To understand a non-trivial subject fundamentally, we start with an analysis of its axioms. The basis of all human action is scarcity, and out of this binary attribute we can deduct a logical framework of individual liberty, property rights and prosperity. [1]
Part one of this thesis is exploring the fundamental axiom of scarcity, and how this conflict of exclusion leads to the need for property rights to manage resource allocation and mutually beneficial exchange amongst individuals. The opposite polarity of non-scarcity is evident in the dealings of the mind and cyberspace where knowledge can be shared freely amongst peers. [2] Cryptography in general, and Bitcoin specifically, are concepts that utilize both scarce and non-scarce goods to create fascinating tools to remove uneasiness. Although Bitcoin, the network, is in non-scarce cyberspace, the individual bitcoin, the unspent transaction output, is fundamentally scarce, thus enabling non-simulated property rights in this libre sound money.
Individuals act in order to remove uneasiness by allocating scarce resources throughout time. There are means available, and one can utilize them in order to achieve some desired end. Action is purposeful behavior believed to solve problems. This necessarily must take place in time. There is an a priori value judgment of the possible ends to seek out, and following the action to employ the means necessary to succeed in the plan. Time is the concept that something has changed, and since action is change it therefore implies the passing of time. "Time is scarce for man only because whichever ends he chooses to satisfy, there are others that must remain unsatisfied." [3]
Action implies a preference hierarchy of scarce goods. Alice has the choice to consume either an apple, coffee or pizza, yet she can at any time only use one of each of them. Although she would like to take all three of them at once, her means, time, is insufficient. When Alice chooses to eat the apple, she clearly ranks this as her most favorable satisfaction of the ends, the apple is better than the pizza or coffee. From the axiom of action, it can be deduced that the all means are scarce resources that are allocated to the most satisfactory end.
The first attribute of scarcity is the exclusivity of a good. When Alice has a wood log, she has full control over it and can use it throughout time and space, she can for example build a house with it. At the same time, Bob cannot have the same log of wood and applying it to a different task, like building a boat with it. It’s either Alice, or Bob, who can enjoy the current possession and future utility at their full disposal, but not both of them at the same time. Only one can use this good to solve problems, and even though the other might need the good, he cannot utilize it at all. Alice must sacrifice the usage of the wood, in order that Bob can have it. Scarcity applies to everything that cannot be simultaneously owned, where one’s ownership excludes that of others. Scarcity is an unwavering natural constraint on these goods, yet it is neither negative nor positive, but neutral and natural.
The exclusivity of a good does not in it of itself make it an economic good. Although there is the potential of conflict over who can use the good, there needs to be sufficient demand by individuals to utilize this scarce good. This scarce good needs to be the means used to achieve certain ends with purposeful human action. Only when humans actually use a scarce good in order to remove uneasiness then it is an economic good. In the case where a scarce good has not yet been occupied by anyone, then it is so far not of value to anyone. There is no need to allocate a non-economical good, since it is unclaimed for now, and in the case one would need it, he can simply homestead it.
There are scarce goods, which are valuable and used by individuals as means to achieve ends, and they are limited in supply, so that only some individuals can use them, while others are excluded. Although many would like to own these rare goods, there is not enough for everyone. For example a small water reservoir in the dessert with otherwise no water source. Clearly, this water is a scarce good, that is desired by individuals, yet limited in supply not sufficient enough to satisfy everyone. The demand is larger than the supply, thus the buyers of this rare good will be willing to sacrifice a higher price in exchange.
A good is abundant when its supply is vastly larger than its demand. For example river water has potential of conflict of use. The water is also the means of many individuals who utilize this economic good in order to satisfy their ends. Yet the supply of the water at a river is more than sufficient to satiate any demand by any individual, thus there is no urgent need to allocate this super-abundant non-scarce good. Any individual who needs water for whatever reason can go to the river and take some, without taking from another individual. Only when there is enough demand so that not everyone can draw from the available supply is there the actual need to allocate these resources efficiently.
