Bitcoin solved a major technical problem, but not an economic one(krugman.blogs.nytimes.com)
krugman.blogs.nytimes.com
Bitcoin solved a major technical problem, but not an economic one
http://krugman.blogs.nytimes.com/2013/12/29/an-ubernerd-weighs-in/
79 comments
> Inside every Bitcoin transaction is a small program that contains no loops. If that program when executed returns true, the transaction is valid.
I've read elsewhere that the official client no longer processes any such scripts except for ones that are whitelisted. That reduces the current protocol to a single feature set, instead of the promise of future extension without requiring further agreement from miners.
Can anybody verify this? Does today's client still process arbitrary scripts?
I've read elsewhere that the official client no longer processes any such scripts except for ones that are whitelisted. That reduces the current protocol to a single feature set, instead of the promise of future extension without requiring further agreement from miners.
Can anybody verify this? Does today's client still process arbitrary scripts?
I stopped following bitcoin about 18 months ago so it's possible my information is out of date, but I think your assertion is only true in the sense that today's client does no mining.
It is miners which run these scripts, and when I was following bitcoin it was miners who decided which script features they would allow. There were some significant mining pools which allowed nonstandard script features.
It is miners which run these scripts, and when I was following bitcoin it was miners who decided which script features they would allow. There were some significant mining pools which allowed nonstandard script features.
Some operations were disabled by Satoshi because they were incompete/buggy/risky. Those need majority consensus among all miners and users to enable or modify.
Some specific kinds of scripts are marked as "standard", all the rest are "non-standard". Non-standard scripts are valid and all miners will validate blocks containing such scripts. But non-standard transactions (i.e. transactions, containing a non-standard script) will not be relayed by default by the bitcoind nodes. Every node and every miner may decide for themselves whether they relay/mine non-standard transactions or not. I'm not sure how many miners accept non-standard transactions, but there are some. You can also pay some miners directly to mine a specific transaction. Or you can mine your non-standard transaction yourself, if you can afford it. Non-standard transactions typically require higher miner fees and take longer to confirm (as not every miner will include them).
The point behind standardness is to contain damage if some complex scripts will turn out to allow DoS attacks, allow losing funds or something like that. In 2012 Bitcoin was extended with P2SH ("pay to script hash") type of transaction (which is also standard) that allows you to define the redemption script during redemption, not during payment. Payer sends coins to a "hash of script" instead of the script itself. Payee then needs to provide not only signatures to redeem the payment, but also the script matching this hash (however complex it is). This has several advantages:
1. Payer does not spend higher miner fees because of the complexity of the script.
2. Payer does not wait indefinitely long till the transaction confirms.
3. Payer may not know the contents of the redemption script until it's being used. In some protocols this could be a useful feature for privacy reasons.
So with P2SH a service may already use arbitrary non-standard scripts shifting the burden of mining non-standard transactions from its customers to itself. For the customer it will look exactly like sending money to a Bitcoin address, although that address will start with "3", not with "1" (which is reserved for the usual "pay to public key hash" script).
Some specific kinds of scripts are marked as "standard", all the rest are "non-standard". Non-standard scripts are valid and all miners will validate blocks containing such scripts. But non-standard transactions (i.e. transactions, containing a non-standard script) will not be relayed by default by the bitcoind nodes. Every node and every miner may decide for themselves whether they relay/mine non-standard transactions or not. I'm not sure how many miners accept non-standard transactions, but there are some. You can also pay some miners directly to mine a specific transaction. Or you can mine your non-standard transaction yourself, if you can afford it. Non-standard transactions typically require higher miner fees and take longer to confirm (as not every miner will include them).
The point behind standardness is to contain damage if some complex scripts will turn out to allow DoS attacks, allow losing funds or something like that. In 2012 Bitcoin was extended with P2SH ("pay to script hash") type of transaction (which is also standard) that allows you to define the redemption script during redemption, not during payment. Payer sends coins to a "hash of script" instead of the script itself. Payee then needs to provide not only signatures to redeem the payment, but also the script matching this hash (however complex it is). This has several advantages:
1. Payer does not spend higher miner fees because of the complexity of the script.
2. Payer does not wait indefinitely long till the transaction confirms.
3. Payer may not know the contents of the redemption script until it's being used. In some protocols this could be a useful feature for privacy reasons.
So with P2SH a service may already use arbitrary non-standard scripts shifting the burden of mining non-standard transactions from its customers to itself. For the customer it will look exactly like sending money to a Bitcoin address, although that address will start with "3", not with "1" (which is reserved for the usual "pay to public key hash" script).
Let's go to the source: https://en.bitcoin.it/wiki/Script
"Note that there is a small number of standard script forms that are relayed from node to node; non-standard scripts are accepted if they are in a block, but nodes will not relay them."
It seems there's enough flexibility left to do some interesting things. I see discussions in the forum of things like M-of-N, nLockTime, and anyonecanpay.
