Let’s talk about antifragility: what it is, its consequences, and how it’s related to Bitcoin and the dollar.
The term antifragile was first coined by Nassim Taleb. In the following quote, Taleb outlines the qualities of anti-fragile systems:
“Some things benefit from shocks; they thrive and grow when exposed to volatility, randomness, clutter, and stressors. Antifragility goes beyond resilience or robustness. The elastic resists impacts and remains the same; the anti-fragile is getting better. “
In an economic context, antifragility suggests that economies without government protection such as tariffs, subsidies, and bailouts are stronger and more efficient than economies with government protection that are fragile.
Whenever the government endorses a company, that company relies on the government to stay in business. Businesses could also start acting more irresponsibly, making high-risk decisions, knowing that if something unfortunate happens, they can always turn to the government for help. In such a case, the state, the economy and the company’s resources are not used optimally, which leads to a fragile economic system.
To put antifragility in a real context, think about the immune system. If your body becomes infected with germs and bacteria, you will get sick. But then your immune system will be boosted to fight these germs and, on the other hand, you will have a healthier body. But if you stayed huddled in your house and never went outside, you would have a weak immune system and the first illness you encounter could be enough to cause a more serious illness.
The same idea applies to an economy as well. An economy operating with government protection is fragile, inefficient and prone to breakdown. A prime example is the 2008 financial crisis. The 2008 crisis is quite complicated. To keep this as simple as possible, let’s talk about how she started. During the real estate boom, banks issued risky subprime mortgages because government-sponsored agencies like Freddie Mac and Fannie Mae wanted to buy these mortgages and sell them to investors as mortgage-backed securities. Fannie and Freddie knew these mortgages were risky, but they kept buying them anyway because they were also high-yielding. And Fannie and Freddie knew they could turn to the government if they ever took too much risk and got into trouble.
But how does this apply to fragility and our immune system?
Remember to isolate yourself in your home as the government supports Fannie and Freddie. The riskier investments Fannie and Freddie were, the more dependent they were on the government and the more susceptible to possible shocks. And when that shock came in 2008, they both collapsed. Their stock values fell more than 99%, several banks they sold securities to went down, and millions of Americans lost their homes.
So the big question: How could antifragility have prevented the financial crisis? If the government hadn’t backed Fannie and Freddie, they wouldn’t have been willing to take out these high-risk loans. Instead, they would have invested in safer loans like the 30-year mortgage. This would have resulted in more sustainable growth.
But how are the dollar and bitcoin related to fragility and anti-fragility?
The dollar is in the loop of government control, giving the government the power to print and manipulate the currency at will. This is how the Federal Reserve saved Fannie and Freddie. It just printed the money the agencies needed to stay afloat.
But Bitcoin doesn’t work that way. Bitcoin is programmed to be decentralized and finite so that a single institution cannot take control of it and print more coins. If the US operated with Bitcoin, the government could not offer anyone financial protection. That means companies would have to behave responsibly to survive because they would understand that there is no government safety net to fall back on. Free market economies are inherently anti-fragile, but central institutions corrupt the free market by controlling and manipulating currency and by benefiting well-connected industries and businesses. Bitcoin only retains the natural anti-fragility of the free market.
In addition to Bitcoin preserving anti-fragility, Bitcoin is also anti-fragile in its own right.
Bitcoin uses open source peer-to-peer technology, which means anyone with an internet connection can access Bitcoin. So if someone tries to manipulate the currency, it can be quickly addressed by other people on the network. This is what makes Bitcoin so unique. It works with a huge computer network so anyone can check their deliveries and transfers at any time. This is the opposite of fiat currency, which is centrally managed behind closed doors. Nobody knows if, when or how a fiat currency will be manipulated. We are all simply told to stop asking questions and trust the superiors of the Federal Reserve.
Bitcoin transfers that freedom, power and knowledge back to people. And whenever someone tries to take that power away from us, Bitcoin adapts and improves, maintaining its decentralized and finite nature.
This quote from Parker Lewis sums up Bitcoin’s anti-fragility perfectly:
“While it’s easy to fall into a trap and believe that Bitcoin is untested, unproven, and not permanent, it’s just the opposite … every time it proves to be up to the challenge and comes out of each test in a stronger state . “
This is a guest post by Siby Suriyan. The opinions expressed are solely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.