The Three Pillars Theory

1) Sound Monetary Policy

For the first time in human history, the immaculate conception of Bitcoin allowed for a digital commodity to achieve greater scarcity than any element found in nature. The entire system of participants exists to preserve this fact. The intention behind the code is to create a supply distribution that is immutable. This is an unprecedented feature which understandably has to be seen before there can be widespread belief. The antifragility in Bitcoin has been tightly bound to the promise of a fixed, finite, supply. The market responds to the distribution schedule in Bitcoin after the system follows the code.¹⁰ By this it is meant that the price of a Bitcoin lags behind decreases in the supply curve. This is the natural outcome when distribution is suddenly diminished while demand remains constant. When cryptocurrencies sustain immutability in their hard-coded supply distribution, humans can gradually rely on their use as technology. Figure 3 below shows the monetary policy metrics for both Bitcoin and Decred respectively. While there are thousands of cryptocurrencies in existence, these two projects appear to dominate in terms of overall network security when compared to other implementations. Security should be the number one priority of any cryptocurrency seeking to maintain genuine scarcity through the eons. In this context, security refers to a network’s ability to protect itself from violating monetary policy that is agreed upon by users.

Figure 3: Monetary Policy Metrics for Bitcoin & Decred ¹¹

When the trait of scarcity is discussed, it helps to reflect on human behavior during the exchange of precious metals. There is social consensus that these metals come from far beneath the Earth’s surface. The magnitude of human effort put forth to extract these metals contributes to their legitimate scarcity. The cost to produce the metal can be thought of as stored energy in the metal itself. Costliness and scarcity go hand-in-hand. This was also the case when collectibles were used as money. A collectible was only worthy of trade when it was difficult to forge its value.¹² There have been many (many) digital currencies created which cost next to nothing to produce. Those currencies fail to generate genuine scarcity because humans are keenly aware of implied costliness. Detecting unforgeable costliness has become a human instinct for survival and cooperation. Although currencies created out of thin air are profitable for their creators, it is unconscionable to imagine people will be deceived yet again by this scheme which is well-understood and broadly detested by the many.

Sound Monetary Policy is how a currency establishes its purchasing power relative to every other good traded in the open market. This process takes a lot of time, trust, and human effort. These systems are still relatively new and must prove themselves through certain turmoil ahead. Seemingly robust statistical observations of the past will fail to apply to the future should this pillar be weakened or destroyed. Stock-to-flow models and sharpe ratios are certainly useful, but they will only be effective when the anticipated scarcity of a given currency remains static. Should a currency suddenly become cheap to produce or less scarce than humans once thought, the purchasing power of the currency will be diminished proportionately over time. When scarcity is suddenly interrupted in an unpredictable manner, the human experience is akin to direct theft. The rational collective action at that point is to restore order by reestablishing the social contract that was once fruitful for the network. If the arrival of digital currencies makes a clear statement about anything, it is that humans will endure immense sacrifice to reclaim sound money and the cherished contract therein.

Monetary policy is robust to the extent that it can’t be manipulated by a selfish authority. As a consequence of hard-coded supply distributions, cryptocurrencies have overcome the typical stock-to-flow deviations which persist in the physical realm. Humans tend to produce more of a physical good when the good’s price rises in real terms. The ramping up of production often leads to an environment where supply exceeds demand. This, in turn, collapses the good’s price and reduces utility as money. With the advent of hard-coded supply distributions, we now have the capability to circumvent massive fluctuations which bring about unnecessary instability. When money has a predictable supply curve, the result is a stable foundation for economies to build on top of. It is rational for the collective to demand money that is immune to debasement. Beyond providing fairness for economic participants, sound money is perhaps the antidote to needless expansion of government. Sound money, in short, is something worth fighting for.

