Cypherpunk Governance: How Social Contract Theory Informed the Development of Crypto in the 1990s

Before the 2008 financial crash, early blockchain pioneers and 'cypherpunk' cryptologists envisaged digital currencies as a way to protect privacy, encode new layers of property ownership, and revisit the social contract between citizens and governments

Cypherpunk Governance: How Social Contract Theory Informed the Development of Crypto in the 1990s

Summary
Today crypto is almost universally identified as a financial instrument. Yet before the 2008 financial crash, early blockchain pioneers and 'cypherpunk' cryptologists envisaged digital currencies as a way to protect privacy, encode new layers of property ownership, and revisit the social contract between citizens and governments. This "cypher governance" predated and informed the development of crypto currencies, suggesting the emergence of a financial instrument which contains within it the seeds of a broader revolution.

Imagine being born around the 5th or 6th century BC, and being sent on a shopping trip with one of the world’s first minted coins. It seems inconvenient. There's an unusual degree of maths involved. Part of you still doesn't quite trust the coin; a decent sword or a good broth is more immediate. How much does a loaf of bread actually cost in coin, anyway? What happens if the tavern has no change? Where do you keep the coin, when you’re not using it? It will take centuries for this new technology to transform into a modern monetary system.

This anecdote isn't a segue into evangelising for crypto as a currency. It's not about suggesting digital currencies will replace fiat as coin once replaced bartering. Instead, this is a simpler point. Cyrpto might be inconvenient, but it contains a powerful logic. This logic will reshape government and alter global society. Like money once did.

Over the past few weeks I’ve been researching crypto-currencies for a Crypto Study Group (CSG) on DISCORD. Hobbes’ blockchain timeline demonstrates it has taken less than 40 years for blockchain based transactions to accrue in financial value (Bitcoin) and utility (Ethereum). In fact, it’s taken less time than that; Satoshi Nakamoto mined the first Bitcoin block on 3th January 2009.

In less than 12 years, some of the world’s largest hedge funds, corporations and financial institutions have found themselves forced to either invest, experiment or diligence the idea of a digital currency.

There’s clearly something there. Technology is accelerating history and producing a shift in economics that seems civilisational. Where did this all start? And how do I buy a loaf of bread?


Crypto & Cyberspace Economic Markets

“The Times 03/Jan/2009 - Chancellor on the brink of second bailout for banks.” 

The above article was contained in the first block’s coinbase parameter of the genesis Bitcoin block. Bitcoin was invented in the context of failing financial institutions.

The first sentence of the Bitcoin White Paper references the need for a “peer-to-peer version of electronic cash” in which payments can be sent without going through any centralized financial institution.

Bitcoin’s loftiest proponents claim it was “discovered not invented,” and that an emphasis on bypassing centralized financial authority ignores its real significance. One blog describes the shift in terms of human belief systems: “The technical advantages of cryptocurrencies are bootstrap mechanisms for mass-belief. Once enough people believe in a currency, it's real.” The Internet allows us to communicate and transfer data across a network we largely control. Bitcoin is doing the same for economic value.

“The technical advantages of cryptocurrencies are bootstrap mechanisms for mass-belief. Once enough people believe in a currency, it's real.”


Over the past two decades government’s have scrambled to interdict and dis-intermediate the backbone protocols of the “Internet.” It’s not difficult to see how the advent of a nascent and parallel economic system of decentralized finance might occasion similar efforts. Why?

Because crypto is a part of a wider contest for who controls value, utility and freedom in the future markets of the twenty first century. These markets, which are still emerging, are digital-first, no longer tethered to nation-states, and difficult to meaningfully dominate or control .

Another way of looking at this, is in reverse. Imagine a future for cyberspace based on the fiat currencies and nation state laws we have today. Would it grow as fast? Would the incentives it creates and mega-communities it sustains be anywhere near as giant? No, they’d be infinitely smaller. A barter based economy can only grow so large. Equally, a fiat based economy is incapable of serving the latent potential and size of cyberspace.  

a fiat based economy is incapable of serving the latent potential and size of cyberspace.  


Flicking through the technical discussions of early crypto-history, I suspect bitcoin is not the killer app - but cyberspace is.

Satoshi Nakamoto, and others like him, wanted to do more than create a new unit of financial logic or topple atavistic economic systems. Digital currencies were in part inspired by and designed to evolve the integrity of the network. Their logic of peer-to-peer exchange and interaction mirrors the backbone infrastructure and philosophical underpinnings of cyberspace. This logic is very different to the analogue systems of today, even as COVID-19 seems to have edged us further towards the virtual.

Cypherpunk Governance & Social Contract Theory

The writings of the early Cypherpunk’s seem to begin from the starting point of "cypherspace governance" rather than financialization. In 1993 the “Cypherpunk Manifesto” wrote:

“Even laws against cryptography reach only so far as a nation's border and the arm of its violence. Cryptography will ineluctably spread over the whole globe, and with it the anonymous transactions systems that it makes possible. For privacy to be widespread it must be part of a social contract.”


Here the invention of cryptocurrency defends privacy ahead of the “electronic age.” The financial crash of 2008 hasn't happened yet. In 1993, digital currencies offer privacy, economic freedom and a defence of 'open society.' Anyone who has read John Perry Barlow, Lessig or Berners Lee will find the language familiar.

Writing in an influential 1998 paper, Nick Szabo discussed property rights rather than currency, observing “a common pattern during eras of political instability or oppression has been the confiscation of land via the forgery or destruction of public records.”

The paper advocated that “new advances in replicated database technology will give us the ability to securely maintain and transfer ownership for a wide variety of property,” resulting in public records that “can survive a nuclear war.” Szabo uses political words to describe an early rendering of the blockchain; “a group, called a property club, gets together on the Internet and decides to keep track of the ownership of some kind of property.” Within the protocol, vests a new kind of authority:

“The property club can be thought of as a "micro-government", an entity that performs globally and independently one narrow function normally associated with government. In particular it is a "constitutional microdemocracy" with low entry and exit costs. After the rules of property transfer have been decided, each vote should stay within this constitution -- so that normally the vote will simply implement a distributed operation according to the property rules. The voting is necessary not due to a democratic political ideology but because it is the optimal result in analysis of distributed databases with malicious attackers”

During the transition to the early-modern era in the 17th and 18th centuries, Smith, Locke, Hobbes' debates on the meaning of public and private property would reshape government and political authority. Today these ideas are so internalised in our consciousness, that recognising them as constructs can be difficult.

Embedded in blockchain and crypto-currency are new modes of economic and political authority, flowing from the logic of cyberspace. Trading and the peer-to-peer financial systems are the current use-case of blockchain based crypto-currencies. The use-case is likely to expand outwards into all types of physical and intangible property ownership more generally. This has implications for the social contracts upon which most of our societies are based.

On 22nd May 2010, Laszlo Hanyecz paid 10000BTC for two Papa John's Pizzas (~USD $25) via an intermediary buyer. The first thing humans did with digital currency, was to buy bread. After all, what else would you use it for?