March 14, 2016    10 minute read

Can Bitcoin Redefine Democracy?

   March 14, 2016    10 minute read

Can Bitcoin Redefine Democracy?

In 2010, Laszlo Hanyecz convinced someone to accept the 10,000 Bitcoins he had mined in exchange for two pizzas. In those distant days, Hanyecz estimated that each Bitcoin his computer had earned through mining was worth a fraction of a cent. Today, 1 Bitcoin equals to $437, thus Hanyecz’s pizza purchase would be worth about $4,367,900.00 in today’s money.

Hanyecz’s transaction that day marks as the first transaction ever made with Bitcoins. Today, from my living room in Milan, I can send €100 worth of Bitcoins to Kyoto only by generating a QR code from my smartphone. This means that any recipient in Japan with their Bitcoin wallet ready to scan that code would be able to claim the money, which usually happens in seconds. If you are still asking “Why would I prefer this type of money transfer to my brick and mortar bank?” the answer is: Bitcoin gives you the opportunity to transfer money in minutes and for free (or for an infinitesimal mining fee if you want your transaction to be confirmed within a reasonable length of time). Do you know a bank that does that?

Flashback to 2008, two weeks after the collapse of US banking behemoth Lehman Brothers, when a gargantuan credit crunch nearly caused systemic failure of the entire banking system. Governments rushed to animate the feeble banks while businesses found it almost impossible to find new loans to maintain their usual operations. Just when politicians were newly comprehending the concept of “too-big-to-fail,” a paper circulating the internet – Bitcoin: A Peer-to-Peer Electronic Cash System – was expounding a methodology to use a P2P network to generate transactions without relying on an intermediary. In the context of the intense financial strain, just the anticipation of extirpating “the intermediary” is enough to take Bitcoin seriously.

The underlying objective of the aforementioned paper was to introduce Bitcoin – a decentralised digital currency and a payment system to record transactions. Bitcoin is very dissimilar to traditional banks. Purchases made by Bitcoins are recorded in a public ledger called the blockchain that can only be edited by consensus of the participants of the system and, once entered, information can never be erased: the blockchain contains a verifiable record of every single Bitcoin transaction ever made. Therefore, a part of this massive blockchain is constituted by my €100 transfer to Kyoto.

The founder and CEO of Guardtime –  a blockchain company to ensure the integrity of systems, networks, and data at industrial scale – Mike Gault explains blockchain with the following analogy:

“Imagine that you’re walking down a crowded city street, and a piano falls from the sky. As dozens of people turn to watch, the piano crashes down right in the middle of the street. Then, without a second to lose, every person who witnessed the event is strapped to a lie detector and recounts exactly what they saw. They all tell precisely the same story, down to the letter. […] the bystanders who agree on blockchain events are different computing nodes, geographically and computationally isolated from each other. For the lie-detector test, they show a “proof of work” — a cryptographic process for proving that the computer arrived at the correct outcome in the correct way. Falsifying events in the blockchain would be equivalent to getting more than half of the people who saw the piano fall to all lie in the same way, at the same time, without any ability to coordinate beforehand. In short, it can’t be done.”

The “proof of work” mentioned by Gault is a right to participate in the blockchain system. It prevents users from changing transactions on the blockchain without re-performing the work that is protected via cryptographic hashes that ensure its authenticity. Proof of work concept emerged from how the digital coins are mined.

Infograph that explains how a Bitcoin transaction works
Bitcoins act like cash, but they are mined like gold. Bitcoin mining is using processing power (of a computer) to try to produce a valid block and as a result, get some Bitcoins as a reward. Bitcoin miners find a random number that when inserted into the current block makes the output below the current target. Following such, the computers send that block around the network, and every user checks whether their work is below that target. A small percentage of the works will have a hash below the actual target and the miner who found the exact number will make a profit. This process is way different than what a Central Bank does with fiat money. From Economics 101, central banks can increase the amount of money in circulation by printing it, setting reserve requirements, changing interest rates and engaging in OMOs. The CB has total (debatable) control over the money supply, thereby, the performance of the aggregate economy is tied to its policies.

Bitcoin Price Index Chart

(Source: Bitcoin charts)

The value of a Bitcoin, however, is tied purely to the laws of supply and demand. Naturally, Bitcoin’s value is volatile when compared to more established currencies and commodities due to its relatively small market size. This discrepancy will decrease gradually over time as the currency matures and the market size increases. The market size of Bitcoin has evolved in these six years. There are many Bitcoin startups (Coinbase, 21, BitPay, etc.) that are actively doing business.

