Bitcoin is many things, all referenced under the same word. Confusion about its nature and valuation naturally arises from insufficient differentiation of these facets, combined with a general human tendency toward “either/or” thinking. Often, the situation is more “both/and,” which becomes clearer after looking through first impressions and simple or even misleading analogies.

A short section of Francis Pouliot’s post on the Bitcoin Foundation of Canada blog caught my attention: “The currency and the network, although conceptually different things, cannot be separated. Bitcoin the network is valuable in itself because of its characteristics and, because you need to obtain bitcoins in order to use it, so is Bitcoin the currency.”

This reflects the kind of unit/system duality approach that I have found helpful, and it started me considering some further implications (I discussed the application of unit/system duality and economic/technological duality concepts to Bitcoin in “On the origins of Bitcoin” (3 November 2013)).

Discrete tradable bitcoin units are one of the integral aspects of the Bitcoin network, which in turn is a live instantiation of the Bitcoin protocol (language/convention/consensus system). The value of the units is what enables the distributed financing of the entire network; the existence of this network enables the existence, security, and value of the units.

Along another conceptual axis, economic theory supports the interpretive understanding of what people do. What things are is addressed in this case as what I call the technological layer. These layers interact, but the methods appropriate to studying them differ. One is the domain of action theory, with concepts such as ends, means, and preference; the other, in this case, of computer science, networking, and cryptography.

Still, the technological layer of Bitcoin (the system) can give hints toward economic theory interpretations of the value of bitcoin (the tradable units). Additional economic insights might at times be inspired by checking back to see what is “really” going on in the technological layer, and then clarifying the relationships between the layers.

The helpful fable of the “bitcoin”

In applying economic-theory concepts to interpreting actions, the interpreter references the more specific constructs that the people in question use in their own acts. In this case, among Bitcoin users, this construct is the operative image of “bitcoins” or other such units as interchangeable, tradable digital objects.

Yet when dialing the technology layer up into a higher presence in awareness and overlaying it on the action-interpretation layer, “bitcoins” begin to look like something of a made-up image, albeit one that enables people to interact with the technology layer in a meaningful way. The image makes it intuitive for people to use the system to accomplish their own objectives—to create, hold, and adjust balances and to buy and sell products, services, or monies out of such balances.

The tradable units on the network are not bitcoins, and are in a sense not even satoshis (100,000,000 to a bitcoin). Satoshis are an abstract unit of account within the network, whereas the elements held and traded are “unspent outputs” of all possible sizes denominated in this abstract unit (or more convenient multiples thereof). Satoshis are not now generally useful in the form of a single unspent output of one satoshi. Unspent outputs, each defined in part as some number of satoshis, are assigned to an address in a state from which they can be reassigned to other addresses (including to change addresses as needed), provided the specified signatures and other transaction data are relayed to the network.

All of this can work for a general population of end users because none of them needs to understand any of it to use the network for their own purposes. Even those who do understand such details do not have to think in such literal terms when interacting with the network in the role of end user themselves. The fable of the existence of “bitcoins” helps facilitate the human-network interaction at a practical level.

So long as the practical effect of such an image fills this role without causing errors or deceptions, it is a purely pragmatic and instrumental issue. Electronic “fly-by-wire” systems have been displacing mechanical flight controls and electronic and electrical controls are also taking over the auto industry. It does not matter at this level if a car’s steering wheel turns the wheels on the road mechanically or sends electronic control signals to electric motors that actually steer the vehicle—provided that the practical result in either case is that the vehicle actually turns as intended in response to the human-generated directional signals.

A dualistic valuation

In this way, combining the unit/system duality and economic/technological duality approaches can lead to additional insights about the way people value Bitcoin/bitcoin. The network is only in a loose metaphorical sense valued “as a whole.” The principle practical way for users to value it is via their own possession of and ability to transfer specific tradable units. Such units are an integral characteristic of the system. Viewed together as a social phenomenon, this could suggest the superficial appearance of a mass user valuation of the system in general. However, an idealistic “in general” valuation or mere widespread sentiments of technological appreciation could not support a functioning monetary system; only individual user valuations of discrete units can do that, and it is from there no surprise that this is precisely what Bitcoin “the system” enables.

Unspent outputs denominated in satoshis and multiples of them form a key part of the end-user interface of the protocol/network. Users value these and incorporate them into their respective structures of action. The units (or rather, the interface construction of the units) cannot function as they do in this role without the system; nor can the system exist as it does—or be entirely self-financed in a distributed way as it is—without the scarce and discretely valued tradable digital objects denominated in the system’s own abstract accounting unit.

Originally appeared 20 May 2014 on konradsgraf.com.