Information Theory of Money : Bitcoin as digital gold
4 min readDec 14, 2021
- Money is the central information utility of the world economy. As a medium of exchange, store of value, and unit of account, money is the critical vessel of information about the conditions of markets around the globe in both time and space.
- Wealth is knowledge and growth is learning, and that both are governed by the rigorous science of information. The denizens of the Stone Age commanded all the material resources we have today. The difference between our age and the Stone Age is the expansion of knowledge. Knowledge expands through testable learning, “learning curves,” proceeding through entrepreneurial experiments.
- Growth in wealth stems not from an efflorescence of self interest or greed, but from the progress of learning. It is accomplished by entrepreneurs conducting falsifiable experiments of enterprise, with the outcomes measurable by reliable money.
- All information is most essentially surprise. An orderly and predictable mechanism, such as a determinist physics or Adam Smith’s economy as a “great machine,” embodies or generates no new information. Without surprises, time is low value and boring. Entropic surprises are what lend energy and directionality to time and economies.
- In economics, money is part of the conduit or carrier. If money is to foster learning and knowledge, it cannot itself be surprising. Part of the channel for capitalist activity rather than part of the content, money must be the measure rather than what is measured. It is the fixed medium rather than a flexible message, a stable matrix for the market rather than an active marketable item.
- The economy is not chiefly an incentive system, but an information system. It requires a reliable standard of value rooted in the irreversibility of time.
- Creativity always comes as a surprise. If it didn’t, socialism would work. Information is defined as surprise.
- Information is the opposite of order. Capitalist economies are not equilibrium systems but dynamic domains of entrepreneurial experiment.
- Money should be a standard of measure for the outcomes of entrepreneurial experiments.
- Interference between the conduit and the contents of a communications system is called noise. Noise in the currency makes it impossible to differentiate the signal from the channel.
- A volatile market shrinks the time horizons of the economy. Gyrating currencies and grasping governments are deadly to the commitments of long-term enterprise.
- Analogous to entropy, profit or loss represents surprising or unexpected outcomes. Analogous to average temperature in thermodynamics, the real interest rate represents the average returns.
- Velocity is not a constant. Therefore, the effective money supply is not controlled by the central bank but by the free decisions of individuals as they accumulate knowledge.
- In entrepreneurial experiments, the governing constraint is the scarcity and irreversibility of time. With infinite time, anything is possible. Finite time imposes the necessity for choice and prioritization. Time is embodied in interest rates (the time value of money), in budgets, in contracts, and in accounts. In economics, time is chiefly represented by money. In the deepest sense, money is time.
- As an economy grows, with ever more abundance deriving from ever more learning, only one resource grows relatively scarce in proportion. That resource is time. It is the most real and irreversible of all constituents of value.
- Money offers an accurate measure of earnings and expenditures chiefly as it reflects these costs of time, gauged in two irreversible ledgers — physics and biology: the speed of light and the span of life. If it does not represent these fundamental scarcities of human life, our economics will diverge from reality and betray us.
- Financial inequalities do not affect the underlying scarcities of time and attention, speed of light and span of life, playing out across the real economies of our days. Time is remorselessly egalitarian, distributed with rough equality to rich and poor alike. Registering the radical increase in equality around the globe is a massive flattening of comparative lifespans. The rich cannot hoard time or readily seize it from others. It forces collaboration with others.
- Gold achieves irreversibility through its refractory chemistry (79 protons in the gold parade) and the time-based entropy of extraction. As master of the mint in 18th century England, Isaac Newton spent much of his time proving that gold could not be hacked, counterfeited, or reverse engineered from other elements. As Nick Gillespie of Reason magazine has observed, Newton was not an alchemist so much as an “anti-alchemist.” 37 Bitcoin and other digital currencies offer similar irreversibility through complex mathematics and software, based on a time-stamped public “block chain” of transactions. Modern-age Newtons make constant efforts to hack Bitcoin.
- Gold and Bitcoin both exclude from the measuring stick the advance of physical capital or technology and even the learning curves of labor. If the measuring stick changes in response to economic progress, it cannot measure that progress. In order to bear creative changes, it must not change itself. In order to have a gauge that is exempt from the turmoil of markets, it must be rooted outside those markets. It must somehow cancel capital, technology, and learning.
- When Bitcoin innovators Satoshi Nakamoto and Nick Szabo sought to invent new forms of money, they explicitly designed algorithms that nullified the effects of technological advance in computer technology. As Moore’s law improved the computer systems used to validate transactions and integrate them with the Bitcoin block chain, for example, the “proof of work” challenge in the algorithm becomes proportionately more difficult and the reward smaller.
