Bitcoin’s ‘Lightning Network’ Let-Down, Part 2: A Solution to One Problem, a Source of Another

Summary

• Bitcoin may be unique, but it faces competition.
• Centralisation in ‘Lightning Networks’ will increase competition further.
• An IMF/World Bank SDR global currency has much official support.
• Gold may re-emerge as the pre-eminent international money.

In Part I of this article we explored how so-called ‘Lighting Networks’ might make bitcoin both more convenient and less costly to use, but at the cost of sacrificing its decentralised nature, a key feature for many advocates. If bitcoin use thus coalesces into networks with some degree of centralisation, then bitcoin will need to compete as a monetary alternative with other potential stores of value that also trade in such fashion.

So what might those alternatives be? Other digital coins come to mind, or tokens backed by real assets of some kind. Bitcoin might have a first-mover advantage as the first blockchain-based digital currency, but as with most technologies over the past decades, those holding great promise and huge first-mover advantages tend to succumb to one or more successor technologies over time. And the best technologies do not always win in their own time, much less the future. Think Betamax for example.

What about a global currency, such as that which the IMF has proposed, based on the special drawing rights (SDR) unit of account? Much academic work has been done on the idea, and the SDR basket has already been adjusted to account for China’s spectacular economic rise over the past few decades.

The problem with using a currency basket as the international monetary base lies in the politics, or game theory. Legendary French economist Jacques Rueff was highly sceptical that the SDR could ever work as a practical international money rather than merely a unit of account for supranational financial institutions. He correctly observed that, as structured, the SDR could only provide an inherently unstable global monetary equilibrium. As I write in my book, The Golden Revolution, Revisited:

An SDR-based system would suffer from an inherent moral-hazard problem encouraging deficit spending and domestic inflation, which would periodically spill over into international monetary crises. Under Bretton-Woods, only the United States enjoyed the ‘exorbitant privilege’ of being able to effectively force creditor countries to finance its trade and budget deficits at low interest rates. Under an SDR-based system, any country running trade and budget deficits would have the privilege.

Were Jacques Rueff alive today, he would probably see an SDR-based solution as even more unworkable than in the late 1960s, given the current degree of monetary instability and lack of global cooperation in economic and monetary affairs, both of which are an order of magnitude greater (pp. 148-9).

How about tangibles? Precious metals might seem passe. But when it comes to providing a stable, neutral, international monetary base, one candidate stands head and shoulders above all the rest: gold.

Gold and silver have provided the de facto monetary base since ancient times, perhaps even pre-historic, as some anthropologists claim. The global monetary and financial system may have evolved rapidly at times, such as during the Renaissance or, more recently, when banking began to link up with telecommunications networks in the 19^th century. Notwithstanding such technological advances in payments, settlements and banking generally, gold continued to provide the global monetary base in some fashion all the way into the 1970s. Bitcoin may appear to be another great technological leap forward, but if bitcoin can only work efficiently as an international money if transactions are processed by centralised, regulated national networks, what makes it different than similarly centralised and regulated gold-based digital networks?

Well, bitcoin is intangible, for one. It has zero non-monetary use cases. It has no tradition, cultural or religious, behind it. It can be replicated in all essential properties for essentially zero cost. It can only be stored through millennia if the cold-storage hardware is maintained adequately and the source code or codes are preserved and understood through the generations. One can imagine bitcoins being discovered in some future archaeological site, only to be retrievable by first deciphering and translating a blockchain ‘Rosetta Stone’ of sorts.

Gold, as a natural substance made in supernovae or possibly stellar collisions, is neither creatable nor replicable in its physical properties. It is neutral and international, weighing the same and having the same density of value the world over. It can be stored safely for far less cost than the implied cost of maintaining the bitcoin network, which consumes far more electrical power. A future archaeologist discovering some gold at a dig site will be able to identify it and realise its current market value expeditiously with almost zero friction (absent legal claims such as those made for the gold recovered from shipwrecks or other lost hoards).

Gold: The Once and Future International Money

These are but a few of the reasons why gold and also silver have served as the preeminent international monies for the bulk of recorded human history. Bitcoin may have certain advantages over precious metals, but when it comes to practical use cases, it has yet to establish itself and may never do so. Yet today, a walk through the souks of Dubai or street markets of Delhi makes plain that gold is still a de facto money in much of the world, is highly liquid, is near-frictionless and contains none of the devaluation, credit or counterparty risk associated with modern banking systems.

Bitcoin therefore has a long, I would argue Sisyphean, hill to climb if it ever wants to emerge as the pre-eminent international money. Not only must it displace the dollar, although something else almost certainly will over the coming years. It must also displace all national fiat contenders. And it must also displace gold, which has served the role through the ages, and in the background of the international monetary system, run by central banks holding it as reserves, still does.

I admire bitcoin. I really do. Blockchain is an elegant technology with a potentially vast number of use cases, such as smart contracts and inventory and supply-chain management. But could it ever emerge as the pre-eminent international money? I doubt it.

That does not change the fact, however, that the dollar’s days as the pre-eminent global trade currency are numbered. And so I close here with the core thesis of my book, The Golden Revolution, Revisited: ‘Gold provides the only game-theoretic monetary equilibrium for a multipolar, globalised world.’

1. Among other of his discoveries, Shannon realised that the core tenets of nascent information theory used fundamentally the same physical equations used in classical thermodynamics. In other words, there is an entropic cost to creating, transmitting, receiving and processing information. While inside the system the information (enthalpy) can be conserved, information activities nevertheless must add to the overall entropy of the broader universe.

   Yet today, while physicists understand this, technophiles sometimes don’t, hence claims such as that batteries are a ‘clean’ technology, when in fact their raw materials mining and manufacture is amongst the dirtiest, most dangerous and poisonous of so-called ‘green’ industrial activities. ↑