Bitcoin defunds the State; Nostr actually replaces it
Why real world economic trade is the key to mainstream Nostr adoption, and how relational contracting indicates the viability of global, State-less stability.
Note: if you are not sure why you are receiving this email, I was working on some bitcoin startups (WageVest/Caliber/Faucet21, all of which are now effectively defunct after I exchausted the financial losses I was willing to bear around the end of 2022 alongside an absence of any serious investors in Bitcoin), and I went ahead and added all the email subscribers to my newsletter, to which I post rather infrequently. If you do not wish to be on this list, I apologize for the inconvenience and you can go ahead and unsubscribe, or if you’re curious, check out the Heaviside Newsletter Archives.
Before getting into it, if you aren’t sure what Nostr is, I have added several links to excellent overviews near the top of this website: https://theofficialbitcoinwebsite.org
Social interaction as pre-economic activity
I think it is fairly clear even to the biggest Nostr bulls that we had a bit of a hype wave (myself included) a few months ago, and likely were a bit overzealous about the short term trajectory, even if the overall thesis remains unchanged. (Of course, just like bitcoin works regardless of price, Nostr is incredibly valuable even without mass adoption e.g. as a decentralized GitHub, but that is not what I am discussing now.)
To not bury the lede, here is the crux of my thesis: social interaction exists purely to grease the wheels of economic interaction. Might be a bit reductionist and take some of the meaning out of it, but it is functionally true, even if a part of effective social interaction is a sort of suspension of the knowledge that this is true.
Therefore, no one will actually give a fuck about social interaction tools untethered from economic value, and I mean hard economic value, not the value gained because someone wants to tip you for some clever quip or because they like your drawing -- no one actually gives a fuck about art, macro-economically speaking. Everyone knows what real production is (and if you have trained yourself to forget, I made a handy website to jog your memory: https://civilizationmetrics.org).
I also anticipate that centralized social media platforms will never become so un-free that that alone will drive mass Nostr adoption. COVID shows how compliant people are, and the Laffer curve of taxation probably has some analog for censorship. Corporations might veer one way or the other, but generally, the censorship will be maximized only to the extent that it is actually viable, and the censorship now is proving viable to a large degree. There is a bit of a catch-22 in censorship resistant social media in that the sort of people who are interested in it, are likely to already have also been exposed to and considered bitcoin, which is the primary economic decision of concern. The block wars proved that even with centralized social media and many centralized corporate interests, the necessary signals were able to propagate and achieve a percolation threshold. While it is certainly reasonable to think that something like Nostr would be even better in resisting this sort of attack, the most substantial opportunity is in gaining additional economic territory for productive, honest actors, which is easily traceable by the adoption of Bitcoin, most notably in its price.
In science and engineering, often times solving a problem is rather straightforward — the challenging bit can be finding the right question to ask that will lead to a useful outcome, and of course, there is no scientific principle that instructs one upon which question to ask (which is at the heart of why most modern science is fake). In Bitcoin, if one has a conversation with a nocoiner as to whether they might wish to acquire some bitcoin, one may probe as to the particular nature of their life and the factors that might matter to them, not realizing that “do you wish to acquire some bitcoin?” is in fact an extremely reductivist, facile question that does not accurately map to the reality of the complex assortment of economic decisions people make. There is a notion that the acquisition of different amounts of bitcoin would be a question of quantities, when in fact, these are likely categorically different. It is not possible to even begin to contemplate the nature of the great transition without first understanding these categories. Moreover, each category exists within one of the four “super categories” that are the four functions of money I previously discussed. So rather than simple binary questions, let’s consider the dynamics of economic decision making that will underpin Nostr, then Bitcoin, and finally, the evaporation of the State as we know it.
