Site icon Juraj Bednar

Lunarpunk – the future of cryptocurrencies in regulatory hell

When there was a battle of “ideologies” going on around me during high school – the Nazis (yay central Slovakia!), the metalheads and the punks, the hippies and the normies, I was immersed in cyberpunk literature myself (William Gibson, Neal Stephenson) and cypherpunk philosophy. Cyberpunk is a genre of science fiction that deals with dystopian futures that tends to focus on a “combination of lowlife and high tech”. There are no “Star Trek” spaceships for the entire civilization, but the protagonist is usually a poor journalist or a junkie who has been put in a situation where some technology reaches him that he can use to influence the reality around him. Cyberpunk “invented” the first Internet, often called the matrix (Gibson) or a metaverse (Stephenson) in literature. It explored the possibilities of collective immersion in a “collective hallucination”. 

The technology in these works has some interesting features. It twists the asymmetry of power between the powerful and individuals – in favor of the individuals. In Stephenson’s Diamond Age, a poor girl gets  “A Young Lady’s Illustrated Primer.” It is a book (today we might say a tablet) in which artificial intelligence educates the reader. Someone who gets their hands on the technology is able to use it to change their environment, even though someone else doesn’t like it – states, corporations (which often merge in cyberpunk – much like in our reality today), often not even the inventor of the technology in question.

The second interesting feature of technology is that it cannot be “uninvented”. If a technology is created, the world has to adapt to it. Today we see that states do not understand this. They are turning around the functioning of even a basic technology like a web browser and regulating the use of cookies (🤦🏽), trying to regulate internet payments, cryptocurrencies, social networks, …

And that’s where cypherpunk comes in. It has only partially made its way into literature (Stephenson’s Cryptonomicon, Paul Rosenberg’s A Lodging of Wayfaring Men, or The Breaking Dawn, or the anonymous work agora.txt). Cypherpunk technology is in direct  conflict with the world’s powers and predicts how the powerful will react to it. The cypherpunks have worked systematically on encryption and anonymization technologies (PGP, mixmaster, Tor, peer to peer networks, …) and electronic cash (e-cash). Electronic cash was the most important element of the cypherpunk vision described in the Cryptoanarchist Manifesto by Timothy C. May and it was the most difficult to implement. Cypherpunks perceived that states would try to prevent this vision and would use the traditional excuses for why they regulate something – fighting tax evasion, terrorism, and drugs. They even predicted the emergence of prediction markets, which you can read about in this book, and even that it would be impossible to keep state and corporate secrets (WikiLeaks).

The technologies of cypherpunk are already here and they have indeed reversed the asymmetry of power. One thing is certain – the technologies really cannot be “uninvented”. Any criticism of cryptocurrencies, of encryption, of anonymisation, which is based on the idea that “these technologies are bad and we must ban them” is working with the false notion that it is possible to turn the arrow of technological progress. Ever since gunpowder and the printing press were invented, these technologies have worked despite efforts to regulate them. In Japan, the former Prime Minister Abe was assassinated in July 2022. Japan is known for strict gun regulations. The attacker made the gun himself – at home. When the technology exists, creating a weapon is just implementing the information about how the technology works into physical space, using other technologies like 3D printing and at home manufacturing. It is not possible to ban the printing press, regardless of how the powerful of the times hated what was coming of Gutenberg’s invention.

How this conflict will evolve is not clear, but what we know for sure is that we will not forget that there is Bitcoin, Tor or encryption. Just as states have tried to ban the use of marijuana, only someone somehow forgot to tell those hundreds of millions of users. Or rather, they did not respect the ban. When the editor of Reason magazine asked the author of the crypto-anarchist manifesto  what he thinks about the fact that these technologies can be abused to fund terrorism or blackmail, he simply replied “They have to deal with it”. We have to learn to live with it and react to it. They are never going away. The possibility of “shutting down Bitcoin” is no longer an option, for whatever reason – good or bad.

