Decentralization and Bitcoin

"Bitcoin itself is a currency that might best be considered existing in a state of anarchy."

By Emile Phaneuf III, American Institute For Economic Research

From the late-1980s until the early 2000s, the Cypherpunks – a group of cryptographers, mathematicians, computer scientists and activists – worked to build what they referred to as a crypto-anarchist “Galt’s Gulch in cyberspace.” This virtual place would be one where individuals from around the world could communicate and engage in commerce, with property rights protected, with contracts enforced, and with its own native digital currency. These Cypherpunks are widely credited to having significant involvement in the development of (or influence on) projects such as Tor, anonymous remailers, PGP for email encryption, OTR for chat encryption, BitTorrent, Wikileaks, the Silk Road market, and, of course, Bitcoin, both during the group’s formal existence and thereafter.

As Bitcoin’s very existence derives from the set of ideas to which these Cypherpunks adhered, it is worth exploring its anarchic roots. 

According to Timothy C. May, one of the Cypherpunk founders and more influential members, crypto-anarchy was a concept deriving inspiration from the work of economist David D. Friedman, science fiction writer Vernor Vinge, and philosopher Ayn Rand. 

Friedman’s book The Machinery of Freedom, first published in 1973 and now in its third edition, makes the case for anarcho-capitalism, exploring how various societies throughout history, to varying degrees, protected property, resolved disputes, enforced contracts, and provided defense without the state. 

From Vinge’s work, May references the novella True Names. And, as it turns out, Friedman had an impact on Vinge’s thinking too. In an interview, Vinge cites Friedman’s The Machinery of Freedom as one of his own inspirations, stating that Friedman’s book instigated a profound “internal intellectual revolution.” 

Friedman’s inspirations for anarchy

Where did David Friedman’s own anarchy come from? His influential parents Milton and Rose Friedman were certainly no anarchists. 

In an email to me, he confirms that Robert Heinlein’s fictional novel The Moon is a Harsh Mistress was a primary influence. In an interview about the book Friedman states that it: 

…provided a fictional picture of a society in which law and law enforcement are endogenous… done within the system… As far as I could tell, it was an internally consistent picture… That is as far as I could tell [from] reading it, there is no particular reason why that shouldn’t have worked under those circumstances… Once I was convinced that it was possible to have a society in which law and law enforcement were internal to the market system rather than imposed from the outside, that got me interested into the question of how one could do the equivalent in something more like the world I actually lived in. 

Friedman is quick to point out that if he had more knowledge of history and anthropology at the time he may not have needed Heinlein’s fiction to arrive at these conclusions, as he later discovered there was no shortage of real world examples. 

F.A. Hayek was another influence. In a recorded conversation, Friedman highlights Hayek’s “distinction between an organization and a self-generated order.” He (Friedman) was intrigued by the idea that “a market economy does not have a purpose” in the way that clubs or corporations do. This is to say that many individuals, with their own different ends, could still coordinate their plans. In Friedman’s words, “a set of people that have different purposes nonetheless interact and coordinate their activities.” 

Notably, Friedman dedicated The Machinery of Freedom to both Heinlein and Hayek (among others). 

Friedman’s influence on May

Timothy May advocated for a crypto-anarchist society as far back as 1988 in his “Crypto Anarchist Manifesto” and later repeatedly mentioned Friedman and The Machinery of Freedom in the Cypherpunk mailing list as well as in other writings.

But beyond anarchy generally, May would have also had the opportunity to come across Friedman’s writings on money. The second edition of Friedman’s book The Machinery of Freedom, published in 1989 around the time that the Cypherpunks were just getting started, contains a chapter entitled “The Market for Money.” This chapter (which also cites economist Lawrence H. White’s work on private monies) argues that “instead of arguing about whether our government should return to the gold standard we should instead be thinking about whether the government should produce money at all,” and that private monies might be devised that would “not rely on the wisdom or benevolence of the people appointed to manage the money supply.” Here we see Hayek’s idea of competition in money integrated into Friedman’s broader anarchist ideas, which were quickly embraced by the Cypherpunks. 

May’s passion for crypto-anarchy was shared by Cypherpunk and computer engineer Wei Dai, whose 1998 essay ‘b-money’ described how a cryptocurrency might work (and, by the way, was listed in the references of Satoshi Nakamoto’s Bitcoin whitepaper). Dai wrote in his essay that “I am fascinated by Tim May’s crypto-anarchy.”

Note: Although May had come across Murray Rothbard’s ideas (yet another pioneer in anarcho-capitalist thought), I have found no mention of Rothbard in any of May’s Cypherpunk-era writings. So May’s writings on anarcho-capitalism, taking on a new face as ‘crypto-anarchy,’ make it clear that Friedman was the primary influence.

Timothy C. May’s (later) influence on Friedman

May noticed that Friedman was becoming interested in the mating of ideas between cryptography and anarchy. He wrote in the Cypherpunk mailing list how Friedman “became a convert” to crypto-anarchy and had given a talk on the matter in Los Angeles.

Friedman stated in a presentation to the Independent Institute in 2001 that “the basic history of these ideas is that I stole them from from a bunch of people called ‘Cypherpunks,’ of whom the leading light is Tim May, who stole some of them from me… and then I stole the ideas back from him.” Friedman even dedicated his book Future Imperfect to May (among others), and in fact, the book covers Friedman’s own contributions to many of the same technological ideas that Cypherpunks dealt with. 

Conclusion

Timothy May envisioned – and some key Cypherpunks worked to create – a (sometimes) hidden digital society (inspired by the fictional works of Ayn Rand and Vernor Vinge) that would essentially exist in a state of anarchy (inspired by David Friedman). In the context of cyberspace, this meant that individuals from around the world with very different ends could coordinate their plans, thanks to interconnectivity of computers around the world, open source software, and technological breakthroughs in cryptography.

Bitcoin itself is a currency that might best be considered existing in a state of anarchy. It was indeed designed, but its decentralized governance operates in such a way that no single party (neither the miners, nor the full node operators, nor the programmers, nor the users, nor the exchanges, nor the wallet providers, nor the payment processors) controls it. Thus, it has governance, objective rules by which each party must follow, but as a protocol, it is entirely stateless. 

Friedman’s reading of Heinlein’s science fiction allowed him to imagine a society “in which law and law enforcement were internal to the market system rather than imposed from the outside,” and when he began to dig, he found many real world examples of this in practice. 

Beyond fiction, he also took the idea of a “self-generated order” to its logical conclusions: to anarchy, further than Hayek was comfortable with taking it himself. His creative way of thinking about how individuals with very different ends could coordinate their plans was instrumental in the thinking of the Cypherpunks, whose ideas and work eventually led to what we now call Bitcoin.

Originally posted in June 2023.

About Emile Phaneuf III

Emile writes on matters of money and cryptocurrency and has spent well over a decade working in international business development around the world. He holds a Master’s (double degree) in Economics from OMMA Business School Madrid and from Universidad Francisco Marroquín as well as an MA in Political Science from the University of Arkansas.

He is from the USA but has also lived in Japan, New Zealand, and (now) Brazil.

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