Plata o plomo? The non-ergodicity of enterprise
The top down control of modern neo-communism involves careful control of the labor markets and impeding the ability for people to make a living outside of large institutions that have prime access to the money printer and can cancel/fire people for wrong-think. This is why there is so much licensure around jobs that people can carry out independently. In California, there is simultaneously one of the highest licensure rates and one of the highest rates of recidivism. Want to be a beautician and paint someone’s nails in California — you better have a license for that! Beyond this, threats of State violence lurk around every corner for the individual who would seek to make a living by simply providing some useful good or service directly to their customer with onerous regulatory laws and the threat of frivolous lawsuits. It is usually even more extreme outside the US (e.g. Europe is even more violently anti-capitalist).
The communists need to actively skew things because the natural state of affairs is that far more people would be self-employed or start their own startups. This would be a threat to the monetary system that is artificially kept scarce — the dollar is not the store of value, rather, real estate and equities are — real estate is kept artificially scarce with onerouse regulations against building, and equities are artificially made scarce by onerous impositions to building disruptive businesses.
One aspect of suppressing natural business formation and competition is exploiting certain aspects of ergodicity, or lack thereof, a critically important concept in considering how economic actors will respond to risk under uncertainty. Ergodicity means that the phase space is the same as the domain space, which we must explain: if some group of people each follow the same path in parallel, that has some enumerable set of steps, or days, the distribution of outcomes across all people in a slice in time (one day for each of N individuals), or, the distribution of outcomes for a single individual across N days. If these are the same, we say the system is ergodic. As an example of what each event could entail, it could be as simple as a binary double-or-nothing bet with a coinflip. If that were the event, the system would suddenly become non-ergodic since some individuals would go broke if they were playing double-or-nothing, leading them to ceasing play. Let’s imagine that instead of double or nothing, each player had a 1% edge, causing their expected value to be positive. You might wish to have access to this expected value, but no individual is the average, so odds are fairly high you will go bust. Instead, you might seek exposure to an index that allows you to gain the average without exposure to the extremes.
The central planners would like people to build their lives to be as fragile as possible since that gives those who are aggregating economic events with reduced ensemble volatility the greatest possible edge. For instance, the mortgage system is designed artificially with funds from the money printer to have a positive expected value for the person who takes one, since this fragilizes the individual by making them less capable of adapting to volatility in income, which is the more natural state of affairs. Moreover, this enhances the State’s ability to know exactly where you live with incredibly little effort compared to renting. Health insurance in conjunction with employment is designed for the exact same purpose, as is the extra-communist medical system — health is an area where people are highly emotional and an effective way to induce fear, which though perhaps warranted to some extent, will still trigger the desired over-reaction.
Any time economic events are aggregated, the aggregator collects a substantial premium for providing these services, and due to the non-linear effects of scale, the aggregating actors are able to escape the risks, especially since they have access to the money printer to fully eliminate their exposure to the relatively small remaining risk. So every individual is given the offer of plata, o plomo, and only the highly irrational or unemployable are able to capture the greater expected value, and take a massive hit on expected utility. This is not just an abstract concept, we can observe the quantitative values rather easily since public companies publish financial data, allowing us to glean the profits per employee in different companies or sectors, and it is often 2-3x the salary costs.
Warren Buffett once did something where he offered a billion dollars to anyone who could get a perfect March Madness bracket (next to impossible), and his intention was to limit his exposure by offering anyone who got close a buyout at a fraction of the expected value, but many times more in expected utility since anyone would take $125m over 50% odds at $1b (except for those of sufficiently high net worth that they could tolerate the $125m loss). This is the exact same effect that enables large corporations to use their money printer access to acquire startup companies that actually are growing the global productive capacity the fastest. Of course, most founders optimize for expected utility over expected value.
All this indicates that if people were able to both pool their risk through the disintermediated formation of business, and were able to reduce the tail risks against which people take an overly-cautious reactionary approach, there would be far more real competition and capitalism would be able to compete with the communist system in place, rather than simply waiting for people to buy bitcoin. The latter risk reduction is key. The ability for people to independently make a living in low risk ways, will allow them to feel comfortable engaging in higher risk activities.