Solarpunk and Lunarpunk

Solarpunk is a positive, vibrant response to cyberpunk dystopia. In solarpunk, the authors explore what happens if humanity solves all of its big problems – sustainability, climate change, coexistence with nature, etc. Unlike cyberpunk’s darkness and heroes being marginalized groups, solarpunk heroes fly around in electric airplanes, live happily in organic buildings that seem to have “grown up” along with the habitat that makes up part of their green cities. It’s a bit like Tolkien’s wood elves, but instead of magic, they use the latest technology to improve their condition and the world. This future is sunlit, and in cryptocurrencies it is represented, for example, by the cryptocurrency Ethereum, where people are crowdfunding “public goods ” and building a parallel financial system that is fully transparent. They respond to the threat of state bans by saying that such a good thing as Ethereum cannot be banned – why would they…? And it’s a question that, if seriously considered, would be fear-inducing. Ethereum and solarpunk crypto are not in conflict with power, but want to cooperate with it, and they somewhat naively assume that the other side will also behave rationally and is interested in this cooperation.

Solarpunk is thriving at a time when markets are going up. Projects have crazy valuations and want to solve every problem in the world – global warming, urbanism, transportation, access to financial services, international trade, direct democracy, funding of nonprofits, … Solarpunk is playing on the edge of communal, cooperative progress and central planning. Architects, artists, natural scientists, programmers, designers invent the future based on their expertise, as best as they can. The question of someone not being comfortable with such a future is not considered; solarpunk sort of assumes that their solutions are good enough that no one can reject them.

And then the bear attacks. Crash. Chaos. And the states have to bail out all the “investors in the public good”. By regulation. Everything is visible, everything is in transparent public blockchains. There is no need to hide, until the need to hide comes and then it is too late. And repression comes.

Lunarpunk is a response to the inevitable attack. As the need for states, corporations, and criminal groups to monitor, tax, regulate, and protect increases, a natural response arises – a technology of anonymity, encryption, invisible unregulated financial flows, and other forms of communication is developed and used by the people. With such a positive feedback loop, the need to regulate and monitor is again reinforced (“see, they are avoiding our control, we need to increase surveillance!”), thus improving technologies to circumvent regulation and surveillance even more. 

Creative destruction – why is decentralization antifragile?

What happens after the attack? How does the system react? A centralized system will collapse after a successful attack. It can resist attacks, but if there is a successful attack, the system collapses. Fragility means that after an attack, the object (or system) falls and collapses. Like a cup falling from a green skyscraper to the ground.

If experts, economists, central bankers, politicians and bureaucrats plan a society and there is a crash, everyone involved in the economy suffers – even many who are not even directly involved suffer the second order consequences. All it takes is one seemingly innocent failure – a badly set interest rate, too high a tax, too much regulation, too much money printed, and everything collapses like a house of cards.

Solarpunk’s efforts to make things better come into conflict with the powers that be, because they pretend and some even believe they have a patent on good. Want to solve climate change or reduce transaction costs, transportation of people and goods, provide loans or produce better money? Solarpunks are trying to cooperate with them, but often their reaction is “surely someone is funding terrorism or ‘laundering money ‘ in the process”. Regulate, ban, subjugate – that’s the most common response to someone doing something better than the state.

An explanation of Lunarpunk. This video gives me chills everytime….

And here comes lunarpunk . Unlike standard computer programming as we know it and as Ethereum uses it, lunarpunk uses a different principle, called “anonymity engineering”. Instead of calculating who won the token vote, the poll is verified using an anonymized zero knowledge proof. Instead of writing down who sent how much money to a publicly available ledger (Bitcoin, Ethereum), a proof that no new money was created is constructed and only the transaction participants see the amounts. All communication is encrypted and everything is shrouded in moonlight – only the outlines, the absolutely necessary parts of transactions and interactions are visible. In lunarpunk technologies such as Monero, Tor or DarkFi, even the fact that you are communicating is often invisible, as the communication often involves fabricated or decoy communication.

