Do libertarians dream of electric coins? The material embeddedness of Bitcoin

TL;DR: Taylor et al. as mentioned in this paper presented Taylor and Francis' accepted and refereed manuscript to the article, which is the authors' accepted, refereed, and accepted manuscript for the article.

Abstract: © 2014 Taylor & Francis. This is the authors’ accepted and refereed manuscript to the article.

Summary

Embeddedness and how to trace it

• Since Bitcoin is at its core an attempt to expand the purview of markets through destabilizing universally adopted state monopolies on the production and verification of currency, I want to analyze it using current sociological theories on the role of markets and their embeddedness in modern economies.
• The main idea is that one cannot give a correct picture of markets without considering the way formal and informal networks, government regulation and political institutions shape markets.
• In line with the idea that embeddedness can be traced by examining the material ties between phenomena, exploring the material and social underpinnings of Bitcoin and its promise to make true some of the visions of the libertarian ideologues that were among the first to see the political potential of the decentralized and pseudonymous internet can yield interesting results.

Virtual money

• Before discussing virtual currency, I have to clarify some terms.
• This has to do with the institutions that underlie traditional forms of money, and how these are challenged by the particularities of the design of virtual currencies.
• The authors of Bitcoin-like schemes see central banks unfairly imposing control on regimes that are best left out of the purview of the state.
• Even the most secretive bank havens must have a way of verifying who each end of a transaction actually are.
• A number of attempts to create a secure way to handle such have been proposed during the last couple of decades.

Free us from the state

• The security of Bitcoin transactions is guaranteed through cryptographic software that ensures that communication between two parts can happen in relatively secure anonymity.
• The protocol is based on work done by cryptographers since the 1980s to make secure virtual communication possible, useful both for government and for those who wish to avoid government (Joye and Neven 2009) .
• The free market anarchists in the "cypherpunk" movement have been publishing widely on the need for a securely private way to communicate away from the prying eyes of government, through catchy-named publications such as The Crypto-Anarchist Manifesto 9 and The Cyphernomicon (May 1994) .
• Even more important is the explicit moral support for markets within economic discourse (Fourcade and Healy 2007) .
• So much for the ideological basis for virtual currencies, which the authors can see is already embedded in a large array of concepts and institutional arrangements.

Bitcoin materiality

• One thing that is often lost in the discussion of virtual currencies and private pseudonymity is the amount of non-virtual materiality which is required for these schemes to even have a chance of succeeding.
• The second deals with the types of economic institutions a development such as Bitcoin is produced by and, in turn, itself produces -decentralized markets, a new type of contractuality and a new monetary politics of possible hyper-deflation.
• Because it relies on a combination of secure, anonymous communication and complex algorithms for production and dispersion of the money supply, Bitcoin cannot be understood without taking into account the importance of the technologies it builds on.
• The ability to link transactions to specific sources digitally (Merkle 1990 ), the encryption of data for secure communication (Diffie and Hellman 1976) , the possibility of timestamping transactions (Une 2001) , the use of algorithmic problems to verify them and many other techniques all build upon existing technologies that were originally developed with other uses in mind.
• That, and the fact that the number of people in the cryptographic community that were interested in thinking about crypto-currencies and also taking the time to write the code to implement it is relatively low.

Market embeddedness

• While the long debates within economic sociology might seem unrelated to the matter at hand, it has clear implications for two of the core issues at stake with the introduction of virtual currency schemes, namely the question of trust and contract enforcement.
• With traditional marketstechnically sophisticated though they may be -the issue of how to establish trust between actors which act in their own self-interest is solved by having a robust system of third-party regulators, which can arbitrate in case of disputes and enforce sanctions in case of contractual breaches.
• These conventions reduce uncertainty and lend some stability to a fundamentally unstable arrangement, but also pose a specific challenge to accounts of these markets to accurately describe and analyse what is going on in a specific market setting.
• In fact, there has already been trouble with the software, with a bug causing the public ledger of all transactions (known as the blockchain) to split in half when an update to the official software was released 12 .
• It has the potential to have interesting consequences for some of the core institutions of modern economies.