Nostr will replace centralized two-sided marketplaces
I was reminded to write this post recently upon hearing from a bitcoiner who delivers for Instacart that he made $400 in one day, which is substantially more than I would have imagined. The growth of gig work in general indicates the competitive threat posed to aggregators, but gig work still takes place through large centralized companies that used money printer VC dollars to secure a monopoly, and offer incredibly lousy products with poorly built software, and total disregard for the quality of their services (standard communist behavior). Even if their is a competitive order-matching happening somewhere on the backend, if the user is not directly exposed to that, bad things can happen, similarly to the bad things that happened to the users of Swan and Strike in November 2022, which are not exchanges, but RFQ (non-COB) brokerages as I explained in a Bitcoin Magazine article.
Nostr offers a better option. First, we must consider, what is the fundamental nature of economic interaction? We can bifurcate across two categories: those which are atomic transactions, i.e. almost simultaneous exchange of something for payment, and future transactions. In the latter case, it is usually nonsensical gibberish to speak of smart contracts since the nature of useful exchange with real world goods and services is one that is not determinable by a computer program that is not subject to the oracle problem — so what is a real contract, for real people, who actually engage in real economic activity? — note, of course, the obvious criticality for the existence of contract as soon as we introduce a time delay and discuss future exchange, which is considered necessary for planning purposes or the scope of things that could be done would be greatly limited. A contract is built upon three core pieces: 1) offer, 2) acceptance, and 3) consideration. It turns out that Bitcoin is utterly useless for the first two. Monetary substitutes have the utility of send and receive, which is only useful for the 3rd part, consideration.
As an aside, we may note that another fundamental concept for a valid contract is meeting of the minds, and this precludes frauds and scams such as shitcoins from being valid contracts, regardless of the absence of State regulation — in the natural world, if you sell someone fake goods, they return to demand their money back, and if they refuse, they lawfully kill you for your crimes in order to defend their property. Shitcoiners proclaiming the desire for free markets, as usual, are lying, for they love how the State protects criminals such as them from their victims. When the law and violence are decentralized, degenerate would-be criminals will fear their victims, and crime will be exceedingly rare.
Offer and acceptance seems like such a basic idea, it is easy to overlook, just like money is so ubiquitous people often do not consider its nature, similarly to how David Foster Wallace’s fish is oblivious to the nature of water. The nature of most business interactions centers around developing offers that will be acceptable to various counterparties, and the nature of which offers are accepted and by whom is shaped by the media in which said offers are exchanged. Considering that the nature of business is inherently social, it should now be apparent that social media, is of far greater significance than may first appear — not to mention, Nostr is not a social media protocol, but a more primitive sort of communication protocol, and no one would dispute that communication is integral to economic activity, for the real world is inherently illegible from a quick glance.
Currently, people make great use of the internet to have their offers more widely visible, leading to far greater competition, but these offers face numerous centralized chokepoints that prevent customers from finding the most desirable goods or services. Google is of course the most obvious one, a massive quasi-state actor providing an inherently lousy service that would get outcompeted in a free market. Two-sided marketplaces are similar, with various companies restricting the nature by which individuals may interact with each other. If you consider two persons encountering each other in a physical town square, each carrying a number of objects, there would be no inherent intermediary controlling their exchange, but online, there is, especially since the latency of distance introduces the need for contract, and counterparty risk, leading one to turn toward a 3rd party. These 3rd parties claim that they offer a critical service, but they limit the set of possible counterparties, and just like with money, there is a demand for maximum liquidity. In money this leads to a single winner (Bitcoin), and in marketplaces, there need not be one, but the present state is both more fractionated and more monopolized than what Nostr will bring. This is also why no centralized app will be able to effectively compete with Nostr long term — Nostr has the super network effect where you get the square of the sum of participants across all Nostr apps, and Nostr becomes the Schelling point for developers since everyone will already be there.
You don’t need a State for that!
