The Socio-Technological Life of , or Why Bitcoin was Never Meant to be Money

Abstract ‘Bitcoin,’ ‘,’ and ‘’ have become buzzwords in the media and are attracting increasing academic interest, mainly from the fields of computer science and financial economics. However, its status as a compelling object of research more broadly in the social sciences has remained elusive. In the Social Life of Bitcoin, Nigel Dodd (2017) breaks the sociological ice and begins an earnest and provoking inquiry into Bitcoin and its role qua money. In this essay, I both extend and critique Dodd, arguing that cryptocurrencies and are indeed an important object of social science research and thought, but not for their moneyness per se. Through a historical sociology of the antecedents and discourse leading up to Bitcoin, I show that it was never meant to be money in the economic sense, but rather a solution to the technical puzzle of preventing opportunistic actors from “double-spending” digital ‘coins’ as well as a fervent ideology surrounding online privacy and infringement of individual rights in the digital age. Then, drawing from science and technology studies, I suggest that Bitcoin and other ‘cryptoassets’ are properly socio-technological assemblages that constitute new and important ontologies relevant to economic, political, and social life: as systems of accounting, as organizational forms, and as institutions in their own right.

Keywords: Bitcoin, blockchain, economy, money, technology, technoculture

Introduction

“The foundation is being laid for a dossier society, in which computers could be used to infer individuals’ life-styles, habits, whereabouts, and associations from data collected in ordinary consumer transactions. Uncertainty about whether data will remain secure against abuse by those maintaining or tapping it can have a ‘chilling effect.’” (David Chaum, 1985: 1030) Bitcoin, cryptocurrencies, and blockchain have become buzzwords in the media and are attracting increasing academic interest, mainly from the fields of computer science and financial economics. However, its status as a compelling object of research more broadly in the social sciences has remained elusive. Nigel Dodd (2016, 2017) helps breaks the sociological ice and brings Bitcoin into focus as an object of social inquiry, challenging the notion that Bitcoin is ‘trust- free’ money (but see also Bjerg 2016 and Nelms et al 2017).1 Dodd sets out by citing what seems to be a paradox: “if Bitcoin succeeds in its own terms as an ideology, it will fail in practical terms as a form of money.” I agree with this point, yet it confines our analysis in that it relies on the implicit assumption that Bitcoin is meant to be ontologically equivalent to money in the first place. Dodd reasons that if Bitcoin operates as a mere monetary automaton, then it obscures the social forces and grassroots movements that undergird it, writing, “the idea behind Bitcoin is premised on denying what I believe is Simmel’s most important insight into the social life of money: by treating money as a thing, not a process” (Ibid.: 20). I build on this sentiment and argue that there are imperative technical and social processes of Bitcoin that transcend its status

1 qua money. Drawing from science and technology studies, I suggest that Bitcoin and other ‘cryptoassets’ are properly socio-technological assemblages (Latour 2005), which are indeed of sociological interest but not because they operate as money par excellence. Rather, it is what these assemblages accomplish: they bring people together directly through the radical disintermediation of institutions, which are in turn superseded by a technological locum. By ‘radically disintermediate,’ I mean that Bitcoin and its descendants enable purely peer-to-peer transfers of property rights without the need for a trusted third party to ensure a credible commitment. The implications are indeed significant. It is commonly held that one of the critical roles of the state is to enforce property rights (e.g. Demsetz 1964; Besley and Persson 2009; Campbell and Lindberg 1990). Enforcement by the state is posited to reduce self-enforcement costs which increases the value of assets and incentivizes economic growth and prosperity (Alston and Mueller 2008). Even in the most extreme minimalist libertarian versions of a ‘Night- Watchman State,’ one of the goals of the government is still to enforce property rights (Nozick 1974; Titmuss 1974). The interpretation that the fundamental trust embedded in money has simply been transposed into “machine code” while severing all ties with social relations is thus misplaced. In fact, by engendering true peer-to-peer interactions, (e.g.) Bitcoin fosters more direct social relations however mediated by technology. Will Bitcoin (or some other ) succeed or fail at being money? – is consequently the wrong question to ask. The imperatives are instead existential: what is Bitcoin or blockchain and how does it structure social interaction. I begin my inquiry by mapping the antecedents of Bitcoin and how it arose using an analysis of archived online discussion forums, personal web pages, and email exchanges of important actors; as well as from a literature review of key developments found in the academic literature of applied from the 1980s and ‘90s. Dodd (2016) does an excellent job in touching on many of these origins episodes in The Social Life of Money (ch. 8), but I seek to elaborate on these in order to show that Bitcoin was not meant to be a prototypical internet money per se, but rather a particular tool-set used to disintermediate institutions and enable peer-to-peer transfers of private property rights – where monetary instruments are but one possibility. Looking at the historical sociology of what would become Bitcoin, it becomes clear that being a “good money” (in the economics sense) was not an ongoing concern. In fact, those most influential to the Bitcoin project publicly conjectured that a cryptocurrency would be more akin to a collectible or a commodity than money. The primary drivers in Bitcoin’s development were thus patently non- economic and comprised: (1) the technical puzzle of preventing opportunistic actors from “double-spending” digital ‘coins’; and (2) an ideology of online privacy in the digital age. The first section of this paper traces the development of the necessary pieces that will come together to ultimately create Bitcoin. These pieces are technological artifacts in the form of inscriptions: theory, formulas, design elements, and lines of computer code. These pieces, moreover, come to be loaded with symbolic meaning based on a worldview where computerization creates vulnerabilities and concerns over confidentiality and surveillance of individuals by corporate or state actors.

