Hasu – Bitcoin as a social contract

What is common between Bitcoin and the theory of social contract (social contract)?

Social contract (social contract) – the concept of a social contract implies that people completely give up their sovereign rights in favor of the state in order to protect their interests through it. The social contract thus signifies an agreement reached by citizens on the issues of the rules and principles of state administration with the corresponding legal registration.

Bitcoin is an innovative socio-economic institution. It is so different from existing institutions that many people are extremely skeptical and ask a lot of questions before endowing this new kind of money with material value.

Some questions can only be accurately answered by time, however, this does not mean at all that we will not be able to reveal some assumptions regarding this economic phenomenon or to define its paradigms.

One of these assumptions, which greatly helped me understand the nature of Bitcoin, is the theory of social contract. To begin with, fiat (official) money is the result of a social contract or social contract, which, in principle, is one and the same.

The essence of this agreement is that people give the state control over the money supply and other important functions of the currency. The state, in turn, uses its strength to manage the economy, distribute wealth and fight crime. But many people do not realize that Bitcoin works in a similar way, i.e. through a social contract.

The social level and its rules – the basis of Bitcoin.

The main points of the social contract theory will help answer some fundamental questions:

  • Why did bitcoin appear?
  • Who defined its parameters?
  • Who controls him today?
  • Can critical bugs destroy bitcoin?

Social contract theory

The theory of social contract begins with a mental experiment: it assumes that in a hypothetical state our world is so cruel that people simply cannot exist in it. Then, driven by a desire to improve their position, they gather and collectively agree to authorize the rights of a sovereign government to protect their lives and interests. And each of the people refuses any freedom (not to kill, not to steal, and so on), while the government is empowered to create laws and enforce them, thereby protecting people from all kinds of cruelty.

But this theory is not limited to the relationship between the state and people. The same mental experiment can be applied in economics. If a sufficient number of people are dissatisfied with a barter (based on natural exchange of goods) economies, they may collectively agree to use money, loans or something else to improve the quality of their trade.

The process of introducing money or credit into a barter economy occurs in an unexpressed form. Each person wonders what outcome he would like to get and how to achieve it. If many people in the community are waiting for the same outcome, then the result can be called “Schelling’s main point” or a social contract.

Money as a form of social contract

Throughout history, money-controlling states have abused their power with all permissible methods: they arrested accounts, prohibited individuals or even groups from making deals, and also printed more money than necessary, thereby creating inflation on the existing money supply — sometimes with hyperinflation.

Every time when the degree of state abuse of power reached a critical point, people began to doubt the social contract that endowed the state with this very power. And they moved to an agreement that would retain most of the economic benefits (for example, the general means of payment, the stock of values ​​and the unit of account), but without commodity money as a form of abuse of power by the state.

Money teaches an important lesson: the larger and more valuable a social institution becomes, the more willing there is to control it. However, the new commodity-money contract was also unstable. Consider for example the gold standard. Physical gold was too uncomfortable to separate, transport and store. Therefore, people quickly invented a new level on top of it and began to trade using representative paper money, and physical gold no longer needed to be transported.

Since paper money is easy to produce, it becomes necessary to create a reliable central authority that would supervise the money supply. And so, gradually, governments began to abandon the binding value of paper money to the base commodity in order to re-establish paper money.

This implies an important lesson: the current social contract is strong only as long as it inspires confidence.

Without a stable institution to ensure its observance, the contract loses people’s faith and ends.

Bitcoin rules

When Satoshi Nakamoto invented Bitcoin, he did not try to come up with a new social contract. Satoshi did something else – he used technology to solve many problems of past development and used the old contract in a new way. He established the following rules:

  • Only the owner of the coin can put a signature authorizing the waste of this coin (impossibility of confiscation / seizure of funds);
  • Anyone can make transactions and store savings in Bitcoins without additional permissions (freedom from censorship);
  • There will be only 21 million Bitcoin coins in the world, which will be issued according to a predetermined schedule (the impossibility of inflation);
  • All users will be able to check the rules of Bitcoin (protection against fraud).

Bitcoin as a new form of social institution

Money teaches us a very important lesson: the larger and more valuable a social institution becomes, the more it attracts people eager to control it completely. Therefore, the institution needs protection, which it can receive only from a certain influential structure, namely, the state. Over time, this protection will turn into control, and then into abuse. And when a social institution stops benefiting people, it will simply be replaced by another institution, and the cycle will start anew.

Satoshi tried to break this vicious circle in two ways: first, instead of asking for protection from an influential central structure (government), Bitcoin creates a hypercompetitive market for its own protection. By doing this, Bitcoin turns security into a trade item, and security suppliers (miners) into harmless commodity producers.

Secondly, Satoshi invented a way for how competing miners will be able to come to a consensus about who owns what and what in any period of time.

The Bitcoin protocol automates a contract accepted at the social level, while the social level defines the rules of Bitcoin according to the principle of consensus (general agreement) of its users.

These rules are symbiotic: the effectiveness of one rule is impossible without the effectiveness of another. The social level and its rules are the essence of Bitcoin. And the protocol level enforces them only for the first time, which simultaneously makes the social contract more reliable for outsiders.

