On the Antifragility of Bitcoin
(february 2020)
“I jumped out of the car and stripped quickly, then ran across a field to the river. When I got to the bank, I felt scared. The river looked deep and fast,
running over rocks. There was a muddy part where cows drank from. It was easy to reach the water from there. I turned my head and saw everyone
standing, watching me. Mum smiled and waved me on. ‘You can do it, Ricky!’ she called.
This is how the five-year-old Richard Branson swam for the first time. It is not a major surprise that character-building experiences make one’s psyche tougher; nor that a gym workout makes one’s muscles stronger. What is somewhat surprising, though, is that modern languages did not have a word to describe the widespread property of complex systems to gain when exposed to stressors. In his fascinating philosophical essay “Antifragile” Nassim Taleb provides us with not only a name for this property, but also with a bunch of insights and tips as to how to recognise and build it in more abstract contexts, including economics, finance, and technologies. He has this rare ability of spotting things and re-directing our attention from the evening news to the elephant in the room, or rather the Hydra in the room.
The Hydra is a Greek mythological creature that has numerous heads and when one is cut off, two grow back in its place. It is one of the metaphors he uses to illustrate the concept of being antifragile, i.e. gaining from stressors, volatility, randomness and disorder. Antifragile is quite different from and beyond robustness, i.e. being neutral to the impact of stressors (e.g. a steel door) and is the opposite of fragile, i.e. being harmed by them (e.g. a china tea cup). Nassim Taleb defines that “anything that has more upside than downside from random events (or certain shocks) is antifragile; the reverse is fragile” (p. 5).
Once exposed to Bitcoin a person soon gets a feel of its antifragile properties. What promotes it better than the hundreds of its obituaries? Below we aim to briefly introduce some of the insights provided by Nassim Taleb and how they correspond to the Bitcoin’s antifragile properties. As fragile and antifragile are relative terms, to comment on Bitcoin’s antifragility we juxtapose it with some of its alternatives in the context of ongoing debates in the cryptoasset space.
The Scaling Debate
Nassim Taleb hammers down that the process of moving from the fragile end of the spectrum towards the antifragile one is path dependent, i.e. “what matters is the route taken and order of events, not just the destination” (p.159). “The first step towards antifragility consists first decreasing downside, rather than
increasing upside… Mitigating fragility is not an option but a requirement… To make profit and buy a BMW, it would be good idea to, first, survive” (p. 159).
The debate as to how to resolve the problem with the limited rate of transactions Bitcoin can process (throughput) is well known within the crypto community. Due to the limited block size and frequency of producing new blocks (1-megabyte block of transactions every 10 minutes or so) Bitcoin’s performance is
currently thousand times poorer in terms of transactions per second relative to the payment networks such as MasterCard and PayPal. The approach taken by the big blocker community (BSV & BCH) in improving this
key performance indicator is to increase the size of the blocks.
However, in any technology, including computer science, there is a tradeoff between security and performance. To drive a car safely you must adhere to some reasonable speed limits. It would be naïve to think you can boost performance, e.g. drive 300 km per hour, and keep the level of security at constant level. The security of the Bitcoin network depends on the georgraphical spread and number of nodes that keep a complete copy of the blockchain. These are referred to as “full nodes”. They validate the transactions broadcasted by the miners and the higher the number of full nodes the more difficult it would be for
malicious miners to double-spend. Due to this distributed data management of Bitcoin, complete record of transaction history exists across thousands of full nodes (a Hydra with more than 10,000 heads), as opposed to one central server or warehouse 2 and a 1 MB block consumes far more resources than 1 MB web page. This high redundancy of the Bitcoin protocol is critical to achieve its automated integrity, building stability and immutability into the system. Increasing the block size will make full nodes more expensive to run. Only
big players will be able to afford the storage space, processing power and bandwidth necessary to transmit, process and store such huge amounts of data. Small node operators would be taken out of business, which would decrease their number and geographical spread, leading to more centralization, i.e. compromised security.