Lunarpunk is not made up of a single project like Ethereum and the apps built on top of it, but instead a decentralized ecosystem. And a decentralized ecosystem has the property of antifragility. It improves when attacked. The market generally has this property. We have thousands of food producers in the market. If there is a problem in the market, such as insufficient supply of some important foodstuff, companies that are flexible and can adapt production to replace it with something else will start to thrive. Or firms that did not even need the scarce resource at all. The whole ecosystem is improved by such market ‘attacks’. Firms that cannot respond flexibly begin to either adapt or they disappear and this means that the ecosystem as a whole improves. We see a similar principle in nature. The viruses and bacteria that can adapt most effectively to changes in the immune system of their hosts survive. In a heavily vaccinated population, a variant of the virus for which the vaccine does not work begins to spread. In a wildfire environment, individuals and species that are resistant to wildfires survive – they are for example able to escape when they sense the fire (birds), or they are able to reproduce in such a way that after the fire is extinguished, new individuals emerge that are able to draw nutrients from what is left after the fire. The forest after the fire, the virus, the ecosystem and the market are victims of destruction, but this destruction is “creative” because the result is a stronger ecosystem. After the attack comes growth.

The lunarpunk crypto economy works similarly. It is made up of projects that respond to spying, censorship, blocking and regulation by being encrypted, uncensorable, unblockable and unregulatable. Some technologies are not good enough for this purpose – ciphers are broken, an attacker will find a way to censor, block, or regulate something. These projects will disappear and thus the lunarpunk ecosystem will improve again. Only the strongest will survive, and another attack will come, stronger and more sophisticated, which in turn will kill more projects.

If there is a demand for the services that lunarpunk projects provide, and there are a sufficient number of them with different attitudes towards attackers and different defenses, the lunarpunk system becomes antifragile. I even consider shouting out: “regulate and attack the system please, we want to be even better!” Lunarpunk welcomes regulation because it will kill competition that cannot solve these problems in the presence of the said regulation.

But is there a demand for these services? That is the most basic question. Paradoxically, the biggest enemy of lunarpunk is a lax approach to regulation and a live-and-let-live approach. If solarpunk solutions work because no one attacks them, there is no reason for the lunarpunk ecosystem to develop. Why bother with Monero, Tor, VPNs and encryption when no one is punishing me for using transparent Bitcoin, Ethereum, for accessing whatever sites I want and sending unencrypted emails? I’d rather use a beautiful colorful app that a big corporation or a team of solarpunk enthusiasts is working on and publish all my communications to an auditable blockchain. But if reprisals come, lunarpunk projects go “to the moon”. 

The question remains why there should be a demand for these services. What do they provide that the mainstream financial system does not. With the rise of tracking (central bank digital currencies – CBDC) all participants in the parallel economy – plumbers, hairdressers, musicians, programmers, graphic designers and basically anyone who works without receipts and invoices – need a payment solution that is not tracked. The restrictions on the use of cash and its gradual elimination from the economy around the world directly leads to lunarpunk solutions. If there is no cash, the plumber can switch to accepting gold coins, which is still low risk and low cost compared to issuing invoices and paying taxes, but thanks to the existence of anonymous cryptocurrencies, they can simply show the customer a QR code and accept payment electronically. The greater and more effective the efforts of states to regulate anonymous transactions, the higher the demand for lunarpunk projects that address the problems of anonymous payment and other related financial (lending, hedging, interest yield, crowdfunding, ..) and communication (encrypted messaging, video calling, file transfers, group conversations) services.

If we are threatened with repression in social organizations, such as anti-war groups in Russia, users who want to communicate about the war without the threat of repression will use anonymous and encrypted communication tools. If a plumber wants to send a quote to a customer, he wants to do it in a form that cannot be used later as evidence against him.  

