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Divorce of Crypto-Austrians and Crypto-Keynesians

Cory
November 23, 2017

I know how much debate there has been regarding crytocurrencies on this site so when I came across this I thought I should re-post and see what everyone thinks. This is not about are cryptos in a bubble but more about the future in terms of scale for economies and investors. As the title says the recent Segwit2X update is taking Bitcoin in a different direction than intended by its founder. Read below to find out more.

Click here to visit the original posting page.

The scaling battle that’s been raging in the Bitcoin ecosystem the past 3 years is finally over. The entire Bitcoin network has spoken and it has spoken for … what exactly?

There are lots of articles that will chronicle for you what’s happened in the past few months and years. If you aren’t familiar with the story so far, please go read this. In this article, I’m going to try to interpret what this whole drama means.

The Great Divorce

The final nail in the coffin of a united community was the abandonment of the 2x hard fork earlier this week, but to be truthful, the Bitcoin community has been divided for a long time.

The past few years has seen the development of separate subreddits, separate forums and now, separate blockchains, but it wasn’t always this way. Back in 2013, there was a single community united against fiat, excited at the prospect of new and exciting features that would take Bitcoin to the next level. Yet here we are 4 years later post-divorce, wondering what happened.

At least nominally, the issue at hand is a block size increase. Specifically, a hard fork to larger blocks that would enable a larger degree of on-chain scaling. In the grand scheme of things, this doesn’t look like a big issue, so the question we have to ask ourselves is, how did this issue become grounds for divorce? What is the real problem here?

Economics

Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.

This is a quote from John Keynes, an economist of some renown. I bring up this quote because I believe it to be relevant to the scaling debate. The real conflict over the past several years wasn’t so much about the technical specifics, but about economics.

Before I go on, however, I want to introduce you to a couple of different economic theories. The first is Keynesian, which is named after the economist quoted above. The second is Austrian, which is named after some Austrian economists from the last century.

Keynesian economics looks at the economy at the macro level and is largely interested with making sure money and goods are moving. To a Keynesian, exactly what is moving isn’t as important as much as the dollar amounts and speed. Macro-economic indicators are interesting to Keynesians as they believe numbers like Gross Domestic Product (GDP) and velocity of money matter more, than, say, exactly what products are moving and where the money is being invested. As such, Keynesians tend to be more concerned with consumer confidence, consumption of goods and services and how quickly money is flowing through the economy.

Austrian economics looks at the economy at the micro level and is more interested in what generates wealth. Savings and good investments are what ultimately lead to prosperity in this theory and so, not all transactions are good. Bad investments and over-consumption cause down cycles so those are to be avoided.

These are two very useful distinctions and I’m not here to imply that this has a direct one-to-one correlation with what I’m going to describe below.

Crypto-Keynesians

If you think about the block size limit, it’s essentially a speed limit on money moving through Bitcoin. I define Crypto-Keynesianism as a perspective where moving money through the economy is more important than perhaps an extra level of security around the money itself.

From a Crypto-Keynesian perspective, this is deadly for an economy. For an economy to grow, the Crypto-Keynesian perspective requires the money to be moving faster and faster. Larger blocks, then, allow for more consumption of goods in Bitcoin and thus are the key to Crypto-Keynesian prosperity.

From a Crypto-Keynesian perspective, Bitcoin’s usefulness increases with the velocity with which Bitcoin can move through the economy. If the velocity is limited, the thinking goes, the growth of Bitcoin is also limited.

In other words, Crypto-Keynesian economics emphasizes a faster velocity of money because the value of money from a Crypto-Keynesian perspective is mainly as a medium of exchange.

Crypto-Austrians

I define Crypto-Austrianism as a perspective where security of sound money is the basis of Bitcoin’s utility.

From a Crypto-Austrian perspective, savings and thus the ability to secure those savings is more important than the ability to exchange it quickly. If a hard fork causes less security, durability, fungibility or decrease in the store of value proposition of Bitcoin, it is not worthwhile.

Thus, for a Crypto-Austrian, store of value is the property to be protected at all cost and any change to a coin’s security, whether it be a change to the development team, or a possible network split that affects wallets and possibly lose them money, is not worth it.

