free market

What is Bitcoin Infrastructure?

Recently I was confronted with the idea that “Bitcoin infrastructure companies” consist of the following:

  • wallet companies (hosted or local apps)
  • APIs (block explorers or blockchain analysis)
  • payment processors

As Ryan X. Charles reported from Montreal, among this group apparently “everyone wants the block size to increase”.

Merriam-Webster defines infrastructure as follows:

the underlying foundation or basic framework (as of a system or organization)

Apart from “local apps” (wallets, presumably open source), the list above consists entirely of centralized services. These are not Bitcoin infrastructure by any definition. These are peripheral services that use Bitcoin.

Actual Bitcoin infrastructure (validating wallet, node, miner) developers should be extremely wary of pressure coming from this sector. The business model of each of these types of companies requires centralization. Each would prefer a substantial portion of activity relating to Bitcoin pass through their gateways. Ryan described the group as representing a:

large fraction, if not majority, of bitcoins held, bitcoins transacted and bitcoin API calls made

In other words, it may be that this small group of companies is a gateway for the majority of Bitcoin transactions and is acting as a bank for the majority of coins in existence. It may even be that a large portion of these so-called Bitcoin transactions are actually off chain. It may also be that these so-called Bitcoin wallets are actually custodial accounts.

fox-hen

But even the best of these services (i.e. those who claim you control your own keys and that only transact on chain), with the best of intentions, represent a dangerous centralization trend for Bitcoin. These are hardly the voices that Bitcoin developers should heed.

Good intentions won’t stop these types of services from failing their customers when the shit hits the fan. And when Bitcoin starts to significantly challenge seigniorage revenues, the shit will be all over the room.

Many of the good people in these companies naively believe that Bitcoin is a super-efficient system. They see the core value as cheap and rapid transactions for the masses. Some are even interested in the benefits of sound money or even pseudonymity. They are right, these are ultimately the benefits to the user base (all humans).

What they fail to understand is that these benefits are a strictly consequence of the single innovation of Bitcoin – consensus without trust. This innovation allows Bitcoin users to resist censorship. This censorship resistance is only achieved through decentralization. Some may think that only applies to mining, which is not the case. These business models are themselves the primary threat. Each new user of a centralized service expands the attack surface.

Dark Market : Trade is not a crime

Last night, while you were sleeping, three guys at a hackathon in Toronto created a free market. You are probably thinking, what does that even mean? Before one can fully grasp the importance of this event a little background is in order. The free market is any trade unregulated by the state. The term black market arises from the inability of the state to see and thereby control trade, but applies equally to trade over which the state asserts no control. In a free market each exchange is a voluntary agreement between two parties.

Recent research has shown that the size of the free market globally is roughly 23% of world GDP, down from 26% in the 1960’s. The free market has been in a free fall in Asia, currently at a level of 20%. Sub-Saharan Africa, Latin America and post-socialist regions enjoy free market levels of at least 36%.

shadow economy

Why is the free market declining in the more developed economies and holding its own those that are less developed? It stands to reason that the regulated market is “free enough” in more developed economies, causing more people to “come out of the dark” – accepting regulation as a cost of doing business. Another interpretation is that in the more developed economies trade is more easily controlled. World Bank research shows a strong correlation between “formal account penetration” and per-capita GDP. In other words, wealthier people rely more heavily on banks. A business without financial services in a developed economy is generally at a competitive disadvantage.

account penetration

Account penetration differs enormously between high-income and developing countries in the aggregate: 89 percent of adults in high-income countries, but only 24 percent in low-income countries, report that they have an account at a formal financial institution. – World Bank

Ultimately these are two sides of the same coin. People come out of the dark when their cost of doing business in the regulated economy becomes less than their cost of doing business in the free market. Economically this is a contradiction, since the aggregate cost of doing business in the free market should always be the lowest possible. The catch is that free markets do not exist on a large scale. The means of exchange itself is heavily regulated. In order to trade freely one must either accept unreasonable risk by lugging around piles of cash or join the heavily regulated financial system, with all of its various financial and privacy costs. Cryptocurrency is disrupting this model by enabling trade that does not rely on “formal accounts.” People can trade in cash on a larger scale.

Trading in cash is not illegal, but as we can clearly see in global financial trends, it is going away. It is being replaced by a very expensive and insecure system subject to onerous state-level controls. Developed markets may be “free enough” to sustain this presently, but this is a dangerous trend from a historical perspective. So if trading in cash is legal, and free market trading is legal, why are markets like the Silk Road under state-level attack? On the surface it’s pretty simple, free markets don’t differentiate between legal an illegal trades – that’s the “free” part. So the knee-jerk answer is to shut down the market.

It is not the case that all trades on Silk Road were illicit. Yet all accounts have been closed and 26,000 BTC seized. It only takes a small amount of paranoia to consider that the market itself might have been the target, not illegal trades or even the alleged dark motives of its original operator.

Shut down the black markets take away what little they have, then double the amount of floggings and executions put them on TV. Broadcast them live! Sow fear, more fear. – Plutarch Heavensbee

The beauty of Bitcoin is that nobody is trusted. There is no operator. The protocol cannot commit a crime. This makes it impossible to shut down the system. It’s important to remember however that this does not make it impossible to track down criminals and bring them to justice. It just preserves the rights of the innocent.

The Gift of Satoshi is consensus without trust – we no longer need to accept trust in order to trade. Amir Taaki (libbitcoin and Dark Wallet), William Swanson and Damian Cutillo (both of Airbitz) have in one night given us Dark Market – the first implementation of a Distributed Anonymous Marketplace. The world may never be the same.

In the interest of full disclosure, I work on libbitcoin.