I have thought about this question a lot, and I finally feel ready to put forward a comprehensive response.
by Arman The Parman on 27 Oct 2022
TL;DR - If we have a money born in the free market, in a free society, that shall replace fiat money, then it cannot be evenly distributed from the beginning while simultaneously being valued by all people - It necessarily must go through a period where only a few people value it.
Equality & Fairness
I want to start with what "fair" means. Many people, particularly the politically left-leaning, think that for something to be fair, there must be equality. At first glance, and without much further thought, it seems right, but actually, it is grossly untrue. You might believe that equality is an instinctive expectation between peers. The error comes when that natural instinct is unconsciously extrapolated to other things.
Imagine the natural feeling of injustice a child might experience when a sibling (peer) gets more candy than themself - “Why should he/she deserve more than me?” This adds an extra variable - “deserve”, which I will come back to in a later section. For now, I will address equality and fairness.
It's unreasonable and illogical to expect everything in nature to be equal. Given that ability and other differences exist in nature, then the result of those differences will, of course, be unequally distributed. To deny that is to deny reality, and to deny cause-and-effect. To interfere is to "play God".
For example, some trees get more sunlight and rain than others and flourish more than others; some animals eat other animals; some people are wiser, stronger, faster, more attractive, or more productive than others. Such is nature and is at the core of natural selection and evolution, and in this way, natural ecosystems achieve balance.
While you might like to interfere with the balance of nature in your vegetable garden, applying your wishes over the lives of other humans, against their will, can be immoral. For example, to take wealth/property (forcefully) that is earned by someone more ABLE, or more contributory to society, and give it to someone needy and less productive (the essence of socialism), is authoritative, counterproductive in the long term for everyone, and leads to the eventual collapse of civilisation (Ayn Rand explored this in her 1244 page masterpiece novel, Atlas Shrugged, which I highly recommend). This "forcing" of equal reward from the results of different abilities uses “fairness” as justification, but it is inherently UNFAIR, as it goes against nature.
Taking (by force) from those who earned more, and redistributing to those who earned less, represents the ideal of EQUALITY - in outcomes, but to achieve that, you are treating people unequally.
The rewards distributed by natural differences (i.e. ability, foresight, experience) or differences in effort, without interference by outside forces imposing their will (authoritarianism) - that is FAIRNESS. This is consistent with treating people equally with respect to natural laws, and even laws by authority.
An alternative view of fairness is that rewards should be based on morality - while that sounds nice, it is pure fantasy.
None of this is to say that some things shouldn’t be equal. For example, natural human rights in fact are equal. They are NOT based on ability, need, morality, criminal history, political beliefs, luck, effort, status, importance, fame - not at all.
They are based on being human.
Why this is relevant will become clear very soon. Everyone has equal natural rights. Some examples are the right to life, liberty, speech, and privacy. These rights exist without needing permission to exist - they might be violated, or they might be respected/protected - but they are not bestowed or given to us, nor can they be taken away. They are independent of laws.
To clarify, all these rights do not require anyone else to do anything for you. “Right to Life” seems to break that rule, but really it should be called “right to not be killed”; No one has a human right to force another to sustain their life. Similarly, with speech, no one has the right to be given a platform to speak, but they have instead a right not to be silenced. The true meanings can be lost in simple language/words we are used to using.
The following is very important to understand: A natural human right is something we have based on our intelligent REASONING of what is right and wrong, and is not at the discretion of an authoritative power. The authoritative power though does have the ability to violate the right or to protect it.
Just because I have human rights does not mean the current authoritarian of the day (government) will protect them. Instead, it is the responsibility of a benevolent authoritative power to protect it.
A natural human right is something all humans have (but is not always protected by law).
This is different to a legal right:
A legal right is something given by an authoritative power.
Now that human rights have been superficially explained, I want to re-emphasise something very important:
While equality of human rights is a natural thing to expect between all humans, it is very different to expect equality of rewards for our abilities or efforts. In order to achieve equal rewards, we must treat people differently which is inherently unjust.
I don’t think any further logical argument is required. If you don’t yet agree, I suggest you re-read what I’ve said and ponder over it.