In his paper “Money, blockchain, and social scalability” Nick Szabo points out that “Satoshi made radical tradeoffs in favor of security and against performance. 3 ” Compromising security is clearly in the opposite direction of Nassim Taleb’s strong view that to improve antifragility we should first decrease the downside: i.e. being paranoid about protecting yourself from extreme harm (further strengthen security), not increase the upside (improve efficiency). Both Nick and Nassim are on exactly the same page. The former states: “Bitcoin offends the sensibilities of resource-conscious and performance-measure-maximizing engineers and businessmen alike 4 ” while the latter claims: “This fragility that comes from path dependence is often ignored by businessmen who, trained in static thinking, tend to believe that generating profits is their principal mission, with survival and risk control something to perhaps consider-they miss the strong logical precedence of survival over success” (p. 160).
As a result, to make Bitcoin even more antifragile requires “sacrificing performance in order to achieve the security necessary for independent, seamlessly global and automated integrity 5 ” and the improvement in the
computational efficiency of Bitcoin is to be sought rather via second layer solutions (e.g. Lightning), rather than increasing the size of the blocks, which improves efficiency at the expense of security.
The Difficulty Adjustment
In his book “The Bitcoin Standard” Saifedean Ammous discusses the dynamics of a monetary good becoming a store of value. If people like and increasingly use a good as store of value (e.g. a commodity like gold, silver or copper), the demand for it would increase, which would increase its price, which in turn would stimulate the increase in its production. If the increase in supply of the good is easy (the so-called easy money), then it is likely that the significant increase of its supply will depress the price, devalue it and destroy its function as a store of value. Saifedean Ammous call this dynamics the easy money trap 6 . If an increase in supply is difficult (the so-called hard money) the price would not be depressed significantly and the function of this monetary good as store of value is sustainable.
Satoshi Nakamoto, the Bitcoin creator, not only made it immune from the easy money trap, but introduced an aspect of protocol (the difficulty adjustment) that makes it even stronger and more valuable once exposed to such pressure. As more and more people choose to hold Bitcoin, the demand for it increases,
which increases its price, which in turn stimulates more miners (more processing power) to join and try to create new Bitcoin tokens. Increased processing power would make, ceteris paribus, solving the mathematical puzzles used to mine new Bitcoins quicker than the targeted 10 minutes per block. Such an
accelerated and unhindered increase in the supply of Bitcoin would have made it easy money. This would have created also several technical problems, including not giving enough time for the new blocks to propagate through the network, creating multiple versions of the blockchain and orphan blocks, i.e. a mess.
To overcome these issues, Satoshi Nakamoto introduced a difficulty adjustment – the more processing power is engaged in mining new blocks, the more difficult the mathematical problem needed to be solved in order to produce new Bitcoins, which ensures the Bitcoin’s steady and healthy 10-minute heart rate.
Easy money is fragile because any increase in demand ultimately causes the value to collapse. Hard money is robust, as increase in demand does not affect negatively (but also not positively) its value. Bitcoin is antifragile in this respect because increase in demand does not devalue it as the supply schedule is pre-
determined due to the difficulty adjustment, but attracts more miners and computer power, which makes the network more secure (more difficult to gain 51% of it and double-spend), and this increased security makes it even more valuable.
Does Bitcoin Resemble a Cat or a Washing Machine?
Nassim Taleb points out that antifragility is a uniquely distinguishing feature of living, organic (complex) things, say, the human body, unlike that which is inert, say, a physical object like the stapler on your desk. Many things such as society, economic activities and markets, and cultural behavior are apparently man-
made but grow on their own to reach some kind of self-organisation. They may not be strictly biological, but they resemble the biological in that, in a way, they multiply and replicate – think of rumors, ideas, technologies, and businesses. They are closer to the cat than to the washing machine, but tend to be mistaken for washing machines (p 56).
If we are dealing with a complex system that gains from, and loves, disorder and volatility, but we confuse it with a non-complex one, trying to manufacture stability by depriving it of stressors (i.e. attempting to fix it), we fragilize it on two levels. First, we inject unpredictable side effects with unknown unintended
consequences. A washing machine is a complicated device, yet, not complex; push a button and you will get the same response each time (no side effects). Complex systems are full of interdependencies (hard to detect side effects) and non-linear responses. Second, we deprive it of information. For organic systems
volatility, errors and their consequences are information. The human body, for example, receives information about its environment and learns not through logical thinking, but from stressors. If you increase the difficulty of your workouts in the gym, your muscles learn from this stressor and prepare for a
further increase in the difficulty. The body overcompensates – builds extra capacity and strength in response to information about the possibility of even greater stress. Building such redundancy is the central risk management property of organic systems and it is more like investment than insurance.