Social materiality

• One of the most popular uses of bitcoin for commodities is for anonymised trading in illegal goods (Christin and most prominent of the sites for such traffic is the Bitcoin-exclusive Silk Road, an online black market that operates in a somewhat different manner from regular web sites.
• Using this sort of "shadow" internet makes it possible for user to browse sites such as Silk Road, which looks like an Ebay or Amazon for illegal substances, in what for all practical purposes is complete anonymity 17 .
• The question of how Bitcoin is socially embedded can perhaps best be traced by looking at how people are talking about and using Bitcoin in a social context, and the best way to assess these connections in the case of a digital currency is to go online.
• Due to the nature of how it operates, Bitcoin is being thoroughly scrutinized for security flaws.
• A decentralized system can be much more difficult to change than a centrally controlled one.

Conclusion

• I have argued that keeping an analytical eye on the material embeddedness of market interactions allows us to understand in what way virtual currencies are intimately linked to the institutional setup of the material world, just like non-virtual currencies.
• Even an effort like Bitcoin, which in its most utopian incarnation promises to free money and the social ties that are associated with it from what is seen as the dysfunctional institutions of modern economies, cannot decouple itself from a whole host of material and institutional issues.
• Along the way, Bitcoin does threaten to upset some parts of the reigning order (as witnessed by the frantic worries of narcotics officials over the new drug traffic (Alcantara, Alcantara, and Alcantara 2013) ), even if it relies on that very old communications networks, the mail.
• While it is too early to say exactly what will come of the rapid development of Bitcoin, the widespread interest in it shows that there might potentially be dynamite in this virtual currency.

Full text

1
Do libertarians dream of electric coins? The material embeddedness
of Bitcoin
Henrik Karlstrøm
1
Abstract
The new, decentralized, anonymous digital currency Bitcoin has in less than three years gone from a
proof-of-concept to being traded for about €78 million on a daily basis. Its ascendancy offers up a
puzzle for financial regulators and other law enforcers worldwide, while also promising to fulfill the
political visions of a group of market-anarchist cryptographers. While it is still a very small economy
in absolute terms, Bitcoin also poses some interesting challenges to traditional economic institutions,
and is thus an interesting case for economic sociology. Using the notion of material embeddedness,
this paper examines the possible implications of a further propagation of Bitcoin. If the currency
proves a success, this will have ramifications for a large number of economic institutions, such as the
possibility of taxation of untraceable money, the credit economy and interest rates, and international
currency control.
Keywords: Bitcoin, virtual currencies, embeddedness, crypto-anarchy, institutions, trust,
cryptography, markets
Introduction
“It’s not clear if Bitcoin is legal, but there is no company in control and no one to arrest.”
- Joshua Davies (2011)
In October 2008, a username on the Cryptography Mailing list posted a white paper detailing the
workings of a new peer-to-peer, pseudonymous digital currency called Bitcoin (Nakamoto 2008). The
username Satoshi Nakamoto - most probably a pseudonym itself, for one or more persons - posted
the code for software that would enable the production and trade of bitcoins
2
in January 2009. At
first, it seemed mostly like an interesting novel way to apply certain cryptographic techniques. 1 BTC
cost €0.0005, and new ones were introduced rapidly and easily for home computation. By early
September 2013, 1 BTC was worth around €100
3
- two hundred thousand times the initial worth. The
currency had already been through several cycles of boom and bust (but with a clear upwards
general trend), and the market cap of the Bitcoin trade had grown to more than €1.2 billion
4
. Even if
this is measly compared to the €3 trillion of more established currencies that is traded daily (Bank for
International Settlements 2010), this new currency has received a lot of attention, and is garnering
interest from traders, technophiles and utopian anarchists alike. Meanwhile, the creator(s) has
disappeared without ever revealing the actual identity behind the moniker of Satoshi Nakamoto.
1
Ph.D., Department for the Interdisciplinary Study of Culture, Norwegian University of Science and Technology,
7491 Trondheim, Norway. Contact: henrik.karlstrom@ntnu.no, +47 73591765
2
Shortened to BTC, and written capitalized when speaking of the entire ecosystem and lowercase when
speaking of specific instances of the currency
3
From the Bitcoin exchange Mt.Gox (mtgox.com), read 11.09.2013
4
Bitcoin Watch (http://www.bitcoinwatch.com/), read 11.09.2013