Relating back to the topic of this piece, bitcoin distribution - wealth is not a human right, it is a REWARD. Equality of wealth between humans is not a human right either. However, it is a human right to be free to own property, and for your property not to be infringed upon. It is the responsibility of any existing government to protect those human rights. Further reading, see libertarianism.
Coming back to “deserving” - this is a human construct, based on good and evil: "Good people deserve good things, and bad people deserve punishment."
In reality, though, bad things happen to good people, and good things happen to bad people. It is hard for many people to accept this.
Using logic, it can still make perfect sense why people don’t always get what is deserved - because nature doesn’t perfectly hand out rewards based on the human constructs of good and evil.
It is the human that attempts to police the balance between consequences and morality. They imagine the way things ought to be, but the more they pay attention to nature, the more they will be disappointed with reality.
Instead, in nature, there is cause and effect. There is some predictability, but also, some randomness exists whether we like it or not. Many people don't like it.
Don’t mistake this for some call to abolish rewards and punishments in society. What I’m reasoning is that it’s not possible for humanity to police all of nature successfully, based on what is deserved (using the moral definition of “deserve”). I suppose a highly advanced authoritarian state might try.
Fair distribution of a new money
To decide how Bitcoin's distribution should be in an ideal world, let's first consider what is desirable AND possible for a new money, and then we can see just how magnificently Bitcoin’s design has achieved this:
We are going to create hypothetical new money. Let's give it some non-negotiable features relevant to this discussion (this is not a complete list):
- The money shall be digital.
Because physical money, gold, has failed.
In a global society, with any physical money (non-digital) 3rd parties are required (to digitise the physical money and allow long-distance payments), leading to the development of fiat money.
2. The money shall be something that is born in the free market.
i.e. value is not forced by law. Remember that Bitcoin was invented to separate money and state.
3. No one controls its issuance or can change the supply.
4. Access to this money is available to all.
Within reason - we shouldn't place the burden on fixing every conceivable problem in the world with the new monetary unit.
5. There shall be no dependence on governments or banks to store money on behalf of individuals, although it is permitted and optional.
If it's required, we'll end up with fiat again.
Next, we need to distribute this money we just created. How shall we do this as "fairly" as possible? Let's try giving each human alive an equal share, as one possible reasonable attempt at "fairness".
For this to be feasible, each human must be in some database - assume we have that. We might have to accept that some people will be able to double dip and scam the system, but imagine we find a way to mostly prevent this.
Now we must allocate the funds such that each person has the private key to their funds, and no one else - this is the essence of digital ownership. Whoever has the private key has the power to spend the funds, and thus owns the money. So each human must be the only person that has access to their private keys (with some allowances for help with trusted family members). Let's assume there is some new technical discovery making it instantly achievable for everyone somehow, and easy, without us needing a central authority like a bank to ensure security.
Very importantly, and virtually impossible to ensure - everyone with a private key should protect it - that is, they should not lose it, should know its importance, and not have it stolen (private key disasters happened to many early Bitcoiners), or be tricked into giving it away or selling it cheaply.
So far, so good, but with some optimistic assumptions.
With some magical ability, imagine we can effectively communicate the information about the new coins and private keys to each human on Earth, regardless of their circumstances (within reason). It would, of course, have ZERO value to begin with (as it was free to create, and has no other use other than money).
Remember, as initially stated in the pre-conditions, there is no authoritative rule here, we cannot force people to value this money and use it, the way governments use force for fiat, otherwise, it would be fiat money. The purpose here is to be free from fiat money.
Congratulations, we have a hypothetical alternative to Bitcoin that is EVENLY distributed to every human alive, and each human has control over their own money. Is this better than the Bitcoin launch/distribution back in January 2009? Has this solved the even distribution problem?
Not yet, and the reason is that we have distributed something worthless.
We need one more thing - everyone must SIMULTANEOUSLY value the newly acquired money AS MONEY, and accept/spend at roughly the same value. Obviously, this is not possible in a free society.
“Free society” - is extremely important here. We must allow people to do what they wish with this newly distributed money. What will happen? Some people will value it highly, and some will not - the people who value it highly will buy it from those who do not. Then what are we left with? A small proportion of the world that believes in this money who now owns most of the supply.
Wait, wasn’t that exactly the case with Bitcoin? Isn’t that what people were complaining about?
