Bitcoin, Thermodynamics and the Game Theory of Living
Despite seeming somewhat unrelated, Money, Thermodynamics and the Game Theory of Living are intrinsically linked, and only by fully understanding their interrelationships can one come to grips to the profundity of what Bitcoin promises to be.
The Second Law of Thermodynamics states that in a closed system, entropy (the degree of randomness) is bound to either increase or stay constant.
In more layman terms, from a statistical point of view, disorder is vastly more likely than order, meaning that things over time tend to fall apart.
This statement seems to be in opposition to the complexity that we can observe around us, ranging from simple organic chemistry, to all the complexity of life itself.
One may then ask, how can life even exist given the tendency for things to fall apart? Doesn’t life exist in violation of the second law?
On the surface, it may appear that the emergence of complexity that we see all around us is impossible. However, a decrease of entropy in a system is possible, and the rate at which this decrease happens is determined by two factors:
- the amount of energy flowing into the system
- the effective channeling of energy - often referred to as work
Given these two factors, we can conclude that all of the complexity we see around us, is due to the constant energy flow from the Sun, as well as the effective channeling of energy that life has been able to conjure up.
We can thus make the claim that the purpose of life is the effective channeling of energy for entropy reduction, which ensures its survival as well as its ability to thrive and flourish.
Even though most of us aren’t aware of thermodynamics and the dichotomy between the effective channeling of energy with the constant fight against entropy, we all possess an intuitive understanding of it.
The dichotomy is analogous to that of Heaven/Hell, represented symbolically in virtually every culture and religious tradition. It is perhaps no coincidence that the color red, corresponding to a low-energy wavelength has intuitively been linked with Hell, whilst Blue/Purple which are high-energy wavelengths have been associated with Heaven/Divinity. The color green exists in-between, which might serve to explain its symbolic and intuitive association with life.
Game Theory of Living
As outlined above, the most basic of human instincts is that of individual survival. We are evolutionarily programmed to effectively fight off the tendency towards disorder by effectively channeling energy.
We do this in several forms, ranging from the breathing of oxygen and the subconscious regulation of our body temperature, to the creation of art (highly ordered information) and the construction of nuclear reactors.
As a social species, we have learned to cooperate and specialize. We do this through our ability to externalize the effective channeling of energy onto others, as well as effectively channel energy for the benefit of others, or, in layman’s terms do work for others, and have others do work for ourselves.
In order to be able to socially coordinate, we need to be able to define what is of value, as well as keep track of the value individuals provide. For that, we need a standard unit of measurement for value. Unlike units of measurement for energy, such as Joules/Calories/Kilowatt Hours, the unit of measurement for value needs to exist in the form of a token, so that economic actors can claim possession of it.
Historically, Gold was the standard unit of measurement for value, hence the idea of a Gold Standard.
The token used for unit of measurement needs to fulfill several properties in order to be an effective form of money. Most crucially, the supply of the value token needs to be as inelastic to its price as possible.
By making the supply inelastic for the value token, the money flows in the system are reoriented towards the increase in value production, rather than towards value preservation. This comes with two direct consequences:
- work geared towards value preservation is rendered obsolete — this type of work produces no economic good for the collective, and leads to unnecessary competition between market participants.
- every other asset geared towards value preservation gets demonetized (i.e. real estate).
The concept of “value” in an economic system is analogous to that of heat in thermodynamics:
‘We could think of analogies between money dynamics and thermodynamics. As the main reason for the existence of thermodynamic phenomena is the thermal difference between two communicating systems, the reason for money flows is the imbalances between supply and demand for a socially accepted means of exchange of economic goods. Any imbalances between two thermal systems that are both isolated to their environment but communicate to each other via a “thermal gate” will tend to diminish until they become thermally equal. From this process work will be produced. At the point of balance there no further natural tension for spontaneous flows”
Without a unit of measurement for value whose supply is inelastic to price, an economy is not able to collaboratively channel energy towards value creation and entropy reduction.
Bitcoin adoption thus represents not just a technical, economic and moral imperative. At its core, it is a biological and arguably even a religious imperative.
Karakatsanis, Georgios (2012) - A Thermodynamic Theory of Money https://isecoeco.org/conferences/isee2012-versao3/pdf/354.pdf