Whilst Bitcoin has its benefits, the blockchain has the potential to revolutionise our perception of not only money but anything that has value. Blockchain is like Microsoft Excel Online: Excel spreadsheets that accept inputs from lots of different parties. The ledger can only be changed when there is a consensus among the group. That makes it more secure and eliminates the need for a central authority to approve transactions. Goldman Sachs says the blockchain technology “has the potential to redefine transactions” and can change “everything.” JPMorgan last month announced it was launching transaction project with the blockchain startup led by its former executive, Blythe Masters. For now, I only mentioned its use in Bitcoin, nevertheless, the user cases cannot be limited to that. Some other uses of blockchain are:

  1. Smart Contracts: digital documents and proof of ownership for transfers
  2. Stock Exchanges: digital trading platform
  3. Smart Property: digitally recorded assets
  4. Health Records: decentralised patient records management
  5. Music Distribution: proof of ownership of digital content
  6. Secure Digital Voting: fraud proof anonymous digital voting solution

Back to the Future: Secure Digital Voting and Liquid Democracy

In 640 BC, the first currency was minted in Lidia (now Turkey) and a few generations later, the first large-scale democracy was established in Athens – just across the Aegean Sea. Money and democracy are inextricably intertwined from the early stages of human history, thereby, both should be addressed while referring to a complication stemming from the other. In my opinion, the greatest problem with modern democracy is modern money: the wealthy that control the money flows prioritise their personal interests rather than the general good of the society which increases inequality and weakens the security of the poor. For this reason, the security of modern money is underpinned on a dilemma.

The security inherent to Bitcoin makes it impossible to claim without justification. Bitcoin is separated from the government: not even the inventor, Satoshi Nakamoto, can change the Bitcoin-code without reaching a consensus among users. Hence, in utter contrast to the financial power lobby-groups and mega banks have exercised over the monetary policies, in theory, each and every Bitcoin user is equal to the network. When the value of Bitcoin rises, everyone who has Bitcoins becomes proportionally richer.

Furthermore, as opposed to fiat money, which can be banned at will (as the WikiLeaks Banking Blockade has illustrated) it is not possible to withhold payments with Bitcoin since these payments do not require a middleman, and consist of cryptographically protected information. In a similar vein, arbitrary confiscations of wealth (like in Cyprus) are simply out of the question as long as Bitcoins are stored securely.

Can we redefine democracy via Bitcoin?     

The supporters of Bitcoin attribute its democratic character to “one CPU, one vote” mechanism of proof of work requirement. Personally, the current state of Bitcoin is hardly democratic.

First of all, the amount you mine depends on the performance of your hardware. And logically, your hardware performance depends on your equipment, ultimately – your money. ASICs – integrated circuits customised for Bitcoin mining – determine how fast and efficient you can mine. There are companies established for mining purposes. Ant Pool, Discus Fish/P2Pool, Bit Fury are examples of the gigantic firms whose operations are fueled by thousands of mining stations containing millions mining chips. One can buy an ASIC as a personal computer, but there are market leaders that own a huge percentage of Bitcoins. There is a minuscule chance that your CPU will correspond to 0.00000001% of their vote. Hence, the Bitcoin payment mechanism doesn’t free the financial system; it just gives a different group of people – people who are already relatively rich and started mining earlier – the power to rule.

Secondly, the democratic potential of Bitcoin is not even valued by Robert Ver – an investor who already invested over a million dollars into new Bitcoin-related startups – who gave the following interview in Bitcoin Gospel Documentary:

“Interviewer: People may find it scary… A new currency, a new system based on an inventor who owns already 1/20th of all currency.

Robert Ver: Satoshi Nakamoto invented one of the most important inventions in the entire history of human kind. It’s going to improve the planet. If he had half of the Bitcoins, he would deserve it.”

Nonetheless, Bitcoin and blockchain are two separate concepts. Bitcoin is the currency and blockchain is the system in which it operates. The popular misconception is that the advocates of digital voting are supporting voting with their Bitcoins. This is, of course, untrue. Blockchain voting systems create wallets for each candidate/party in an election. All voters are allocated a coin (not a Bitcoin!) that represents one vote, which they can cast by sending their coin to the wallet of their choice. The entire process is recorded in the blockchain public ledger meaning that unlike most current elections, a voter can verify that his or her vote was actually counted.

While the lack of anonymity in the blockchain’s most popular use case – Bitcoin – is a hindrance for conversion of voting platforms, the use of anonymising software can ensure that voters’ identities are not revealed.  The startup V-Initiative works on bringing fully anonymous yet fraud-proof block chain voting solutions and uses IP masking software such as the Tor to assure voter anonymity.

Given these improvements of the system, several political organisations commenced experimenting with block chain voting. Most recently, Flux Party (formerly Neutral Voting Block) of Australia has proposed the introduction of a token-based political system based on block chain. Max Kayne is the mind working on this project. His long term aim is to inaugurate a democratic system that cares for the right sort of philosophy to bring about efficient policy consistently, or at least more often than our political systems. In the short run, Kayne wants Flux to get some seats to have an impact on the current economic policy of the country.

Similarly, since 2013 Denmark’s Liberal Alliance party is utilising some form of a blockchain for internal voting at the party’s annual meeting. For many digital voting supporters, the end goal is “liquid democracy” – a democracy by which all citizens have the potential to vote on every issue but can dynamically delegate some of their voting rights to others whom they feel are better qualified to vote.

Personally, blockchain has many benefits compared to our modern voting systems today, and if companies like V-Initiative can bring fully anonymity to the system, blockchain technology will redefine modern democracy.

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