The Conflict

In this light, the block size increase is really a difference of economic perspective, not only a technical one. Technically, a hard fork is riskier than a soft fork. Economically, a hard fork to enhance medium of exchange properties at a cost to the store of value property is what we’ve been arguing about all along.

For a Crypto-Keynesian, medium of exchange upgrades are worthwhile since that will increase the throughput of money, enhancing Bitcoin’s economy.

For a Crypto-Austrian, medium of exchange upgrades are not worthwhile since the security tradeoffs (especially in switching developer teams) is not worthwhile.

Businesses vs HODLers

Businesses require revenue to survive and a limit on transactions can be deadly. Most businesses, therefore, tend to promote Crypto-Keynesian policies to encourage economic activity as more transactions clearly benefit them.

In addition, Bitcoin businesses fill up a large percentage of blocks, as their revenue depends, in one way or another, on transactions with customers. In Bitcoin, having cheaper transactions benefits the businesses as their costs go down.

It’s not a surprise, then, that a majority of businesses supported the New York Agreement. They make money off of transactions and are incentivized to support Crypto-Keynesian policies. Customers that use Bitcoin mainly as a medium of exchange are also incentivized the same way.

HODLers, on the other hand, don’t care that much about the speed of transactions. Most don’t transact frequently and as a result, presently take up little block space.

HODLers care about making sure that the money they have holds its value and are incentivized to support Crypto-Austrian policies. HODLers were not sufficiently represented during the negotiations for the New York Agreement and it’s not a surprise that there was a popular outcry by HODLers in the ensuing days.

The futures markets and No2x movement showed that the HODLers have a major say in the Bitcoin economy.

Conclusion

The Civil War is finally over. Bitcoin has had its divorce and there are now two different blockchains: Bitcoin and Bitcoin Cash. What led to this divorce are fundamentally different economic philosophies.

Businesses and people engaged in everyday commerce utilize Bitcoin as a Medium of Exchange and fill up blocks through their transactions. They were frustrated because Bitcoin was making their use case more expensive by not making blocks bigger.

HODLers utilize Bitcoin as a store of value and don’t use the blockchain that much at all. They were frustrated because Bitcoin’s security properties were being endangered to satisfy the needs of the Medium of Exchange people.

At its core, this civil war was about how to utilize money. Is money more important as a Medium of Exchange or as a Store of Value? There really isn’t a scientifically verifiable way to answer that question, but we can come pretty close.

By going their own separate ways we can see which economic theory is correct. One facilitates more transactions and thus increases the velocity of money, but perhaps isn’t as secure due to a newer, less experienced developer team. The other facilitates less transactions at present, but is perhaps more secure due to making everything backwards compatible and utilizing a proven developer team.

I wish both coins the best of luck and may the truth be found.

Discussion
43 Comments
    CFS
    Nov 23, 2017 23:01 PM

    As I have previously stated in this forum, I expect BCH to outperform BTC.

    (Maybe not in value, but in growth of value)

    Nov 23, 2017 23:06 PM

    Where is the source that this article came from? Who is the author?
    When evaluating the Cryptos, one always must consider bias. Does the author own any Crypto and what are they?

    The author of the article in my opinion fails to make the distinction when comparing Keynesian verses Austrian principles whether the benefits to be derived are either short term or long term.

    Those of us that were early investors into Bitcoin automatically received the Bitcoin Cash token when they did their “soft fork”
    There is more going on here. The issue is replay protection. You say REPLAY PROTECTION, WTF?
    This is when you fork from one blockchain and do not provide the protection to use the same Bitcoin on the other. Segwit2X did not provide this . There was a process to initiate the security yourself but it was a major pain in the ass. When Bitcoin Cash did it’s soft fork they had replay protection built in.
    Bit Coin Cash did their fork this past August and those who were in posession of Bitcoin at that time automatically received the Bitcoin Cash token.

    The argument between Bitcoin and Bitcoin Cash as to who will win in the end is interesting,ultimately the newcomers coming into the Crypto space will decide. I own them both so I could care less. Maybe now some of those on this site who tried telling me how naive I was for not selling can understand why I never did.