Nassim Taleb calls such naïve rationalists who apply the methods suitable for noncomplex domains to complex ones Fragilista. The examples he provides include the medical fragilista who overintervene with medications with severe side effects and underestimate the body’s natural ability to heal, the social planner who mistakes the economy for a washing machine that he fixes all the time, the soccer mom (overprotective parent) etc.
Bitcoin is antifragile because there are much less (if any) Fragilistas than in the fiat money banking systems, where those who make mistakes on a massive scale (“too big to fail”) are bailed out at the expense of the rest of society and future generations. They underestimate the difficult to detect side effects, e.g. that by injecting more debt into the system they might make it even more fragile, or the moral hazard and wealth redistribution consequences of the modern phenomenon of “privatizing the gains and socializing the losses”.
There was no one to save Mt. Gox, the cryptoasset exchange, that failed in 2013, which was processing some 80% of Bitcoin transactions at the time. The result is stronger security of the crypto exchanges now in operation and much less concentration on this peripheral, but important part of the Bitcoin ecosystem.
Keeping in mind that Bitcoin is more like a cat than a washing machine has important implications. Since Bitcoin is antifragile and benefits from stressors, injecting some moderate level of new stressors may make it even stronger; the “proof of keys 7 ” initiative of Trace Mayer is an illuminating example of this. Also, since having layers of redundancy is the primary risk management property of organic systems like Bitcoin, maintaining and building on them (e.g. increasing the quantity and geographical distribution of full nodes), is
critical for its decentralized and automated integrity and security. Bitcoin is organic by nature and is more than a monetary asset and a protocol. Trying to improve its efficiency by “fixing” the software alone, while discounting the importance of preserving its core value propositions, looks like an aspiration to fix a cat with a screwdriver.
Socializing the Gains and Privatizing the Costs – the Origin of Bitcoin
Nassim Taleb also provides insights on how new technologies emerge, as well as profiling the innovators behind them. We noted that top down drivers like social planners, soccer moms etc. reduce antifragility and growth. “..everything bottom-up thrives under the right amount of stress and disorder. The process of
discovery (or innovation, or technical progress) itself depends on antifragile tinkering, aggressive risk bearing rather than formal education” (p. 5).
How do you innovate? First, try to get in trouble. I mean serious, but not terminal, trouble… innovation and sophistication spark from initial situations of necessity… It contradicts modern methods and ideas of innovation and progress on many levels, as we tend to think that innovation comes from bureaucratic funding, through planning, or by putting people through a Harvard Business School class by one Highly Decorated Professor of Innovation and Entrepreneurship (who never innovated anything)..” (pp. 41-42).
In terms of the people behind those technological innovations he says: “..we didn’t get where we are today thanks to policy makers – but thanks to the appetite for risk and errors of a certain class of people we need to encourage, protect, and respect”(p 11). He compares them to prophets, who not only have their skin in the game, but their soul in the game. “A prophet is not someone who first had an idea; he is the one to first believe in it – and take it to its conclusion” (p. 396).
It sounds as if Nassim Taleb is telling the story of Bitcoin invention, without explicitly referring to it. Although we don’t know who Satoshi Nakamoto is, we know that the origin of Bitcoin stems from the cypherpunk movement and we have Nakamoto’s publications in the various Internet forums originally published before his retreatment from public life in 2011.