“Only because scarcity exists is there even a problem of formulating moral laws; insofar as goods are superabundant (‘free’ [non-scarce] goods), no conflict over the use of goods is possible and no action-coordination is needed” [4] Since only one individual alone can at any time use a limited scarce good, there needs to be an economic and moral principle for individuals to allocate the scarce means so to achieve their ends. There are three logical systems that might be applied: Individual Liberty with private property; Slavery with a master and slave class; or Communism with collective ownership.
The function of property rights is to mitigate interpersonal conflict by defining one specific and exclusive owner of each scarce resource. With property rights, it is always clear who owns which good and which goods are not allowed to be used, specifically the property of someone else. These property rights must be both visible and just, since otherwise they could not effectively mitigate conflict. One individual can only know that a specific good is owned by another if it has been advertised clearly. Thus, the definition of property rights must be universal, objective and unambiguous. This is specifically the Law of Non-Aggression: do not murder, do not assault, do not steal, do not trespass, do not rape, do not lie. Do not initiate aggressive force against the person or property of another peaceful individual. [5]
Resources are abundant in nature and the first individual to occupy a previously unused good and intermingle his human ingenuity to create higher order scarce goods has acquired the just property rights. Whatsoever, then, he removes out of the state that Nature hath provided and left it in, he hath mixed his labor with it, and joined to it something that is his own, and thereby makes it his property. [6] Homesteading is the establishment of a link between a particular person and an particular scarce good before anybody else had done so. [7] Since natural resources are unowned and not used by anyone, the homesteader does not harm anyone else by occupying these goods. Contrarily, with these goods at his disposal, the homesteader has the means to remove problems in his uncertain future, thus marginally increasing his subjective values. Because nobody loses, and the homesteader gains, this act is in accordance to the Natural Law of Non-Aggression.
Since property rights mean full and ultimate individual control over a scarce good, he can exchange the right to use these goods with another peer. [8] When two peers are exchanging scarce resources, Alice is sacrificing her property in that good, she is giving up the current and future enjoyment and prosperity of it. In order to compensate her for this loss, she will want to have something in return, a good or service being offered by Bob. And only when she values Bobs exchanged good marginally higher than she values her previous good, will she voluntarily agree to the trade. The same is true for Bob, but in reverse order. He will only trade if Alice’s good is of higher marginal subjective value than the good he is sacrificing. Only because of this asymmetry of needs and desires will the two peers voluntarily choose to trade their goods, and only then it is mutually beneficial. Although both have sacrificed and lost access to a good, they have both gained marginally more, and are thus better off. Since nobody was harmed, there was no aggression and no violation to Natural Law.
Homesteading and mutually beneficial voluntary exchange are the only ways of justly acquiring the property rights in a scarce good. Anyone who is aggressively and without consent taking away a justly acquired good from another is politically breaking private property rights in that scarce good.
"The argument for property rights is based […] on the need of individuals to employ means to achieve ends, and to avoid interpersonal conflict over such means. This scarcity is […] a necessary background condition that must obtain before property rights can emerge." [9]
In a system of slavery there exist two distinct classes of individuals: the master class who has property rights, and the slave class who has not. The tyrant has the legal right to exclusive ownership for all his homesteaded, exchanged scarce goods and his human slaves. He has the full benefit of their human ingenuity to remove problems, and can deploy them in various tasks. For fundamental praxeological analysis, it is not of concern how the master came to rule, through inherited monarchy, elected democracy or military dictatorship. The tyrant can affect others through autistic, binary or triangular intervention.
In autistic intervention [10] the master denies the slave the peaceful use of a scarce good. For example during prohibition the tyrant aggresses against a slave who is himself consuming a good like alcohol without permission. The master claims a higher right in the slaves body and action, than the right of the individual. The master gains in the satisfaction of obedience and by the inaction of his slave, he only loses the opportunity cost of not enforcing the intervention. The slave loses due to the lack of problem solving, as well as through the direct and indirect aggression of the master, yet he gains nothing. He loses regardless his intention to adhere to the man made law, since even if he would voluntarily choose to comply, he is still subject to the implied coercion by the master. This is contrary to a free market of voluntary interaction, where the individual would be suggested and persuaded to stop the action non coercively without the threat of violence. Yet the free individual can, of course, deny the advice and continue allocating his scarce resources in the way he intended.
