A Response to Paul Krugman from a Keynesian Bitcoiner

Dear Paul,

I don’t envy your position as public enemy #1 for the cryptocurrency goldbug set, but it’s clear from your recent editorial that your ongoing feud with them over deflation is blinding you to what is exciting about blockchain. And there is much for economists to love. Let me explain.

Bitcoiners are trying to create a public good (a non-excludable and non-rival data network) that is also self-sufficient (pays for its own provision). Mancur Olson taught us this is impossible: that the free market demands enclosure as the cost of provision.

Except this isn’t impossible with blockchain, because Satoshi Nakamoto did more than invent a token: he structured it in a way that paid for the supporting network. That’s a bit like requiring the pasture in the tragedy of commons to be a clearing house for wool-futures and using the income from its trading arm to cover maintenance of the grasslands.

The fact that cryptocurrencies control how fees flow into and out of the network allows them to pay those who contribute to the commons. This can be done without the collusion or privatization Olson believed was necessary. And it opens the door to an entirely new class of solutions to collective action problems. Best of all, the hard part isn’t even the technology. The difficult problems here are economic: how to measure the value participants contribute and pay for it at market rates without compromising the security of the network.

Once you start seeing Bitcoin as a nascent kind of public good, you’ll realize that the network is even more deeply flawed than you imagine and that the people supporting it are not even libertarians at all. Satoshi quite clearly cut corners on self-sufficiency by requiring volunteers to run critical infrastructure, for instance, and his solution (“from each according to his ability, to the miners according to their hashpower”) only resembles free-market capitalism if we squint rather hard.

In the last decade we’ve also learned that the security and openness of these networks is far more dependent on this volunteer-layer than previously recognized. So it is no wonder most cryptocurrencies are having trouble scaling. Making matters worse, almost no developers understand the economic foundations of what they are building: most attribute the openness and self-sustainability of Bitcoin to its decentralization rather than its volunteer-provision, which is a bit like imagining that children get free candy on Halloween because the houses are distributed in space.

But you should put aside the obvious failures in their attempts. Because mining might be broken. And staking might be broken. But the door is open to something important: a new class of public goods that can sustain themselves in the absence of an owner and help us push back against monopolistic encroachment in our digital commons. And all that is standing between us and this reality is fixing the incentive structure that Satoshi abandoned.

So have some empathy for the crypto-classes. If it’s challenging for you to see Bitcoin as a nascent kind of public good, imagine how difficult it must be for them, non-economists cosseted in an ideology that teaches them free markets can never fail. The people embracing Bitcoin do have an admirable desire for egalitarianism. Is it any wonder they read that idealism into a virtual token and defend it using an analogy to gold? Surely no more unreasonable than you — in objecting to their arguments — doing the exact same thing.

At a minimum, you should stop making objections to cryptocurrencies on the grounds that private companies like Venmo provide commensurate services. Arguing that public goods are pointless because private ones exist is no different than arguing Linux is useless because Windows is around. The properties of openness and non-excludability that characterize public goods may be abstract, but they are very real in terms of the permissionless innovation they unleash. And if you still care about net neutrality, for instance, you should also realize that the open data-layers these networks support will ultimately be as if not more important than the financial tokens that sustain them.

And if you want to help, please send the economists. The biggest problem in the blockchain industry right now is the lack of understanding developers have of the underlying economic problems they face. This is why most chains are enclosing (hello, Mancur) previously-open networks components in a bid to induce the private sector to scale them. Delivering on the promise of a genuinely public blockchain will require something harder: aligning the incentives in these systems with market-based price signals. And that is a problem that has everything to do with economics and absolutely nothing to do with gold.

Best Regards,

David Lancashire
M.A. University of California (Berkeley)

4 Replies to “A Response to Paul Krugman from a Keynesian Bitcoiner”

  1. Bitcoin doesn’t need volunteers. People run nodes to verify the network because that’s the only way to do it without trusting someone else. The incentive to do this applies to everyone, but is felt more keenly by those who have a significant amount of their wealth in bitcoin/those who understand the principle of cryptosovereignty (Bitcoin’s raison d’etre). Paul Krugman is a statist/corporatist propagandist who thought the internet would be less impactful than fax machines. Why waste your time trying to convince him of anything when you could continue the process of investigating Bitcoin and evolving your thinking about it such that you avoid misunderstandings like the network depends on volunteerism.

    1. Thank you for the comment, MMT.

      The defining characteristic of a volunteer is that they are unpaid not that they are unmotivated. If people have motivations to run infrastructure (not just consuming data — which puts a cost burden on others — but providing for consumption by others) then there is nothing wrong with a volunteer-powered model.

      At a certain point scale requires for-profit commercial provision, because even Girl Scouts won’t sell your cookies week-after-week if you’re not paying them. There’s a good case that the draw of sovereign money can induce people to help bear the load, but the BTC devs are certainly aware of the limits and have said as much during the blocksize debates.

  2. This is a very smart article that gets most things right, but makes a few glaring errors.

    1. The network does NOT depend on volunteers. The network depends only on people who have a vested financial interest in preserving the blockchain: the miners who create the chain for profit, and the businesses, governments, large holders, and other entities who have an incentive to keep their own local copy of the chain. The notion that the network requires volunteers is an entirely false narrative that was foisted on Bitcoin from the outside and which is not shared by Bitcoin’s creator, Satoshi Nakamoto.

    2. So referring back to this quote “from each according to his ability, to the miners according to their hashpower” we can safely change it to “from each according to his need, to each according to his work performed” is a fairly capitalistic model after all.

    1. Thank you for the comment, Jess. Please note that you can find Satoshi’s need for volunteers in section 5.1 of the Bitcoin whitepaper where he explicitly requires all transactions to be shared with all nodes prior to the commencement of hashing.

      Eliminating this step is not possible without eliminating the open-access properties of the network, and we know it requires volunteers as the for-profit provision of “fee collecting and sharing” is subject to market failure. If you pay to collect and share inbound transactions for instance, then others maximize their own income either by not sharing or (should that slow block propagation) simply making blocks using the transactions you have already shared.

      We have empirical confirmation of this problem in ETH where miners are free-riding on Infura and in BSV where the dominant commercial miner is open about not sharing its privately-sourced transaction flow. There are examples in other networks like EOS as well.

      I do agree that players with a “vested financial interest” may provide temporary infrastructure for strategic reasons. Most scalable projects are funding infrastructure by venture investments and subsidies from token-rich development teams. But these are not sustainable economic models: all they technically do is swapping in a larger and richer volunteer until the funds run out.

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