Stories and Market Cap: The Value of Fiction

Money has value because its valuable. To exchange value with currency is an act of faith that other people share your belief in the value of that currency. Its a shared narrative in society that gives currency its value, not technical implementation, and its not intrinsic.

Out of all the crypto currencies Bitcoin has proven to be the most valuable, and will likely remain that way for the foreseeable future. This value isn’t derived from the technical implementation, rather its legendary origin story. Bitcoin from a tech perspective is barely sufficient, it provides assurance that the properties of the network are good enough for a currency, but its a rather crude solution that is terribly inefficient. Even as crypto currencies maybe developed with better technical details, they will fail to surpass Bitcoin in terms of market cap unless they can create a stronger shared story. What Bitcoin lacks in technical sophistication it is the clear leader in narrative, and this is what lends financial value.

Origin of BTC

Bitcoin was born from the ashes of the 2008 financial crises. Its origin block has this inscribed

The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.
Satoshi Nakamoto

This sets the tone, and the date for the chain. It would take many years before Bitcoin would acquire real monetary value.

1 million bitcoin in satoshi wallet

preordained amount of bitcoin

The small band of early bitcoiners all shared the communitarian spirit of an open source software project. Gavin Andresen, a coder in New England, bought 10,000 bitcoins for $50 and created a site called the Bitcoin Faucet, where he gave them away for the hell of it. Laszlo Hanyecz, a Florida programmer, conducted what bitcoiners think of as the first real-world bitcoin transaction, paying 10,000 bitcoins to get two pizzas delivered from Papa John’s. (He sent the bitcoins to a volunteer in England, who then called in a credit card order transatlantically.) A farmer in Massachusetts named David Forster began accepting bitcoins as payment for alpaca socks. https://web.archive.org/web/20131031043919/http://www.wired.com/magazine/2011/11/mf_bitcoin

Value common assets
Common and accessible
Constant utility
Low cost of preservation
Transportability
Divisibility
High market value in relation to volume and weight
Recognisability
Resistance to counterfeiting

Tech stuff

Byzantine Faults

The want of money is the root of all evil. People will cheat, lie, and steal when money is involved. This is where tech comes in. By combining various technologies its possible to prevent fatal flaws that would ruin the suspension of disbelief needed for storage of value. Tech plays a supporting role, it allows for a story that cannot be ruined by a few bad actors.

From a generalized technical perspective we need a Byzantine Fault Tolerant Replicated State Machine. Crypto currencies will use one of these and specialize it to act as a general ledger to keep track account balances, but its a more generalizable concept. By breaking down these terms we can get a better sense at what problem blockchains are trying to solve, and not worry about how they are doing it. It might seem like a big term, but by learning the stories that went into arriving at it it will make a lot more sense.

State Machines

A state machine has two parts, data and operations. The operations that are allowed depend on the data, or the state of the machine. In the case of ledgers we want all transactions to be zero sum, and we don’t want accounts to go into the negative. The state is the balance of each account. We want this abstract machine to be replicated to prevent a single point of failure, and to democratize access to it. The simplest case of replication is commonly taught with an analogy to two generals. If we want a backup ledger in case the primary fails we need to ensure its synced with the primary.

Two Generals

The two generals problem is a story that illustrates the difficulty in getting two different computers to agree on a result in real world conditions. Imagine two generals need to agree on a strategy, attack or retreat. Tech isn’t concerned with what is the better option, only that they agree on what they are doing. If one general sends a messenger saying they plan to attack they risk that messenger meeting an untimely end before delivering the message. Sending a message doesn’t mean the recipient will receive it. To counteract this, they might want to receive an acknowledgement from the recipient before they carry out with plans to attack. However this only shifts the uncertainty to the other general.

Practically speaking this can be solved by sending multiple messengers and acknowledging acknowledgements to arrive at arbitrary certainty by sending more and more messages. However its impossible to arrive at absolute certainty. This is known as the two generals problem. Given two processes that communicate over an unreliable connection its impossible to guarantee a shared world view. This is assuming generals are honest, and messages will not be forged.

Building on the concept of two generals, the problem is further generalized by having multiple officers coordinating an attack. The situation becomes Byzantine when we begin to consider the possibility of the enemy being one of the generals. The term Byzantine was chosen since its a posthumous name given to the Holy Roman Empire there is no risk of insult. A Byzantine general is a treasonous one.

In this case we want all of the generals to agree on a plan, but there is the possibility of traitors in the ranks. These traitors can lie, telling different generals different things, in an attempt to prevent an agreement being reached. In the case of distributed ledgers we are concerned with an agreement of everyone’s account balance, and people are incentivized to lie.