It seems there's enough flexibility left to do some interesting things. I see discussions in the forum of things like M-of-N, nLockTime, and anyonecanpay.
I think that's true, but clients can change.
> their parents operated in a world based on centralized authority subject to rent-seeking corruption
Krugman is surely correct that it's silly to waste resources digging gold out of the ground only to re-bury it in a bank's vault.
And if Bitcoin was just another currency, it would be equally silly to waste compute resources mining it.
But if crypto-currencies could disrupt even a small part of the centralized, rent-seeking, mafia-economy, then the cost of mining dwindles to insignificance.
It's not about intrinsic value. It's about changing how people transmit value over distance and time. It's about freeing that process from the gatekeepers who control it and extract rents from the labor of others.
Krugman is surely correct that it's silly to waste resources digging gold out of the ground only to re-bury it in a bank's vault.
And if Bitcoin was just another currency, it would be equally silly to waste compute resources mining it.
But if crypto-currencies could disrupt even a small part of the centralized, rent-seeking, mafia-economy, then the cost of mining dwindles to insignificance.
It's not about intrinsic value. It's about changing how people transmit value over distance and time. It's about freeing that process from the gatekeepers who control it and extract rents from the labor of others.
>It's about freeing that process from the gatekeepers who control it and extract rents from the labor of others.
And do you think these gatekeepers are going to relinquish their power quietly? There are many ways that the entrenched powers can stall or even kill bitcoin. One declaration by China saw a loss of 50% of bitcoins value in a day or so. The claim that bitcoin is disruptive to the system is vastly overblown. Guns still rule in meatspace as well as cyberspace.
And do you think these gatekeepers are going to relinquish their power quietly? There are many ways that the entrenched powers can stall or even kill bitcoin. One declaration by China saw a loss of 50% of bitcoins value in a day or so. The claim that bitcoin is disruptive to the system is vastly overblown. Guns still rule in meatspace as well as cyberspace.
No, the gatekeepers and rent-seekers will not fade quietly away.
Just as they fought tooth and nail against digital networks and strong cryptography, they will try to smother crypto-currencies in their crib.
But decentralization, pseudo-anonymity, and free software are powerful forces, maybe even more powerful than men with guns.
Just as they fought tooth and nail against digital networks and strong cryptography, they will try to smother crypto-currencies in their crib.
But decentralization, pseudo-anonymity, and free software are powerful forces, maybe even more powerful than men with guns.
> Just as they fought tooth and nail against digital networks and strong cryptography, [...]
In what universite did that happen?
In what universite did that happen?
You could say the same thing about copyright infringement. The governments, with all their guns, still lost that battle, despite very real and high profile lawsuits and crackdowns. When something is extremely easy and completely ubiquitous, it becomes very difficult for government to scale its enforcement. You could say the same thing of something offline, like marijuana in the US (although with that one I would argue that there is no sincere desire on the federal level to eliminate marijuana or even reduce marijuana access and use).
The problem is that the stuff of copyright infringement is purely virtual. For a currency to be useful it must be exchangeable for physical goods. And this physical commerce creates the endoints that allow governments to exert its influence even in the face of a distributed currency. The battle control of the monetary supply will not be a parallel.
| A whole generation of kids is going to grow up soon routinely using small Bitcoin escrows to hedge everyday scenarios.
Could you explain this in more detail? Or perhaps provide a specific example? I've heard people talk about DACs and such (which I also don't really understand very well). At the risk of sounding stupid, I honestly don't understand what kind of scenario this would prove useful (or at least simple enough to warrant its use over traditional methods).
Could you explain this in more detail? Or perhaps provide a specific example? I've heard people talk about DACs and such (which I also don't really understand very well). At the risk of sounding stupid, I honestly don't understand what kind of scenario this would prove useful (or at least simple enough to warrant its use over traditional methods).
That's what so many people miss. They see "Bitcoin" and forget about the technology behind it. The ability to create "cryptocurrencies" at no cost is going to be very interesting, I can't wait to see what we can build on this basic logic.
This analysis is true to a point, but overlooks that the 'decentralized cloud bank' innovation now allows a whole bunch of other technologies to be applied into an important economic domain without the old gatekeepers and limitations. Those other technologies are a bit more familiar to people:
• global always-on connectivity
• encryption constructs
• easy discovery/formation of communities-of-interest
• open source collaboration
• instant rich search and giant archives of past behavior
• delegation of policy to ever-improving software/automation
• cheap powerful handheld computer-phones
• ...etc
These may not seem to be similarly novel breakthroughs; we're getting used to them, over the last 5-20 years. But now they're being applied to a monetary domain, via Bitcoin (and other cryptocurrencies), where progress was formerly bottlenecked.
So while I'm wouldn't generally put a lot of weight on the cheap, shallow shot against Krugman – "he thought the net wouldn't have more impact than the fax machine" – there is a somewhat similar failing here. By looking at one aspect of Bitcoin in reductionist isolation, he (and his tech friend) are missing the combinatorial effect of all these new possibilities together.