However, here there is likely an implicit notion as to the nature of contract enforcement that is actually false, which is that counterparty risk precludes the functionality of contractual exchange without recourse to violence, whether by a State with lawsuits, or directly as in the case of organized crime that is less organized than the State. Relational contract theory (a theory like gravity is a theory) shows that not to be the case. It is trivial to consider why relational contracts work with quantitative numbers. First, a relational contract is one in which there is a series of transactions of a similar type between the same pair of counterparties, with either one or both having the opportunity to cheat the other and gain a one time advantage. Without even having to allude to difficult to quantify reputational risks, we can consider the discounted future marginal value each party can expect by maintaining the relationship, and as long as that exceeds the value of cheating/defecting (perhaps with some margin of safety), neither party will defect.
It turns out that this is a remarkably stable and robust pattern of behaviour, and generally, it is desirable to avoid lawsuits that are extremely costly anyway. Just like Bitcoin makes war unprofitable, most lawsuit type activities will occur far less frequently. The ability to bring a lawsuit is largely the State marketing itself while the idea that that is the thing stabilizing the relationship may be a total illusion. Relational contracting is also extremely efficient, and efficient means competitive, which means winning in a free market. Amidst a plurality of economic actors, some of whom are able to figure out stable states of co-operation with a greater tolerance for (non-existential) counterparty risk via relational contracting, will end up outcompeting those who are not.
This is of course nothing new — many anthropologists believe it was the homo sapiens’ superior ability to socially co-operate that led to it outcompeting other hominids. Regardless of whether that is correct, it is certainly the case that humans increasing the scale at which they were able to co-operate through superior means of communication was a key enabler in becoming the dominant species of the planet.
Not all types of economic activity take equally well to relational contracting. The ones that work best have a couple key aspect: 1) divisibility: if your transactions involve very large chunks, this sets a floor for the counterparty risk that the value of the relationship must overcome, which may become of prime importance when one considers whether a relationship can be bootstrapped, since it is not enough that it be stable in the theoretical equilibrium state that has already been ongoing. Finely divisible chunks help with this. A simple example would be the deliver of some commodity material on either a daily or monthly in a 30x large quantity; 2) low switching value (commodity): if there is substantial value to be gained by rapidly switching amongst competing providers, that will compete with the value gained in a relationship amidst a fixed pair.
Returning to the notion of two-sided marketplaces (e.g. ride share such as Uber or Lyft, equipment/car rentals such as Turo, delivery services such as Favor, Instacart, or Doordash, sale of goods such as Craigslist, Ebay, sneaker marketplaces, or darknet markets, home services such as TaskRabbit, labor services such as Fiverr or UpWork, etc), it would appear that the requirements for relational contracting are often not in place. For the sale of goods, e-commerce solutions can already be achieved relatively easily in a P2P way using self-hosted webstores and btcpayserver, but the need for real time matching for some of these markets is more complex. In this situation, one wants to receive the best offer from a competitive order-book rather than sticking with a trusted counterparty, which is seemingly in stark opposition to relational contracting. But consider for a moment how you might do business in a more primitive society with a smaller set of tribes — you make a request for bids, and upon receiving offers, you accept the most favorable one, with the confidence that there is a relational sort of operation that is scaled to the tribe layer because the density of interaction within the tribe is high enough that cheating a counterparty bears a high cost. The problem with the modern world in some regards than can be characterized as one in which the strategy of defecting has become favorable due to the effectively infinite number of counterparties available.
It is my conjecture that the critical value of Nostr will be the scaling of relational and reputational data such that people can operate at a global scale with the co-operater strategy, playing games with other co-operators, and making the defect strategy no longer globally competitive. Another way to phrase this would be to say relational contracting with participant fungibility — the ability within two pairs of counterparties A-B and C-D, to swap their counterparties to A-D and C-B, with zero loss in functionality. Now, I don’t think it is possible to have zero loss in trust — consider for instance, if you trust Bob with a high degree of confidence, and he tells you he can’t make it, but he trusts Roger absolutely, you might trust Roger to some degree, but there is a loss — however, it is not necessary to match the trust, only that it exceed the threshold needed for defection to be a losing strategy. I say conjecture because I am not certain as to how this will work, and since I want this to be correct, I have a further bias that may be clouding my judgement. In presenting this concept to others I have encountered the rebuttal that Nostr actually does nothing to solve the reputation problem.