2
What is Bitcoin? In short, it is a combination of three already existing phenomena: 1) a “traditional”
electronic currency, 2) a security protocol for handling the challenges of anonymous trading, and 3)
computer software for implementing these two things. The software consists of a deterministic
computer algorithm that takes the place of modern central banks in deciding when and how new
money is added to the money supply, and where each user of the Bitcoin software is a node in a
decentralized, peer-to-peer network that is responsible for verifying both the creation of new
bitcoins and the authenticity of all the transactions in the network.
New bitcoins are created by the software, which releases a block of bitcoins when any node in the
network provides a proof for a mathematical problem. It is set to produce a new block every ten
minutes, and the problems become more computationally difficult the more nodes there are in the
network to maintain this fixed schedule. New bitcoins are far out of reach of the everyday computer
user, and are mainly produced in one of six or seven gigantic server farms. The process is known as
“mining”. Miners receive new bitcoins for free
5
, and can then distribute them by buying things or
services for them, or simply selling them at a bitcoin exchange. Crucially, no transaction is counted as
having taken place before it has been verified by the other nodes in the network.
Outside of the interesting technical features of the currency, Bitcoin represents some challenges to
the status quo. Bank regulators scratch their heads as to how to deal with a currency without any
form of central control, without anyone to regulate. Internet libertarians celebrate another strike
against central government and surveillance culture. Drug dealers and money launderers rejoice in
better, more secure business. Currency traders debate whether it constitutes a creative pyramid
scheme or something they will soon have to take seriously. The currency’s genesis in an online, open-
source, anonymous fashion only seems to add to its allure.
The rapid rise (and possible future rapid decline) of Bitcoin constitutes a fascinating opportunity for
the social study of money and markets – a near real-time experiment and attempt to upend some of
the core institutions and social practices that lie behind the modern market economy. In this article, I
will detail some interesting facets of the Bitcoin technology, focusing on its creators’ embrace of a
libertarian ideology of non-governmental monetary policies and the promise of technology to free us
from politics. By paying attention to the way even seemingly ethereal developments are connected
to specific material and institutional arrangements – so-called material embeddedness – we can see
how the stronger claims of its adherents might
In the following sections, I will discuss the theory of material embeddedness to show how it can be a
fruitful concept for examining a superficially non-material technology. I then discuss the
methodological challenges of studying new developments in the virtual world of the Internet, before
giving some examples of the ways in which Bitcoin is materially embedded, leading to some closing
remarks on how keeping an analytical eye on the material embeddedness of market interactions
allows us to understand in what way virtual currencies are intimately linked to the institutional setup
of the material world.
5
However, at present a new block requires so much computational power that the cost of electricity for
producing new bitcoins is non-trivial.

