Blockchain: Decentralized Power or Chaos in Disguise?

In this episode of Fascinating!, Rik from Planet Vulcan delves into the genius of blockchain technology—the decentralized, self-organizing system that powers cryptocurrencies like Bitcoin. As Rik explains, blockchain’s ability to function without a central authority echoes the natural phenomena seen across the universe, much to the dismay of Earth’s central planners. With a nod to Satoshi Nakamoto, the mysterious figure behind Bitcoin’s creation, Rik explores the revolutionary implications of this tamper-proof, transparent ledger system that’s shaking up how transactions—and power—are handled.

But as blockchain grows, so does the fear-mongering from those who currently control fiat currencies. Are they simply protecting their turf, or are they onto something? Rik tackles the concerns head-on, highlighting how blockchain could either usher in a new era of economic liberty or lead to chaos, depending on whom you ask. Tune in to discover why blockchain technology might just be the most fascinating—and disruptive—innovation of our time.

Transcript

Good day to you, and welcome to Fascinating!  I am your host Rik, from Planet Vulcan.  My continuing mission on Planet Earth:  to search for signs of intelligence and to encourage its spread.

Most of you have heard about Bitcoin, the original cryptocurrency, and other cryptocurrencies which operate in the same way.  It looks like cryptocurrencies are here to stay, in spite of some growing pains and a lot of volatility in their value relative to the value of traditional currencies such as the US dollar; and in spite of fierce opposition from government agencies that control fiat currencies, which seems to be motivated more by a desire to protect their turf than by anything else. 

If you have heard of Bitcoin, you have probably heard of Bitcoin mining.  Why do you suppose Bitcoin mining is a thing?

This takes a little bit of explanation, but it will be worth your while to hear it.

One of the more significant problems with a fiat currency is that there is no effective limit on the creation of more of that currency.  Under the gold standard that was in effect in the United States before 1933, the amount of currency that could be created was limited by cost feedback, i.e., it cost something to produce more gold; and you could not issue currency without someone having produced the gold.

Under the gold standard, prices in the United States were stable over long periods of time.  The average rate of inflation in the US prior to 1933 was close to zero. But in 1933 a series of presidential executive orders was instituted and led to the Gold Reserve Act of 1934, which loosened the connection to the gold standard, raised the dollar price of gold and required US citizens to turn in their gold coins, gold bullion and gold certificates.  For a number of decades, it was a criminal offense for a US citizen to possess gold, with a few exceptions for things such as gold jewelry and dental fillings.

Predictably, as happens with any such attempt at prohibition of anything, criminal activity grew up around the smuggling of gold.  In an old episode of Hawaii 5-0, McGarrett and crew were depicted as busting up a gold smuggling ring, as if there was something inherently criminal about possession of gold.

In 1944, along with the creation of the United Nations, a conference amongst the nations at Bretton Wood, New Hampshire attempted to establish a protocol under which exchange rates between national currencies were to fixed.

It quickly became evident that the belief that exchange rates could be managed was delusional.  In 1971 the convertibility of dollars to gold was ended by executive order as it became evident that the Bretton Woods protocol was failing to deliver.

Between 1933 and 1971, the average rate of inflation in the US was between 2% and 3% per year.  

After 1971, the inflation rate in the US has been volatile.  During the 1970’s it averaged just over 7% per year and spiked to alarming levels late in the decade.  Inflationary expectations are routinely built in to interest rates, which are determined by the supply of and demand for credit.  Short-term interest rates spiked to over 20%.

Following the spikes in inflation and interest rates, the monetary authorities strove for several decades to bring the inflation rate down to a more moderate level by dampening the growth of the money supply, and their efforts resulted in a period of low and stable inflation.

Recently the US government has effectively adopted what is euphemistically referred to as “Modern Monetary Theory” or MMT.  MMT is the present-day equivalent of debasing the coinage, and there is certainly nothing modern about that idea.  And, predictably, in recent years the US has once again experienced an alarming spike in the inflation rate.

