Bitcoin is only as robust, trustless, and anti-fragile as its exchanges
Value comes in two forms: offers utility or can lead to utility (e.g. trading for something that gives you utility). For the latter in the form of an exchange medium, like many other social constructs, it’s a kind of Catch-22. Tom doesn’t really want X but thinks Jessica wants X. Jessica doesn’t really want X but thinks Tom wants X. Suddenly, they go from both not wanting X to both wanting X.
So that’s all it takes to turn a valueless X into something valuable. To maintain this belief that someone else wants it. Easy? Maybe to establish this for a few weeks or few months. How about maintaining this belief for centuries and millennia? How will Bitcoin do this?
Though Bitcoin is programmable scarcity that’s trustless and anti-fragile, if everyone understood what this meant and really internalized what that fixed scarcity meant, would that understanding be enough to infuse Bitcoin with value? It’d be a significant step but it wouldn’t be enough. Why? On day 1 of Bitcoin, if people heard somebody bought it for $1000, but then heard no other price data for a year, how much would they buy it for at the end of the year? How about after 5 years of no price data. There’d be greater and greater uncertainty of how others still value it.
It seems obvious that a market or exchange would be important to resolve an issue like this and a bunch of crypto exchanges already exist. So problem solved right? To any other store of value or exchange medium, possibly. But to Bitcoin, not quite.
Bitcoin’s value is much more dependent on price data from exchanges than other assets. An object like gold has natural utility and the support of cultural reinforcement (e.g give gold ring in proposal, play video games and board games with gold, gold in Game of Thrones). On the other hand, Bitcoin is beautifully but dangerously pure, especially if its function is solely defined to be a store of value. Unlike in history when royalty can show off their wealth by coating objects in gold and crafting gold relics, reinforcing gold’s value by taking advantage of gold’s aesthetic property while associating it with wealth, Bitcoin lives in the abstract. Its sole purpose is to be value. It’ll take time for people to figure out which of Bitcoin’s abstract properties could be reified in a way that could turn into a symbol of value in order to start building cultural backing. (Think — how might a wealthy person show off their bitcoins and thereby reinforce bitcoin’s association with value? Priceless art works can be shown off, real estate can be shown off, etc. ) Therefore, exchanges play an especially important role in helping establish the belief that Bitcoin has value.
Moreover, this means that Bitcoin’s value in at least its early innings is almost dictated completely by its exchanges, obviously in the literal sense but also in the structural sense. If an exchange suddenly starts falsely listing gold’s price lower and lower, there’d be a threshold where people would lose trust of the exchange since there’s a sense of gold’s value and support from its natural utility. If an exchange began to lower bitcoin’s price artificially, people have a lighter prior of disbelief and will more likely decide to go with it. What is Bitcoin but pure value and what is pure value but an abstract price. Hence, Bitcoin is only as trustless and anti-fragile as its exchanges.
Bitcoin was designed with edge cases in mind and to cater to the widest possible possibility space. If we hope to preserve those properties that make it durable in extreme circumstances such as a nuclear catastrophe or a breaking down of trust in society or corruption or a legion of hackers, the exchanges must offer the same properties. If the price data is no longer there, Bitcoin’s value, at least in the early eras, will begin to erode. If the price data can’t be trusted, Bitcoin’s value is at risk. Let’s support those who are working to strengthen or decentralize the exchanges.
Also published on my substack.