Bitcoin as a form of social contract, enforced and automated by modern technology, has many advantages. And this will help us answer the philosophical question about the nature of Bitcoin.

Who can change the rules of Bitcoin?

Contract rules are defined and continuously reviewed at the social level. The Bitcoin protocol only automates them. As a computer network, Bitcoin appeared when many people began to install software implementations of Bitcoin on their PCs that obey the same set of rules (this is the same thing as speaking the same language).

You remain online as long as you follow the same rules as any other user. If I decided to change the rules of Bitcoin unilaterally on my local computer, this would not affect the operation of the rest of the network. This would only lead to the fact that I would be excluded from the network, because we are not able to reach mutual understanding (consensus). It turns out that now I speak a different language.

The only possible way to change the rules of Bitcoin is to suggest changing the social contract. And each such proposal must be voluntarily accepted by other members of the network, because a proposal can only become a rule when a sufficient number of people actively include it in their local set of rules.

Convincing millions of people is a very difficult job, so the risk that any contradictory changes will be made is zero, because otherwise the network users will not be able to reach a broad public consensus. Therefore, the Bitcoin network can be changed in such a way that would reflect the desire of its members, but at the same time would be completely protected from the changes proposed by the attackers.

Can a software error kill Bitcoin?

In September 2018, a software crash occurred in the most popular Bitcoin implementation (local rule set). The failure had two potential attack directions: he would have allowed the attacker to stop Bitcoin clients from working on the users’ computers (in this case, they would no longer be able to confirm the rules, which would reduce the network’s security against fraud); failure would allow spending the same Bitcoin token twice, thereby violating the rule of protection against inflation.

Bitcoin developers quickly fixed a bug in the software by introducing an updated set of rules into the network that closed the likely angles of attack. Although the error was detected on time and was not used by the attackers, however, some people began to wonder: how much damage could it cause to the network? Could the Bitcoin network exist in an inflationary environment, destroying user confidence in this rule (resistance to inflation)?

The social contract theory gives an unequivocal answer to this question: no. Bitcoin rules were adopted at a social level, and software only automated them. The difference between the social contract and the protocol level is that the protocol level is always wrong. The inability of the protocol level to temporarily enforce the rules of the contract does not have a permanent impact on the validity of the contract itself.

Bitcoin itself has no value. Value arises solely at the social level.

Instead, this is what would happen: the exploitation of the vulnerability of the program code would be prevented by reorganizing the blockchain so as to level the damage caused by the attacker. Such an approach would divide the Bitcoin network into two networks, each of which would have its own token: one with an error, the other without. Each bitcoin owner would have the same number of tokens in each network, but the value of these coins would be determined solely by the market, i.e. by how much the buyer is willing to pay for them.

Here it is important to understand that the Bitcoin token itself does not represent a value: it is only a number in a distributed registry. Value arises solely at the social level. Therefore, a token is also a public consensus that determines which of the two tokens will receive economic support in the future. Most likely, the entire economic value will move to a new, revised network.

When Bitcoin software successfully automates social contract rules, both levels are synchronized. And if the software temporarily stops synchronizing, it always has a social contract as a guiding beacon light, which can be returned to.

The recent error in the program code will not be the last error at all; probably there will be others. But the theory of social contract gives us confidence that failures, though they may happen, will not constitute a threat to the social institution of Bitcoin.

Do forks threaten the rule of Bitcoin inflation?

Another philosophical question addressed to the concept of “fork”. Since Bitcoin software is open source (open source allows users to check the effectiveness of rule sets), anyone can copy this code and make changes. This is called a “forking” or a fork. But, as mentioned earlier, these changes can occur only at the protocol level, but not at the social level. Without changes to the rules at the social level at the beginning, the only result of the ramification of Bitcoin will be that you will simply be excluded from the network.

If you wanted to fork out Bitcoin (and not allow the sudden death of the new network), you first need to fork out the social contract. You will have to convince as many people as possible that your rule set suits them better, so that they update their rules with you. Such forks are rare and difficult to produce because they require the agreement of millions of users. Using a similar process to create value is reminiscent of a presidential campaign in terms of costs.

Again, the main thing is to understand that the entire value of tokens rests solely on the social contract. Tokens have no value. They derive their value from social consensus. The protocol forking has nothing to do with the social contract forking, so a new token by default will have no value.

In those rare cases where a social contract is shared by itself (for example, when Bitcoin Cash separated from Bitcoin), users end up with two weaker social contracts, each of which was concluded by fewer people than in the previous contract.

Money in general and Bitcoin in particular can be represented as a form of social contract between people in the community. Bitcoin is also not a new contract: it is only the implementation of a contract whose history goes back hundreds of years. Compared to previous attempts, the implementation of Bitcoin is a serious leap forward, because this new type of electronic money creates a hypercompetitive market for its own security. The social level and level of the Bitcoin protocol reinforce each other, and their interconnection makes it possible to better understand such complex concepts as rule changes, forks and protocol errors.

Material prepared with the support of Bitmag | Telegram: @yourbitmag

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Vladyslav Skakun

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