    French Asset Management Firm Launches Europe’s First Bitcoin Mutual Fund.
    https://www.cryptocoinsnews.com/

    Nov 23, 2017 23:17 PM

    And if you think the Cryptos are out there,check this guy out.
    Monday morning could prove interesting for the price of Gold.
    http://www.foxnews.com/science/2017/11/23/rocket-launch-will-prove-earth-is-flat-california-man-says.html

      Nov 23, 2017 23:11 PM

      Fleetwood Mac-Little Lies.
      https://www.youtube.com/watch?v=Xr9Oubxw1gA

      Nov 23, 2017 23:08 PM

      We have to keep an open mind. It’s hard to get past the
      programming and mind control. Check out the flight pathways for non-stop flights in the southern hemispere.Why did admiral Byrd keep returning to antartica? Why operation fishbowl? Exploding high altitude nuclear rockets? Why? Why did they invent Nasa?

        Nov 23, 2017 23:15 PM

        Careful there spacenormal. Somebody must be running out of Kool-aid.

          Nov 23, 2017 23:30 PM

          I think we’re making headway.Correct me if I’m wrong,but a short while ago you began to question whether nasa sent a man to the moon. By the way NASA in hebrew translates _________ To Decieve. I am running low on my kool-aid

            b
            Nov 23, 2017 23:49 PM

            Aliens run the world.

            Dont tell anyone, its a secret.

            Nov 23, 2017 23:07 PM

            space:
            Irish started it and D.T questioned me about it. I found it funny I had never questioned it.
            I think NASA has been leaking it. They can’t afford to keep it going.
            Funny it would come down to munny.
            Neil Armstrong , NeilA backwards AlieN

            CFS
            Nov 23, 2017 23:43 PM

            Neil Armstrong (ex-Purdue) was actually a friend of my wife.
            He was genuine.

            Nov 23, 2017 23:44 PM

            And NASA went to the moon.Right CFS?

            Nov 23, 2017 23:45 PM

            CFS:
            How many times did I post about Bitcoin before you caught on?

            b
            Nov 23, 2017 23:27 PM

            cfs is obviously “in on it”.

            Nov 23, 2017 23:17 PM

            b:
            Let’s hope so.

    CFS
    Nov 23, 2017 23:11 PM

    I wish I understood the performance of Palladium.

      Nov 23, 2017 23:37 PM

      It’s just a small market that is overdone. It’s a sell while platinum is a buy.

          Nov 23, 2017 23:54 PM

          Got a fair bit of physical ‘mostly’ palladium(60%) both in ingot & shot form in an alloy (mixed with other minor metal %’s, platinum, iridium, gallium etc.
          Going to head to the refinery next week to cash in.
          I have no idea where the price of palladium will go?
          But I know its a helluva lot more expensive now than when I stacked this horde away.
          Going to take the profit & put/add some of it into some areas that haven’t run up as much yet.
          The rest I will spend on family time away.
          You have to enjoy/spoil a portion of your gains with your loved ones imo.

          …..they are more understanding if you do, especially when one of your mining stocks suffer an unforseen event.
          Cheers.

            Nov 24, 2017 24:26 AM

            Congrats on the win and good advice.
            Cheers

    Nov 23, 2017 23:17 PM

    HOUSTON WE HAVE A PROBLEM.
    NASA ADMITS WE NEVER WENT TO THE MOON.
    https://www.youtube.com/watch?v=DpPMoIv1lxI&t=4s

      CFS
      Nov 23, 2017 23:52 PM

      You would be foolish to accept that video on face value as true.

      1. I have not bothered to look up the temperature in the thermosphere, but let’s assume his number of 2000 degrees C is correct.
      It may be correct, but it is irrelevant to the question of melting an Aluminum alloy with a melting point of 500 degrees C.
      What matters is the thermal density and thermal capacity of the thermosphere.
      As the space vehicle goes through the thermosphere, the space vehicle absorbs heat from the thermosphere AND the thermosphere proximate to the space vehicle is COOLED down by the space vehicle. Since the space vehicle is much more dense thermally than the thermosphere, the thermosphere is much more cooled than the space vehicle is heated, by thermal conduction. (The space vehicle is also heated by friction effects, but not greatly.)