3
Embeddedness and how to trace it
Since Bitcoin is at its core an attempt to expand the purview of markets through destabilizing
universally adopted state monopolies on the production and verification of currency, I want to
analyze it using current sociological theories on the role of markets and their embeddedness in
modern economies. It is well established within economic sociology that markets and the economy in
general must be seen as embedded in a larger social context, with rules that are mediated by social
ties and institutions that are the result of historically contingent developments (Granovetter 1985;
Zukin and DiMaggio 1990). Put simply, markets can only exist and work efficiently if a lot of work is
put into creating and maintaining them.
This sociological analysis of markets has focused on the way markets tie into existing institutional
arrangements. With the operation of markets relying on spoken and unspoken agreements, personal
relationships, a reasonable level of trust, formalised rules directing market transactions, lawmakers,
industrial backers and so on, the study of market embeddedness has tended to focused on the study
of this social context: what types of bonds exist between actors, which informal rules are in place to
mediate interaction, who sits where in which institutions (Krippner and Alvarez 2007; Swedberg
1994)? The main idea is that one cannot give a correct picture of markets without considering the
way formal and informal networks, government regulation and political institutions shape markets.
This means that varying combinations of networks, regulations and institutions will produce different
types of markets, a claim that goes against the grain of traditional economic theory (Dobbin 2004). It
also poses a plethora of questions to tackle for sociologists, as indeed they have: What institutions
created and sustain markets (Fligstein 2001), what networks are the actors involved in (Dimaggio and
Louch 1998), what are the rules of engagement (Edelman and Stryker 2005), and where do actors’
preferences come from (Bourdieu 2005)?
The embeddedness literature is not without its critics. Some claim that by making too clear
demarcations between other social settings and market settings, it fails to actually integrate markets
in the social setting, instead keeping it as an entity separate from larger society. Krippner (2001)
claims that by focussing on the surrounding context economic sociology has, like the economists it
often criticises, taken the market for granted. Gemici (2007) argues that embeddedness as a concept
has value as a methodological approach in that it guides scholars towards the ways markets connect
to the larger societal context, but that this achievement is also the reason why the embeddedness
approach fails to provide an alternative to prevailing economic thought. The market is still a separate
sphere from the society is embedded in. This is a conundrum that economic sociology has yet to
solve, as witnessed by one recent attempt to tackle the concept (Dale 2011).
6
Lately, the sociology of finance inspired by theories from science and technology studies has
challenged this view of embeddedness, paying closer attention to the material underpinnings of
markets and market relations (Muniesa, Millo, and Callon 2007; MacKenzie 2006). The claim is that
the problem with embeddedness theory is that the “social context” which the economy is embedded
in is poorly defined. Because it can be difficult to define what exactly a social context is, this strand
prefers to trace the more easily identifiable material linkages between market actors. This means
paying attention to the machines, algorithms and other such market devices that make market
operations possible: “Emphasis is put […] not on any substantive definition of what “economic”
6
Indeed, Dale suggests that there might be something to gain from adopting the more Marxian view that
society is embedded in the economy rather than the other way around.