2) Permissionless Access

The last nail in the coffin for precious metals was arguably the advent of government permission to use them as legal tender.¹³ Today, it’s nearly impossible to purchase these metals without revealing exactly who you are and where your money came from. In the name of combating terrorism, citizens abroad are expected to comply with Know Your Customer (KYC) & Anti-Money Laundering (AML) requirements before purchasing gold, silver, or any other traditional asset. Governments had practically cornered their citizens into using paper notes exclusively; that is, until Satoshi Nakamoto and the Cypherpunks came along with a unique method for global citizens to usurp their economic freedom from the State.

The ability to send and receive scarce digital units without having to trust a third-party is one of the essential pillars in the Cypherpunk social contract. It’s as if we are able to walk up to a complete stranger and physically hand over a piece of gold or silver; except, of course, we can do all of that work from a smartphone or computer within just a few clicks. With sound digital scarcity established, individuals can interact like they used to when exchanging goods and services for precious metals. The fact that the Bitcoin protocol first enabled this interaction is somewhat of a miracle. Without this important property, Bitcoin would likely exist in a vacuum overseen by some central authority. Without the permissionless capacity to send and receive transactions, the promise made explicit by hard code is broken and the social contract can disintegrate.

Another feature of participating in crypto networks is the ability to permissionlessly extract digital scarcity. Similar to the extraction of precious metals, there is a significant barrier to entry to keep in mind; although the capital investment required to begin mining cryptocurrency is arguably more tenable than starting a gold mining operation. With access to a computer and internet connection, individuals can obtain incremental amounts of cryptocurrency. Even though the extraction method doesn’t require authorization, participating in cryptocurrency mining bears similar risks to mining physical ores. We are in the midst of a digital gold rush where there will be winners and losers. Profitability in cryptocurrency mining is tethered to electricity costs and access to capital. This has expectedly produced a hierarchy in mining, but the permissionless nature of this extraction mechanism ensures the possibility of healthy competition. While Bitcoin has relied solely on Proof of Work mining in its distribution, Decred has added additional ways for people to obtain freshly minted currency. When someone is unable to overcome the entry barrier to mining Decred, they might be able to participate in permissionless Proof of Stake to receive newly minted coins. If someone has zero capital to stake or invest in mining hardware, they can still hope to extract Decred through their own labor. With 10% of Decred’s supply distribution placed in a development treasury fund, anybody with an internet connection and a beating heart can participate in its extraction. An integral part of the social contract in cryptocurrency is that anyone can sip from the distribution faucet without permission from authority.

Beyond the capability to transact and extract scarcity anywhere, anytime, digital currencies also empower their holders through confiscation resistance. Upon adequate training, anyone is capable of duping even the most sophisticated burglar. The ability to hide multiple copies off the same wallet ensures that individuals will always have the upper-hand over brute force in the physical realm. Better yet, the most proactive holders can memorize their private keys to hold their wealth inside their own minds. Without the ability to physically locate someone’s property, it becomes impossible to steal away. This simple characteristic empowers humans to stand up for themselves and store the fruits of their labor without needing to trust a bullying bank. On a larger scale, local governments can protect their wealth from invading nations like never seen before. Cryptocurrencies must defend their permissionless nature at all costs. Without doing so, they could share the same fate as those physical currencies which have become relics of antiquity.

3) Universal Fungibility

A scarce money that is fungible retains salability through time. The human desire to price goods in markets is what makes Universal Fungibility an indispensable characteristic of sound money. Modern markets require goods to be priced in currency that is denominated by interchangeable units. This is a fundamental element of pricing goods in the market. When fungibility is absent, a stable pricing mechanism is simply not possible. If collectibles and heirlooms were still the primary currency of human beings, you wouldn’t be able to price anything with complete certainty. Variations in perceived value are prevalent because no two collectibles are equal in physical terms. This risk is likely the reason why humans have not converged to use non-fungible goods as money. Non-fungible goods will assuredly exist as useful stores of value; however, they will inevitably be priced in something that sustains uniformity in value and interchangeability in function.