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In the second section, I propose alternative ontologies for understanding what Bitcoin is by abstracting from it the underlying socio-technological assemblage that is the blockchain. I propose that blockchains can be interpreted variously as systems of accounting, as an organizational form, and as institutions in their own right.

Trust in the System Pecunium ex machina

Ever since the dawn of the computer age, the idea of creating a digital form of money had been both intriguing and vexing. How can one prevent something like money from being counterfeited when it exists in computerized form? How can one prove it is they who are in possession of a virtual ‘coin’? How can such a money be securely stored and transferred between computers? How can anonymity be preserved in a system where digital traces are recorded all along the way? The true origins of cryptocurrencies such as Bitcoin (which emerged in 2009) do not begin with radical notions of disintermediating money from the state or disrupting central bank hegemony. Instead, it begins by seeking answers to the practical questions listed above, which are concerned with solving fundamental problems provoked by an existence in ‘cyberspace.’ Meanwhile, economic notions of what constitutes moneyness (e.g. as a medium of exchange, a store of value, a unit of account; durable, fungible, transportable, etc.) were negligible and inchoate throughout this discourse. In reality, the humble beginnings of cryptocurrencies and blockchain technology – a technology which may indeed prove to be a revolutionary force in modern social, economic, and political life – began with a group of young academics (although none of them economists) trying to solve a set of intellectual puzzles. In 1982, an international group of researchers - mainly mathematicians and computer scientists - met for the 2nd annual CRYPTO conference in Santa Barbara, . Among the attendees was a newly minted 27-year old Berkeley PhD in computer science and business administration named David Chaum. He presented a brief 5-page summary of his dissertation thesis entitled Blind Signatures for Untraceable Payments (Chaum 1983), outlining how cryptography could theoretically be applied to create a secure, anonymous digital form of cash – the first known reference to what will become a cryptocurrency. 2 The innovation was in using a pair of cryptographic “keys,” one known publicly coupled with a private key that only its owner retained. The public key would function as an identifier or digital , much like a bank account number; the private key would be used as a “blind” digital signature proving that the public key in fact belonged to the party in question while preserving agents’ anonymity. Concerned with the implications of an impending computerized age, Chaum (1983) was prescient: “Automation of the way we pay for goods and services is already underway, as can be seen by the variety and growth of electronic banking services available to consumers. The ultimate structure of the new electronic payments system may have a substantial impact on personal privacy” (199). Chaum, however, did not seek to disrupt the financial system; rather, he

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sought a way to protect consumers in the digital age by working with existing institutions. Chaum founded a private company called DigiCash in 1989 to realize the goal of protecting online transactions through cryptographically secured, anonymous ‘ecash’, aligning with several banks including Mercantile Bank in the U.S. and Deutsche Bank in Germany.3 But, DigiCash was apparently ahead of its time. The company filed for bankruptcy in 2002 after failing to gain support from both end users and financial backers. Throughout the 1980’s and the 1990’s, the CRYPTO conference, along with its European and Asian extensions, continued to attract ambitious young scholars where they built on Chaum’s groundbreaking idea (among other topics) and to put forth alternative digital cash protocols. For instance, at the 3rd annual CRYPTO conference in 1983, a trio of Israeli computer scientists introduced the concept of an ‘electronic wallet,’ designed to store “unforgeable amounts of digital money” and enable unforgeable transactions between other such wallets, using a “public key cryptosystem” (Even et al. 1984). To this day, cryptocurrencies are held in what are colloquially known as wallets, and which are based on their work. Soon enough, a major technical hurdle began to undermine the theoretical developments made thus far: the so-called “double-spend” problem. What is to prevent anyone from making several copies of an electronic coin and using them at different locations or with different counterparties? In 1988, Chaum returned to the CRYPTO conference with co-authors Amos Fiat and Moni Naor to propose a solution to this problem. Using additional cryptographic methods known as zero-knowledge proofs they could “allow a bank to trace a ‘repeat spender’ (aka Alice) … so that the bank can supply incontestable proof that Alice has reused her money” (Chaum, Fiat, & Naor 1988). The significance of a zero-knowledge proof is that you can demonstrate the veracity of some fact without knowing what the fact is. The following example adapted from Quisquater et al. (1989) illustrates the fundamental intuition behind a zero-knowledge proof: Suppose your friend has discovered a magic codeword which unlocks an enchanted door located inside of a ring-shaped cave. Your friend refuses to tell you the magic word and you are suspicious of the authenticity of her claim. How can you confirm that she indeed knows this fact without knowing its contents? The cave has two forking paths A & B, one heading to the left the other to the right and which meet each other at the far end of the ring – where the magic door sits. Your friend enters the cave and takes either path A or B at random without you seeing which way she went. You then shout into the cave and tell your friend which path she should exit from. If she indeed knows the magic word, she will consistently follow your instructions since she can unlock the door and proceed around the ring. However, if she does not know the magic word there is still a 50% chance that she will still exit from the path you choose. However, if you repeat this task again and again the probability that she follows your directions by chance alone quickly approaches zero. Thus, you can conclude that she knows the magic word without knowing what it is. With this same logic, you can know if a digital coin has been double spent without knowing anything about Alice.