• global always-on connectivity
• encryption constructs
• easy discovery/formation of communities-of-interest
• open source collaboration
• instant rich search and giant archives of past behavior
• delegation of policy to ever-improving software/automation
• cheap powerful handheld computer-phones
• ...etc
These may not seem to be similarly novel breakthroughs; we're getting used to them, over the last 5-20 years. But now they're being applied to a monetary domain, via Bitcoin (and other cryptocurrencies), where progress was formerly bottlenecked.
So while I'm wouldn't generally put a lot of weight on the cheap, shallow shot against Krugman – "he thought the net wouldn't have more impact than the fax machine" – there is a somewhat similar failing here. By looking at one aspect of Bitcoin in reductionist isolation, he (and his tech friend) are missing the combinatorial effect of all these new possibilities together.
Bitcoin to money is what app store is for mobile software, or the web is to newspapers etc. It's decentralization of power. There's no gatekeepers to prevent new innovative payment services. You need $100 to create a new payment service, not millions. You don't need to ask anyone permission to do what you want.
In practise, individuals will now have the power that only large corporations used to.
In practise, individuals will now have the power that only large corporations used to.
I'd disagree that Bitcoin is to money what the app store is for mobile software. If you are talking about the Apple App Store, they are the gatekeepers to what software you can load.
I agree that it's not a perfect analogy. App stores (I'm talking in general, not referring to Apple's store) are still centralized and act as gatekeepers, but the "gatekeeping level" is in another level to what it used to be. Before app stores it was practically impossible to for a lone developer to create an application and release it.
You do realize that software development existed before app stores, right? Lone developers created and released applications all the time. App stores are about convenience, and so they are not like your other examples, which are about decentralization. They just don't fit.
>Lone developers created and released applications all the time.
The context was applications for mobile phones.
The context was applications for mobile phones.
every time i have read a statement like this in the past it has been followed at some point by a crushing, total and complete, reversal that shows that the exact opposite effect was produced from the anticipated outcome.
It's hard to recognize the importance of technological breakthroughs and impossible to predict the future. With Bitcoin the problem is doubly difficult because the technology is new but the economics may be old. Unlike, say, digital publishing that democratized a process that was once in the hands of gatekeepers because of high costs, crypto-currencies try to do away with gatekeepers that were put in place because decentralized currencies didn't work so well. This discussion bears resemblance to others about economic regulation, which, just like Bitcoin fans, ignore the fact that regulation was put in place, at least in America, to save Americans from the horrors of the Gilded Age.
Many of the problems with private/decentralized currencies in the past – problems that motivated the state monopoly and regulations – are no longer relevant, with modern technology. The global network, encryption, and transparent open-source governance render obsolete lots of the old concerns.
Also, while regulations and state monopolies always have an surface rationale based on solving actual problems, sometimes the real reason they're put in place, or maintained even as circumstances change, is because they benefit certain narrow entrenched interests.
We owe older regulatory arrangements some respect, for the effort that went into their initial crafting and their longevity across eras where (whatever other problems we have) we've survived and thrived beyond the past. (I agree with the "Chesterton's Fence" principle: don't take down a fence until you know why it was put up.)
But we shouldn't fear that old regulations and traditions are the only thing protecting us from 'horrors' of the past. The world has changed, some old risks are obsoleted by new levels of understanding and wealth, while all-new risks have arrived – including many created by the privileges and inflexibility of older 'solutions'.
Also, while regulations and state monopolies always have an surface rationale based on solving actual problems, sometimes the real reason they're put in place, or maintained even as circumstances change, is because they benefit certain narrow entrenched interests.
We owe older regulatory arrangements some respect, for the effort that went into their initial crafting and their longevity across eras where (whatever other problems we have) we've survived and thrived beyond the past. (I agree with the "Chesterton's Fence" principle: don't take down a fence until you know why it was put up.)
But we shouldn't fear that old regulations and traditions are the only thing protecting us from 'horrors' of the past. The world has changed, some old risks are obsoleted by new levels of understanding and wealth, while all-new risks have arrived – including many created by the privileges and inflexibility of older 'solutions'.
Krugman has spent the past few months qualifying, trivializing and disclaiming his previous asinine and uninformed remarks about bitcoin. Does he have a single shred of dignity left? Insufferable.
Moreover, Krugman is blissfully unaware of the hundreds of millions of people that don't have access to stable or reliable banking. How does opening the markets to untold millions, via peer-to-peer transactions, not solve an economic problem?
Moreover, Krugman is blissfully unaware of the hundreds of millions of people that don't have access to stable or reliable banking. How does opening the markets to untold millions, via peer-to-peer transactions, not solve an economic problem?
How dare a guy change his opinions when he gets to know the facts better. Travesty I tell you.
We want that will think on Wednesday the same they thought on Monday, no matter what happens in the world on Tuesday. (Shamelessly stolen from colbert)
We want that will think on Wednesday the same they thought on Monday, no matter what happens in the world on Tuesday. (Shamelessly stolen from colbert)
Eh, sorta missing the point there, brah. He's not changing his position that Bitcoin is a farcical experiment. He trivializes every argument that favors bitcoin, therefore allowing him to save face.