Though I am not a developer, from reviewing the various GitHub discussions on reputation NIPs, I get the sense that no one has figured out a particularly good solution, and I do not claim to have one, but I do have a hand-wavy direction for a possible framework. Perhaps others will be able to identify it as nonsensical, or hopefully, flesh it out into something useful. I call it costly-signaled proof-of-transaction: if you want to establish that a potential counterparty will not want to cheat you, you will want to see that they have a transaction history with that particular Nostr identity, and attributes of the transaction history (total volume, frequency, recent volume, etc) indicate the costliness of incurring reputational damage to that identity (note, the reputation only needs to grow to a certain threshold value and there is not additional value beyond this — moreover, these identities cannot become collectable since they cannot even be traded given that a private key can be repeatedly shared, and delegation is not a payment to someone else’s keypair, but tied to a master key the originator owns). I am skeptical of the scalability of webs-of-trusts due to rapid trust degradation after a few degrees of separation. We need to know that the transactions are real transactions rather than payments made to oneself (Sybil resistance), and I think this may be achievable by having a small fee on each market transaction that is paid to a relay. The relays then maintain reputational state information and running specialized relays for particular types of transactions (e.g. food delivery or a ride-share) can become extremely lucrative. Since anyone can modify their own client, people will be able to run whatever matching algorithms based on the parameter weightings they want.
There is a question of how one prevents a relay from being a bad actor, but I suspect this is relationally enforced by the greater lifetime value of being a reliable relay than colluding with a bunch of people to cheat a single time. Another question is how someone knew joins with zero reputation, and I suspect it may involve paying an upfront fee to join a relay such that their day 0 cost exceeds the value they could get from cheating their first counterparty. Moreover, there could be dynamic pricing that takes into account reputation i.e. you might pay a premium for someone who has been around for a while, or decide to take a risk in exchange for a smaller service fee. A question arises as to how one prevents dishonesty with someone maliciously providing a falsely negative review, but given that the counterparties are unlikely to know each other, this may just naturally be a rather uncommon occurence that does not need any sort of mitigation.
This is the fundamental primitive that enables Nostr to replace the modern State, for relays will become the new maintainers of state, the state of future obligations to counterparties in trustful relationships, that is. When people mention Bitcoin eliminating the state, there is something obviously missing, a void that draws skepticism from most reasonable people. With Nostr, the premise of the end of the coercive State finally (at least sort of) seems to close. Nostr becomes the substrate over which economic activity is co-ordinated, and may grow to encompass all facets of exchange and markets. This will of course include the privatization of defense and law. Some States may decide they wish to not go extinct, which is to say, they will transform themselves into Nostr relays, and if they have a competitive offer that people want, their relay will win voluntarily paying subscribers.
Nostr gig-work will compel fiat corporates to become competitive
Taking a step back from the lofty end result, let’s think a bit more about the singularity of the transition since the transitions are always where things get a bit wonkier and harder to parse.
The fiat offer must not be underestimated. As I have shown on https://civilizationmetrics.org, the world has been growing stupendously in recent decades any way you want to look at it, despite fiat, which means from a standard of living perspective, there is a not a huge pressure for most of the money to go into bitcoin — moreover, most of the money exists in the hands of people with large balances, which means have a more ergodic experience of markets and are comfortably able to gain the returns of the market, preserving their value over time. Since bitcoin is a monetary network, it is a question of the amount of money that flips bitcoin more than the number of people. This means there is nothing that guarantees adoption will occur at any particular pace, regardless of the perpetual monotonic growth of the weighted moving average (for a minimum amount of time that itself may grow as it recently did).