The closer something resembles a base element in the periodic table, the more fungible it becomes. Pure elements are intrinsically homogeneous, interchangeable and uniform. Any sample of a given element will display properties that are constant. It is this quality where physical goods naturally outshine anything in the digital realm. The interchangeable quality of the elements can be imitated and held as an ideal by digital currencies seeking widespread adoption. An additional characteristic of the elements is that there isn’t a way to discover their precise origination. We know some stars exploded to gift us the various elements around us, but that’s about it. The transfer of physical goods was untraceable until humans began writing things down on ledgers. In the age of digital mass-surveillance, anything that can be chronicled online will likely remain so.¹⁴ The reality of modern KYC/AML requirements is that they increase the potential for malicious actors to attack the fungibility of digital currencies. Given the innate traceability of online activity, preserving fungibility in the digital domain means erasing the history of who has owned a cryptocurrency throughout its lifespan. This is an extremely delicate task because users of digital currencies must still be able to verify scarcity. To sacrifice unmistakable scarcity for fungibility is, to put it bluntly, a fool’s errand. Users must be able to verify monetary policy and retain their individual anonymity. It’s a balancing act.

Thanks to the enhanced dissemination of information, humans have awoken to their shared dark history. With open-source effort and relentless advancement in cryptography, human beings can finally reclaim money that is fungible, scarce, permissionless, and sound. Universal Fungibility might not be essential to stores of value like real estate or art, but it does play a critical role in any currency undertaking the displacement of fiat as the primary method to price goods in the open market. If two currencies are considered equal in terms of Sound Monetary Policy and Permissionless Access, the currency that is more fungible will display superior resilience as sound money.

Conclusion

The era of paper money has run its course and humans must now ask themselves if the benefits outweigh the costs. Should we ever adopt a currency that isn’t costly to produce? Are we okay with the stealth tax of inflation and the slow march of paper moneys toward their inevitable demise? Can we build a society that is free from central banks and all problems they seem to create? Is it acceptable to have every single transaction scrutinized by some central authority? These are questions we must grapple with as we evolve into a more civilized society. Money is at the heart of all these issues and it is up to us to demand money that is fair.

The social contract known as money is derived from our lack of coincidence of wants. Sound money is a necessary feature to bridge this natural phenomenon in a capitalist society. Humans have historically relied on their governments to protect their property through the rule of law. What has become abundantly clear is that these governments are no longer ruled by the people or their own laws; but rather, they have been captured to rule in favor of a select minority. Our national governments have proven corruptible in every single instance. State-control over money has been a complete and utter failure. When the hoards of paper currencies reach their inexorable destruction, modern cryptocurrencies will be there to reinstate power back to the people.

“Capitalism is the fullest expression of anarchism, and anarchism is the fullest expression of capitalism. Not only are they compatible, but you can’t really have one without the other. True anarchism will be capitalism, and true capitalism will be anarchism” -Murray N. Rothbard

Capitalism and statism have indeed proven themselves incompatible. Capitalist ideals of private property, capital accumulation, wage labor, and competitive markets can emerge without state-control over money. This was the case during the 19th century when most countries were on the gold standard.¹⁵ Anarchy is derived from the Greek word, anarkhia, meaning “without a ruler.” Decentralized cryptocurrencies are anarchy in its purest form. Voluntary cooperation between human beings has emerged to reject an unjust system which has been catastrophic for society.

The Theory of Three Pillars in the Cypherpunk Social Contract serves as a mental model for the intrinsic properties of sound money. This theory posits that whichever currency adequately defends The Three Pillars will withstand the test of time, but it is ultimately up to the market to decide which currencies to adopt. Sound money must be chosen by the collective. Many cryptocurrencies are competing to safeguard the contract of sound money by using considerably distinct methods. This theoretical framework will serve as a foundation to compare these digital currencies and later assess trade-offs in risk.