Peer to peer economy and crypto dealers make crypto available

In the chapter on ethical veksláks (crypto dealers), we discussed why they are the solution to regulation. Most of the projects mentioned are not just technological projects, but also have a social dimension. Cryptocurrencies are not just a transaction format, an internet protocol through which transactions are sent and a nice wallet app, but also a tomato vendor who shows me a QR code that I can pay to. In order for us to access these technologies, someone has to make them available to us.

The lunarpunk approach does not expect that a corporation like Meta, Google or Apple will make these technologies available to us. And not because they don’t want to – Facebook’s efforts to introduce cryptocurrency have been met with huge resistance from states. The Mobilecoin project of the non-profit that produces Signal met with failure precisely because of accessibility – the technology worked well, but the society’s trust in the technology and its accessibility didn’t follow.

If THC-containing cannabis is banned in a country, we know that we will certainly not buy it in Lidl, Whole Foods or in a pharmacy around the corner. Corporations are an easy target for attack – their owners want to enjoy a ride in their new electric car, not sit in a prison cell for years. Yet few things are as available worldwide as high-THC marijuana. Thanks to decentralized production and a peer to peer economy, its distribution is fueled by a variety of small dealers who make it available to anyone who shows an interest. Since the prohibition, creative destruction (producers and distributors in prison) has created a market that is adapted to the legal situation. Pot dealers have figured out what they need to do to be able to do their business without risking punishment.

The basis of the peer to peer economy in cryptocurrencies is not primarily the “crypto dealers”, but the matching needs of the peers in a community. Someone needs to pay rent in fiat and someone wants to buy cryptocurrencies – buddies get together, exchange cash for crypto and solve each other’s problems. The half-professional crypto dealers step in when a counterparty cannot be found in the social circle.

Regulation determines the form in which the crypto dealers operate. In the regulatory vacuum, centralized exchanges were created. They did not require identity checks, they did not report surveillance data to chain analysis companies, financial police or tax offices. They just allowed anyone to buy and sell using their platform. As regulation took over the crypto industry, traditional firms began to provide worse service – they began to report users, verify users, and began to censor transactions. They became involved in the apparatus of financial tracking, and thus creating the space for a peer to peer economy that began to provide the original unregulated service. Without the glowing advertisements at the bus stops, but flourishing anyway.

The peer to peer economy in most of the western world is not as regulated as classic business and therefore in most cases a crypto dealer will meet you in a café, you will have a good flat white and chat together. But if there’s more repression to come, you’ll meet by moonlight, in sunglasses and a black hoodie, in a deserted place. The shape of the lunarpunk is determined by the attacks, but the parallel economy will never go away – just as no country in the world has yet succeeded in truly banning pot. Almost all of them have it regulated by law in some form, but even in countries where possession is a capital offense the trade in it is thriving. Where there is demand, there is supply.

What exactly the peer to peer economy with cryptocurrencies will look like in situations where various specific forms of bans occur, I cannot predict. Just as I had no idea that in Moscow, weed would be sold by drop gangs who, after receiving payment, would send a message to the client telling them where their package was – under a park bench, in a lockbox with a code, or anywhere else. With the diversity of regulations, the decentralized crypto market will also have diversity in solutions. If we lose cash, maybe your favorite crypto will be sold for eggs, gold coins, or an Amazon gift card. Or for a can of diesel.

Why cryptoanarchy works – the OODA loop

The history of privacy technologies (anonymity, encryption, signing) begins at least with the Cypherpunks movement, which came to full fruition in the early 1990s. Of course, encryption as such existed long before that. It is also related to the aforementioned cryptoanarchy of Timothy C. May, who in his crypto-anarchist manifesto talks about how these technologies will enable a world in which governments will have much less of a role in our lives.

But how is it possible that lunarpunk, cryptoanarchy and cypherpunk can influence what laws are de facto in force, i.e. enforceable?

