The Ethics of Money and Bitcoin

19 minute read

The Ethics of Money and Bitcoin

By Nicolas Dorier

Posted March 30, 2019

When I am bored coding, I read about coding. But once in a while, I read something else, and Rothbard is often a good bet to not bore me.

For those who never read Rothbard, his thoughts are always derived logically from very simple premises, it is almost like following a mathematical demonstration, but one that you can actually understand. It is hard to disagree with him as you need to find a flaw in his logical reasoning or you need to dismiss his premises. The conclusions of his thoughts are often associated as “radical libertarianism”, to which he is able to convince anybody open to strict logical reasoning.

I don’t consider myself radical libertarian, but neither could I find any flaw in his arguments in the books I read from him. If I read again, I will eventually end up radical libertarian.

Anyway, recently, I peeked up the ethics of liberty from Rothbard.

I can’t explain his idea better than himself, so if you are interested, read him directly, not me. He spent way more time than I did shaping up his reasoning than me spending time writing this blog post.

Loose definition of Ethics

Ethics is like a set of value which define if a behavior can be considered immoral. There are many ethics around there, from religion or philosophy, which can contradict each other.

A moral dilemma is when you hold conflicting values where in a given situation, all actions are immoral. This can lead an individual to madness or to abandon his values to save his sanity.

A religion ethic is in generally non conflicting, as any conflict will result to either the madness of the believers, or to the destruction of its values, or a split, in short, the disappearance of this ethic. Religions, surviving for a long time, has shaped themselves and built stronger set of ethics over time. (Religions are Lindy)

In the bitcoin world, some are shocked by the fundamentalist of catholic christian bitcoin developer Luke-Jr, but this all come down to religion having strong ethics in the sense that any particular behavior can be considered clear-cut as immoral or not.

Human Nature

So Rothbard, starts defining human nature.

In everyday life, when people refers to “human nature” it is often in a pejorative way of pointing out greed, selfishness and long term unsustainable of current technological development.

Religions refer to human nature as something arbitrarily defined by a superior non-human entity.

All those definitions contradict one another and are always subjective to the person preaching it. A christian will have a different view on what human nature is than a Buddhist, Atheist or Agnostic.

Rothbard definition of human nature is objective in the sense that his definition does not change depending on what religion you are. This does not dismiss other definitions, this is just the definition of Human Nature Rothbard builds his ideas upon.

So how to define Human Nature in an absolute way? Rothbard states that human nature should be based on characteristic proper to humans.

Characteristics which only humans depend on for their survival as opposed to other species.

He claims that instead of relying on instincts, the proper characteristic of human is the use of reason. We aim at a specific goal with our inalienable free will (as opposed to instinct), then reason lead our actions to find the most efficient way to reach it. It turns out that the most efficient way is often by the help of other fellow humans and by making tools, as our body is not self sufficient for surviving (no fur, no built-in poisonous fang etc…). This lead to specialization of skills and the need of being a social creature. Rothbard contrasts the inalienable free will with the alienable labor service one can render. The fact that the fruit of our labor is voluntarily alienable make social cooperation possible. Our reason lead us to cooperate for attaining our goal in the most efficient way. The result of our civilization is just the natural outcome of those principles unique to human.

Other animals have some degree of social skills, but they don’t have the free will to aim on a specific goal and to use their fellows as a mean to such end. They select goal by instinct, and reach the goal by themselves.

In a nutshell, the nature of human is selection of a goal by inalienable free will then action guided by reason to reach it in the most efficient way. This lead to cooperate with other fellow and to the division of labor.

Human Ethics, the case of slavery

So human ethics is then considered as a set of values which do not oppose to Human Nature as defined above. In this ethic, everything that oppose the nature of human is deemed immoral, everything that help human nature is deemed moral.

Let’s just see how to judge slavery in such ethic:

  • It is clear that both slave and slave master follows Human Nature as defined above, so one can’t define the slave as non-human.
  • Slavery is when the fruit of labor of the slave’s labor is being taken with compulsion by the slave master.

Now, let’s have a thought experience in a imagine a world where everybody is slave and slave master.

  • Nobody can reap the fruit of his own labor,
  • Everybody can take by force another person’s labor

It is easy to see that in such situation, labor will eventually cease to exists and human specie disappear. Even if one is hungry to death and reap an apple, this apple will be confiscated by somebody else, so he can only chose to die, or wait that somebody else take an apple, but this somebody else will die as he can’t eat the apple. Eventually everybody will die, the last of them can eat all the apples but will not be able to reproduce and will die from old age. Thus, slavery is against human nature, and thus it is immoral by Human Ethic.