A tyrant can enforce binary intervention [11] by coercing an individual to interact with the state. This can be the involuntary expropriation of scarce goods or scarce labor. The master gains in the products and services stolen, and only sacrifices the opportunity cost of not enforcing the taxation. The slave loses the scarce good, the opportunity cost of acquiring this good, and the implied coercion. In any case, the master gains at the expense of the slave, he constantly applies aggression and coercion and claims property rights in the person and goods of the individual slave. Since this action is not voluntary, it is praxeological proof that it is not mutually beneficial. Even though the state might use some of the stolen property to sustain the slaves, like food, shelter or health care, these goods are not desired marginally most, since they have not been voluntarily chosen. The tyrant breaks the legs of the slave, then hands him a crutch and demands gratitude for the support. This is, of course, in stark contrast to a free market with only mutual beneficial exchange.
In triangular intervention [12] the tyrant aggresses against two slaves who do not ask for permission to engage in trade amongst them. Through some form of licensing, registration or forced contract covenants, the state prescribes the way in which two peaceful individuals must act, and failure to comply results in punishment. The attack is either in form of price control, or product control. A minimum price artificially excludes both clients and entrepreneurs who would each willingly trade at a level below the minimum price. Since this is inherently not mutually beneficial, it destroys capital and prosperity, while benefiting the master only. When manipulating the nature of production directly, rather than the terms of exchange, the building or sale of certain scarce goods is prohibited. Again, both client and entrepreneur are artificially prohibited from removing their problems and increasing their subjective marginal value scale, yet the master gains in the pleasure of submission.
Communism is the utopia of shared ownership of scarce means of production. The workers shall collectively use the tools at their disposal to remove problems, from each according to his ability, to each according to his needs. [13] Yet this disregards the universal truth of exclusivity and rarity of scarce goods. The workers cannot collectively own the scarce means of production, since they are fundamentally scarce, and thus only one individual at one time can use them. In any case, ultimately the choice of what to do with a given scarce resource has do be done by one individual, it cannot be done by "the collective" because only individuals act. Thus even when striving for the end of common ownership of the means of production, ultimately there has to be one individual to actually manifest the action. Without clear individual property rights, the only other option is tyranny by a master class who has full control over the means of production. Communism neglects the need to allocate scarce resources throughout time, and thus inevitably will lead to aggression against individual, the destruction of capital and the overall decrease of individual subjective value scales. [14] The ideal of sharing goods with others, although logically infeasible in the realm of scarcity, is not just doable, but desirable with non-scarce goods.
The polar opposite manifestation of scarcity is non-scarcity, goods that can be copied ad infinitum without degrading the quality of the original. [15] Due to this super-abundance these good are not subject to desire and choice, as they exist in superfluity, they gratify and also satisfy all desires which depend on their use. [16] They are non-exclusive, thus anyone who desires access and use, can gain this without taking it from another.
When based on her previous experiences Alice formulates a thought, and speaks this into existence to Bob, this information forces itself into Bob’s possession. He can now contemplate what Alice is trying to convey and act upon the information. Bob has clearly gained possession and usage of a good, this can help him remove uneasiness and thus increase his subjective valuation. He only sacrificed the opportunity cost of listening to Alice, yet he may gain tremendously by this new knowledge. Alice maintains her "original" idea in mind, she can further think on it and share it with others and nothing has been taken away from her. Rather, she can now accumulate new information based on Bob’s reaction and use this input to advance and refine the idea. “When speaking words, they can be taken all to oneself, yet leave all to others and unless the memory fades away, everyone who can hear those words, can take them all and go on each separate way.” [17]
Early cypherpunks had a thorough understanding of the axiom of scarcity, and they strived to create a realm in cyberspace where non-scarce knowledge can be shared freely and without permission. Nobody could possibly own the 0’s and 1’s that make up the computer code, just as nobody could exclusively own a certain pattern of words or a specific number. Especially digital data can be copied at high speed with negligible computing costs, and shared across a global network of nodes. Anyone desiring access to a certain set of data can request a copy without decreasing the quality of the dataset of the originator. Should they add to this data the original author is free to request a copy of the expanded data set, which if granted results in a marginal benefit for the original author at little to no cost.
