TAYLOR PEARSON: We're living through an anomalous period in a sense of historically, most people worked for themselves or worked in small organizations. The next-- I don't know-- two, three, four, or five years, things will continue to develop. But a lot of-- the main use case for bitcoin or cryptocurrency right now is speculation.
My name is Taylor Pearson. I'm the author of The End of Jobs.
What is the selectorate theory, and how does it pertain to Bitcoin?
So what is selectorate theory? It was developed a political scientist named Bruce Wayne. And basically, his idea is why are democracies better than dictatorships. And he calls it-- he has this idea the selectorate, the number of people who have a say over the political process, so sort of his lineage. Presidents aren't intrinsically better people than dictators. They're just limited in what they can do, this idea of checks and balances.
And so when you look at governments, governments that tend to have large selectorates tend to be more stable over time. It's harder for one individual to corrupt, but they trade off a lot of efficiency. When you complain about things getting done in Congress, or what's going on politically, it's not a perfectly efficient system. And that's sort of by design.
Whereas you think about a dictatorship, it is very efficient. And that efficiency can go either way. You look at Lee Kuan Yew in Singapore was able to get a lot done because he had near dictatorial powers. He had a lot more control than, say, a president of the US would. You bring this story in the context of blockchains and money, and what Bitcoin did was it traded off-- it made a different choice on this selectorate spectrum.
So bitcoin is unlike a lot of fiat currencies today. There's not one group or a small number of groups of individuals that can change exactly what's going on. Anyone is able to run what's called a full node, and that effectively gives them some say into the monetary policy in terms of how the government-- how the network is governed. I think you can put any system on this selectorate spectrum.
On one end is Mark Zuckerberg, Facebook, move fast and break things. The other end is move slow and don't break things. If you're building a consumer web application, you can move fast and break things. The fact that someone can't see their cat photos for half an hour-- if the system goes down, it's not that big a deal. If you're building a nuclear power plant, you're not going to move fast and break things.
You going to move very slow. You're going to have huge levels of redundancy. You're going to have a backup generator to the backup generator to the backup generator, because the cost of messing that up is large. And so you bring that into bitcoin and cryptocurrency. And bitcoin, in my mind, makes a different tradeoff on that selectorate spectrum. It's relatively hard for anyone to change. The selectorate is larger, which in a sense reduces its short-term efficiency. You can't aggressively change the monetary policy of bitcoin in response to some sort of crisis or shock or whatever. There's a huge pool of people that you'd have to get onboard in order to change that.
You can look at other cryptocurrencies or the crypto networks, and they make different tradeoffs along that spectrum, in general tend to air more on the side of robustness as opposed to efficiency and the move slow and don't break things as opposed to move fast and break things.
What tradeoffs between robustness and efficiency have cryptocurrencies made?
One of the areas where this comes up is in terms of how you scale blockchain. So if you look at the different projects-- I'll take ethereum and bitcoin as the two well known-- they made different tradeoffs on that selectorate spectrum. If you look at bitcoin's roadmap, the development
Schedule that happens there, it's much slower. It's much more of a move slow and don't break things. The changes are mostly incremental. They're significant and important, but they're not trying to engineer the network. Whereas if you look at something like Ethereum or some of the smart contracting platforms, they're further down that spectrum of move fast and break things. They're doing-- the roadmap two years out depends on fundamental computer science research, understanding these tradeoffs better, whereas two years after Bitcoin is mostly implementing cryptographic systems that were developed in the 1980s and 1990s.
It's not nearly as ambitious in that sense. But the Bitcoin group would argue that what you're doing there is you're trading off that efficiency for robustness, for being able to trust the solid foundation of the network. And when you're dealing with something like money, that's more important. It would be nice if your money was more easily programmable, and it can do all these things. But really, what you want it to do is you want it to hold value. You want to know it can't be quickly inflated away. You want to know it's not going to get a bug and disappear overnight or whatever.
And so where on that spectrum we end up, I think, is one of the big questions with the different projects. And I think different products are making different tradeoffs along that spectrum.
What's the tension between centralized and decentralized systems?
One of the ways the selectorate spectrum plays out in practice is that a lot of times, things that look efficient in the short term end up being inefficient in the long term. There's a book called Seeing Like a State by a guy named James C. Scott. He's a Yale professor. And it tells a story about German forestry in the 17th, 18th century. And basically, the German state wanted to make forests more efficient. They wanted to make them produce a greater quantity of timber so they could use them for building warships, people's homes to be able to burn wood.