With Bitcoin, most of us had roughly equal access to the initial coins. Anyone could have mined, and the coins were virtually worthless to begin with. The initial adopters traded some electrical costs, their time, and their effort, in exchange for newly mined bitcoins.
No, Satoshi did not “pre”-mine, he MINED with everyone else (beginning January 3 2009) two months after the announcement of the new system (October 31, 2008).
There was no knowledge that Bitcoin was going to be certainly worth anything at all. Early miners earned their share of bitcoin because they had the foresight to see its value, and they took a RISK with their resources, time, and effort. You and I, we ignored it. We laughed at it. We hoped it would fail. We “deserved” to miss out.
There’s a saying amongst Bitcoiners, “Everyone will buy bitcoin at the price they deserve.”
Why were we wrong, and what made it gain value over time? The fact that some people, the early adopters, GAVE it value (value being a subjective human decision), and then over time others joined in. The early adopters were right that others would later give it value after others took risks and Bitcoin didn’t die. The later you get into Bitcoin, the lower the risk, the higher price you’ll pay to acquire some - this is appropriate.
Because of the uncertainty, many people did not mine, or spend time to take a serious look, or buy bitcoin when they had the chance. This would be the case with ANY money that is created, even if evenly distributed.
In other words, offering even distribution from the beginning is effectively the same as offering equal opportunity to collect bitcoin.
As I said at the start:
If we have a money born in the free market, in a free society, that shall replace fiat money - then it cannot be evenly distributed from the beginning while simultaneously being valued by all people. It necessarily must go through a period where only a few people value it.
Satoshi did an excellent job in designing the protocol so that the issuance happens over time. It is arguable that he could have made the issuance slightly different, but he/she/they is only human (probably), we have what we have, and it can’t be changed now.
Initially, 50 coins were rewarded to miners every 10 minutes (each block), and this amount halves every 210,000 blocks (roughly 4 years). Currently, the reward for each block is 6.25 bitcoin and 19.5 million of the 21 million coins have been issued. In 2024, the reward will be cut in half to 3.125 bitcoin every 10 minutes.
Besides providing an equal opportunity for the coins to be distributed, Satoshi’s design to stagger the distribution also strengthens the quality of the money and its potential for success. In the next section, I will discuss how distribution affects the quality of the money.
The ideal distribution of free-market money
Putting aside fairness and morality, I would like to present the argument here that the distribution of non-fiat money in a population is a variable that affects the quality of the money.
If all bitcoins were available right from the beginning, then very few people would have owned all of the supply. This would actually have risked causing the failure of Bitcoin, because for a money to be useful, it needs to be distributed widely. One of the functions of mining was to distribute the coins - Satoshi’s design ensured that distribution would be sufficient such that it could gain value over time, which would then allow spending and further distribution.
It helps to think of the extremes. Imagine one person owns the entire supply of the world’s money. In that case, does the unit have any value as money? I would argue it would have zero monetary value, but depending on what it is, it may have some commodity value (some people say “intrinsic value” when they actually mean commodity value or non-monetary value. A deeper discussion on this can be found here.)
You may already know about how money evolves out of a state of barter, explained here in detail, and briefly as follows: In a barter society, a potential monetary good initially has value for its non-monetary use (non-monetary value), so it starts with a monetary premium of zero. If it is held by a sufficient number of people it becomes practical to use as a medium of exchange to overcome the limitations of barter, and thus increases trade, reduces the risk of specialisation, and increases the prosperity of that society. As this type of exchange becomes more widespread, the unit becomes more desirable which increases the value above commodity value. This extra value is the monetary premium. A monetary premium then causes more people to hold the unit, and via a positive feedback loop, it eventually becomes universally accepted, resulting in the monetary premium to reach full potential - ie, fully adopted as money.
Going back to the hypothetical situation of one person holding all the available money in the world - then that represents a reversal of the entire process where a monetary premium developed from barter. If the process has completely reversed, we end up in the original state where the unit has a zero monetary premium.
Compare that to the opposite extreme - what if everyone in the world had a uniform holding of this money. In that case, you would have the maximum confidence that the unit will be accepted in trade.
And now consider the middle of the two extremes - if there was a population of people who didn’t have any of this money, then your certainty about where and to whom you could spend your money in the future would be lower - and therefore the quality of the money is lower. I see that there will be a continuum, but at some point, distribution will be sufficient for the money to function well, and any further change towards more equal distribution will have negligible effect.