AKA he's justifying his dumb thoughts...
AKA he's justifying his dumb thoughts...
No.
This is like a religious fanatic retreating from a god of the gaps corner, but never considering the possibility that he might be fundamentally wrong.
Of course I can show you irreducible complexity! Look, Eyes! No wait, that doesn't work, I mean blood clotting! No no no hang on, I mean flagella based molecular motors! Ok, look, that's wrong too, but I'm still right, just, look, let me get back to you on this, OK?
Alright, good, are you there? Forget irreducible complexity. That's just hokum, but this will just knock you out of the park, are you ready? Ok, here; Bananas are clear proof of intelligent design!
Hello? Where did you go? Why is nobody listening to me? Anybody? Bombardier Beetles!
This is like a religious fanatic retreating from a god of the gaps corner, but never considering the possibility that he might be fundamentally wrong.
Of course I can show you irreducible complexity! Look, Eyes! No wait, that doesn't work, I mean blood clotting! No no no hang on, I mean flagella based molecular motors! Ok, look, that's wrong too, but I'm still right, just, look, let me get back to you on this, OK?
Alright, good, are you there? Forget irreducible complexity. That's just hokum, but this will just knock you out of the park, are you ready? Ok, here; Bananas are clear proof of intelligent design!
Hello? Where did you go? Why is nobody listening to me? Anybody? Bombardier Beetles!
What's the overlap between people with access to stable or reliable banking and stable or reliable power and stable or reliable internet access?
Majority of Africans own a cell phone, and they already use it for payments.
Man, you weren't kidding: http://en.wikipedia.org/wiki/Mobile_telephony_in_Africa#Curr...
Just need to work on that blockchain size given GSM speed limits.
EDIT: Apparently there are clients that don't need the full blockchain now?
Just need to work on that blockchain size given GSM speed limits.
EDIT: Apparently there are clients that don't need the full blockchain now?
More on (existing) thin clients:
https://en.bitcoin.it/wiki/Thin_Client_Security#Header-Only_...
The success of bitcoin, in large part, relies on faith that people will support it as a currency. If its market cap and/or trade volume isn't high enough, then a secure mining network cannot be supported, and the entire system, including all of its extra features touted by techies, will collapse.
Bitcoin will succeed if enough people believe that it will succeed, and bitcoin will fail if enough people believe it will fail.
Krugman is attempting to damage the future prospects of the system by spreading asinine notions about how it's not "economically viable". This really hits a nerve, because it serves no purpose other than to gain readership and to make him feel better for not investing in it. There is a risk that he, and others, could destroy bitcoin's future by convincing enough people that it shouldn't be trusted.
No economic arguments (especially Krugman's) about it are valid. Bitcoin's success or failure is entirely a self-fulfilling prophecy.
Two factions will form (or have already formed) - supporters and haters. The system needs enough supporters (and their investments) for it to be viable. The hope is that the supporters will grow in number or at least remain unchanged. Krugman is trying to turn supporters into haters, reducing the viability of the system.
Bitcoin will succeed if enough people believe that it will succeed, and bitcoin will fail if enough people believe it will fail.
Krugman is attempting to damage the future prospects of the system by spreading asinine notions about how it's not "economically viable". This really hits a nerve, because it serves no purpose other than to gain readership and to make him feel better for not investing in it. There is a risk that he, and others, could destroy bitcoin's future by convincing enough people that it shouldn't be trusted.
No economic arguments (especially Krugman's) about it are valid. Bitcoin's success or failure is entirely a self-fulfilling prophecy.
Two factions will form (or have already formed) - supporters and haters. The system needs enough supporters (and their investments) for it to be viable. The hope is that the supporters will grow in number or at least remain unchanged. Krugman is trying to turn supporters into haters, reducing the viability of the system.
I don't think it will be viewed as a currency (I agree with Krugman), but I do think it could viably be viewed as an asset backing a currency. Here's my idea: There's nothing stopping cryptocurrencies from eventually becoming centralized. Successful alternative cryptocurrencies will pop up and will be backed by governments or businesses, giving them real value. There will be a market between all cryptocurrencies and centralized currencies will be built on top of that market. Inflation will happen whenever anyone creates a new currency and people want to buy it. So crypto-assets will serve as a base for viable (inflationary) currencies. It wouldn't matter if bitcoin or any other individual cryptocurrency succeeds or fails as long as that market remains, and it will due to all of the benefits of cryptocurrencies in general. I'd be happy to hear any flaws in this idea, I haven't talked about it with anyone yet.
It may be a mistake to assume that small alternative cryptocurrencies are automatically viable. 51% attacks may become a severe problem, especially for very small mining networks. We may eventually see enough 51% attacks on altcoins that most people revert to the few largest networks (Bitcoin, Litecoin, and maybe a couple more). Or maybe we won't, and each new altcoin inflates the system.