If we consider the relative competitiveness of large, fiat corporations as compared to small businesses and individual contractors, there has been a flippening of relative advantages on pricing due to State intervention of robbery and the respective ability of each class to resist this extortion. When people used cash extensively, small businesses were able to charge lower prices since they could under-report tax liabilities. The proliferation of cashlessness has eliminated this, a far greater burden than the payment card interchange fees. In parallel, large corporations are able to afford all sorts of shenanigans to reduce their tax burden (e.g. the Double Irish, and presumably a large number of bespoke techniques that do not have common names) in addition to the free money they get from the money printer. Nostr will bring cash back to individuals and small businesses since it will be the only choice, especially if other regulations are being violated, and they will once again becoming competitive.
Here corporations will face a double-edged-sword whenever the money gets easier, which is that the more free money they get, the more employees (employment itself being a relational contract of sorts) will be getting screwed on their fiat salaries. The way a fiat salary works is a corporation must first overpay, and then underpay, because the salaries fail to be based on a sound standard of value given the labor is being priced and quoted for an ongoing (usually yearly) basis in dollars. Gig-work inherently has no such problem because the price is set gig by gig, so when the dollar is worth a bit less tomorrow, you can still be paid the market rate.
There will be a massive rush to sovereign self-employment via Nostr, and maybe then the social networks in the more traditional, “frivolous” sense will grow, and this may then go both ways, kicking off a runaway growth cycle.
Of course, large corporations will still exist and employ many people, but this will finally force them to face competitive pressure, and the labor markets will become more competitive. This is where composite standards of value in contracts, the premise of WageVest and what I previously discussed around the 4th function of money, will finally emerge. When the alternative is to receive market rate payments, the only way to offer something competitive is via futures that achieve composite standards of value, which is something one cannot obtain from gig work. I was correct in what I previously discussed as to the nature of the transition, I was simply missing this intermediate step of Nostr to compel adoption of composite currencies.
Two psyops: collapse, and pro-social scaling limits
Preparing for collapse shifts you into extreme non-ergodicity mode and makes your decision calculus one that sacrifices the most expected value in favor of expected utility. It’s hard to conclude at this point that this is not a psyop since it is an incredibly effective strategy at making people poorer. In other words, when you are hunkering down, you are limited in your ability to gain ground and increase your wealth or power due to extreme risk aversion.
Another psyop is that the natural, pro-social, capitalist interactions of humans cannot scale beyond a tribe without the State’s involvement, but even without Nostr, the nature of private arbitration shows that to not be the case. When it comes to maritime trade, there is also nothing that would prevent an insurance company from operating a private Navy that allows it to offer the lowest premiums.
The “X, but with Bitcoin” is largely a LARP. It was a LARP when people were fixated on micropayments around 2013, and it is a LARP today when clueless people are investing in junk Lightning startups pitching superiority of LN to ACH and Wires to idiots who do not even bother to know thy enemy and the existence of TCH RTP/RFP, Mastercard Send, Visa Direct, though finally people are starting to talk about FedNow, albeit, clueless to what it actually is and spouting nonsense about CBDCs, but I digress.
If you look historically at harder money beating softer money, individual choice of adoption plays a role, but it was the dynamics of exchange and economic interaction where one side had an edge that really mattered. Store of value is not enough, certainly not for those who understand why Bitcoin & Nostr fix everything. The free world can scale and you can use the tools to meaningfully engage with it today. Fuck telling cantillionaires or pacified degenerates to buy bitcoin, I want to see EXPORTS, and the sincere bitcoiner to capture their maximal expected value so that it can be turned into bitcoin, rather than giving away the surplus value where it gets turned into fiat. With Nostr, it seems there is finally a path to expedite the great transition and I hope someone pushes it forward. Adoption of bitcoin as the standard of contract/value today is effectively at 0. Only once the world gets off 0 do the dynamic events commence that constitute the fixing of everything, the true start of human civilization, if you will.
Oh, I also recently made some sets of ball bearings numbered 0000 through 2047 (American Hodl’s idea) so you can roll your own entropy to make a seed phrase without having to verify any math is being done correctly. https://21baller.com
— npub1c8nlcgd5l8qenesgdcy4vw0s794yujyy23z50n52v5ld0ddkcjnsppqsah