This article discusses the relationship between modularity, distribution, freedom, and efficiency in the context of solving a bitcoin issue through clubification.
Yes, I believe I invented the term clubification. I am referring to the process of converting a public or common stock good into a club good.
Read more about the problem itself here in my recent past article. The solution is to clubify bitcoin, but this can be done in multiple ways. That is where this article picks up. The two fundamental solutions are internal and external solutions.
The correct answer is that an external solution is usually more efficient, although it is technically an empirical question. You might want an internal solution to increase, in terms of opportunity cost not in terms of absolute level, the network value. You also might want an internal solution because there are large fixed costs to implementation and society would be better off on net if there was a centralized investment. Society in this case being all users and potential users of bitcoin.
This would be a short term benefit at the cost of long run efficiency. Although it could be an intermediate step as a gradual transition toward the long run solution.
The longer run solution is the efficient solution which is distributed implementation.
In case it isn’t clear, I am talking about the use of contracts to redistribute wealth from bitcoin users to bitcoin miners in order to improve incentives for miners to continue operating in a wide, competitive market. However, these contracts can be written into the code (internal) or they can be administered by software or organizations outside of bitcoin (external).
The external solution offers the ability for greater customization, distribution, freedom, and modularity. As a result the entire system is more efficient in the long run.
Distribution means that the bitcoin code itself will remain lighter, specialized, less risky to depend on, and more compatible and flexible with other services. If a modification to the core is made such as requiring a transaction tax it would be less efficient due to the lack of local knowledge and variety of preferences and means of payment held by individuals.
Clubs could take services as an input payment, or take in exotic currency, and more, while the core modification would likely just take some coin because it is quick to implement. Clubs are also able to offer peripheral benefits which would be costly or impossible for the core to offer. Freedom in general is efficient because it allows decisions to be made at the individual level. This is usually efficient because individuals usually know what’s best for themselves compared to anyone else, so they can usually best make decisions to meet those ends.
This is one definition of social efficiency by the way: The ability of society to maximally achieve its own ends
Modularity, which is just another way of looking at distribution or decentralization, is like an interest effect on innovation, which can eventually result in exponential increase. If we modify the core we must make one careful change at a time. If we leave the core be and let modules sit on top then those modules can fork into other modules and so on and at no time does it become very risky or expensive for the different pieces to fail. They also grow at a faster rate. Core changes are more slow and bureaucratic.
In conclusion, we don’t want taxcoin. Taxcoin is a name for bitcoin after it undergoes a hypothetical change which requires fees or taxes. We don’t want internal clubification. We want external clubification through the development of actual organizations with people, or the use of software which is modular because it is separate from bitcoin or other crypto but it works together.
We want this for 4 reasons: Decentralized innovation grows with an interest effect, maximal individual freedom creates efficiency because people can best choose their own demands, clubs reduce risk of central failure, and clubs increase the ability to give and accept diverse goods and services without weighing down the core.
But we might not want external clubification for 2 reasons which are probably a bigger deal now than they will be later: Distributed implementation is more costly in the short run because implementation projects are a fixed cost, and bitcoin or the network itself might be more valuable in the short run because core implementation will rapidly deploy to a wide market, although in the long run this will devalue bitcoin and the network because it is a fundamentally less efficient approach.