After realising this, I came up with this question: Is it really the distribution of money that matters here, or is it the acceptance of that money as payment, i.e. the demand? I concluded that they are intimately connected.
It seems intuitive that if one person had all the money in the world, more people would reject the unit as money, either because they would rebel at the wealth inequality, or they would be unsure if others would accept it. And if everyone owned some of the money, it’s intuitive to believe that more people would accept it.
For Bitcoin, the distribution began with a single person holding the entire available supply. This happened at block one, January 3, 2009, when Satoshi mined the first block and was rewarded 50 bitcoin. He couldn’t get any more bitcoin at the time due to the protocol rules - he had to continue mining, and accumulate coins over time.
In the very first days, it was just Satoshi and Hal Finney mining. Then others joined, and now it is a worldwide phenomenon. The staggered release of new coins has significantly helped the distribution. As new coins were released over time, those that came in later were still able to compete with the earlier adopters.
Thirteen years on, most of the coins (around 19.5 million out of 21 million) have been distributed by mining.
Won’t the wealthiest Bitcoiners just hoard the coins and control the network to increase their wealth, leading to reduced distribution?
What matters, I’ve come to realise, is not the widespread distribution, but the widespread demand. This will increase the price, and entice early adopters to release (spend) some of their holdings to improve the quality of their life - this is only natural; in this way bitcoin holdings become more distributed over time, and with this distribution, its value as money increases, further helping demand, further helping early adopters to release coins.
A very important difference compared to fiat money is that those with the most money do not get any unfair influence to increase their wealth. Opportunity is equal. In the fiat system, those that are most wealthy have access to the money printer first (eg. bailouts, government subsidies to large companies that form monopolies, or access to cheap credit which itself is actually a form of money printing), and they get to spend that money in the economy before prices rise to match the increase of the money supply (Cantillon Effect).
In Bitcoin, there is no money printing. Those with the most bitcoin wealth get to enjoy that wealth by spending it to those who work for it (once bitcoin becomes ubiquitously accepted as money), and this allows more distribution.
Of course, the richest bitcoiners may increase their wealth, but it will be done by exchanging something of value to those who spend bitcoin to them (i.e. voluntary exchange), instead of effectively “stealing” as is done now via the Cantillon Effect.
In a free world, if a rich Bitcoiner provides a service, and a poor Bitcoiner pays him/her, BOTH of their situations improve. The rich Bitcoiner earned more bitcoin, and the poor Bitcoiner weighed up the pros and cons and decided his/her life will be better by spending some bitcoin. I’m not making stuff up here, this is basic Austrian Economic teaching, and fairly intuitive.
But look, almost no one is spending. How can Bitcoin be money? Money needs to be spent.
I’ve written about this before, but it’s worth repeating here as I’m sure this question will come up when considering the distribution of coins.
It’s a little confusing because for a token/unit to be money, it must be used as money. That’s different to language - A language is still a language even if no one speaks it.
For a unit to become money, it not only needs TECHNICAL properties of money (scarcity, divisibility, recognisability, portability, fungibility, etc), but it also needs SOCIAL properties - i.e. a network of people valuing it as money, in very much the same way that for a language to be useful, it needs to have the technical properties of a language (sounds, symbols, and rules) but also a network of people communicating with it.
Now that this is understood, consider Bitcoin. It has excellent technical monetary properties, but not enough people use it as money. That should lead you to conclude that it is not good money overall - BUT, that does not mean it won’t become good money. Bitcoiners believe it will, and that is why they are adopting it, and waiting for the rest of the world to catch up.
Just because you might hear some Bitcoiners promoting Bitcoin as money, that does not mean they are wrong and Bitcoin will therefore fail. They are referring to Bitcoin’s superior technical properties of money. Their opposition argues with a different definition, complaining that Bitcoin isn’t used as money.
I have explained that Bitcoin’s distribution is developing approximately how any free-market money’s distribution would, and that the expectation of even distribution is unreasonable. The nature of money is what it is, some people may not like it, but that does not give validity to the argument that Bitcoin should be abandoned and we should resort to a money where some people are in charge (altcoins or fiat).