Gold, in alchemical terms, is synonymous with value itself. It represents the ultimate goal, the endpoint, the pinnacle of our value hierarchy. Consciousness is the principle by which all things can — and must — be transmuted into gold. Gold represents the sun: the highest thing in the world, the giver of life, the brightest light in the sky without which we can not live.
The point of the above spiel was to outline the functionality of gold as a representation of value for humans. It works. And the principle of choosing functionality and pragmatism over idealism and theory shouldn’t be lost on Eth bulls.
There are countless smart contract platforms that claim to be better than Ethereum in almost every regard, and perhaps they are. But Ethereum works and has done for a long time, and in pragmatic terms has birthed a thriving DeFi ecosystem that has locked up billions of dollars in somewhat useful and potentially revolutionary finance projects. Ethereum’s burgeoning NFT ‘metaverse’ is also laying the foundations for a completely reimagined world of content: art, music, and gaming have all taken steps towards a more equitable and functional system thanks to the decentralisation and ownership offered by NFTs.
So if gold works as a monetary base, why throw the baby out with the bathwater? Why not refine the aspects that don’t work rather than scrapping the whole thing and trying something completely untested? Nobody’s asking for DeFi to be ported to the barely-working Cardano blockchain because of high gas fees on Ethereum.
Complex systems and the law of unintended consequences
The probability of achieving the desired result when changing a core variable in a highly complex system of interrelated and interdependent variables is close to zero. Case in point: the EU. Let’s assume for a second that the goal of the federalists was actually to create a better economy for Europe, as implied by the Union’s original title before its nefarious and intention-revealing name changes: the European Economic Community.
In this regard, it’s been a total failure. Brain-drain for many Eastern European countries, the robbery of nation states’ economic sovereignty, and the redistribution of wealth from struggling economies like Greece to rich bankrollers like Germany.
The presumption that it’s possible to know and understand all the variables in a system and design a better version is seriously ignorant at best.
Bitcoin makes a different assumption. Bitcoin correctly assumes that our current inflationary system is majorly, badly broken (I agree with Robert Breedlove’s description of inflation as a “moral cancer”). But the beauty of Bitcoin is that it seeks to correct the evils of our system while preserving the part of it that gives us a stable system that functions at least in part.
This speaks to the Hobbesian idea that order and stability should not be dismissed entirely on the basis of a system’s corruption. Jordan Peterson also touches on this frequently, warning us against dismissing conservatism and religion as outdated simply because they seem peculiar to our modern sensibilities. We do not know how much certain customs have influenced our society or how much they underwrite the stability and function of our lives. Surface-level assessments of societal precepts are bound to miss crucial provisions that these make for our cohesion, robustness, and longevity.
Consider the pub: it may seem perverse to drink a lot (especially on weeknights) and spend excessively on pints in the pub, but the pub is actually a vital and central social institution that allows for political discourse, social mixing, and of course leisure time, in a world where our working weeks are growing ever longer.
Back to Peterson and onto his order/chaos model with regards to hierarchy. He explains that the perfect state of being is an equilibrium between order and chaos. Hierarchies, which arise spontaneously and are a law of nature, are also subject to this interplay. Too much order and hierarchies become over-rigid and subject to corruption. Too much chaos, and the hierarchy loses its integrity and structure. Presently, our system is seriously corrupt and needs a dose of chaos to reinvigorate it. Bitcoin provides this — it succeeds where gold couldn’t as an antidote to the fiat system, largely due to its censorship resistance and portability. Ether, and its completely new system, would arguably induce systematic instability that could be catastrophic.
Bitcoin’s gold supply mechanics may seem clunky and old, but they are predicated on a model that we know to work as a monetary base. Dispense with these mechanics at your peril.
The beautiful, elegant simplicity of Bitcoin
Another aspect of Bitcoin that makes it apt as a replacement for the basis of an extremely complex system is its simplicity.