The rational conclusion of the non-exclusivity of software is that the user shall have full access to the source code, and that nobody has the right to aggress against him for copying and adapting the code. "'Free Software' means that the user has the freedom to run, copy, distribute, study, change and improve the software." [18] This implies the ability to run the program in whatever way possible and for whatever purpose, since regardless how the software is used, this is of no concern to the author. Changing the individual implementation of the software does not meddle with the copy of other peers, thus there is no harm in forking the code to solve a different task to that originally intended. The source code must be open and accessible in order for the user to study and verify what the computation is doing. This includes the ability to share the knowledge with whoever may request it, both the original, and the forked version. Only when the improvements to the code are made public can everyone benefit from them by updating their code, the right to learn and share what one learns with others.
As there is no potential conflict of control, there is no need to organize the structure of production with these non-scarce goods, because any entrepreneur who would need the good to advance the process could simply copy it. There does not need to be a direct exchange, because the original creator does not give up anything, he still retains his version without sacrifice. "But sharing isn’t immoral — it’s a moral imperative. Only those blinded by greed would refuse to let a friend make a copy." [19] “These designs – the recipes, the formulas, the ideologies – are the primary thing; they transform the original factors – both human and nonhuman – into means.”_ [20]
Because there is no need to ration the allocation of non-scarce goods, property rights are not necessary. There is no individual ownership of ideas, recipes or music, rather, anyone who is interested can acquire and use this information without taking it from someone else. Information belongs in the universal field of knowledge from which any individual can draw everything needed to understand the truth and apply it in one’s life.
There are currently several different types of "intellectual property" [patents, licenses, non-disclosure agreements, …]. They all claim that the "creator" of a specific idea, recipe or thought is to be the sole beneficiary of it. Anyone who is using this idea on its own, without the explicit consent of the "original thinker" is breaking their property rights and thus punishment is justified and desired.
This line of reasoning is flawed on a fundamental level; all forms of intellectual creation are per definition non scarce, that is, when the information is shared with others, the "original" producer does not sacrifice the enjoyment of the thought. Precisely because there is no need for resource allocation, there is no need for property rights. IP thus attempts to introduce artificial scarcity in a place where nature has granted us non scarcity! It is aggression against the possibility of sharing new knowledge with anyone who needs it, without taking anything from anyone else. The knowledge differential in the hierarchy of peers increases and is thus more prone to attacks. This is an unnecessary limit on the prosperity which humans can achieve.
Furthermore, following this bogus claim to establish property rights where we do not need them, innocent individuals legitimate property rights get violated. Suppose Alice formulates the idea to bake an apple cake, and she registered her IP claim, when Bob independently formulates the same recipe he has not taken anything from Alice. Because Alice has the power of the State, she can enforce her IP claim and steal the cake from Bob. She has no property right whatsoever in the goods and services that Bob has produced on his own, yet with IP, she can justify her aggressions against a peaceful individual.
"Natural scarcity is that which follows from the relationship between man and nature. Scarcity is natural when it is possible to conceive of it before any human, institutional, contractual arrangement. Artificial scarcity, on the other hand, is the outcome of such arrangements. Artificial scarcity can hardly serve as a justification for the legal framework that causes the scarcity. Such an argument would be completely circular. On the contrary, artificial scarcity itself needs a justification." [21] Thus, any form of "intellectual property", be it patents, copyrights or trademarks are completely unjustifiable monopolies of state aggression, privilege and censorship. They are evil to its fundamental core, since it introduces an artificial limit to the potential prosperity humankind might achieve, at the benefit of only a few, but at the expense of many. Those that violently enforce unjust intellectual property, assert control and ownership over someone else’s property in scarce resources.