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At CRYPTO ’89, a pair of Japanese researchers from the Japanese telecom company NTT DoCoMo, Tatsuaki Okamoto and Kazuo Ohta (1989), improved upon this zero-knowledge design and proposed a new type of electronic cash, which for the first time could be subdivided into many pieces (p.481). Four years later, Brands (1993) showed how cryptographic protocols could be employed by an issuing bank to prevent double-spending of a digital coin proactively instead of detecting it after the fact. Each of these innovations was incremental, building off an existing literature and solving technical problems as they presented themselves, or what Kuhn would call “normal science.” By now, the use of cryptography effectively allowed for a virtual coin to be securely held and transferred anonymously between parties, however the solution to the double-spend problem still rested in some trusted third-party. In each of the above solutions, a bank or “mint” validates that a coin has not be spent by using a zero-knowledge proof and then issues new unspent coins to replace those that have been already used. In these cases, the fidelity – and indeed the value – of the system ultimately boils down to trust in that third-party. For many of us, the story would stop here – since we routinely trust third parties. We trust in the government, the central bank, the commercial banking system, the credit card operators, the regulators, the law – to ensure that economic transactions and property rights are sound. Why do we need to disintermediate such a third party and hand over the reins to some decentralized algorithm? The answer is an ideological one. As Dodd (2017) points out, the appeal to such a disintermediated money has found favor among groups as disparate as libertarians and anarchists to hippies and Cyberpunks [sic]. While each of these groups has for their own reasons mistrusted the government in one way or another, I turn my attention to the , whose members actively participated in the creation of Bitcoin. While Chaum did express some moral underpinnings to his research, much of what came after was strictly academic. The Cypherpunks, an influential group of thinkers, technologists, and software developers picked up where solving the double-spend problem left off and valorized the theoretical foundation laid above with an ideological practice.

In Crypto We Trust

Timothy May was an early engineer at Intel who solved some very important technical issues surrounding silicon chip fabrication (Greenberg 2012), but he is best known for his active role in an online mailing list known as the Cypherpunks which appeared in the early 1990’s and attracted as many as 700 subscribers at its peak (May 1994). The term ‘Cypherpunks’ was coined by the late computer hacktivist Judith [St. Jude] Milhon to acknowledge the spirit of the movement: the goal of privacy through encryption (where cypher alludes to cipher, or coded text). Tim May (1994) penned the ’s platform, the Cyphernomicon, where he spelled out the group’s ambitions: that the government should not be able to snoop into peoples’ affairs; that protection of conversations and exchanges is a basic right; that these rights may need to be secured through

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technology rather than through law; and that the power of technology often creates new political realities. Taken to its ideological extreme, some members of the Cypherpunks movement advocated for a crypto-anarchy, where governments and institutions are effectively replaced with technological solutions that ensure individual freedom, prosperity, and above all privacy. The Cypherpunks also revered the work done by the academic cryptographers. One of the first to pick up on this research was Hal Finney, a computer scientist helping to develop an encryption protocol called ‘pretty good privacy’ (PGP).4 (Despite its modest moniker, there is no known method which will allow a person or group to break PGP encryption by analytical or computational means (Schnier 1995)). In a November 1992 blog post, Finney writes:

Here we are faced with the problems of loss of privacy, creeping computerization, massive databases, more centralization - and Chaum offers a completely different direction to go in, one which puts power into the hands of individuals rather than governments and corporations. The computer can be used as a tool to liberate and protect people, rather than to control them. Unlike the world of today, where people are more or less at the mercy of credit agencies, large corporations, and governments, Chaum's approach balances power between individuals and organizations.5 The first crypto-application that came out of the movement was an anonymous re-mailer, a server that receives email messages and then forwards them on to their intended recipient removing any identifying information of the sender. On the surface this kind of application might seem esoteric, however it speaks volumes to the worldview shared by this group and the ideology embedded in their software. Finney continues:

[Re-mailers] represent the ‘ground floor’ of this house of ideas - the ability to exchange messages privately, without revealing our true identities. In this way we can engage in transactions, show credentials, and make deals, without government or corporate databases tracking our every move as they can today. Only by securing the ability to communicate privately and anonymously can we take the next steps towards a world in which we each have true ownership and control over information about our lives.5 In May 1993, fellow Cypherpunk posted online a similar sentiment:

Most e-mail users are unaware that it is the most public medium ever invented, and use it to write love letters, letters to their lawyer, discussion of illegal activities, etc. Vast volumes of e-mail can be stored on small magnetic tapes and searched in bulk for keywords, eg "mari[jh]uana". The good news is, the computer brings an even greater weapon to fight these threats to our privacy and political freedoms: widely available, automatic cryptography.6 What is clear from these excerpts is a shared belief that the widespread use of information and computer technology poses an existential threat since governments or other powerful actors can eavesdrop on private affairs. But, at the same time it also technology which can be used to restore personal privacy. Privacy is not secrecy; Eric Hughes, a mathematician and founding