Rothbard analyses way more situation than this in a completely logical way, I can’t do him any justice, I just wanted to tell this example so you get a taste of his strictly logical reasoning.

If you want to defend slavery you need to reject human ethic (replacing it with another ethic going against human nature) or find a flaw in the reasoning. This is typically the Rothbardian way of defending any position he takes.

The Nature of Money

I came under the realization that Rothbard’s reflection about the nature of human can be applied to Bitcoin such that we can develop an ethic of bitcoin rooted in the objective Nature of Bitcoin.

In the bitcoin community, we likely already know the Nature of Money kind of well. And there are books talking about it so we won’t be long.

The nature of money, what distinguish it from any other things, is that money can be easily exchanged at any time in future against another good by another party, where, the specific time, the future good and the other party don’t need to be known in advance. This is the nature of money.

The less you know about which future good it will be, when the future exchange will happen and which party it will be, the more money is needed. This is why in uncertain time people prefers saving.

Some characteristic of money, are:

  • Durability

If money was not durable, it would worthless when you want to exchange, non durable money is against the nature of Money.

  • Fungibility

If money was not fungible, you would be unable to know whether you will be able to exchange it in the future, and so unable to value it, so non fungible money is against Money Nature.

  • Portability

If money was not portable, you can’t exchange it, which goes against the nature of Money. Rai Stones seems to go against this idea, as Rai stones were not moving, instead ownership was orally passed by, but this is quite similar to gold being stuck in a vault and exchanging paper claims instead of the actual gold. The money is not the gold or the Rai stone, but the paper or oral claim.

Even if we do claim that the stone was the money, portability issues limit socially the parties who will accept it (only in possible in small tribes), thus being against the nature of money.

In the case of Bitcoin, censorship naturally refer to portability. If miners could censor you, it means they will prevent you to exchange your bitcoins.

  • Divisibility

If money was not divisible, then it would severely limit the things to exchange with it to big purchases, thus being against the nature of money.

Bad divisibility limit the minimum (or maximum) value of the thing you can buy with it. Note, under this point of view, bitcoin fees are actually a divisibility issue.While bitcoin are in theory divisible to 8 decimals, practically the minimum value of thing you can buy with it is limited by the mining fee. (… in a world where lightning network does not exist)

  • Scarcity

I think that scarcity is actually the same as portability. All resources are scarce. If oxygen was money, the problem would not be that we have too much oxygen, but that it would be impracticable to transfer. If bitcoin was not scarce the problem would be portability: A transaction would be infinitely big just representing the number of bitcoin you want to transfer.

  • Distributed

This one is important but often overlooked. Imagine a money infinitely centralized such that suddenly I get 100% of the supply right in my hand (Practically speaking, an ICO). Now, you could speculate on this, and buy it from me, but speculation is not the nature of money.

Money can be exchanged in the future against another good by another party, where both the future good and the other party don’t have to be known in advance

In speculation, you know which party you will resell to in advance (… Binance) and you know against what. (money, like Bitcoin or fiat) Thus, speculatively buying my ICO token does not make my ICO token money.

However, gold is widely geographically distributed, thus people from different background could somewhat agree on its value. Note that fiat money have a distribution issue which limit where it can be accepted.

Because the only reason why you would buy an asset I own 100% is for speculative purpose, you can see how non-distributed money goes against the nature of money. As far as distribution is concerned, there is a spectrum between me doing an ICO and gold. Bitcoin is actually very distributed as the source of renewable energy (which are the cheapest form of energy for mining) are distributed.

  • Defensibility

Somehow, I never saw this one mentioned anywhere else. But it is easy to see that a money which can’t be defended would be immediately stolen, and thus completely useless as money.

Bitcoin is the most defensible form of money as it requires very few resource to protect even a large amount from any kind of attacker. (included nation states) What we call privacy is nothing but an attempt at improving defensibility.

The Ethic of Bitcoin

Bitcoin’s nature is money’s nature. Certainly its design has been created to fit this purpose, and it is widely accepted in the context of money.

Lot’s of people accept bitcoin because they know they can exchange it at an unknown future date, with an unknown party, against an unknown future good.

So when we talk about the Nature of Bitcoin, we really talk about the Nature of Money. As if Bitcoin could not be money by any characteristic of money infinitely abused, it would cease to exist.

