The only alternative to expending resources on money issuance is the centralized trust. The consequences of trusting governments to manage the supply have been disastrous - ranging from bureaucratic waste to horrible wars. Cryptocurrency mining compared to that is a beneficial trade-off.

It all boils down to trust

The primary function of money is a universally accepted medium of exchange. It is something people can accept for goods or services with the expectation of using it to pay other goods and services later. The ability of an asset becoming universally accepted as a medium of exchange boils down to a single aspect: trust. People need to trust, that the basic characteristics of the medium will not be manipulated. And the most important of those characteristics is scarcity. There are only two ways how an asset can be scarce - either by a centralized third party managing its supply or by work required to issue that asset into existence.

Throughout history, gold emerged as a universally accepted medium of exchange because people learned to trust its scarcity. It required investments and effort to dig out and transform into the form usable as money and it became clear over time, that the rate at which that happened was steady and predictable.

Minters and banks provided a service of standardizing the units of gold into bullions, storing those for their customers and issuing trusted notes representing the weight of the gold. When the sovereigns wanted to enact early legal tender legislation, they had to piggyback on that trust in the scarcity of gold. The Dollars, Pounds, or Francs used to represent an amount of gold you could exchange for them and they maintained their value because people trusted their banks to make good on the promise those notes represented.

As that promise got eroded over time, that trust was more and more centralized, eventually reaching the point after World War II where the one trusted party was the US Federal Reserve System. The central bank of central banks promised to exchange dollars held by other central banks for gold in its vaults. That system lasted for little more than two decades and when it became clear, that the US government was abusing that trust to finance its disastrous war in Vietnam and wasteful welfare programs, that final link got broken, which led to a run on the FED and stagflation in the US.

Since then, the fiat currencies of the world have maintained some value only because of their universal acceptance as a medium of exchange. They maintain that acceptance because people reasonably trust their governments to not mismanage the currencies too much. There are other factors, which help of course: the legal tender legislation mandates the use of national currencies for tax payments and debt settlement; the government-mandated education makes sure people don’t question the nature of things where the state manages money; and of course the network effect of money is a tremendous force, which requires an extreme counterforce to be broken.

But as we have seen repeatedly, even all the legislation, propaganda, and network effects are not sufficient when the trust gets seriously broken. When it does, even the government doesn’t have enough weapons to force people to use their worthless pieces of paper and the currency collapses, as was the case many times in history, most recently in Venezuela or Turkey.

Consequences of state money

Money is the information bearer of the whole economy. It informs us how scarce the resources are, which investments make sense, which goods and services we can afford and how much value we as consumers of those goods and services need to produce to purchase them. Without money, there is no specialization, no division of labor, and no possibility to increase standards of living beyond the subsistence. It is the most important commodity in the economy.

People presented with no other alternative have blind and misguided trust, that the only model for managing that commodity is to put a handful of well-educated people in charge. However, when that happens, it inevitably leads to those people and their bosses abusing the trust they have been given. They use the money they can issue freely to finance inefficient bureaucracy and wasteful government programs, to bribe voters with welfare, and to bail out those who can give them lucrative contracts when they leave their office. What’s worse is, that because that information, which the money carries is incorrect, it makes businesses believe there are more resources available for investments then there really are, which leads to wasteful malinvestments, bubbles, and crises.

The worst consequence however is, that trust that central banks enjoy allows the state to finance even more destructive wars. It was the first World War, which broke the classical gold standard. It was the Vietnam War, that put a final blow to the weak link to gold. And when Bush, Obama, and their European counterparts were busy destroying the Middle East with wars, and the economy with interventions and bailouts, their chief bankers debased the currencies used to finance all that destruction fivefold.

Seeing all these consequences, one must come to an unequivocal conclusion, that the trust in the state to manage money must be replaced. That will not, however, be achieved through legislation (nor it should). The vested interest of the state, the military-industrial complex and the finance sector in maintaining the current system is too strong for that to happen. The fish will not drain their own pond. The only way that can happen is through - albeit illegal - competition from media of exchange, which remove the necessity of centralized trust and replace it with resource expenditure necessary for their issuance. With gold, as for millennia that includes the labor and capital necessary to mine, process and transport it.

Cryptocurrencies and trust

Cryptocurrencies provide a modern alternative to that process with their distributed proof-of-work algorithms. Those algorithms create a competition of miners for newly minted coins and transaction fees. All transactions, including those which issue the new coins at a predetermined rate, must be signed in a way, which proves, that the miner who signed them first took part in a competition with predefined rules (did the work in other words). All other miners must agree with that signature in order to be able to take part in a competition for signing the following transactions. This way a consensus on the predefined inflation rate and immutable transaction history is achieved. The users of the cryptocurrency can also see at any point, how difficult the competition is and thus how much resources would anyone have to expend to beat all the competition in order to manipulate the consensus. That way instead of trusting a central issuer to maintain scarcity of the currency, it is sufficient to trust the distributed consensus.

Because of how the incentives play out, the number of resources this process consumes depends on users’ appraisal of the potential of the cryptocurrency becoming a universally accepted medium of exchange and a store of value. The important thing to understand is, that it happens regardless of the number of transactions on the network - the marginal cost of every additional transaction is virtually zero. The very fact, that this process has any value to the users represents the extent to which people distrust the governments in managing the money. If it was not for the consequences of state money, people would not be desperately looking for alternatives.

Unfortunately, the mainstream media who don’t understand the process report on how much does one transaction cost to “process” by taking estimates of the mining costs divided by a number of transactions on the network. They completely disregard the primary value of the process of securing the network and gaining trust. Should any cryptocurrency be successful in becoming universally accepted, its transaction costs calculated this way would drop to insignificance compared to the benefits it would bring by limiting the government’s waste