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member of the Cypherpunks explains, “a private matter is something one doesn't want the whole world to know, but a secret matter is something one doesn't want anybody to know. Privacy is the power to selectively reveal oneself to the world.” It is privacy, and not secrecy that was sought after. One of the main ambitions, and indeed one of the recurring themes, of the Cypherpunks was to create a secure digital cash in order to ensure privacy of transaction records and avoid snooping from the government or competitors – and this meant a particular type of digital money that could pass directly from one person to the other without a banking system or government agency facilitating that transaction in any way. “[P]rivacy in an open society requires anonymous transaction systems. Until now, cash has been the primary such system” (Hughes, 1993). In the late 1990’s Nick Szabo proposed a precursor to the Bitcoin system, known as Bit gold. Szabo was enamored with the notion of purely peer-to-peer transfers of ownership and property rights using encrypted computer networks. Of particular concern was the perceived ability of the state or other powerful actors, especially in times of political instability, to destroy or confiscate property such as homes and land or their corresponding property records. Even in times of political stability, Szabo noted that property owners often feel the need (or are compelled) to purchase title insurance to validate ownership. Szabo (1998a) proposed a solution based on combining the cryptographic methods developed in the 1980s:

[W]ith new advances in replicated database technology [that] will give us the ability to securely maintain and transfer ownership for a wide variety of kinds of property, including not only land but chattels, securities, and monetary instruments. This technology will give us public records which can ‘survive a nuclear war’… While thugs can still take physical property by force, the continued existence of correct ownership records will remain a thorn in the side of usurping claimants. This idea of a secure record of property rights enforced by a replicated database sows the seeds for what will become blockchain technology. A blockchain generically is a decentralized, distributed and public digital that records every transaction in linear, chronological order replicated across many computers so that records cannot be altered or deleted retroactively without the alteration of all subsequent blocks and without the collusion of most nodes in the network. Szabo (1998a) relates how such a technology would function:

A group gets together on the Internet and decides to keep track of the ownership of some kind of property. This property is represented by ‘titles’: names referring to the property, and the public key corresponding to a private key held by its current owner, signed by the previous owner, along with a chain of previous such titles. The purpose of the replicated database is simply to securely agree on who owns what. The entire database is public. In theory, the idea is persuasive. In practice, how to ensure that the entries in this shared ledger are valid is tricky. The classic illustration of this trickiness is told by the Byzantine Generals

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Problem (Lamport et al. 1982): imagine that several divisions of the Byzantine army are camped outside an enemy city, each division commanded by its own general, and where the generals can only communicate with one another by sending a messenger. After observing the enemy, they realize that they can only succeed if they are able to coordinate a common plan of action and set an agreed time to attack. However, some of the generals may be traitors. Moreover, it cannot be known that a messenger sent from one camp to another will not be intercepted by the enemy. Lamport and his colleagues prove (mathematically) that coordination can never be achieved under “normal” conditions, since one can never be convinced that all are still loyal; however, consensus can nonetheless reliably be realized given the right incentives and the existence of unforgeable messages based on cryptography. In the case of a replicated database of property rights, new entries must be confirmed in a way that is tolerant to the Byzantine Generals Problem, and the chosen solution is known as proof- of-work (PoW). Proof-of-work was first proposed as an answer to the growing problem of junk email (“spam”). At CRYPTO’92, Dwork and Naor (who had worked with Chaum on zero- knowledge proofs), presented an idea to deter junk email by imposing a cost, but which will not interfere with normal uses of email. The main idea is for the mail system to require the sender to compute some moderately expensive, but not intractable, function in order to gain access to send, thus preventing frivolous use (Dwork and Naro 1992:140-141). In other words, the sender of an email would have to present a valid proof that resources had been expended before having permission to transmit it. Such a proof function may take several seconds or minutes to solve, which would not be prohibitive in most cases, but would impose a substantial cost on a spammer. , would propose a similar system known as ‘’ in 2001 and disseminate it to the Cypherpunks mailing list.7 If email systems could become trustworthy by requiring some sort of resource expenditure, it soon became clear that other problems could be similarly solved. Jakobsson and Juels (1999) formalized this concept as proof-of-work and proposed using it to ensure the fidelity of an online micropayments system called ‘MicroMint’ (see: Rivest and Shamir 1996). It is exactly this sort of proof-of-work scheme that Szabo adopts as his solution to the fidelity of his replicated database. To test the idea conceptually, Szabo (1998b) designed a mechanism for the secure peer-to-peer transfer of ownership rights to a virtual commodity he named ‘bit gold:’

Precious metals … have an unforgeable scarcity due to the costliness of their creation. This once provided money the value of which was largely independent of any trusted third party. Precious metals have problems, however. It's too costly to assay metals repeatedly for common transactions. Thus, a trusted third party … was invoked to stamp a standard amount of the metal into a coin ... What's worse, you can't pay online with metal.