In Bitcoin we talk:

  • Mining fee instead of Divisibility
  • Censorship instead of Portability
  • Privacy and self-validation instead of Defensibility
  • Fixed supply instead of Durability

But those terms are really the two faces of the same coin.

Thus, we can declare objectively if an action is immoral for Bitcoin or not. By We, I don’t want to give the impression of superior value that must be shared by a community.

I mean We in the neutral sense of: If you agree with me about what is the Nature of Bitcoin, and that the Ethic of Bitcoin are values which can logically prove that an action is immoral when it goes against the Nature of Bitcoin.

I don’t really mind if you personally want to follow such ethic or not, as you are free to hold onto whatever value you want. But as far as Bitcoin is concerned, I will judge your action against this ethic.

With this ethic, you can judge what is “bad for Bitcoin” or “good for Bitcoin” without any subjectivity involved.

Bitcoin can be immoral for you because it conflicts with your values, but this is a separate issue.

Any development on Bitcoin which hurt its nature as Money, or hurt free expatriation, or the enforcement of property by software should be objectively considered immoral.

The case of Lightning Network

So now we are equipped with values which objectively allow us to debate whether a technology is good or bad for Bitcoin, I start with the Lightning Network.

As I talked about in The Nature of Money, I consider that mining fee in Bitcoin is bad for the divisibilityof Bitcoin by making it unsuitable to use for low value payments. Not only this, but Bitcoin, because of its pseudo anonymous nature, have various hostile forces trying to decrease its fungibility.

In this sense, Lightning increases the divisibility of Bitcoin by decreasing the minimum value of good Bitcoin can be exchanged against.

Secondly, Bitcoins sent through the lightning network are completely fungibleas it is impossible to know with on-chain information the source of the payment that someone receive.

Thus lightning is virtuous. Chain analysis companies are bound to lose this battle and will become obsolete.

The case of trusting block validation to miners

Needless to say, if there was no miner, we can’t preserve the “free expatriation” characteristic of Bitcoin. So miners are vital to the Nature of Bitcoin.

Some people assert that we should just follow whatever rule miners decide.

But then, nothing would guarantee that such miners does not act immorally against the Nature of Bitcoin. History shows again and again that whenever a social group take control over the rules on money, they behave against the Nature of Money via debasing, or inflation (impacting durabilityof money).

Miners are nothing but a social group, we should assume history will repeat itself, thus assume they will go against the Nature of Money and thus trusting them is immoral.

The case of Bigger Blocks and inflation

A point was made for Bitcoin to have bigger blocks. Since mining fees impact the divisibilityof Bitcoin, some people defend that it is virtuous to decrease the fees by increasing the block size.

Surely, a world where mining fees are absolutely zero can work for a while. It already did in the past. This can works thanks to inflation which keep miners mining. But if you want zero fee, you also need bigger block as the space is eventually too scarce to accommodate every users.

So let’s start by analyzing the case of adding inflation to Bitcoin.

If inflation was 99% per year, it is easy to see that inflation is nothing but an attack on the durabilityof money.

Thus actions attempting to add inflation should be considered immoral. We can’t say that durability (no inflation) is objectively better than divisibility (low fees) but we can say that the particular action of raising inflation is an attack on the Nature of Money by impacting durabilitynegatively.

In the same way, assume an altcoin becomes money like Bitcoin one day and has inflation. Is dropping inflation immoral? And it actually is! Either this inflation is balanced by higher fees and divisibility is damaged. Or miners get less revenue and we increase risks of immoral money control if they collude. We can’t quantify it, but such ethical analysis does not require quantitative analysis, just the fact than one action damage some property of the Nature of Bitcoin is enough to consider it immoral.

Under this notion, needless to say that a central bank consistently playing with the inflation rate is completely immoral as it goes against the Nature of Money.

However, inflation is not enough for keeping fee to zero. You also need to increase the block space, let’s analyze this.

The need for cheap outsourced durable storage is unlimited. So there is no fixed size which will be good enough at all time high to please everybody. Let’s take the extreme case of unlimited block size: We don’t have to make complicated model to understand that this would end up with having one single giant database somewhere on the planet, and then will hurt the Nature of Bitcoin by impacting defensibility, as this giant database owners can now confiscate bitcoins or censor them.

If an unlimited block size increase hurt the very nature of Bitcoin by hurting the free expatriation characteristic of Bitcoin, then it must be considered immoral.

Obviously, a small increase will not have the same impact as an unlimited increase, but still, it impacts the very Nature of Bitcoin, it should be considered immoral.