That's a good point, I'll have to think about that more. My initial thought is that at least exchanges wouldn't be limited to currencies with that vulnerability. Most small currencies would also have limited or no initial value and probably wouldn't be worth taking over unless it was a pump and dump scheme, but centralized exchanges might be able to mitigate that.. Interesting idea, thanks.
Successful alternative cryptocurrencies ... backed by governments or businesses
It seems like this could have been done 15 years ago with Chaumian digital cash (which requires no mining and is more anonymous than Bitcoin) or even earlier with plain public-key crypto if you don't care about anonymity. Why hasn't it?
It seems like this could have been done 15 years ago with Chaumian digital cash (which requires no mining and is more anonymous than Bitcoin) or even earlier with plain public-key crypto if you don't care about anonymity. Why hasn't it?
Right idea at the wrong time maybe. A large proportion of the US didn't own a PC 15 years ago and some people still thought the internet was a fad, I'm not sure what PC adoption was like in other countries. There are still some problems to be fixed with the general use of digital currencies, but Chaumian digital cash could make a comeback if there were broader digital currency exchanges and people saw value in it. As for why countries might switch to such a currency... probably to get off the US dollar, but I don't know much about that sort of thing. They'd also have greater control over their economy if they could control their own currency's source code. Also, if bitcoins do take off then the last countries to support them will be poorest and might be better off starting their own currency. I think it could end up being like a stock market, where each unit of currency would represent some unit of specific resources.
Bitcoin will succeed if enough people believe that it will succeed, and bitcoin will fail if enough people believe it will fail.
Uh, the problem is that this is not a one-time succeed or fail thing. If one fine day, enough people think bitcoin will fail (or just think it no longer serves their purpose, say, it no longer has a chance of significant value increase), the consequences for many people may be very painful - even if for many previous days, most people thought bitcoin would succeed, even if some imaginary point had reached where some commentator could say "wow, looks like bitcoin has actually succeed".
Uh, the problem is that this is not a one-time succeed or fail thing. If one fine day, enough people think bitcoin will fail (or just think it no longer serves their purpose, say, it no longer has a chance of significant value increase), the consequences for many people may be very painful - even if for many previous days, most people thought bitcoin would succeed, even if some imaginary point had reached where some commentator could say "wow, looks like bitcoin has actually succeed".
> Uh, the problem is that this is not a one-time succeed or fail thing.
I think you're misunderstanding the risk here. If the mining network reaches a point that it is no longer secure, because the market cap and trade volume is not high enough to support a large computational network, then a single widely publicized 51% attack can cause a near-complete loss of faith in the system.
The damage to cryptocurrencies after such an event is probably irreparable.
I think you're misunderstanding the risk here. If the mining network reaches a point that it is no longer secure, because the market cap and trade volume is not high enough to support a large computational network, then a single widely publicized 51% attack can cause a near-complete loss of faith in the system.
The damage to cryptocurrencies after such an event is probably irreparable.
Perhaps I didn't phrase it right - definitely think that bitcoin working until it doesn't is a serious, probably insurmountable problem.
I think transaction-fee-free money transfer is a pretty radical economic problem Bitcoin solves.
Unless we think banks taking 3% of all Internet transactions is a good thing.
Unless we think banks taking 3% of all Internet transactions is a good thing.
The problem with that thinking is that Bitcoin is not transaction-fee-free. Transactions are subsidized by block rewards, but already today, your transactions might get stalled if you don't pay fees. And this is only going to get worse.
Taking a 3% cut of transactions (or even more in some of the walled garden ecosystems) is obviously too much for a service of irreversible transactions. We'll see whether (a) reversible transactions and the related insurance problems can be solved more cheaply than today's credit cards and friends, and (b) whether irreversible electronic transactions will be accepted by people given the sorry state of computer security.
Taking a 3% cut of transactions (or even more in some of the walled garden ecosystems) is obviously too much for a service of irreversible transactions. We'll see whether (a) reversible transactions and the related insurance problems can be solved more cheaply than today's credit cards and friends, and (b) whether irreversible electronic transactions will be accepted by people given the sorry state of computer security.
I wouldn't go to Krugman for technology insights. This is the same guy who basically said the Internet has no future, and now he's repeating it for Bitcoin.
He came around on the Internet (and admitted his mistake), and now believes there will be large productivity gains from Big Data.
http://krugman.blogs.nytimes.com/2013/08/18/the-dynamo-and-b...
Edit: I realize I'm not addressing your larger point. He still may not be the guy to go to. But that being said I think his opinions are more nuanced.
Edit 2: Another post by him on the value of ICT: http://krugman.blogs.nytimes.com/2013/10/11/the-ict-revoluti...
http://krugman.blogs.nytimes.com/2013/08/18/the-dynamo-and-b...
Edit: I realize I'm not addressing your larger point. He still may not be the guy to go to. But that being said I think his opinions are more nuanced.
