The Incompatibility of Bitcoin’s “Strong” Decentralization Ideology and Its Growth as a Scalable Currency
Bitcoin1 launched the digital currency revolution and remains the most successful of the cryptocurrency experiments to date.2 Its reputation as a disruptor of the establishment tends to precede it: “Bitcoin looks like it was designed as a weapon intended to damage central banking and money issuing banks, with a Libertarian political agenda in mind—to damage states [sic] ability to collect tax and monitor their citizens [sic] financial transactions.” 3 Indeed, the original founding document behind the Bitcoin protocol called for the digital currency to achieve at least two fundamental goals: (1) financial transactions in a completely decentralized system, eliminating third-party institutions for either issuing the currency itself or facilitating its transfers; and (2) complete privacy and anonymity of transactions. Along with these deliberated aspirations for Bitcoin, another one of its inescapable characteristics is its intangibility, its lack of inherent value.
This note explores the idea that the widespread adoption of Bitcoin as a functioning currency is incompatible with its unique mix of decentralization, anonymity, and inherent valuelessness. Understanding the aptitudes of decentralized versus centralized orders through Randy Barnett’s framework of First Order Knowledge Problems, this note argues that Bitcoin’s lack of inherent value prevents it from conveying any meaningful localized knowledge to an operational, emergent price mechanism within a decentralized order. As a result, the prices that have emerged attaching to bitcoins have been conspicuously volatile, hindering it from serving as a reliable medium of exchange and store of value.
However, the persistent ideological gloss surrounding Bitcoin as an anti-authoritarian instrument belies the reality of how Bitcoin has actually spread across digital wallets around the globe. As if to acknowledge the incompatibility of Bitcoin’s simultaneous characteristics of decentralization, anonymity, and inherent valuelessness, the virtual currency’s rise has in fact largely depended on private, third-party service providers to better serve existing customers and expand Bitcoin’s reach to new ones. This note next explores how a few of these currency exchanges, digital wallets, and payment cards have fundamentally shaped the Bitcoin landscape. This note then examines how the Bitcoin community has inevitably collided with other centralized systems, such as conventional financial institutions and government regulators. Finally, this note concludes by comparing these two groups of middlemen and drawing a principled distinction between private, third-party intervention and governmental or regulatory intervention.
Bitcoin’s success in continued expansion indicates that the algorithm powering this new cryptocurrency system is fundamentally working. Its reliance on third-party institutions and increasing cooperation with enforcement agencies, however, also indicates that some of its original ideologies must give way with an eye toward mainstream adoption.