If we can communicate, produce and pay anonymously, in an internet environment, nation-state regulations whose enforcement is based on violence against the physical body are unnecessary. How is it possible that some software can prevent the enforcement of laws? Conflicts (including conflict between the individual and the state) follow the so-called “OODA loop” – in military terminology. It is a cycle that consists of four parts – observation, orientation – understanding what is happening, deciding how to react and action. Both sides of the conflict go through this OODA loop. Different ways of increasing freedom focus primarily on the last two steps. For example, law reforms or decriminalization change the way the attacker (the state) decides and acts. A law that permits possession of marijuana affects how judges decide in case of possession is discovered.

Cryptoanarchy in the narrow sense and cypherpunks in the broader sense are focused on the first two parts of the OODA loop. If someone does business over the Internet (for example, a Belarusian programmer) and does not pay taxes from that business, it does not mean that a judge would rule in his favor or that the state would not use violence against him (and thus imprison him). Thanks to encryption, privacy technologies and anonymous payments, the state will not even know that something has happened (the observe part of the OODA loop won’t yield any results) or if it does find out, it won’t know what happened (it won’t be able to find out who did what, for whom, how much and whether they got paid).

If it is not possible to identify the individual against whom the state is to exercise violence (imprisonment, confiscation of property), the law is of no effect because it is unenforceable.

It must be said here, of course, that the cypherpunkers’ vision runs up against what is in reality a disastrous operational security (opsec) problem. In practice, people often make all sorts of mistakes – registering an email address under their own name, occasionally failing to encrypt something, and so on.

The reason I write about cypherpunks here is that this philosophy implies what cryptographic techniques are used. It’s not just boring basic encryption that makes it impossible to read messages. Some communication tools use other privacy techniques – blind signatures, anonymization techniques, perfect forward secrecy. Let’s explain the last one mentioned. If we exchange an encryption key (“password”) and it is somehow revealed, we can decrypt in the future any messages that have been encrypted with that key. Perfect forward secrecy means that discovering the password will not allow us to retroactively decrypt the messages, because to do so an attacker would have to actively interfere with the communication – and it has already happened, so he would have to go back in time. He can only decrypt messages in the future, even then only if he manages to successfully stand in the communication and change its content. Another slightly more advanced technique are ring signatures, which allow the creation of cryptocurrencies where it is difficult to tell which coins of the cryptocurrency were actually used. Or “plausible deniability” – it is impossible to create proof of which party sent a particular message. We know one or the other, but since they both know the key, the agent provocateur could also have created the message and thus it is impossible to prove that someone wrote something.

All these techniques improve the privacy properties of encrypted communication. They can also be used to create social networks in the form of communication groups. And thanks to cryptocurrencies, it is also possible to build business relationships on these social networks that exist outside the control of the states and legacy financial system. All of this improves the sovereignty of individuals, some of whose relationships (business and communication) are separate from their physical identity. Thanks to reputation systems, we can then communicate with people we know only by nickname. Thanks to decentralized autonomous organizations (DAOs), there are organizations made up of anonymous members that manage assets worth hundreds of millions to billions of dollars. This is despite the fact that they have never physically met, don’t know their “official” names, and know that if there is a problem, they can’t go to court because they have no idea who is in which country. These relationships must therefore be set up in such a way as to prevent conflicts.

Unlike reforms (legalizing drugs, prostitution) or preventing enforcement (narcos – drug cartels – shooting cops trying to enforce laws), cryptoanarchy tries to stop conflict at the first step. Codenames, anonymity, encryption, and anonymous payments shut down the law enforcers who cause the conflict so that they won’t even know anything has happened. Crypto-anarchy is when you are crossing the intersection when there is a red light, in a completely empty street. It is a prohibited surgery that takes place in another country (medical tourism), or untaxed income that no one will ever know about. By the way, this strategy only works for so-called “victimless crimes”. This is because if someone is harmed – either physically or property-wise – there is harm and thus the OODA loop goes to the next step. In fact, the victim becomes aware of the rule violation and thus the “observation” part occurs. Cryptoanarchists argue that there is no such thing as a “victimless crime”. It’s just a made-up arbitrary rule that has no basis in standard interpersonal relations and justice as most people perceive it. “Live and let live” and the golden rule of “don’t do anything you wouldn’t want others to do to you” don’t prohibit victimless crimes because there is no damaged counterparty.