Thus, it would be very nice if there were a protocol whereby unforgeably costly bits could be created online with minimal dependence on trusted third parties, and then securely stored, transferred, and assayed with similar minimal trust. Bit gold. My proposal for bit

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gold is based on computing a string of bits from a string of challenge bits, using functions called ‘ functions’ … The resulting string of bits is the proof of work. Bit gold was never implemented, but it completed the (see also: Wei ’s 1998 ‘bmoney’ proposal which also features a shared database and a proof-of-work scheme, as well as Nagy (2005)). By now, all the pieces were in place for Bitcoin to arrive. All that was needed was the right opportunity to reveal itself to unleash it upon the world. What is absent from this account is a discussion of money from an economic, financial, or sociological perspective. The Cypherpunks weren’t economists after all.8 While disparaging references are made to governments’ use of fiat currency as an inflationary weapon, it is striking that little attention is paid to actual monetary economics or monetary policy. A decentralized, pro-privacy cryptocurrency would therefore have to be deflationary by design (to preserve its value, but also as a political statement), but not much else was accounted for. The ideological and technological pieces were in place for a cryptocurrency but the monetary rules and theory for how to actually make these ‘coins’ function like money were overlooked.

Chancellor on brink of second bailout for banks

In 2008 global stock markets crashed and much of the world entered a prolonged economic recession. On October 31, 2008, a technical paper entitled Bitcoin: A Peer-to-Peer Electronic Cash System appeared on Cypherpunks authored under the pseudonym . (Who Satoshi is remains a mystery to this day, despite attempts to reveal his/her/their true identity. See Huamayun and Belk (2018) for an interesting analysis of this structural anonymity). Nakamoto (2008) begins: “A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network … using proof-of-work to record a public history of transactions.” Bitcoin is described as an electronic payment system “based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.” Nowhere in Nakamoto’s proposal are references to the moneyness of Bitcoin or how it might fulfil a store of value or unit of account. On January 3, 2009, the first proof-of-work function solved for the very first block of . Embedded in that ‘genesis block’ was the following text: The Times 03/Jan/2009 Chancellor on brink of second bailout for banks, referring to an actual newspaper headline about the deepening financial crisis.9 Indeed, the timing of Bitcoin’s release concurrent with eroding of trust in financial institutions may have been opportunistic. What better time to interrogate the removal of a trusted third party when that third party is no longer trusted in the first place. The very first Bitcoin transaction involved Satoshi Nakamoto sending 10 bitcoins to Hal Finney.10

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And what of the monetary policy of Bitcoin? In the original technical specifications (Nakamoto 2008), these simply aren’t referenced. Traditionally, the properties of money go something like: (1) It must be easily standardized, making it simple to ascertain its value; (2) it must be widely accepted; (3) it must be divisible, so that it is easy to “make change”; (4) it must be easy to carry; (5) it must be durable; and (6) it must be scarce / hard to counterfeit. In an email to the Cypherpunks in November of 2008 (then known by the name ‘The Cryptography Mailing List’), Nakamoto asserts the following main properties of Bitcoin:11 (1) Double-spending is prevented with a peer-to-peer network; (2) No mint or other trusted parties; (3) Participants can be anonymous; (4) New coins are made from Hashcash style proof-of-work; (5) The proof-of-work for new coin generation also powers the network to prevent double- spending. The actual “monetary policy” for the Bitcoin system also seems haphazard and arbitrary. Upon release of the first version of the Bitcoin software, Nakamoto posted:

Total circulation will be 21,000,000 coins. It'll be distributed to network nodes when they make blocks, with the amount cut in half every 4 years.

first 4 years: 10,500,000 coins next 4 years: 5,250,000 coins next 4 years: 2,625,000 coins next 4 years: 1,312,500 coins etc...

When that runs out, the system can support transaction fees if needed. It's based on open market competition, and there will probably always be nodes willing to process transactions for free. The math implies that a block of bitcoins will be produced on average once every ten minutes and that the last block will be mined some time in the year 2140. Despite the lack of monetary economics, the idea has nevertheless caught on. By early 2018, the aggregate value of all bitcoins exceeds $185 billion, and perhaps more importantly the value that changes hands internal to the system each day (i.e. not the value exchanged into other currencies) exceeds $2 billion.12 In other words, $2 billion of value a day changes hands in spite of – or perhaps owing to – the absence of a trusted third party. Does this fact make Bitcoin money? No, but just the same billions of dollars also change hands every day in the form of securities, derivatives, legal contracts and claims on physical commodities. If the above story tells us anything, it is that it matters far less what people do with their bitcoins, but how they do it and why.

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What’s Money got to do with it?

