Unpacking Bitcoin's Social Contract (2018) - 2-minute bitcoin

Unpacking Bitcoin's Social Contract (2018) - 2-minute bitcoin

Money, in general, and Bitcoin, in particular, can be seen as social contracts between people in society.

Fiat money is the result of a social contract.

People give the state control over money, and the state uses it to manage the economy, redistribute wealth and fight crime.

Bitcoin works through a social contract just as much - the social layer determines the rules of Bitcoin.

The Rules of Bitcoin

No confiscations No censorship No inflation Anyone can verify rules 1-3

A New Form of Social Institution

Money presents an important lesson:

The larger and more valuable a social institution gets, the more it incentivizes others to seek control over it

Hence, the institution needs protection, historically provided by the most powerful entity – the state.

Over time, protection turns into control and then into abuse.

When the institution loses its benefits, the social contract is violated (people lose trust) and breaks down.

Satoshi fixed this dynamic by inventing:

decentralized security - instead of a central party - security is derived from a decentralized hypercompetitive market a way for the competing security providers (miners) to come to a consensus over who owns what at any given time

The bitcoin protocol automates the contract agreed upon on the social layer, while the social layer determines the rules of bitcoin based on the consensus of its users.

They are symbiotic: neither of them would be sufficient without the other.

Who Can Change The Rules of Bitcoin?

The rules of the contract are decided and renegotiated continuously on the social layer - the bitcoin protocol automates them.

Bitcoin, the computer network, comes into existence when many people run bitcoin implementations following the same rules.

This distributed social contract practically rules out any controversial changes which could never get a broad social consensus.

It makes Bitcoin resilient to bad changes but open to good, obvious incremental improvements.

Can a Bug Kill Bitcoin?

No. When the social contract and protocol layer diverge – the protocol layer is wrong.

The chain can be forked to undo the damage.

At this point, it’s essential to understand that the bitcoin token itself has no value; it’s nothing more than a number in a ledger. The value lies in the social layer.

Hence, it is also social consensus that decides which of the two forks, going forward, would be valuable. All economic value would likely migrate to the new, mended network as it is true to the original social values.


Similarly, code forks - running with different rule sets - are useless unless you also fork the social consensus to migrate value to the new chain.

They are incredibly difficult to pull off - you have to get the buy-in from millions of people.

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