Unpacking Bitcoin’s Social Contract

A framework for skeptics

Illustration: engraving by Abraham Bosse via Wikimedia

The social layer and its rules are the heart of bitcoin.

And that social contract framework can be used to answer some essential questions: Why did bitcoin come into existence? Who decided its properties? Who controls it today? Can a critical bug kill bitcoin?

Social Contract Theory

Social contract theory starts with a thought experiment: It assumes a hypothetical state of nature full of violence, that is unbearable for people to live in. Driven by a desire to improve their situation, they come together and collectively agree to empower Leviathan, the sovereign government, to protect them. Each gives up some of their freedom (to, you know, steal, and murder and stuff) while the Leviathan is granted the power to create laws, enforce them, and protect the people from violence.

Money as a Social Contract

Throughout history, governments that controlled money have abused their power in all kinds of ways: They confiscated accounts, blocked certain people or groups from transacting, and printed more money and inflated the supply—sometimes to the point of hyperinflation.

Money presents an important lesson: The larger and more valuable a social institution gets, the more it attracts others to seek control over it.

The problem with the new commodity money contract, however, was that it turned out equally unstable. Let’s take, for example, the gold standard. Physical gold was too inconvenient to divide, move, and store. So people quickly invented another layer on top of it and traded with representative paper money, while the physical gold no longer moved. Because paper money is easy to produce, there had to be a trusted central party to watch over the supply. From there it was a small step for governments to decouple the value of the paper money from the underlying commodity to establish fiat money once again.

The Rules of Bitcoin

When Satoshi Nakamoto invented bitcoin, he did not invent a new social contract. Satoshi did something else—he leveraged technology to solve many problems of past implementations and implemented the old contract in a new and better way. He settled on the following rules:

  • Anyone can transact and store value in bitcoin without permission (censorship resistance)
  • There will only be 21 million bitcoins, issued on a predictable schedule (inflation resistance)
  • All users should be able to verify the rules of bitcoin (counterfeit resistance)

Bitcoin as a New Form of Social Institution

Money presents an important lesson: The larger and more valuable a social institution gets, the more it attracts others to seek control over it. So the institution needs protection, which it can only get from that other powerful entity: the state. Over time, protection turns into control and then into abuse. When the social institution loses its benefit for the people, it is replaced by a new institution, and the cycle starts over again.

Who Can Change the Rules of Bitcoin?

The rules of the contract are decided and renegotiated continuously on the social layer. The bitcoin protocol implementation only automates them. Bitcoin, as a computer network, comes into existence when many people run bitcoin implementations on their computers that follow the same set of rules (think of them as speaking the same language).

Can a Software Bug Kill Bitcoin?

In September 2018, a software bug arose in the most popular implementation (local ruleset) of bitcoin. The bug had two potential attack vectors: It allowed an attacker to shut down other people’s bitcoin clients (making it so they could no longer verify the rules, breaking the counterfeit resistance) and to potentially spend the same bitcoin twice (breaking the rule of inflation resistance).

The bitcoin token itself has no value. The value exists purely on the social layer.

Instead, here is what would have happened: The potential bug exploit would have been mended by reorganizing the blockchain in a way that undoes the damage done by the attacker. That would have split the bitcoin network into two networks, each having their own token: one with the bug and one without it. Every bitcoin owner would have an equal number of tokens in each network, but the value of these tokens would be exclusively determined by the market, i.e., how much the next person was willing to pay for them.

Do Bitcoin Forks Endanger the No-Inflation Rule?

Another famous philosophical question centers around the concept of “forks.” Since bitcoin’s software is open-source (allowing users to verify that their ruleset does what it says), anyone can copy it and make changes. That is called “forking.” But, as established earlier, these changes are only made to the protocol layer, not the social layer. Without changing rules on the social layer first, the only result from forking bitcoin is that you evict yourself from the network.

Independent cryptocurrency researcher

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