“It occurs to me that digital cash could be a collector's item,” remarked Hal Finney in a March 1994 blog post.13 Nick Szabo (1998b), referring to his own digital cash proposal suggests that, "bit gold acts more like collector's items than like gold.” Responding to an online forum thread entitled ‘Bitcoins are most like shares of common stock,’ Satoshi Nakamoto himself emerges for one of his final public engagements,14 replying, “Bitcoins have no dividend or potential future dividend, therefore not like a stock. More like a collectible or commodity.”15 Those seriously thinking about - and developing - cryptocurrency rarely spoke of it in traditional monetary terms, but as a virtual collectible or perhaps a commodity. It is no surprise, then, that Bitcoin behaves much more like those kinds of objects than it does qua money. Before moving on, it is worthwhile to reflect on the current value of bitcoins. Whatever they are, bitcoins do command value in the market, and while some degree is surely speculative in nature, I would like to challenge assertions made that bitcoins are fundamentally worthless. As we have seen, the insight that disintermediated trust can be accomplished mathematically through proof- of-work requires the consumption of resources – in the case of Bitcoin “mining,” that entails electricity use. While PoW schemes were designed to disincentivize spammers, they are meant to incentivize actors to protect the validity of the replicated database – to ensure that records of property ownership and their transferal are honest. Why then, would anybody incur the cost of proof-of-work unless they would receive something in return. Indeed, what they receive are newly minted bitcoins, and these must have an economic value consistent with the marginal cost of securing the system (see, e.g. Hayes 2017). Put differently, the economic value of a bitcoin stems from the price paid for (the ongoing) disintermediation of trusted third parties. It is both a cost and a value.

What Bitcoin Blockchain Is … Let us now abstract away from Bitcoin and focus not on it being money, but on what it accomplishes. In doing so, let us shed the words Bitcoin and cryptocurrency and replace them with the underlying technology, blockchain - which invites its socio-technological arrangement of human and non-human elements (or, perhaps more precisely what Callon (1998) would call an agencement to highlight the fact that agency resides in the singular combination of human and non-human elements).16 These elements include two individuals brought together in a transfer of property rights - a transfer which is facilitated through an encrypted, shared ledger that is, in turn, validated and maintained by a decentralized network that carries out the consensus mechanism (e.g. proof-of-work).17 Schematically, there are three main parts of this socio- technological assemblage: (1) a direct peer-to-peer exchange between humans; (2) a (shared) record of the exchange (and all prior exchanges); and (3) a way to achieve consensus in reference to the honesty of that record without consulting a trusted third party .

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These assemblages can be configured in several ways to achieve various goals, solve various problems, and fit various ontologies. Dodd (2017) invokes several ontologies for Bitcoin more narrowly, but which may be extended to blockchains more generally: Bitcoin as a techno-utopia; as a social space; and as a social movement. The following subsections sketch out three alternative configurations that I propose in brief, and which I believe will provoke interest among social scientists and make a compelling case for the continued study of cryptocurrency and blockchains as a serious object of research.

Blockchains as systems of accounting …

Altogether, such a socio-technological assemblage is capable of facilitating all sorts of transfers between two individuals, much in the way that Nick Szabo envisaged. For instance, taking the ledger to record deeds to real property two parties can directly transfer land or homes without a title company and cadastre. The ledger might record who owns which car, and the assemblage could thus facilitate the buying and selling of vehicles without titling or a department of motor vehicles. The ledger may yet record ownership of equity shares in corporations or bond indentures and thus remove the need for clerical institutions such as stock exchanges and clearing houses. The ledger could maintain a record of voter registration and even votes themselves, providing for an auditable, tamper-proof yet anonymous election count. The ledger could document ownership of intellectual property, simplifying digital rights management and obfuscating the need for a patent office. Thus, at a certain level of abstraction, blockchains are autonomous, self-referential accounting systems. Accounting systems are not trivial. According to Sombart (1927), double-entry bookkeeping was a social technology of calculation that laid the groundwork for the capitalist system of production itself. Capitalism designates an economic system significantly characterized by the predominance of “capital,” transforming assets into abstract values in the pursuit of calculatable profits. According to Sombart’s thesis, capitalism and double-entry bookkeeping are absolutely intertwined. Carruthers (1991) further attests to the importance of the advent of double-entry bookkeeping as a necessary precursor to capitalism (see also: Yamey 1949 and Bryer 1993), but pays careful attention to both its technical and its rhetorical function. In particular, rhetoric around rationality engendered legitimacy and encouraged businesses to take up calculating assets against liabilities. Similarly, rhetorically situating blockchains as “secured by math” or “encrypted” allows for practical implementations of “trustless” peer-to-peer transfers. Some have stylized blockchains as triple-entry bookkeeping (e.g. Grigg 2005), where the third entry refers either to the fact that all share a copy of the same ledger, or that entries are signed by encryption and thus become immutable (Dai and Vasarhelyi 2017; Simoyama et al 2017; Wang and Kogan 2017). Already, the concept of tokenized capital based upon technology is a novel reality. Initial coin offerings (or ICOs) have allowed early-stage entrepreneurs to raise billions of dollars in startup funds through channels not linked to

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traditional forms of capital such as equity or debt. Moreover, these fundraising efforts have brought together firm and investor in a truly peer-to-peer manner, and with similarly direct transfers of capital occurring on blockchain-based secondary markets. If double-entry bookkeeping helped propel capitalism, one can only wonder what triple-entry bookkeeping might empower.