And so they took all these-- what he would call a legible forest, just natural, old growth forest. And they put them-- one species, they put it in straight lines. And they called it scientific forestry. And so this was much more efficient in the short term. The quantity of timber produced went up. It became more predictable year over year.
But they found maybe 50, 100 years later that what happened is there was this complex ecological system going on in the forest that we still don't fully understand. And they had waldschäden, which was a German word for forest death. So you had one virus come through. And because you had this monoculture of trees that were all lined up as opposed to-- in a natural forest, trees tend grow in these isolated groves. So you have one virus coming in. It takes out a grove. You lose 2% of the forest, but that's not catastrophic. Whereas you have the scientific forest with all these things-- with all the trees in a row, and you lose everything at once.
And so there's always this question of you're looking at a political system or you're looking at an economic system, making different tradeoffs on this efficiency-robustness spectrum. And sometimes the things that look very efficient in the short term may, in fact, just be delaying that risk. They're just pushing that risk off into the future. And so looking back at these crypto networks, like bitcoin and ethereum, if some of the networks are able to move quickly, break more things, and that ends up not costing them in the long term in the robustness, that might allow them to get the lead and become more popular, more valuable.
Whereas the flip side is, well, are they trading off all this robustness in order to get efficiency, and that's going to come back to bite them? It's going to be like the German forest story. And I think comparing cryptocurrency and bitcoin in particular against other forms of currency, or just other systems in general in the world, I think they tend to air more on that side of focusing more on robustness and not as much on efficiency.
How do you make blockchain scalable without sacrificing trust?
So if you think about what Bitcoin is, it's a ledger. It's a list of transactions. So a bitcoin block is a list of transactions with some associated metadata. And if you look at the whole history of the bitcoin blockchain, you're basically just looking at a list of transactions, of money or value or bitcoin moving between two parties. So if you think about these on an abstract level, you can say, well, what else is a ledger.
And almost everything is a ledger. Economists call firms a nexus of contracts. Google has a network of contracts and ledgers with its employees of who it's employed, and how much they're paid, and what they do, with advertisers it sells to. With consumers they use a search engine. In the same way, government is a list of ledgers-- tax records, property titles. These are all things that are ledgers which you need some sort of centralized entity to administer.
So will blockchains disrupt these large corporations? If you go back particularly 2017, a lot of the narrative in the crypto community was about we were going to build a decentralized Facebook, a decentralized Twitter, a decentralized Amazon. Because now, all of a sudden, we had this technology where we could agree on rules without a ruler. We could have a set of rules, and we could have a decentralized-- a network of a larger selectorate that was enforcing those rules, and people were working with them. I think that narrative has shifted as people have realized a lot of what these internet platforms do is not the highest trust thing.
No one is super worried-- at least consumers so far don't seem to be super worried about Facebook and their data, or Amazon and their data, that kind of stuff, and looking more to the high trust Sectors. So now the narrative has shifted, and this makes more sense to me towards looking at money as the original thing, but then financial services emerging around that in situations where you need high levels of trust.
And currently, the high transaction costs of blockchain-- if you want to send a bitcoin transaction, it's a few dollars today. And it's been as high as $50 or $60. It's something you're willing to pay for that. There was a book, a sci-fi book that came out in the '90s called Cryptonomicon by Neil Stephenson. And it imagined this e-cash, this digital cash, digital gold that was built by the grandson of a Holocaust survivor as this idea of what if all you need to move your wealth was to remember a 12-word passphrase in your head. You could have-- someone in the Holocaust, a Jew in Germany in the 1930s could've walked out of the country after converting their wealth into bitcoin.
What about gold and selectorate theory?
So if you think about the history of gold as money, you can almost say gold has like a large selectorate. And that selectorate, in a sense, is just geologically how it's distributed in the Earth. Over the last 100 years or so, there's been a relatively predictable supply schedule, if you will, for gold. Something like 1% to 2% a year on average is how much you take out of the ground, and there's not a huge variation with that. You can contrast that with a fiat currency or something where someone can print more. You could have years in which-- I don't know what Venezuela's is this year. It's like 10 million percent a year or something insane.
And so you think about gold, or just commodity money in general-- particularly gold has made this tradeoff more on the robustness side but gives up that efficiency. If there is a situation-- you look at different economic histories since the Great Depression. There's lot of debate over to what extent the gold tender played a role, how things would have been different if you'd stayed on, if you'd gone off sooner, and all those sorts of pieces. So gold does make this clear tradeoff similar to Bitcoin.
