Hayek and the Crypto-Coins

04/23/2018

Prof. Dr. Alberto de Medeiros Jr., Prof. Dr. Adilson Caldeira e Mestrando Ramon Barenco Aceti Herdy de Almeida


Although liberal among current economic agents, liberalism gives way to conservative resistance in the issue of money. Even among the most liberal, the conservative view on the exclusivity of paper money by the state, rather than private initiative, as a means of mitigating risks is predominant.

Thus, it is up to the central banks to determine the monetary policy of their countries. They control the volume of money in circulation, credit and interest rates, in a typically monopolistic regime.

In 1978, Friedrich August von Hayek presented the view that the State's prerogative to issue money should be extended to companies in order to create competition in the market and allow people to choose their own currencies in order to break the state monopoly .

This idea, presented in the book "The Privatization of Money," suggests that it is possible to establish conditions that enable freedom for institutions in various parts of the world to issue money in a competitive system with the same protection against counterfeiting that is given to any another document. In this way, with the competition, the currencies would be better and more stable in their purchasing power.

With this proposal, Hayek (2011) foresaw the bases for the emergence of virtual currencies known today. There remained, then, the development of the conditions that make feasible the adoption of this idea in practice.

Bitcoin was introduced to the world in 2008 on an Internet mailing list and could be considered the embodiment of Hayek's idea after decades of intense research and development of a fully peer-to-peer network without need for an intermediary, with all records of transactions kept in a distributed database, called blockchain.

Bitcoin and other currencies, for which blockchain and encryption are used to ensure the validity of transactions, are known as "crypto-coins". It is a new class of assets, more characterized as a means of payment than properly money, since they do not exist physically. These are decentralized resources, which do not depend on the central banks of the countries to be issued or negotiated (TAPSCOTT, D .; TAPSCOTT, A., 2017).

The difference in relation to traditional currencies is that "transactions carried out in the Bitcoin system are recorded in a ledger that does not depend on the authority of banks or governments but with the assurance of a public computer network that (theoretically at least) can participate "(TAURION, 2018).

Cryptotomes are created by a large number of computers distributed throughout the world, which also record and approve the operations performed. For this, more and more difficult mathematical problems are solved to approve the transactions. With each set of problems solved, a block is closed, allowing the so-called "miners" to receive a fraction of the coin as their reward. This is the blockchain, which is the structure of the crypto-coins.

Cryptotomes, therefore, represent real examples of the feasibility of applying the Hayek principles. With the technological development they have achieved so far, they are not limited to opportunities related to economic issues, but they also solve some computational problems, such as the problem of double-spending, the problem of scarcity in the digital world and the problem of Byzantine generals.

Double Spend

 

The purely electronic value, when passed on to another person, can continue with the original person because it is only a copy. Simply put, it would be when a user can spend the same digital coins more than once.

 

This problem was solved in the following way: each unit of Bitcoin is unique, that is, when a Bitcoin is transferred, the one that sent is without the currency and without any copy of it, and whoever receives the coin takes possession of that unit. uses a process called Job Proof, so it does not use a central authority to maintain transaction history. The various nodes of the network follow the same protocol to validate the transactions and work in consensus. After this process the blockchain are stored in a public database.

 

Shortage in the digital world

 

To solve the problem of double-spending, we ended up creating, in the digital environment, a condition that already existed in the physical monetary system, which is scarcity. In the digital world, scarcity is the ability to create something that can not be duplicated.

 

Byzantine generals

 

The problem of the Byzantine generals was proposed by Lamport, Robert and Pease (1982) who demonstrate a hypothetical situation where several divisions of Byzantine army are camped in an enemy city and each division is commanded by its own general, who can only communicate with each other through the messenger. But they need to decide on a common plan of action, but some of the generals may be traitors trying to prevent loyal generals from reaching agreement. In this way generals must have an algorithm to ensure that all generals who are loyal take the same decision. And prevent traitor generals from influencing loyalists to make a bad decision.