Edit 2: Another post by him on the value of ICT: http://krugman.blogs.nytimes.com/2013/10/11/the-ict-revoluti...
No doubt that when bitcoin's success is obvious, he will also admit his mistake and go on to make another uninformed prediction.
I personally find that people who admit their mistakes more trustworthy because it shows they can at least learn from them. In this case, the jury is very much still out on whether BTC will succeed as a currency, and not as a protocol that's useful for some other thing (or many other things), which seems to be the crux of Krugman's argument.
So don't go to Krugman for technology insights. Go to him for economic insights. Consider the recent discussion about "positive vs. normative economics". It's a similar point here.
There are Bitcoinistas who would like governments to abolish their own currencies and make Bitcoin the currency of the land, or perhaps adopt a Bitcoin-standard akin to a gold standard.
Those are economic policy proposals. Are they good ideas? It makes sense to listen to what economists have to say when you are trying to figure out the answer.
There are Bitcoinistas who would like governments to abolish their own currencies and make Bitcoin the currency of the land, or perhaps adopt a Bitcoin-standard akin to a gold standard.
Those are economic policy proposals. Are they good ideas? It makes sense to listen to what economists have to say when you are trying to figure out the answer.
Except in this case he's only quoting John Levine.
He's quoting a friend of his who happens to agree with him. Shocking.
Not true. Bitcoin did two things that I am aware of: 1) Create a universal currency which can be easily exchanged and that appreciates rather than depreciates (over the long run I mean, I am not referring to short term market fluctuations). 2) It created a mode where many underground (eg: gray or black market dealings) can take place without the need for laundering money. [Note: I don't condone, just pointing out the facts]
1) All major currencies can already be easily exchanged. The only reason they depreciate rather than appreciate is that we have decided that depreciating currencies are good for the market.
2) Bitcoin maintains a public record of every transaction. There are still ways to anonomize yourself (mixing services, proposed extensions like Zerocoin), but cash would still be my first choice.
2) Bitcoin maintains a public record of every transaction. There are still ways to anonomize yourself (mixing services, proposed extensions like Zerocoin), but cash would still be my first choice.
As for your 2): why did the Silk Road explode in popularity? I think, done correctly, Bitcoin offers people on-the-couch access to anything they could want, with the level of risk largely depending on their technical expertise.
Websites to buy drugs have been around with weird e-currency like pecunix and e-buillion for so many years before bitcoin existed. The only difference between silk road and them is how little silk road did to stay low key.
You're right. The black market gives Bitcoin a "floor" value, just like Gold or Silver. It is a very efficient means of currency for the black market, as proven by the Silk Road and others.
Gold and silver have industrial uses. Gold and silver are used in jewelry. Gold and silver have proven to be a store of value for thousands of years. Gold and silver are also, to a first approximation, truly anonymous.
Not one of those four characteristics is true for Bitcoin, so saying it's "just like" gold and silver is a bit of a stretch. This doesn't mean Bitcoin is awful, as Krugman's trollish column is titled, but just that it doesn't have the same intrinsic floor value as gold and silver.
Not one of those four characteristics is true for Bitcoin, so saying it's "just like" gold and silver is a bit of a stretch. This doesn't mean Bitcoin is awful, as Krugman's trollish column is titled, but just that it doesn't have the same intrinsic floor value as gold and silver.
I meant to say that Bitcoin - or something like it - will emerge to facilitate online transactions of the black market kind. Rightly so that Bitcoin doesn't inherently gain value from the black market, but I do believe the black market will use something to do online transactions (as shown by the Silk Road and others). Thus far, that currency has been Bitcoin.
Gold and silver have industrial uses today. That may change tomorrow (albeit highly unlikely).
Bitcoin is the currency of cyber criminals today (hence giving it value today). That also may change tomorrow.
Gold and silver have industrial uses today. That may change tomorrow (albeit highly unlikely).
Bitcoin is the currency of cyber criminals today (hence giving it value today). That also may change tomorrow.
These are reasonable points. I don't know enough about modern-day black markets to say how much Bitcoin facilitates them.
If you're right that Bitcoin is a major factor, then yep, that could be an effective price floor (at least until a better rival comes along). It would be interesting to learn how much of Bitcoin purchasing is due to black market transactions. My intuition says it's mostly speculation, but I'd be happy to be proven wrong.
If you're right that Bitcoin is a major factor, then yep, that could be an effective price floor (at least until a better rival comes along). It would be interesting to learn how much of Bitcoin purchasing is due to black market transactions. My intuition says it's mostly speculation, but I'd be happy to be proven wrong.
> The value of the transactions over this period are equivalent to "roughly $1.2 billion in revenue and $79.8 million in commissions" and involved 146,946 buyers and 3,877 vendors.[13]
That was the value transacted on the Silk Road. Quite impressive numbers, given that it was a single site and much of that growth occurring in Bitcoin's less user-friendly days.
That was the value transacted on the Silk Road. Quite impressive numbers, given that it was a single site and much of that growth occurring in Bitcoin's less user-friendly days.