4
should mean” (Muniesa, Millo, & Callon, 2007:3). In addition to the usual market descriptions of
supply and demand, the flow of information and the main market actors, Calıskan and Callon list a
whole host of objects to include in the description of market matters: “rules and conventions;
technical devices; metereological systems; logistical infrastructures; texts; discourses and narratives”
(Calıskan & Callon, 2010:3), and so on.
This makes for a very loose definition of what markets actually do. While it covers all the bases, the
unwillingness to prioritise factors means there is a risk of losing sight of the more politicised function
of markets in modern capitalist democracies, not least related to the often controversial acts of
deregulation. The authors concede that “markets delimit and construct a space of confrontation and
power struggles”, but this space exists only within the market transaction itself, “until the terms of
the transaction are peacefully determined by pricing mechanisms” (Calıskan & Callon, 2010:3). In a
way, they wish to avoid extrapolating questions of power and politics from the market situation
itself.
This perspective has the strength of keeping the focus squarely on the material basis of economic
transactions, but it runs the risk of losing sight of the context within which they occur. Fligstein and
Dauter, for example, note that “network theorists […] have generally ignored the possible effects of
government and law” in market accounts (Fligstein & Dauter, 2007:107). Countering this, empirical
investigations in the material markets vein have demonstrated how economic actors have worked to
change the regulatory system to accommodate the new options pricing theory (MacKenzie 2006),
and while Callon and Calıskan are mainly concerned with the material configurations of markets, they
do not reject the notion that these configurations arise within a setting that is socially defined:
“empirical analyses of the complex relation between humans and non-humans […] must be
encouraged and pursued” (Calıskan & Callon, 2009:393). Similarly, they point out that markets also
employ “technical and scientific knowledge […] as well as the competencies and skills embodied in
living beings” (Calıskan and Callon 2010:3) in addition to the list of objects mentioned above.
Much of the difference between the STS and economic sociology approaches to markets lies in their
focus: the former represents a concern with theories and their material outcomes, embeddedness
with theories and their institutional representations. Pinch and Swedberg (2008) argue for a
synthesis of these two perspectives, a material embeddedness, which uses material analysis to
establish ties that are if not directly part of a “social context”, then at least something richer than a
simple listing of the techniques involved. In this manner, markets can be understood as socio-
technical enactments with room for social and political strategies employed by human actors in
market interactions (institutions, habits, morals etc.).
These two strands of theory have a somewhat different focus, but I believe they can provide a useful
framework for making legible some of the nuances of the highly complex world of the algorithmic
economy. In line with the idea that embeddedness can be traced by examining the material ties
between phenomena, exploring the material and social underpinnings of Bitcoin and its promise to
make true some of the visions of the libertarian ideologues that were among the first to see the
political potential of the decentralized and pseudonymous internet can yield interesting results.
But how to go about exploring something which is so far from being finally settled? Here I will focus
on the ideological roots of Bitcoin, with its basis in a specific form of technological libertarianism. By
examining the claims of its early adopters as to the function of Bitcoin, taken from various online

5
archives of messages, I hope to show how the currency is viewed as much of an ideological
instrument as it is a practical mode of exchange. In contrast to this, the materially embedded
features of the currency, such as its reliance on very specific physical technologies, can point towards
an underlying tension within the rhetoric behind Bitcoin.
Methodologically, studying Bitcoin is not an easy task. The phenomenon itself is fairly new, and what
studies have been published of it have been of the more technical sort, examining the properties of
the network that sustains the currency or testing its pseudo-anonymity. In addition, the people who
have been instrumental in developing the standard are either anonymous themselves or have
worked through informal channels, preferring to produce proofs-of-concept through self-publishing
on blogs and working out technical details on online message boards. This means that, by necessity,
many of the sources that appear in this article are to a certain degree non-verifiable in the traditional
academic sense – many are from transient web pages rather than published research. While quoting
from faceless internet accounts is a less than optimal solution from a research point of view, it is
worth noting that the crypto-anarchist community described below actively promotes anonymity and
tends to believe that authority should only stem from the strength of arguments.
7
Virtual money
Before discussing virtual currency, I have to clarify some terms. The socio-technical arrangements
that form the basis of any economy mean that markets and money can only be “virtual” in the sense
that they are based on electronic media – in this sense, virtual means “mediated by computers”.
They are intimately linked to material infrastructure, some of which will be covered later. However,
this does not mean that virtual money is material in the same way as non-virtual money. This has to
do with the institutions that underlie traditional forms of money, and how these are challenged by
the particularities of the design of virtual currencies.
Virtual currency can mean a lot of things, and is often used in connection with quite disparate
phenomena. One example is the world of complex financial products such as credit default swaps,
bonds derivatives and mortgage loan credit ratings, which are virtual in the sense of being financial
representations of value that can be traded. Though they are the playground of financial experts and
constitute a large portion of the liberalized market for money and financial markets, they ultimately
rely on the actions of regulators and central banks. Similarly, the concrete political ramifications of
the Bitcoin economy are somewhat different than the ones that are the result of other, more well-
known virtual currencies, such as the market for World of Warcraft gold or the semi-autonomous
economy of Linden Dollars, the currency in the online virtual world of Second Life (Jin and Bolebruch
2009). While both these virtual currencies facilitate “real-life” economic phenomena such as money
laundering or gold-farming (Castronova 2002), the very concept of Bitcoin is more ambitious in its
promise to change the way the global economy works.
For the purposes of this article, the term “virtual currency” as it refers to Bitcoin-like schemes means
a currency that has the following characteristics, which will be expanded on below: 1) the money
supply is managed algorithmically by computer software instead of institutionally by central bankers;
2) supervision of transactions is distributed and non-hierarchical. There is no single authority that can
authenticate the money; rather it is done through verification of each transaction by other nodes in
the network; 3) the online “wallets” of bitcoins cannot be directly coupled to an offline identity.
7
See http://lesswrong.com/lw/lx/argument_screens_off_authority/ for a summary of this position