Blockchains as an organizational form…

What is more, since blockchains exist across computer networks, layers of code can naturally be added as compact programs, or scripts, that direct entries into the ledger one way or another depending on the logic of the script and some set of contingencies. For instance, a script may order A pays B, X units if Y occurs. The execution of such scripts are subject to the same level of decentralized consensus-making and security that proof-of-work provides for static transactions. Known as smart contracts (Luu et al 2016), these self-executing programs could certainly be constructed in the manner of an actual contract between two parties: A pays B the sum of 1 bitcoin if B completes some auditable task on behalf of A within a certain timeframe. There is no need for persons A and B to sign a written contract, and there is crucially no need for lawyers or courts in this framework. There is also no need to monitor and enforce such a contract, since it will execute (or not) automatically depending on if and when person B completes the required task. A can thus be anything from a bet or wager, to a financial contract such as a call option or coupon bond, to an employment or purchase agreement. This leads to (at least) two intriguing possibilities when viewed from the lens of organization theory. The first is the case of transaction cost economics. Oliver Williamson (1979) proposed that firms exist (in opposition to matrices of pairwise contracting) because contracts will always be incomplete (due to bounded rationality) and there will always exist some opportunists who will take advantage of incomplete contracts and shirk on their contractual responsibility. The costs associated with monitoring and enforcing contracts are simply too great, and by subsuming production relations within an enclosed firm business can be carried out by decree instead of by contract. But, smart contracts layered onto a blockchain are inevitably fully enforced and monitored by the proof-of-work mechanism and recorded into the shared ledger at minimal cost. From this perspective, blockchains can systematically and successfully decompose firms into a pairwise matrix of peer-to-peer smart-contracts – effectively obviating the transaction-cost need for firms. Alternatively, Stinchcombe (1984, 1990) argues that firms are founded on a nexus of interrelated contracts that exist within and between firm boundaries (and by extension the idea that contracts are “firms in miniature”). The practical application of this theory to blockchains is straightforward: bring together a succession of smart contracts that interact with one another for some singular purpose. The concept of a Decentralized Autonomous Organization (DAO) has been proposed, which effectively bundles together a series of interrelated smart contracts into

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a hierarchical structure such that some master contract calls on subsidiary contracts to accomplish various functions such as buying and selling computer server time, investing in entrepreneurial activity, or operating a driverless car (see, e.g. Atzori 2015; Norta 2015; Filippi and Wright 2018). In other words, the blockchain becomes the substrate for firm-like organizations that exist virtually across the distributed network. More than an abstract notion, DAO’s are being created and tested in the real world. For example, Jentzsch (2016) developed a DAO in the image of an investment fund seeking to capitalize various projects using the blockchain as its substrate.18 Unfortunately, this prototype DAO collapsed after a bad actor exploited a poorly written line of code (the contract wasn’t hacked per se, on the contrary the contract performed exactly what it was programmed to do).19 Despite this set back, new DAOs have been created that operate disintermediated from the organizational structure we commonly understand as a corporation, but in essence carrying out the same sorts of tasks; that is, producing some good or service intended for the market.

Blockchains as institutions…

According to Hodgson (2016), we may define institutions broadly as systems of established and prevalent social rules that structure social interactions and expectations – that both constrain and enable certain behavior. Within that frame, Douglass North (1993) asks, “How have economies in the past developed institutions that provided the credible commitment that has enabled more complex contracting to be realized” (11). He adds, “the issue of the enforcement of property rights is central to credible commitment and a major historical stumbling block, … and that informal norms of behavior are critical parts of the way institutions affect performances.” Put differently, “formal rules are an important part of the institutional framework but only a part. To work effectively they must be complemented by informal constraints (conventions, norms of behavior) that supplement them and reduce enforcement costs” (Ibid.: 20). North’s argument here and elsewhere (e.g. North and Weingast 1989) is two- fold: first, institutions allow for governments to commit credibly to enforcing property rights; and second, that institutions extend beyond a rigid set of rules to include informal social devices. As socio-technological assemblages that coordinate and enforce property rights, blockchains seem to fulfil North’s definition of an institution. Moreover, because the particular instructions of a blockchain-based system are prefigured, they also fit Hodgson’s broad definition as a body that sets forth rules that shape behavior and expectations. Returning to the case of Bitcoin as an example, recall that the protocol is hardwired in such a way that there will be a fixed ultimate supply of 21 million bitcoins, and that these will be released into circulation via the proof-of-work process – also at a fixed rate of once block every ten minutes. Each block has a specific number of bitcoins, beginning with 50 bitcoins per block and reduced by half approximately every four years (currently there are 12.5 bitcoins per block). Additionally, each block will be found by the proof-of-work algorithm, on average, once every ten minutes – if the actual time is shorter, the difficulty will be increased to restore the ten minute interval. And, so on. These are the rules of