      2. The radiation is a problem, but it is a problem which is dependent on the amount of exposure (time) that astronauts are exposed to the radiation, which incidentally decreases approximately to the inverse square of the distance from the sun.
      A human body can withstand the dose of radiation obtained outside earth orbit for times of te order of months before sustaining dangerous levels of DNA damage.
      This creates a problem for permanent surface colonization of the moon, but not for passage to the moon and back; although it does cause a slight increased risk for development cancer, etc. (The human body, even on earth, is subjected to a low level of radiation its entire life.)
      I have not run the actual numbers, but I imagine a trip to the moon is about the same level of danger (radiation-wise) as working in the control room of a nuclear power station for a year. (I am not saying the radiation is the same)

        CFS
        Nov 23, 2017 23:58 PM

        The probes that we have into space e.g. to capture photos of Saturn, Jupiter, etc. are made exactly of the same material as moon vehicles, so if there was a “melting” problem, how can the photos coming back from those probes be explained?

        Nov 24, 2017 24:28 AM

        Excellent point about the density. Temperature is proportional to the average speed of particles in space. The problem is there are relatively few particles that can share their energy with a solid space ship and cause it to heat up and melt.

    Nov 23, 2017 23:43 PM

    Instead of Cryptos, might be time to take another position in Aluminum
    https://ih1.redbubble.net/image.28543641.9231/papergc,441×415,w,ffffff.2u2.jpg

    Nov 23, 2017 23:56 PM

    Crypto currencies are the alternative to fiat. Crypto is vapor that can be counted and has a limit of its use (can’t buy much with it ). Fiat has no accountability and can be created in many ways, but you can buy stuff with it. And it still is vapor paper. Fiat is debt instrument, and crypto is a belief instrument. Fiat in based on credit and faith. Both are the same in one way. They are nothing but a vapor paper caper.

    The gold standard is the only way to off-set the massive debts that the fiat currency and fiat bonds have created. Crypto currency will not fix the problem. When the gold standard happens (and it will) crypto and fiat are gone.

    My belief is: when the gold standard happens, all bullion will be on a block chain type system that will cause gold and all real assets to go parabolic.

    If it walks like a duck, and quacks like a duck, it’s probably a turkey. Happy Thanksgiving!

    Nov 23, 2017 23:15 PM

    Chartster:
    Your another we can add to the list that doesn’t own any Bitcoin.
    Tell me I’m wrong.
    (can’t buy much with it) What a bunch of Crap!
    Before you buy something with Crypto, you have to have some Crypto. And it is more than evident that you don’t.
    Keep going Chartster,the only turkey here is you.

    Nov 23, 2017 23:24 PM

    You’re correct, JohnK.
    I really do wish I had a bunch of Bitcoin to “sell”.
    So I wouldn’t get ” bit by the coin “. 😬

      Nov 23, 2017 23:58 PM

      Chartster:
      Let’s hope your right about Gold.

    Nov 23, 2017 23:20 PM

    For all the haters.
    1324 Crypto Currencies/6898 Markets
    Mkt Cap 254,097,694,913
    BTC Dominance 52.7%

    Nov 23, 2017 23:12 PM

    St George (SGQ)
    Have an average in at 0.0835 cents in Aussie $
    Kaboom this week.
    Got a bucket of oppies in the filing cabinet for being a loyal shareholder too.
    Happy week.
    Cheers.

      Nov 24, 2017 24:25 PM

      Skeeta – I’ve been watching St George carefully but the recent surge shot it into overbought territory for the short-term, so I’m waiting for a pullback. Nice Copper/Nickel project.

        Nov 24, 2017 24:24 PM

        Ex,
        They are drilling around the clock 24/7.
        They had a minor pullback on friday, I laughed.
        News will flow thick & fast from this project.

          Nov 25, 2017 25:17 AM

          Thanks Skeeta. It is on my shortlist for base metals. There are a few more ahead of it in the cue on my batting order.

    Nov 25, 2017 25:17 AM

    Bitcoin vs Bitcoin Cash? This is quibbling over the name. There already exists many alternative coins (altcoins) for daily transaction speed such as Litecoin, Monero, Dash, etc. So what if Bitcoin is slow, expensive, and chunky? Let the programmers do their work to improve things. Bitcoin Cash was unnecessary, but now that it is here, use it if you want to. Or not. Your choice.