A cryptographic private key x is a very large random number, a piece of non-scarce information which can be copied endlessly without degrading the original. Anyone has the opportunity to independently discover this particular number, it is impossible to exclude others from doing so. Nobody can exclusively use, and thus own, a specific number, thus there are no property rights whatsoever in private keys. In cryptography a sufficiently random number can be gained by throwing dice, picking random pages of a book, or utilizing a cryptographically secure random number generator. Because the number field of 2^256 is so large, when one sufficiently random number is picked it can be assumed that nobody else has knowledge of this specific information.
Whoever has the knowledge of this private key can easily compute a corresponding public key X by using a cyclic group G, and a generator g of G to calculate X = g^x. Yet with knowledge of only the public key, it is computationally infeasible to reverse this operation and calculate the private key. Thus the public key can be shared with others, without revealing any part of the private key itself. In the Pretty Good Privacy protocol [22], a static master public keys is used as a long term identity of the key holder. In Bitcoin however, the public key should be used only one time for one payment, and never reused across transactions. [23]
To sign a message m, a random number r and a corresponding nonce R = g^r, as well as a hash c = H(X,R,m) are computed. The signature σ is the tuple (R,s) with the nonce R and s = r + cx. [24] A signature can thus only be produced with knowledge of the private key x and the random nonce r, which are both generated at random in a huge number field. The verifier of the signature need only have knowledge of the public key X, the nonce commitment R and the part of the signature s. Only when the calculation of g^s = RX^c returns valid, can the signer have provable knowledge of the private key.
Asymmetric cryptography assumes that the creator of the private key can keep these bits hidden and occulted from anyone else. Only when this knowledge is exclusively available to the original creator is the signature a conclusive proof of the identity and intent of the original signer (the creator). However, when some other party copies the non-scarce private keys, he can easily compute an absolutely valid signature, that was not made by the original creator of the keys. It is extremely difficult to keep a private key in the exclusive control of one individual, thus in order to ensure a stable and working protocol, the secure storage and management of private keys is of utmost importance.
A Bitcoin unspent transaction output [UTXO] can only be spent when the corresponding redeem script is returned valid, these conditions are expressed in the non-Turing-complete Bitcoin script language. At any time, a UTXO has only one script which commits to the spending conditions, the property boundry definitions of that bitcoin. Thus, there is a potential conflict over who can use this UTXO, it’s either the script of Alice, or that of Bob. For example a pay-to-witness-public-key-hash [P2WPKH] UTXO can only be spent by he who has the knowledge of the committed private key and proves this with a valid signature. If a transaction is proposed with a wrong signature, then the script computes invalid, and the UTXO is thus not advanced to the next script. Possession of the non-scarce information is sufficient to use the absolutely scarce bitcoin. Although nobody owns information of the private key, its knowledge grants the right to own and use this specific coin. This excludes all those without the private key from using the UTXO, creating a potential conflict of control. Thus there is a need for resource allocation of the coins, which is done with the property rights defined in Bitcoin script.
Because the private key can be shared with others without taking the knowledge from someone else, the access rights to the bitcoin can also be shared. Multiple individuals can have knowledge of the same secret, and thus they have the means to provide a valid signature proof. However, with the single key P2WPKH script, only the first individual to broadcast a valid transaction (and have it committed to the time chain) has ultimate control over the bitcoin on chain. Many peers have potential control over the coin, yet only the first to act has the ultimate ownership of it. Thus, sharing the same private key with others is only a weak simulation of shared ownership.
Pay-to-witness-script-hash [P2WSH] transactions commit to more advanced scripts that can add complexity to the conditions that the spender needs to prove. Such a script could be a multi signature scheme, where n private keys are generated individually by different peers. Each peer has exclusive knowlege of their specific private key, and they compute and share the corresponding public key with their peers. A multi signature redeem script includes all of the n public keys, as well as the threshold number of m signatures required in order to spend the coin. N individuals can create their own unique private keys, however this piece of information alone is worthless, as it cannot create a valid signature script by itself. Only with the coordination of m individuals can the chain of digital signatures be advanced. This is non-simulated shared ownership of the scarce bitcoin which is cryptographically proven and cannot be broken.