Bitcoin was clearly born out of necessity. On 11 February 2009 Satoshi Nakamoto writes:
The root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micropayments impossible. 8 ”The discussions held by the cypherpunks, and seemingly the Bitcoin development process itself, were entirely based on bottom-up tinkering with ideas and technologies. “We played as if we were simulating a war game… So, we played with the ideas and saw what was needed. 9 ”From the introductory quotation above we see that if Richard Branson is such a successful businessman and adventure-lover, it is not surprising at all that his mother is the opposite of a soccer mom. Likewise, the
creator of this digital hydra was a caring and protective, but not overprotective parent. He took his time to encode in the genes of Bitcoin its antifragile properties: ”I had to write all the code before I could convince myself that I could solve every problem, then I wrote the paper 10 ”. Then he let it have its own life on the street, providing it with exposure to the stressors it needed to grow and strengthen its resilience and antifragility. However, he was considerate of the shocks it was not yet ready for. When in December 2010 there was a discussion about Wikileaks using Bitcoin, following the extrajudicial blocking of their funds by PayPal, Satoshi wrote in response to this idea: “No, don’t “bring it on”. The project needs to grow gradually so the software can be strengthened along the way. I make this appeal to WikiLeaks not to try to use Bitcoin. Bitcoin is a small beta community in its infancy. You would not stand to get more than pocket change, and the heat you would bring would likely destroy us at this stage 11 ”.
Nassim Taleb finds that absence of skin in the game is the largest fragiliser of society. Some become antifragile at the expense of others by getting the upside (or gains) from volatility, variations and disorder and exposing others to the downside risks of losses or harm. He calls such people inverse heroes, as they are the opposite of those who made personal sacrifices to the benefit of others. Satoshi had not only skin in the game, but soul in the game, investing time and resources to develop something ingenious to the benefit of society at large. By socializing the gains and privatizing the costs he fully meets the definition of a hero. By mining close to a million bitcoins and never selling or even moving them shows his strong hand and non-mercantile attitude.
“Wind extinguishes a candle and energises fire” (p. 3). This is the first sentence of the Prologue to “Antifragility”. Andreas Antonopoulos said in 2016 that Satoshi is Prometheus 12 (a Greek mythological figure who defies the gods by stealing fire and giving it to humanity). Satoshi Nakamoto not only provided man
with an alternative to fiat money of the fractional reserve banking monopoly, but also sets an example as to how to deal with it in a caring, but not overprotective and interventionist way, lest we fragilized it and have it extinguished. Satoshi’s approach is in line with Nassim Taleb’s recipe: “The first step towards antifragility
consists in first decreasing downside, rather than increasing upside… and letting natural antifragility work by itself” (p. 159).
Bitcoin should continue developing naturally by strengthening its decentralized security model and extending the rational bottom up form of trial and error in all directions that don’t compromise its stability.
We need the corroborative ethos of the cypherpunks, not the one ridiculed in the System of a Down’s song Cigaro, and never forget we deal with an animal never seen before, not a washing machine.
REFERENCES
1 Richard Branson (2006), Screw It, Let’s Do It, p. 41.
2 “Governments are good at cutting off the heads of a centrally controlled
Networks…”, Satoshi Nakamoto (November 07, 2008), https://www.mail-
archive.com/cryptography@metzdowd.com/msg09971.html.
3 Nick Szabo (February 09, 2017), Money, blockchains, and social scalability. Retrieved from
http://unenumerated.blogspot.com/2017/02/money-blockchains-and-social-scalability.html
4 Ibid.
5 Ibid.
6 Saifedean Ammous (2018), The Bitcoin Standard, p. 5.
7 Proof of Keys is a movement that Trace Mayer started through his Twitter account. Every year, on January 3, cryptocurrency holders are encouraged to move their holdings off of exchanges and into a secure private wallet. This is
an application of the truism “Not your keys; not your Bitcoin,” i.e. if you keep your crypto assets on a ‘trusted’ third-party site, you do not own them, you have an IOU. They are owned by the exchange which can freeze your wallet, go
insolvent, pull an exit scam, or be hacked.
8 https://satoshi.nakamotoinstitute.org/posts/p2pfoundation/1/
9 May, Timothy C. 2016. Timothy C. May - Thirty Years of Crypto Anarchy. Video. Prague: Institute of Cryptoanarchy –
Hackers Congress 2016, Feb 2. https://www.youtube.com/watch?v=TdmpAy1hI8g (22:00-22:40).
10 https://satoshi.nakamotoinstitute.org/emails/cryptography/6/
11 https://satoshi.nakamotoinstitute.org/posts/bitcointalk/523/
12 Andreas Anthonopoulos, 2016, Andreas Antonopoulos talks Blockchain Meetup Berlin;; March 2016, Video. Berlin,
Germany 2016, Mar 26. https://www.youtube.com/watch?v=uLpSM3HWU6U (34:30-35:15).
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