Is Bitcoin really “economic freedom”?
- Bitcoin was created to advance democracy and economic freedom.
- However, just a handful of people control the lion's share of the token, meaning that it is also somewhat centralized.
- The cryptocurrency has yet to bypass or replace the banking system.
Bitcoin led decentralized finance to emerge as a global, open alternative to our traditional financial system — and while the concept is appealing to many, the question is if it truly is decentralized and delivers on the economic freedom it promises. Since the 1990s, a movement of activist cryptographers — cypherpunks — shared ideas and thoughts online on how to realize “economic freedom” from the centralized banking system by creating an anonymous and decentralized form of virtual money through cryptography.
On Halloween night of 2008, at a time when banks were facing one of the worst crises ever, Bitcoin fulfilled their dream. A pseudonymous person (or a group of people) under the name of Satoshi Nakamoto introduced “a peer-to-peer version of electronic cash” based on a consensus (computer) protocol rather than relying on the banking system. Bitcoin is created through a process called mining. Participants in the Bitcoin network compete to resolve a math puzzle, which requires a large amount of electric power. The first participant (miner) that solves the puzzle sends the solution to an open network, and only when the majority of the network’s participants agree on the solution, Bitcoin transactions are verified and recorded into a block. These blocks are saved in a distributed ledger called Bitcoin blockchain. The miner that solves the problem is rewarded through Bitcoin. In 2009, the reward for mining one block was 50 Bitcoins, while by 2020 the reward is 6.25 Bitcoins. Before vanishing in 2011, Nakamoto mined about 1.1 million Bitcoins. This ensured his ownership of about five percent of the entire Bitcoin supply.
Bitcoin is often compared to gold for its scarcity, capped at 21 million Bitcoins. One of the reasons that the United States is the leading economic power is its majority ownership of gold — it holds just over four percent of the world’s total gold supply. Nakamoto’s ownership of five percent of the entire Bitcoin supply means he has a larger percent of Bitcoin than the United States has in gold. As the cryptocurrency Professor Matthew Greene noted, Satoshi Nakamoto has the potential to play a critical role in politics. If Bitcoin becomes more important than gold, an unknown person, rather than a country or public institution, will play a critical role in our economic system.
The question is if it’s purely coincidental that Nakamoto is the single largest owner of Bitcoin or if that fact demonstrates that the cypherpunk movement is merely shifting from one form of control to another. As attractive as the concept of Bitcoin is, it appears unlikely that Bitcoin can replace present fiat currencies and be the tool of democracy and economic freedom that some people desire. Although Nakamoto seems to be disinterested in assuming a public role in the ownership of Bitcoins, his overall conduct should at least prompt some serious curiosity whether he trustsa purely decentralized system in the first place.
Today, mining Bitcoin is basically impossible for a single computer as it was in the early years of Bitcoin. There are professional mining centers that are centralizing Bitcoin mining especially in countries like China, where electric power is cheaper. After Nakamoto, the largest bitcoin owners seem to be Micree Zhan, the co-founder of the cryptocurrency mining company Bitman, followed by Chris Larsen, the co-founder and executive chairman of Ripple (the third blockchain platform for importance), and Changpeng Zhao, the founder and CEO of Binance, a leading cryptocurrency exchange. Most Bitcoin transactions today are performed through exchanges or other intermediaries rather than directly by users.
The question is, has Nakamoto’s Bitcoin system created “economic freedom”? Not exactly. At this point, Bitcoin seems to have demonstrated that the more its value increases, the more the network tends to be centralized with its unknown creator behind the scenes. It is common to hear that “Bitcoin is a bank in your pocket” because the network is open to anyone and allows people to transact without a bank account. However, the Bitcoin network relies on the internet, and in countries such as India, half of the population still doesn’t have access to it. The same banking system that Bitcoin was created to bypass soon will enable clients to buy Bitcoins through their bank accounts.
The story of Bitcoin is far from unique. Nakamoto might have conducted the Bitcoin “experiment” as a brilliant game to temporarily confuse the existing money system, and cypherpunks might have found in Nakamoto a perfect leader. However, they cannot pretend that Bitcoin represents everybody’s idea of democracy and economic freedom.
Giovanna Massarotto is a CTIC Academic Fellow at the University of Pennsylvania Carey Law School.