This mean that the block size bump introduced by Segwit was immoral and Luke-Jr have been 100% right on this. (Note that myself I did not opposed to it, this was a mistake)

But what about dropping the block size? It would be as much immoral as it would impact divisibilitynegatively by increasing the fees.

Not doing anything is also an action by itself, but an action which does not modify the Nature of Bitcoin and thus can’t be claimed immoral.

People claiming that the Nature of Bitcoin changed by itself because fee became expensive and caused harm to their business are only admitting they failed to understand the Nature of Bitcoin.

The case of miners mining small blocks

Miners are free to mine smaller blocks if they want. This would effectively mean, as we saw, that the fee would increase and thus divisibilitywould be impacted.

Let’s take the extreme case of miners mining only one transaction per block. It seems clear that in such case, the divisibilityof bitcoin would be so damaged that it would cease to be a useful form of money. This mean that the miner would be immoraldespite it being their right as per the Bitcoin protocol.

The case of SPV wallets

I recently wrote about why Neutrino is dangerous for my self sovereignty.

BIP37 (Bloom filters) are actually quite neutral. There is a legit use case, which is low bandwidth SPV wallet paired to your own full node.

On the other hand, Neutrino is only useful for delegating block validation to somebody else. Using Neutrino to pair to your own node does not make sense as BIP37 is way more efficient.

If 100% of users where delegating validation to somebody else, then again, Bitcoin’s defensibility would be hurted, as this party would be able to censor and steal your coins. That said, even without Neutrino, this could already be the case with centralized block explorers, so Neutrino itself is not preventing this situation to become the norm.

Actually, some people made the case that it improve the Nature of Bitcoin because instead of having a bunch of centralized block explorer, we will have more people serving their own family, friends or community because setting up a node supporting Neutrino is easier than setting up a block explorer. This argument actually convinced me clearly that Neutrino is not immoral.

However, things are different for SPV wallets following Proof of Work.

If 100% of users of Bitcoin were following proof of work, then collusion of miners like happened in B2X would prove fatal to Bitcoin, because as we saw, history tell us that any social group in control of money ends up going against the Nature of Money. A world run like the FED, but with anonymous miners instead.

Any SPV wallets following proof of work must be treated as immoral. Giving to users the ability to follow a specific node instead of the most proof of work chain does not, in any case, save them. A murderer should be considered immoral even if he saved a kitten.

The case of Schnorr signature

Schnorr signature are an improvement to Bitcoin which allow a bunch of amazing feature like signature aggregation which would basically cut down dramatically the size of transactions in some situation.

Unlike a block size increase which would hurt the “free expatriation” characteristic of Bitcoin, this is not the case of this feature whose main effect would be to improve divisibility of Bitcoin.

Some people might protest saying that any change to Bitcoin is a risk to ruin the Nature of Bitcoin by mistake. Such concern should not be taken seriously given that:

  1. Changes can be reviewed so you can be personally sure the code does what it says
  2. Any mistake, while embarrassing and potentially damaging to the reputation of Bitcoin, are fixable.

Damaging the reputation of Bitcoin is not immoral, as hurting the reputation does not impact the Nature of Bitcoin. Mt Gox damaged Bitcoin reputation, but I became Bitcoin developer since I understood that the Nature of Bitcoin was perfectly unscratched by this news. And so do all Bitcoin developers who were here before me, I don’t have one example of any of them stopping working on Bitcoin because of Mt Gox.

Conclusion

I tried to make the case for ethical bitcoin development following the model that Rothbard is taking to define objective human ethics.

This approach to ethics is taking minimal agreed premises on what make Bitcoin special, in other words, what is the Nature of Bitcoin, and define anything that goes against it as immoral.

There should be no gray area when judging actions people have on Bitcoin. Most of actions have no particular effect on the Nature of Bitcoin and are harmless, but when one action can be in anyway affecting its nature, this must be pointed out and treated as such. Subjective values such as “Divisibility is better than Fungibility” are unacceptable justification. If divisibility is hurt in favor of fungibility or vis versa, such action should be considered immoral.

If the Ethic of Bitcoin is conflicting with your own ethic, then you have no other way than to declare Bitcoin itself immoral.

Some cases can be harder to draw a line, but in any case can be discussed and debated in an objective way. I personally thought Neutrino was fundamentally immoral, I recognize that there is moral case for it as long as the wallet don’t follow proof of work. Maybe some cases I discussed above might be discussed in the same way.