 

This problem has been solved by mining because this process validates the transactions and therefore creates a solid network of trust: the blockchain that is public and available for people to access at any time, since the search for trust is the main issue that the structure.

 

Hayek suggested that it would be possible to establish several institutions in various parts of the world that would be free to issue banknotes in a competitive system and, as proposed, other digital currencies were created and in addition to bringing innovations bring new ideas of use, more quickly.

 

Although Bitcoin is the currency with the highest visibility, the world currently has more than 3,000 types of crypto-coins, each created to solve specific problems such as money substitution and international remittances.

 

According to the site Gomes (2018) the following crypto-coins stand out among the others:

 

Bitcoin

 

The first and best known. It uses open source software, its processes are transparent to the network and it is available to anyone. There is no central authority in management what is accomplished this work are mining users.

 

Once a transaction is sent to the blockchain, it can no longer be undone, and your record will remain forever in your history. Another characteristic of the most important is the irreversibility, being impossible to undo a transaction. The system works by pseudonyms to preserve the anonymity of its users.

 

Ethereum

 

It occupies the second place today, and its network works not only with its own currency, housing, also, a series of other criptomoedas in its transactions. It was launched by open source software in 2015, focused on smart contracts, which is a computer code that can enable the exchange of money, property or anything of value, which can automate contract management at various levels of complexity.

 

It also works through mining and professionals can do it in a simpler way, without having to invest in hardware, as in the case of Bitcoin.

 

In Ethereum, a decentralized platform was created, using the blockchain that allows the execution of intelligent contracts.

Ripple

 

Since its platform and tools allow and encourage use through banks, it is not very well accepted among digital media professionals. Its conversion into currencies used by banks, like the real or the dollar, with much lower rates. It has robustness in your code, with faster transactions and very low costs.

 

Litecoin

 

It was developed with the objective of being a lighter alternative for Bitcoin, and works in a very similar way to this, such as mining, transactions and exchange for products and services in the network. Its algorithm has facilitated the emergence of other crypto-coins that also start from the principle of simplicity. It does not require specialized hardware to perform the mining.

 

Dash

 

It was created with the intention of presenting an improvement over Bitcoin regarding agile transactions, and privacy with advanced technologies to promote anonymity. The system is user friendly, facilitating its growth in the market.

 

Finally, the evidence of the possibility of the privatization of money grows and already find models tested and validated, despite the resistance and distrust that still occur. As is common in market dynamics, it is likely that some of the models will fail to be corrected, that security problems will occur, and that the State will create legal, economic, or other obstacles that hinder the adoption of these technologies. In addition, historical records show that technological advancement commonly faces resistance. Just remember the resistance of producers against the sale of music online, from publishers against ebooks or from taxi drivers and public authorities against applications such as Uber and similar, however obvious the benefits to the freedom and power of choice of individuals.

 

The fact is that the crypto-coins gain space in the real and virtual field of society at a global level, and the numbers indicate their capacity to expand as an alternative means of payment. The benefits of this growth can align with societal goals, providing the favorable results predicted by Hayek four decades ago.

Bibliografia

GOMES, B. Quais são as 05 principais Criptomoedas do mercado? Disponível em: https://criptobrasil.com.br/principais-criptomoedas/ . Acesso em 10/março/2018.

HAYEK, F.A. Desestatização do dinheiro. São Paulo: Instituto Von Mises Brasil. 2011.

LAMPORT, L.; ROBERT, S.; PEASE, M. The Byzantine Generals Problem. ACM Transactions on Programming Languages and Systems. v. 4, n. 3, July, 1982. p. 382-401. Disponível em https://people.eecs.berkeley.edu/~luca/cs174/byzantine.pdf. Acesso em 15/março/2018.

TAPSCOTT, D.; TAPSCOTT, A. Blockchain Revolution. São Paulo: SENAI. 2017

TAURION, C.  Bem-vindo a um novo ramo da economia: o Cryptoeconomics. Disponível em: http://cio.com.br/opiniao/2018/01/03/bem-vindo-a-um-novo-ramo-da-economia-o-cryptoeconomics. Acesso em 20/março/18