A double spend is the aspect of a digital asset to be able to be sent several times to different individuals. First, Alice initiates a transaction to Bob, and later, she sends the same asset to Charlie; this is an asset that can be double spent, a non-scarce good that is non-exclusive. The main issue is to find a common state of the most recent property right definitions, this challenge can be seen to be a narrow version of the Byzantines Generals Problem. Bitcoin solves this computer science problem in a decentralized trustless manner.
The ability to spend the same good twice means that Alice can give a good to Bob, without sacrificing the possession and usage of that good. Thus, this good is non scarce and does not require property rights to allocate resources. Any non scarce good can thus be double spent, while this is impossible for any scarce asset.
Every 210 000 blocks, the issuance rate of new bitcoin in the coin base transaction is halved from the original 50 bitcoin reward. Full nodes will not allow any block that has a coin base reward larger than the halved amount. This means that over time, the stock to flow ratio increases exponentially, until it reaches infinity in the year 2141. It is important to differentiate that this does not at all affect the exclusiveness of bitcoin. Regardless the quantity of total money supply, one UTXO can only be spend by the one defined script. This is true in the case of a total money supply of 50, 21 million or 84 billion bitcoin. The axiomatic importance is the fact that one UTXO can only be spend by one script, and not two different scripts at the same time. In order to enable holistic scarcity of bitcoin, there needs to be both the exclusivity of UTXOs as well as a limited supply of bitcoin to justify the need for resource allocation through property rights. Scarcity is what is needed in order to make a monetary asset possible in the first place.
However, since money is neither consumed [that is the direct satisfaction of desires] and nor used in production [that is the building of future consumption good], a larger supply does not mean a higher satisfaction. For a medium of exchange, the total supply of money is completely irrelevant, since prices will simply adjust to reflect the market demand of holding money in percentage to the total money supply. [25]
The scarcity of rare bitcoin is defined as the attribute that one UTXO can exclusively be spend by one pre-defined script. In other words, one UTXO must only be spend once, and only in the way specified by the creator of the UTXO. In previous cryptosystems this was enabled by relying on one trusted central server tho authoritatively define, verify and enforce this scarcity. Yet a slave node has no opportunity to trustlessly audit and enforce the dealings of the central master server.
On the contrary in Bitcoin, even before the genesis block there was libre and open source software that clearly defined the Nakamoto consensus rules. Any peer can see, verify and edit a local copy of this particular set of rules. With the software installation every individual proves they voluntarily agree to use this consensus protocol. Further, any node will only communicate with another node who runs exactly the same consensus rules, thus everyone in the network is voluntarily in agreement of the property rights definition of the scarce UTXOs.
Every time a full node receives a new transaction or block, it funs several checks [26] to determine if this transfer of ownership of the UTXO is valid. For example whether the input coin of the transaction is actually at the tip of the chain of digital signatures in the chain with the most accumulated proof of work. In the case that this particular coin has already been included in a valid confirmed transaction earlier in the time chain, then the sender is trying to double spend this coin. This is an attempt to use the same coin twice for different transactions, to break the scarcity of this UTXO. Every full node will detect and block any such double spend transaction. Notice that even if the witness program would be valid, a already spent coin will never be allowed to be spend again.
Although this is scarcity defined and enforced by imperfect software, written and run by imperfect humans, there are several reasons why this simulation of scarcity is so incredibly strong, that it might even be considered non-simulated. There has never been an invalid transaction confirmed in the most accumulated proof of work chain, the scarcity was never broken. The protocol is currently running at 99.984% uptime [27], with only two downtime events in 2010 [28] and 2013 [29]. Currently it seems there is no active exploitation of critical bugs. Because the Bitcoin Core software has a very rigorous peer review process for any change to the code base, new bugs will hopefully be found and fixed before merge. Of course software, as any other form of speech, is never perfect and the possibility of critical exploits is ever present. Yet Bitcoin is a high assurance protocol with a close to perfect uptime and no invalid transaction confirmation, thus it can be said that the property rights are not simulated, but actually enforceable without any counter party risk.