Encrypted communication tools, anonymization tools and cryptocurrencies make this cypherpunk vision real and thus increase the personal sovereignty of everyone who uses them. Punishment for opinions, dissemination of information or censorship become virtually impossible, even in non-democratic countries. We are still people who live in physical reality and have bodies, but much of our activity can be in the domain of the mind: in crypto-space, cypherspace.

Lunarpunk is the way these technologies will develop. An attack (regulation, ban, breach) will be followed by a reaction (crash, bankruptcy of fragile services), whereby a larger part of the market will be taken over by services that are resistant to similar attacks, and thus the lunarpunk ecosystem will improve. Thus, an ecosystem composed of many fragile elements can be antifragile – if the survival selection criterion selects products that can withstand the attack. Cypherpunk thus proposes particular technologies and their possible uses, maps their use, and tracks the societal consequences. Lunarpunk then explores the dynamics of the ecosystem with individual cypherpunk projects in relation to the attackers.

Who will win?

I don’t think history has clear winners. These are often historical oversimplifications. Did the Allies win World War II? If you count the signed surrender agreements, the winners are clear. But if we look at the destroyed economies and the number of people killed, or the rise of communism in Europe, we can still see the consequences of the conflict today.

Regulators, the solarpunk world and lunarpunk will coexist in parallel. Solarpunk will try an interesting new approach to improving the world. From historical experiments we have seen, for example, various decentralized autonomous organizations, new ways of funding “public goods” or projects (Ethereum was practically the first “ICO” – initial coin offering), automated decentralized exchanges based on the principle of liquidity pools, and so on. Then the state regulator comes in and strikes – tells how ICOs can be done, or sets rules for exchanges. And then lunarpunk comes in and those projects and approaches that have proven to make sense in the market will be remade into their dark, “lunar” form – anonymity engineering, zero knowledge proofs, homomorphic encryption, mixers and non-logging layers will come in.

This cycle is likely to repeat itself over and over again and it is not good to pick winners. I for one am glad to see solarpunk trying new things. And I’m also glad that regulators are motivating lunarpunk programmers to create better and more robust variations of what has already proven useful in the solarpunk marketplace. Since I don’t expect a worldwide consensus on deregulation, this cycle will repeat itself until someone runs out of energy (or funding). The demand for lunarpunk services may disappear. Or solarpunk will invent everything. Or no one will take regulators seriously. There may also be a rare coincidence – the regulators decide not to impede the progress that solarpunk will deliver, and the lunarpunk solution will not be needed. This scenario is unlikely, but either way we win.

Lunarpunk is an opportunity not only for the parallel economy, but also for new fields in computing. Programming in an anonymous and privacy-preserving way, the so-called “anonymity engineering”, is much more challenging and quite different than conventional computer programming. 

Cryptocurrencies made the lunarpunk way which allows us to carve out a better life for ourselves. They give us opportunities we didn’t have before (if we have private keys to cryptocurrencies and follow the basics of security). They are an asymmetric weapon against dictators, unjust laws, arbitrary confiscation of property and injustice. If we are not in a dictatorship and the current democratic environment suits us, we do not need to use this option. However, it is good to have it in reserve as an insurance policy should the regime around us become more authoritarian.

This article is a chapter from my book Cryptocurrencies – Hack your way to a better life. Find more amazing content such as this in the book!

It is a guide for Bitcoin and cryptocurrency ninjas. Learn how to use the Lightning network, how to accept cryptocurrencies, what opportunities there are for different professions, how to handle different market situations and how to use crypto to improve your life.

Get it on my e-shop (BTC, BTC⚡️ and XMR and even oldschool plastic) or at Amazon.

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