Since the creation of Federal Reserve, the value of the dollar has fallen by more than 90 percent, and that is not a surprise.
Modern fiat currencies depend for their value on confidence in the laws of the states that issue them. Some nations, like the United States with its established central bank, inspire substantial confidence relative to nations that may debase for their currency for political objectives. But no nation can absolutely insulate its currency from political manipulation.
That is what gives Bitcoin the opportunity to succeed as a currency. But what gives users confidence in Bitcoin? It is precisely the fact that the rules regulating its currency do not depend on the currency law of any nation state. Bitcoin provides an example of order without law or at least without currency law.
Order without law is not unknown to society. Social norms often regulate behavior without the benefit of formal law. Rules of etiquette tell people how to behave at table without causing offense. Coordination rules help people walk down the street without bumping into one another. In a major work, Robert Ellickson showed that social norms, not law, governed responsibility in a community of cattle ranchers and farmers for the damage caused by cattle straying on the range.
But while order without law is possible without software, software can improve on the enforcement of that order. The beauty of Bitcoin’s design is that its mechanism for enforcement can not only be more powerful than the informal mechanisms that enforce social norms but even more powerful in some respects than the formal mechanisms of law. A software algorithm is not subject to the problem of defection from non-legal enforcement mechanisms. But it is also not subject to the risk of corruption in legal mechanisms of enforcement.
To be sure, the software is dependent on the distributed structure of verifying the blockchain, but that is hard to corrupt, because the community in charge of the software has strong incentives to maintain the value of the currency. The genius of Bitcoin, more fully explained in our recent article, is that the the so-called “miners” who maintain the ledger showing every Bitcoin transaction are paid for their efforts in newly “minted” Bitcoin. Thus, they have stronger incentives to maintain the value of Bitcoin than government officials may have to maintain the value of their currency, particularly when debasing the value may please particular special interests. Money has been well described as a social contract, but when the contract is political, that contract is something of a fiction. Or to put it another way, the agency costs of those charged with enforcing this kind of political contract are very high.
It is certainly true that rise of Bitcoin will not mean the end of all law. In our article, we show how the Bitcoin ecosystem, such as the Bitcoin wallets in which most users hold their Bitcoin, depends on traditional rules of property and contract. Nevertheless, Bitcoin is a jurisprudential as well as technological innovation, because it is a bid to inject a greater mixture of order without law into a fundamental aspect of our commercial life.