The creators of Bitcoin were aware of this history and of the economic theories which explained it, and recognized that, since there would be no monetary authority involved, there had to a built-in feedback loop to limit the creation of new money, and they implemented the practice of bitcoin mining, which ensures that producing new money will entail a cost, just like it did in the era of the gold standard.

The larger purpose of this essay is not to discuss the future of cryptocurrencies, but instead to discuss the underlying blockchain technology that has made cryptocurrencies possible, and to discuss the implications of this technology.

Blockchain technology was invented by an individual, or possibly a group of individuals, known by the pseudonym Satoshi Nakamoto. Satoshi Nakamoto introduced the concept of blockchain as the underlying technology for Bitcoin in a paper titled "Bitcoin: A Peer-to-Peer Electronic Cash System," published in 2008 on a Cryptography Mailing List maintained by metzdowd.com.

To this day, it is not generally known who Satoshi Nakamoto is.   Those who know are not saying, and those who are saying don’t know.

Blockchain is a decentralized and distributed digital ledger technology that records transactions across multiple computers in a way that ensures the security, transparency, and integrity of the data. 

And here is a brief sketch of how it does that:

The record-keeping is decentralized, and maintained by a network of computers (referred to as “nodes”) that work together to validate and record transactions in a ledger.

This ledger is replicated and stored across all participating nodes in the network. Each node has an identical copy of the ledger, which is continuously updated and synchronized.

Transactions recorded on a blockchain are visible to all participants and cannot be altered once confirmed. This ensures that the data is tamper-proof and verifiable.

Blockchain relies on consensus algorithms to validate transactions and to agree on the state of the ledger. 

Cryptographic techniques are used to secure transactions and control the creation of new units. Public and private keys ensure that only authorized parties can access and modify the data.

If someone loses and cannot retrieve their private key, they will never be able to access their account.  

You might be interested in exploring further the nuts and bolts of how it all comes together.  The ingenuity is quite fascinating, and it has yielded proven performance.

But in this essay we will go no deeper into those details, which you can find without too much effort if you want to know more.

The important takeaway, from the point of view that is championed in the Fascinating podcasts and YouTube videos, is that a blockchain system operates without a central authority.

A blockchain system self-organizes in the same manner as do natural phenomena cited in earlier essays in the series, based on the behavior of the elements of the system following local rules.

The ones currently in charge of the payment systems and control of the supply of money are now claiming that without global rules and strict top-down regulation, a widespread blockchain system will lead to bad outcomes, chaos and catastrophe.

They are engaging in an effort that is equivalent to trying to sweep back the tide, as blockchain technology inevitably does become more widespread, and as it becomes increasingly evident that it works, and produces better results than the results that have been produced by intelligent designers during the preceding era.

We should mention in passing, with regard to the historical functioning of the gold standard, that problems arose in credit markets during periods of disinflation.  Borrowers had entered into loan agreement that committed them to future payments of interest and principal, and when disinflation occurred it meant that the payments became more burdensome because their real value had gone up as prices came down.

Many people have argued that this was a fatal flaw in the gold standard system.  However, far from being a fatal flaw, this problem could have been addressed and fixed, for example by some form of indexing in the loan agreements.  But as we now know, the enthusiasts for intelligent design convinced everyone that they could do better than an evolved and evolving market could do.  

And one might be forgiven for concluding that doing a “better job” was not their primary intent.  Their primary intent can be more plausibly inferred as wishing to gain the power to create money out of thin air; a power that they promised to use only for good, like intelligent designers always tell us, but seldom deliver on.

We live in interesting times indeed.

I invite you to have a listen to the next Fascinating! podcast and a look at the next video on our YouTube channel, Fascinating@pregodenada.

If you find the lessons from nature in these podcasts and videos personally valuable, please recommend it to your friends, give it a like, and subscribe.

Theme music: “Helium”, with thanks to TrackTribe.

Live long and prosper.  

Savor your experiences; treasure your memories; anticipate a happy and rewarding future.  

And respect nature’s wisdom.