The Myth of Bitcoin Cash 2: Re-solving Nashian and Szabonian Views on the Emergence of Money Through Trade Juice Follow Jul 30, 2017 · 4 min read

In my previous writing I explained how bitcoin cash cannot possibly hope to pull a significant amount of the market away from bitcoin’s already established network equilibrium. Moving a population from such an equilibrium requires the introduction of a higher order mechanism which bitcoin cash does not provide:

When one studies what are called ”cooperative games”, which in economic terms include mergers and acquisitions or cartel formation, it is found to be appropriate and is standard to form two basic classifications: (1): Games with transferable utility. (and) (2): Games without transferable utility (or “NTU” games). In the world of practical realities it is money which typically causes the existence of a game of type (1) rather than of type (2); money is the “lubrication” which enables the efficient “transfer of utility”. And generally if games can be transformed from type (2) to type (1) there is a gain, on average, to all the players in terms of whatever might be expected to be the outcome.

It’s easy to see how how money creates value by providing more mutually beneficial outcomes in a trade scenario:

Here we can return to the understanding that money has the practical value of creating games for traders. These are games with transferable utility, but if the money were not available, the game of the traders would be a game without transferable utility and thus naturally a game with less efficiency with regards ot the possibilities for the participants to maximize their combined gains.~Ideal Money

We can further consider an excerpt from Nick Szabo’s article “Logical Emergence of Money From Barter” The significance of Szabo’s works on money is that it provides a framework of understanding how bitcoin could arise to be a legitimate money. Without Szabo’s works there is no real argument put forth for how bitcoin could be valuable if it has no other significant use cases as a commodity.

In regard to competing currencies and the phenomenon of the markets discovering and converging to a standard (or not discovering a single standard) Szabo makes a simple observation:

[Now consider a population of Svens, each choosing an intermediate commodity]. Let’s separate this herd into two strategies, by eye color. If Svens have blue eyes, they follow their proper MBA reflexes and diversify, buying equally priced lots of palladium and rhodium. But if they have brown eyes, they buy only rhodium. Who does better? The brown-eyed Svens. Why? Because [the introduction of a commodity that can’t be costlessly stored [but as I observed above this is not really necessary; what we need to introduce are coincidences of wants and mental transaction costs — NS]] has created new demand for both palladium and rhodium. There was no monetary demand before we broke the equilibrium — now there is. Ceteris paribus, the price must go up.

If one major group is diversified between two likely candidates for a money standard the second group profits most by NOT diversifying and instead going all-in on only one of the commodities.

It’s a simple enough observation:

If the outcome is significantly predictable, it pays to invest completely in the most likely winner.

He then introduces a situation in which the winning commodity isn’t predictable:

But let’s add a third group: green-eyed Svens that use just palladium as their intermediate commodity. Green and brown eyes being of the same expected financial size (or of a completely unpredictable financial size), there is a 50% chance that palladium and green eyes will win, while brown eyes lose everything (except the original non-monetary value of the commodity, presumably negligible), and 50% chance of the reverse. For the blue eyes, if they diversified evenly it’s basically a wash. The risk-neutral expected value of all three groups is the same, but if our players are risk-averse our blue-eyed MBAs have the strategy of highest expected value.

The conclusion being:

50/50 diversity is thus the optimal initial position when it cannot be predicted which of two commodities will gain value as money.

However this isn’t a very real scenario that the scales could be perfectly balanced. Eventually there will be convergence to one commodity, therefore, those that converge to it the fastest will gain the most versus those that have a more “diverse” or contrasting strategy:

But since it’s impossible to discover a perfect 50/50 diversification, and mental transaction costs are sufficiently high, the equilibrium is unstable and will converge to a single currency. Once one commodity starts to be favored, the optimal strategy is to move to that currency.

Szabo’s conclusion is incredibly relevant to the bitcoin cash scenario. Especially the bold:

So we have shown that sufficiently high mental transaction costs are sufficient to cause the emergence of a currency standard, even in the absence of storage and transport costs.

Returning to the stated optimal strategy by Szabo:

Once one commodity starts to be favored, the optimal strategy is to move to that currency.

It’s not a question of “when” this will be. Bitcoin is already favored and Szabo has thus shown that residing on bitcoin’s network is game theoretically optimal. In other words, like my previous article suggested, we are already locked in a Nash Equilibrium