I know a lot of people call bitcoin digital gold, and a lot of people that are involved in the bitcoin community came from the gold community because they see it as this more robust-- in some ways, gold is inflationary, albeit very slightly inflationary and relatively predictable, whereas bitcoin is deflationary. And also, the supply schedule is totally programmatic. We don't know for sure how much gold is going to come underground next year if new gold is going to turn up. But we know-- it's programmatically defined exactly how much Bitcoin is going to be created over the next 12 months.
Keynesians, Austrians, and selectorate theory.
I would characterize the debate between Keynesian economists and Austrian economists and how they view the world on this selectorate spectrum. What the Keynesians are saying is humans can be irrational. We have these cycles the markets go through. If we have someone that can come in, and they have more control over the monetary policy, they can come in, and they can even out these cycles. And they can make it cleaner and more stable over time. So you can make it more efficient. We can trade off some of this robustness for some efficiency.
And that's better in the long run, because we're not giving up too much robustness. Whereas the Austrian School, which a lot of the Bitcoin community comes from the Austrian economics background, feels, more on the opposite-- that you're trading this efficiency in the short term. You're doing the same thing the German forestry people did. You're getting a lot these short-term efficiencies, but you're building up risk. You're delaying that risk, and you're pushing it off into the future. And it's going to come back and blow up at some point. So in a way that, bitcoin is a way for Austrians to express that view in a different form than gold.
We started this experiment after the Second World War, and probably particularly when Nixon took the US off the gold standard in full in 1973 in terms of a different tradeoff point on this efficiency-robustness spectrum. And there's two ways you can look back on the last 50 years or so. And one is, actually, this is more efficient. The economy has grown tremendously. We've been able to smooth out the cycles more than we would have otherwise. And this is just a better, more efficient system. And that's a Keynesian view. That would be Paul Krugman's view if you were to characterize him, I think.
And the Austrian view is, well, what you've done is you've done the same thing as what the German forestry people did. You've increased the yield of timber in the short term by pushing off this risk into the future. But there could be this big potential blowup that is worse than if we had moderate volatility. In the meantime, we're pushing off this extreme volatility into the future.
What's next for the cryptocurrency space?
There's the famous quote from Bill Gates, something like we all overestimate what's going to happen in the next two years but underestimate what's going to happen in the next 10. And so I think that that's the same sort of thing here. The next-- I don't know-- two, three, four, or five years, things will continue to develop. But a lot of-- the main use case for bitcoin or cryptocurrency right now is speculation. It's for people to trade and try to make money. I think in the short term, that's probably what it continues to look like.
Money is the first use case. If you talk to someone that's involved in China, that the Chinese oligarch or someone that's trying to squirrel away some of their money outside the view of the Communist Party, it doesn't really care that the transaction costs $100 or even $500 or whatever. That's not the point for them to be able to move it once. And so that's-- if you look where the technology is right now, that use case already exists. Bitcoin is interesting because you don't need to make any breakthroughs in computer science or how these networks are constructed. Again, mostly what's going on is marginal.
And I think over time, we'll start to see different types of scaling solutions. And there's a lot of these that are being worked on now that allow for you to do more and more transactions that allow for things like financial services. And eventually, similar to the internet platforms, you can have mesh networks where everyone is compensated in tokens. Or you could have-- you can imagine driving your car down the street, your automated vehicle. And you can pay more or pay less in the streaming payments to all the cars around you. If you want to go faster, you can pay them to speed up. If you want to go slower, you can slow down.
But I think that's maybe 20 or 30 years off. And I think the other component of that, too, is that the gig economy is everywhere. If you have this way to transfer value as well as information in a trustless way, you can imagine a world 20 or 30 years from now that's something more like the Hollywood model. You have people that can come together and work on these big projects, but the idea of corporations as we thought of them over the last century changes dramatically. And we are closer to something almost feudal or 19th century where you have small landholders, artisans, that kind of thing.
What is the selectorate theory and how does it pertain to Bitcoin?
What trade-offs between robustness and efficiency have cryptocurrencies made?
What is the tension between centralized and decentralized systems?
Making Blockchains Scalable Without Sacrificing Trust
What about gold and selectorate theory?"
Keynesians, Austrians and Selectorate Theory
What's next for the cryptocurrency space?