The revenue was in bitcoins not in USD. How was it converted? (If at the end, then that overstates the volume quite a lot, given the rise of bitcoin's exchange rate.)
I don't believe bitcoin has a floor value in the same sense as gold or silver. A currency doesn't need to have a floor value just because currencies traditionally had. Besides, modern currencies are fiat money without a true "floor" value.
I'll rephrase my argument: given the vast demand for some people to do illicit transactions on the internet, an online currency (or more than one) will emerge to fill that need. So, given that, I think Bitcoin (or something like it) does realistically have a floor value, given its current front-runner stance. That may change, of course, if people choose a different currency, but that currency will be similar to Bitcoin in most, if not all, fundamental ways.
Paul Krugman is a great economic thinker. These blog posts are no doubt just him eliciting feedback so that he, as a nontechnical person, can better understand a new technical phenomenon that has direct bearing on his work.
The scenario with a large number of people wanting to cash out already assumes Bitcoin lost as a currency, so I'd say it could be a result, not the cause of Bitcoin's failure. Bitcoin succeeds or fails on whether you can buy useful stuff with it, buying other currencies is secondary.
The scenario with people cashing out because of regulation also assumes that most bitcoin users live under a single regulatory area, which is untrue. Banning bitcoin in the United States, for example, might decrease it's value, but not destroy it, as there's the rest of the world.
Not to disagree about the main point but US could do more to harm Bitcoin than just banning it internally, especially given that China seems already hostile to Bitcoin.
A bank run would be as devastating on any other currency as it would be to Bitcoin of course. Loss of confidence in a currency destroys it. The same is true for the Yen or the Euro or USD too.
Personally I consider a stack of (non-counterfeit) twenty dollar bills to be 'useful.'
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I'm sure (or at least I hope), John Levine did not ask to be referred to as an "Ubernerd". Not to belittle Levine or his accomplishments or his nerd cred, but I think this article tells us much more about Krugman's ability to differentiate technical genius from mere competence than anything useful about Bitcoin. Given the high level of nerdery representd by the people developing Bitcoin, I'm unlikely to be convinced of a negative outlook for Bitcoin on the basis of an "expert opinion" from any ubernerd that Krugman chooses to trot out. The Bitcoin ecosystem has enough nerd cred to withstand pretty much any argument other than, "here's an exploit that I have figured out" with proof of said exploit.
I found Charles Stross' critique of Bitcoin far more convincing than anything I've read from Krugman. But, not on technical grounds; merely on ethical ones. I do actually worry that we may be replacing a horrible system that enforces and thrives on inequality with a possibly more extreme system that does the same thing (possibly with a few new players at the top).
Regardless, Krugman is in way over his head on the technical aspects of Bitcoin and it shows. There has been much better technical criticism from actual nerds, including nerds who have worked on cryptocurrencies.
I believe we are seeing one of Krugman's famous bits of shortsightedness, and I believe he is falling prey to the very type of bias he claims to be trying to avoid. Bitcoin has a lot going for it, whether you call it a "currency" or something else. I believe that it's impossible to predict how Bitcoin will play out, exactly, since we've never seen anything exactly like Bitcoin. I have some vague feelings, as well (like, I feel like it's likely Bitcoin will be replaced by some other cryptocurrency within a few years...for a variety of technical and social reasons). But, it's all just a hunch, and I'm unwilling to take the kind of stance Krugman is taking, which seems almost naive (certainly on technical issues, probably less so on economic issues) from my perspective.
I found Charles Stross' critique of Bitcoin far more convincing than anything I've read from Krugman. But, not on technical grounds; merely on ethical ones. I do actually worry that we may be replacing a horrible system that enforces and thrives on inequality with a possibly more extreme system that does the same thing (possibly with a few new players at the top).
Regardless, Krugman is in way over his head on the technical aspects of Bitcoin and it shows. There has been much better technical criticism from actual nerds, including nerds who have worked on cryptocurrencies.
I believe we are seeing one of Krugman's famous bits of shortsightedness, and I believe he is falling prey to the very type of bias he claims to be trying to avoid. Bitcoin has a lot going for it, whether you call it a "currency" or something else. I believe that it's impossible to predict how Bitcoin will play out, exactly, since we've never seen anything exactly like Bitcoin. I have some vague feelings, as well (like, I feel like it's likely Bitcoin will be replaced by some other cryptocurrency within a few years...for a variety of technical and social reasons). But, it's all just a hunch, and I'm unwilling to take the kind of stance Krugman is taking, which seems almost naive (certainly on technical issues, probably less so on economic issues) from my perspective.
Krugman has said over and over again that bitcoin is bubble. He is right. But Krugman has failed to understand a crucial aspect about bitcoin - it is truly an international currency. Here is why this is so important. Krugman argues that someday news about bitcoin will come out that is so bad it will scare people away from bitcoin. This will certainly happen, as it has happened already. But bad news is localized. Just because China may ban bitcoins does not mean that people will stop using it elsewhere. The "bad news" would have to be truly world-wide for everyone to abandon bitcoin altogether. Anything short of that, and the bubble will continue onward.