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the game; there is no way to “break” the rules – any attempt to do so will be futile. Bitcoin therefore structures both the “monetary policy” affecting the social-economic system of the blockchain as well as shaping the micro-structures, norms and interactions of the actors partaking in it. By radically disintermediating trusted third parties, which are often paradigmatic institutions (central banks, payments systems, stock exchanges, land registries, departments of motor vehicles, elections, etc.), blockchains form credible (social) commitments through technology. The rules of peer-to-peer transfers are set out and enforced by the blockchain, but there can be a multitude of configurations each setting out their own version of what is allowed and what is not. In fact, as an open-source project, there are now thousands of blockchains that exist copying the methodological framework from Bitcoin and formatting it with their own rules of the game. Each blockchain is therefore its own institutional framework. Bitcoin has its rules and serves its purpose (to varying degree of effectiveness), but when an influential faction of the Bitcoin community grew concerned that existing structures were becoming a constraint they created their own version of Bitcoin through a “hard ” (this fork is known by ) – setting their proof-of-work to follow a new, modified formula that allows individuals to choose the institutional structure they prefer. As an open source project, the code to create a blockchain is easy to understand, to copy, and to modify. By creating new blockchains or breaking off from existing lines, a free market for institutions arises. Competing blockchains now exist as monetary instruments, but also as asset exchanges, as voting platforms, as DAOs. They have been created to facilitate trustworthy peer- to-peer online gambling, peer-to-peer marketplaces for goods and services, peer-to-peer file sharing, peer-to-peer (online) social networks, peer-to-peer online dating, and peer-to-peer car- sharing (think of Uber without Uber). Blockchains are radically disintermediating institutions by maintaining the credible commitments that were conferred by them, but now in socio- technological form. Blockchains don’t replace institutions – they are the very institutions they succeed. Due to the flexible, configurable, and open nature of blockchains, they are indeed sandboxes for institution creation and experimentation – for, institutions are not only replaced but created eo ipso. Novel ways of structuring social interaction through these assemblages will pave the way for new social configurations, new polities, and new economies. In this way, blockchains may fulfil the crypto-anarchic view of a Hobbesian techno-leviathan (Scott 1995, in Dodd 2017). Scott (1995) asks, “Don’t decentralised blockchains offer the ultimate prospect of protected property rights with clear rules, but without the political interference? This is essentially the vision of the internet techno-leviathan, a deified crypto-sovereign whose rules we can contract to. The rules being contracted to are a series of algorithms, step by step procedures for calculations which can only be overridden with great difficulty.” But, unlike Hobbes’ Leviathan, the royal sovereign to whom we sacrifice personal freedom in return for social order (nee property rights) are themselves part of the very socio-technological agencement that constitutes the crypto-sovereign. The sacrifice is returned unto themselves.

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Conclusion In this essay I respond to the nascent sociology of Bitcoin by reframing it (and other blockchains) not as money but as a socio-technological assemblage composed of a direct peer-to-peer exchange of property rights, a shared ledger of the exchange, and a mechanism to achieve consensus with reference to that ledger without resorting to a trusted third party. I first retrace the technological and ideological origins of Bitcoin starting with Chaum (1983) through its emergence in 2009 (Nakamoto 2008). This frames the pursuit of Bitcoin and what led up to it as a practical solution to prevent “double-spend” in a digital space combined with the abstract problem of relying on trusted third parties, or institutions, to enforce credible commitments regarding property rights. I then propose new ontologies for what blockchain is – as a system of accounting, an organizational form of contracting in lieu of firms, and as an institution in its own right.

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Endnotes

1 For convention, Bitcoin with a capital ‘B’ refers to the system, protocol, network, and other macro-structure, while bitcoin with a small ‘b’ refers to the individual units or ‘coins’ that exist within the system. 2 https://iacr.org/cryptodb/data/byyear.php 3 https://en.wikipedia.org/wiki/DigiCash 4 Hal Finney passed away in August 2014 from ALS. 5 https://web.archive.org/web/20050224055704/http://www.finney.org:80/~hal/why_rem1.html 6 https://web.archive.org/web/19970614112136/http://www.best.com:80/~szabo/el.privacy.html 7 The hashcash proof-of-work algorithm is the basis for Bitcoin’s. 8 To be fair, Nick Szabo’s blog posts do show a great deal of knowledge about Mengerian Austrian economic thought. 9 https://blockexplorer.com/block/000000000019d6689c085ae165831e934ff763ae46a2a6c172b3f1b60a8ce26f 10 https://www.washingtonpost.com/news/the-switch/wp/2014/01/03/hal-finney-received-the-first-bitcoin- transaction-heres-how-he-describes-it/ 11 http://satoshi.nakamotoinstitute.org/emails/cryptography/1/#selection-31.0-43.39 12 https://blockchain.info/stats 13 https://web.archive.org/web/20050212115346/http://www.finney.org:80/~hal/beauty_ecash.html 14 Satoshi Nakamoto ‘disappears’ after December, 2010. 15 https://bitcointalk.org/index.php?topic=845.msg11403#msg11403 16 “The term agencement is a French word that has no exact English counterpart. In French its meaning is very close to "arrangement" (or "assemblage"). It conveys the idea of a combination of heterogeneous elements that have been carefully adjusted one another. But arrangements (as well as assemblages) could [wrongly] imply a sort of divide between human agents (those who arrange or assemble) and things that have been arranged” (Callon 1998: 13) 17 Proof-of-work also serves as the double-spend prevention mechanism. 18 Ethereum is a decentralized blockchain platform similar in many ways to Bitcoin, but which is optimized for smart-contracting. 19 This human error in coding a smart contract speaks to the fact that these socio-technological assemblages are very much human.

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