Frequently asked questions

Q1. What contributions have the authors mentioned in the paper "Do libertarians dream of electric coins? the material embeddedness of bitcoin" ?

Using the notion of material embeddedness, this paper examines the possible implications of a further propagation of Bitcoin. 

Q2. What are the two organizations that have issued statements about the new quasi-legal currency?

the European Central Bank (2012) and the US Financial Crimes Enforcement Network (2013) have both issued statements about the new quasi-legal currency. 

Q3. What is the main idea of the sociological analysis of markets?

It is well established within economic sociology that markets and the economy in general must be seen as embedded in a larger social context, with rules that are mediated by social ties and institutions that are the result of historically contingent developments (Granovetter 1985; Zukin and DiMaggio 1990). 

Q4. What is the role of the central bank in stabilizing the financial system?

The central bank also plays a key role in stabilizing the financial system by acting as so-called “lender of last resort” (Fischer 1999), as well as being the instrument in which “the bulk of domestic payment obligations are finally legally settled” (Johnson et al. 1998). 

Q5. What does the author concede that the market is a separate sphere from the society?

The authors concede that “markets delimit and construct a space of confrontation and power struggles”, but this space exists only within the market transaction itself, “until the terms of the transaction are peacefully determined by pricing mechanisms” (Calıskan & Callon, 2010:3). 

Q6. What is the main reason why people are so interested in implementing virtual currencies?

One of the reasons so much work has been put into solving the complex cryptographic problems of implementing virtual currencies is to ensure secure enforcement of contracts. 

Q7. What are the main problems that have to be tackled using?

These problems have to be tackled using a combination of mathematical algorithms and cryptographic regimes, which take the place of human policy makers in supervising the supply of money and arbitrating fairness of exchange. 

Q8. How many vendors accept bitcoins as a payment method?

Bitcoin is growing in popularity as a currency of use, and the number of vendors who accept bitcoins as a method of payment is in the thousands15. 

Q9. Why is the number a cap on the money supply?

While the number itself is a more or less arbitrarily chosen function of the parameters of the block release design of Bitcoin, the point of a cap on the money supply is to avoid the problem of inflation. 

Q10. What is the main reason why the Clipper was withdrawn?

By designing their own cryptography system (the Pretty Good Privacy – PGP – protocol) and mobilizing agencies such as the Electronic Frontier Foundation to the cause, the bill that introduced the Clipper was quickly shelved (Zimmermann 1991).9 

Q11. What are the serious misgivings about the way Bitcoin is implemented?

Although Bitcoin transactions are encrypted using state-of-the-art encryption methods, the way these are implemented might yield some problems. 

Q12. What is the main point of intercept for lawmakers?

As it cannot be traced to the original source and bitcoins can be stored as any other digital medium, the only point of intercept for lawmakers would be in the original bank exchanging of other currencies into BTC. 

Q13. What are the serious misgivings about the scalability of the Bitcoin protocol?

There are misgivings about the scalability of the increasingly resource-intense and time-consuming verification process of Bitcoin transactions which makes real-time transactions potentially difficult (Karame and Androulaki 2012; Becker et al.).