A key foundation of a modern nation's power over its citizens is the ability to arbitrarily create and destroy the national currency, to legitimately demand that taxes be paid in that currency, and to thus be able to use it to purchase arbitrary goods and services. It seems quite likely that major national governments will band together to ban transfers between bitcoin and their national currencies once they realize what a threat a wholesale shift to bitcoin would pose to their power to tax and spend.
To any given government, Bitcoin looks like just another foreign currency. In many foreign countries, you can get dollar denominated bank accounts. How is Bitcoin any different than this status quo?
Governments work hand in glove with banks, they control and are controlled by the world banking system in turn, they can see what money goes where via the SWIFT system, they can approve or deny transfers based on AML/KYC laws which they can enforce if it comes down to it by applying pressure on the banks themselves, the entire system is old, well understood and thoroughly controlled.
The reserve bank of Bitcoin is completely immune to coercion, you can't freeze funds, you can't stop transactions, you can't do anything at all to the funds in one of those accounts without the consent of the account holder. If the account holder doesn't want you to, you can't even know who they are. Altogether, the entire system is the exact opposite of the global banking system, it is extremely poorly understood and almost entirely uncontrolled.
And that's just with the bank analogies, if you take it up a notch and compare fiat issuance to bitcoin issuance it gets even more frightening from their perspective. There's no nation they can apply diplomatic pressure to to change the fiscal policy of Bitcoin, that fiscal policy is linked to interests utterly alien to their own, even.
From their perspective it is indeed a dangerous thing, the only question to my mind is A) How long will it take them to figure this out and B) when they do figure it out, what kinds of actions will they take to try to destroy it.
The reserve bank of Bitcoin is completely immune to coercion, you can't freeze funds, you can't stop transactions, you can't do anything at all to the funds in one of those accounts without the consent of the account holder. If the account holder doesn't want you to, you can't even know who they are. Altogether, the entire system is the exact opposite of the global banking system, it is extremely poorly understood and almost entirely uncontrolled.
And that's just with the bank analogies, if you take it up a notch and compare fiat issuance to bitcoin issuance it gets even more frightening from their perspective. There's no nation they can apply diplomatic pressure to to change the fiscal policy of Bitcoin, that fiscal policy is linked to interests utterly alien to their own, even.
From their perspective it is indeed a dangerous thing, the only question to my mind is A) How long will it take them to figure this out and B) when they do figure it out, what kinds of actions will they take to try to destroy it.
Gold has base value derived from its industrial, ornamental uses. But its trading value is much larger.
Similarly Bitcoin has a base value in the cost of mining 1 BTC. Right now it is around $800 or so.
Because of the competition in mining, asic chips development, and More's law. The cost of mining 1 BTC is going up exponentially.
Similarly Bitcoin has a base value in the cost of mining 1 BTC. Right now it is around $800 or so.
Because of the competition in mining, asic chips development, and More's law. The cost of mining 1 BTC is going up exponentially.
While I think it's true that BTC won't fall below the cost of mining 1 BTC, that's not really saying anything.
If BTC falls below the cost of mining people will stop mining and the network will adjust to the reduced difficulty, making the cost of mining drop.
A problem is that if too few people mine, the network becomes easy to compromise. That's a problem that bitcoin has, and other currencies (and things like gold and silver) do not.
If BTC falls below the cost of mining people will stop mining and the network will adjust to the reduced difficulty, making the cost of mining drop.
A problem is that if too few people mine, the network becomes easy to compromise. That's a problem that bitcoin has, and other currencies (and things like gold and silver) do not.
Bitcoin prices will eventually fall below the cost of mining. Guaranteed. (Because eventually there will be no new bitcoins left to mine. So mining new bitcoins becomes infinitely expensive.)
I can't flip my miner into reverse and produce electricity while destroying BTC. The ability to convert $800 to 1 BTC by mining does nothing to keep the value of 1 BTC above $10.
Cost does not equal value. One could rather say the cost of mining bitcoins is analogous to... the cost of mining gold, not the industrial value it represents.
Bitcoin does solve an economic problem: it sidesteps the usurious interchange fees of Visa and MasterCard, allowing low friction micro payments to become a reality on the web. One doesn't even need to hold any Bitcoins to make use of this feature; just convert on demand.
Inside every Bitcoin transaction is a small program that contains no loops. If that program when executed returns true, the transaction is valid.
The simplest, most boring kind of transaction--but the one that most people assume "is Bitcoin"--is a transfer from address P to address Q. Where things get more interesting is in using those little programs in more creative ways; e.g., k-of-n escrow, attestation of ownership, etc.
A whole generation of kids is going to grow up soon routinely using small Bitcoin escrows to hedge everyday scenarios. They won't quite able to believe that their parents operated in a world based on centralized authority subject to rent-seeking corruption.