Nobel Prize Winner Milton Friedman, Satoshi Nakamoto and Bitcoin
Kun Hu Jun 10, 2020 11:00
Nobel Prize Winner Milton Friedman, Satoshi Nakamoto and Bitcoin
Milton Friedman's surprising prediction
Milton Friedman, the 1976 Nobel Memorial Prize winner in Economic Sciences, who died in 2006, once said in 1999,
I think that the Internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing, but that will soon be developed, is a reliable e-cash, a method whereby on the Internet you can transfer funds from A to B without A knowing B or B knowing A. The way I can take a $20 bill hand it over to you and then there’s no record of where it came from. You may get that without knowing who I am. That kind of thing will develop on the Internet and that will make it even easier for people using the Internet. Of course, it has its negative side. It means the gangsters, the people who are engaged in illegal transactions, will also have an easier way to carry on their business.
Blockchain-based currencies, typically Bitcoin, could potentially fill the missing "reliable e-cash" part of Milton's equation. In 2008, bitcoin is born out of frustration of monetary systems. In bitcoin's genesis block, it says "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks". Since the inception of bitcoin, Our world has been influenced by bitcoin and its spirit. Unfortunately, Milton would not have witnessed the post-world of bitcoin.
But Milton's word told us about the importance of reliable Internet money in reducing the role of government. As we know, to prevent dictatorship and the disaster, it is better to reduce government roles to prevent centralization. With the spread of the Internet, we democratize information access. But now challenges come in. With the help of big data and AI, our thinking and behavior pattern are easily tracked and induced. The government can tighten their control over us with such technologies. Although we have laws on privacy, we have witnessed a series of cases of data leak and invasions of privacy like scandal of Cambridge Analytica and Facebook and Google Privacy Lawsuit.
Bitcoin for monetary freedom
We can guess from Milton's words that the "reliable e-cash" should be of high privacy. Milton further said:
You may get that without knowing who I am. That kind of thing will develop on the Internet and that will make it even easier for people using the Internet. Of course, it has its negative side. It means the gangsters, the people who are engaged in illegal transactions, will also have an easier way to carry on their business.
Milton also predicted the possible side effect of this type of privacy. In earlier days of bitcoin, the users of bitcoin are typically tech geeks, drug dealers. There is some evidence showing that Satoshi Nakamoto, the founder of Bitcoin, is a drug runner.
But Milton didn't define what is "reliable" for e-cash. From my guess, e-cash, like bitcoin, should not be controlled by "central authority", otherwise, the "central authority" has the power to confiscate the money they think illegal.
In fact, the key part of bitcoin is that bitcoin doesn't need to rely on third parties for its movement. As described in bitcoin whitepaper, bitcoin is "A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution". Bitcoin and its underlying technology blockchain removed the need to "trusted third party". And this feature can apply to most industries. We have witnessed the blockchain applications in IoT, supply chain, identity, and more.
From Satoshi's perspective, the trusted third party is even the inherent fault of our monetary systems.
The root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micropayments impossible. In this sense, it’s more typical of a precious metal. Instead of the supply changing to keep the value the same, the supply is predetermined and the value changes. As the number of users grows, the value per coin increases. It has the potential for a positive feedback loop; as users increase, the value goes up, which could attract more users to take advantage of the increasing value.
What bitcoin brings is not just "removal of trusted third parties" but also enlighten us on money issuance algorithm, a way that brings us back to "money consensus" like gold but beyond gold's physical limitation.
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