Moral Hazard: On The Hook

When a party has a well-defined duty to serve the interests of others, but instead places its own interests first.

Individuals and institutions that do not face the full consequences of their decisions will naturally see their appetite for risk increases beyond prudence. We’ve witnessed this repeatedly with almost every major modern financial crisis due to misaligned incentives. The ability of sovereign governments to backstop companies and entire industries sends the signal that becoming "too big to fail" is now a legitimate competitive strategy. This of course is all made possible by our current fiat monetary system.

The provision of taxpayer-funded bailouts deployed in the wake of the 2008 financial crisis were, at the time, staggering. They permanently altered the rules of the game.

Luckily for us, there was a parallel development taking place that would offer an escape.

“If there is an escape, that escape will be used.” -

When Satoshi Nakamoto mined the first bitcoin block, he left a message that would forever be enshrined on every node with a full copy of the blockchain. While it can only be speculated, one would imagine this was a direct critique of a fragile and compromised system.

Once the illusion of central bank independence was well and truly broken, the stage was set for a sequel. Unsurprisingly, the subsequent responses to all major economic shocks since have been much of the same, only on grander scales.

While the exact mechanics and the names of the various programs rolled out by central banks may differ, the general effect has been the same- an accelerated decline in the purchasing power of fiat currency. Because where exactly do central banks get the money to buy these assets?

Bitcoin offers a return to full accountability. Proof of work provides assurances that no new units may be issued without real world costs, a cost that simultaneously secures the integrity of the ledger. At any point in time, the total supply can be independently audited and all units in existence attributed to their rightful address by any single node. Favours cannot be granted, no matter the participant.

“You can stay on the Fiat Standard, in which some people get to produce unlimited new units of money for free, just not you. Or opt in to the Bitcoin Standard, in which no one gets to do that, including you.” -Ross Stevens (NYDIG)

Ultimately, someone is going to be left with the bill for all of this recklessness. Do you really want to be on the hook for it?