Nice hat Nice hat

I needed him to help me make more sense of how the Bitcoin economy functioned, which is good because when I spoke to him he made it clear that he could not care less about the real identity of Satoshi Nakamoto.

Varoufakis is simultaneously the leading economic theorist on the subject of trading virtual hats, and one of the few invited to contribute to an ongoing conversation about how European economies should proceed following the global economic disasters of the mid- and late 2000s.

There are few academics better versed on the subject of virtual economies than Yanis Varoufakis, formerly Valve's economist-in-residence. Today he is on the faculty of the University of Texas, while at the same time serving as the advisor to the general secretary of the Organisation of Economic Co-operation and Development (OECD) in Paris.

"The Bitcoin experiment is unique in the sense that no one controls it."



Varoufakis is a busy guy, but I wanted to know why he took the time to write about Nakamoto in an elegant blog post from late April. In it, Varoufakis almost casually guts Bitcoin, coming very close to calling Nakamoto a fool, one so in love with his own idea that he can't see the flaws in the system he's created.

"All the other [virtual] economies that I've studied are centrally controlled," Varoufakis told me. "They are not controlled by central banks, or by governments. They are controlled by corporations. ... The Bitcoin experiment is unique in the sense that no one controls it. So, effectively, it is a set of tools that allows anyone who uses them to be co-owner of that community.

"Every monetary community allows within itself for very significant degrees of freedom ... to tamper with the money supply to create more of it, to create credit institutions which expand the money supply."

Varoufakis was careful to choose his words as we spoke. These freedoms that members of an economic community have can be for good or for bad, hence "tamper." To create a line of credit by loaning out money in excess of the amount of cash in your coffers, is just as much tampering with the value of a currency as double-spending it.

Getting a loan from Bank of America, Varoufakis said, is not so different as being paid in Bitcoin that someone has fraudulently spent elsewhere. It all depends on the rules you're playing by, and the simulation created by Bitcoin's virtual economy most resembles the rules that existed during what was called the "gold standard."

Playing by those rules, every U.S. dollar was backed by an equivalent amount of gold held somewhere by the U.S. government. The dollar was little more than an IOU from the Federal Reserve, a receipt for a tiny sliver of the Federal hoard. By adding to, or subtracting from, the gold physically held by the Federal Reserve, the U.S. government could change the value of the dollar relative to the other currencies of the world.

But there came a time when the Federal Reserve needed more flexibility than the gold standard allowed.

"The gold standard has been on and off for 100 years," Varoufakis explained. "Whenever there was some major perturbation in the economy, in society, the gold standard went out of the window ... [like] during the First World War or the Second World War, or the Great Depression ... or later the Vietnam War."

President Richard Nixon ended the gold standard in 1971. Since that time the U.S. has run on something called "fiat money."

"In other words," Varoufakis said, "we have money whose quantity is controlled by the state — by the Federal Reserve in the United States, by the European Central Bank, by the Bank of England, by the Bank of Japan — in a manner that seeks to effect price stability by other means, not by tying the money supply to some quantity of physical metal."

Without the gold standard, the Federal Reserve can, through various means, create more money in the U.S. economy. But like the finite amount of gold that used to be held in Fort Knox, there are only 21 million Bitcoins that will ever exist. It's part of the algorithm that Nakamoto made. Scarcity is baked into the system and is the only lever by which the entire virtual economy is controlled.

A system built of numbers has only a number, deaf and dumb, with its hand on the wheel. And that's where things get interesting.

What Nakamoto did by limiting the number of Bitcoins was to revert back to the gold standard. Instead of stifling mineshafts, Bitcoins emerge from computers across the world. But the concept, the scarcity of the monetary vehicle, is the same.

"We are going to end up with a fixed number of Bitcoins," Varoufakis said. "Already we are hitting the buffers in a sense that the rate of increase in the number of Bitcoins available is falling. And it will keep falling. ... When we reach [21 million] it will be as if all the gold from the guts of the Earth has been unearthed."

A Bitcoin researcher, in a blog post from April, found recorded in the chain of Bitcoin transactions evidence that one miner got a head start on everyone else in the world.

It's possible, probable even, that Nakamoto has many of the first Bitcoins ever mined, a stockpile of nearly 1 million stuffed beneath his virtual mattress. At current exchange rates Nakamoto's hoard could be equal to more than $100 million.

That means that the single largest stockpile of Bitcoins in the world is owned by one man.

I had already come to the conclusion that I might never find Nakamoto. But, with Varoufakis' help, it was time to try and get inside his head.