It has very few inputs: basically just its supply mechanics (stable and definite), and market inputs (less and less volatile over time)
Ethereum will have very different supply mechanics (variable fee burn, ongoing and indefinite issuance, extremely variable slashing penalties), as well as feedbacks from DeFi, the value layer, and usage as a transactional currency. Add to this inputs from market data and feedback from the “world computer” function of Ethereum, and we have a lot of variables at play.
Let’s assume that the complexity of a thing has a non-linear relationship to both the number and the volatility of its inputs. ETH has many more inputs than Bitcoin, and they have much greater volatility and lower predictability than those of Bitcoin.
I argue that this makes it totally inappropriate as the fundamental value substrate of an economic system. In the same way that you wouldn’t want your car to also be an espresso machine, maybe you don’t want your monetary base to also be a world computer. Maybe we shouldn’t place something so complex at the centre of such an interdependent system.
Justin Drake even applauds the simplicity of Bitcoin’s code versus Ethereum’s. But I don’t think he realises quite how powerful of a quality this really is.
The security problem
For me, PoS is genuinely no different from central banking. The whole point here is that the central banking system is utterly morally bankrupt and fraudulent. PoS runs contrary to the very ethos of decentralisation and re-establishing individual sovereignty. It keeps power over the chain in the hands of those with the most wealth and introduces a bullshit “democratic” governance structure that keeps monetary policy in the hands of institutions.
This is fallacious in the same manner as communism: communists seek to maintain the exact same concentration of power that exists in an oligopoly and simply reallocate that power into the hands of a different group of people (i.e. the proletariat), in the vain hope that this new group’s human nature won’t be corrupted by that power in the same way as their predecessors. Proof of work succeeds fundamentally because it is pessimistic about human nature: it knows that we are prone to corruption, greed, and stupidity, and takes the vital task of monetary policy out of our filthy, immoral hands for good.
PoW does have a serious problem. The hashpower centralisation issue is a huge one, and something must be done about it, probably urgently. The CCP could definitely cause some serious carnage if they wanted to, and there needs to be a concerted effort from the free world to defensively build a hashrate to compete with the rumoured 75% of mining power situated in China.
But this is not a reason to dismiss the engine of PoW itself. Again, don’t throw the baby out with the bathwater. The idea that PoW is destined to be centralised / concentrate wealth in the hands of the wealthy is wrong. Mining is genuinely redistributive, and there are efforts already underway to move the hashrate balance out of China. Kentucky is offering tax breaks for miners, for example. Although like many Bitcoiners I am highly wary of the nation-state as a concept, I think it’s inevitable that Bitcoin mining becomes a national security issue not too far down the line. And I think on balance, that’s probably a good thing. Again, I am a pragmatist, and I want the Bitcoin network to be adequately and competitively secured.
I think a Bitcoin arms race between China and the West is inevitable, and I think there is a fair chance it will have a net positive effect on technological development. Look at the space race and the attendant benefits experienced by the general public as the tech trickled down.
Postscript on inflation and the corruption of non-monetary value
My earlier comments on Jordan Peterson made me think again about value and what it means. Value is a non-monetary concept represented in monetary terms.
Everything we do is a value judgement. Maps of Meaning blew my mind in this regard, with the realisation that any action we take is a valuation:
Action or Inaction X > Action or Inaction Y
This means that we need something reliable and stable to store our value judgements. To embody the distributed cognition of the human race. The degradation of value caused by fiat inflation has, I would argue, caused us to dissociate from our core value suppositions. We no longer know the value of anything. The monopolisation of value by fiat money and the depravity induced by inflation have caused us to lose touch with what we actually value. This has led us to a society where instant gratification, excessive indebtedness, and entitlement run rampant, and where selfishness and untruthfulness dominate.
Bitcoiners are the antithesis of this. When I look at most non-influencer Bitcoiner types, they are unselfish, responsible, forthright, humble, truthful, physically healthy, and often spiritually inclined.
Ethereans are atheist-materialist types. Not physically healthy. Disembodied. Unwilling to accept symbolic meanings over cold objectivity.
The symbolic meanings of the two competing systems could not be more obvious.
Bitcoin is correct.
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