Yesterday I questioned whether we should expect demand for Bitcoins to be stable over the long run. Today I want to look at the supply side. A constrained supply of money is important to a currency’s stability. One of Bitcoin’s key selling points is that the number of Bitcoins issued will never exceed 21 million. But this promise isn’t credible. To understand why, we need to dig a little bit into how the protocol works.
The Bitcoin peer-to-peer network can be thought of as a giant, shared accounting ledger. Whenever someone makes a Bitcoin transaction, the record of this transaction is submitted to the various nodes in the network. At fixed intervals, each node bundles up all the transactions it has seen into a data structure called a “block” and then races with the other nodes to solve a difficult mathematical problem that takes the block as an input. The first node to solve its problem (the problem is randomized in a way that gives each node a roughly equal chance) announces its success to the other nodes. Those nodes verify that all the transactions in the new block follow all the rules of the Bitcoin protocol, and that the solution to the mathematical problem is correct. (verifying solutions is much easier than finding them) Once a winning solution is found, all nodes then treat the transactions encoded in the winning node’s block as new entries in the global transaction register.
The system has a clever incentive system: each node is allowed to insert a fixed reward (currently 50 Bitcoins) for itself into the block it is working on. If it “wins” the race for a round, then this reward becomes part of the official transaction history. Effectively, the winner of each race gets to “mint” some Bitcoins for itself as a reward for participating in the transaction-verification process. The creator of the Bitcoin protocol established an expoentially decreasing schedule of rewards. If this schedule is followed, no more than 21 million Bitcoins will ever be issued.
The limit is a social convention baked into the BitCoin software. If a rogue node tries to give itself a larger reward than the protocol allows, the other nodes are supposed to reject its proposed block. But that only works if most nodes are enforcing the rules. If Bitcoin became a “real” currency, nodes would face a tremendous temptation to collude in order to give themselves larger rewards.
If a group of nodes colluded to change the rules (say, awarding themselves 100 Bitcoins rather than 50 for “winning” a round), the result would be a “fork” of the Bitcoin network. Nodes that enforced the original rules would reject blocks with the higher rewards, effectively expelling them from their network. The “rogue” nodes would recognize one another’s blocks, and would effectively establish a second, rival Bitcoin network. Theoretically, these different networks could continue in parallel indefinitely, but it’s likely that relatively quickly one of them (probably the larger one) would come to be regarded as the “real” Bitcoin network and cash spent on the other network would become worthless.
So the question is whether it would be possible for a critical mass of nodes to collude to change the rules. And I think the obvious answer to this question is yes, for two reasons. First, the Bitcoin software itself offers a convenient collusion mechanism. If the Bitcoin protocol is anything like other network protocols, a handful of clients is likely to account for the overwhelming majority of nodes at any given time. That means that convincing the creators of the top two or three Bitcoin clients to change their implementations would be enough to effectively change the protocol.
Second, collusion will grow easier as the network grows and becomes more professionalized. Bitcoin supporters are quick to point out that their system wouldn’t require ordinary consumers to run their own Bitcoin nodes. They predict that as the network grew and the resources required to run a node increased, that nodes would increasingly be run by commercialized entities who made money by providing “eWallet” services to ordinary Bitcoin users.
We might call organizations that are in the business of running Bitcoin nodes and processing Bitcoin transactions “banks.” And we could imagine these banks forming a membership organization whose primary function is to control the size of the Bitcoin money supply. It would announce changes to the Bitcoin protocol that expand the supply of Bitcoins at the desired rate. Member banks would agree to change their software accordingly. We could call this entity a “central bank.”
So one of Bitcoin’s key selling points—a permanently fixed supply—is basically illusory. The supply of Bitcoins, like the supply of every other currency, will be controlled by the fallible human beings who run the banking system. We already have an electronic currency whose quantity is controlled by a cartel of banks. If you’re a libertarian, you might think the lack of government regulation is an advantage for Bitcoin, but it strikes me as highly improbable that the world’s government’s would leave the Bitcoin central bank unregulated. So I don’t see any major advantages over the fiat money we’ve already got.
Even more than what you say, the protocol itself has this “anti-counterfeit” mechanism built in. People wouldn’t even NEED to be aware that there’s an attack going on in the network, as long as you continue to use the “honest” bitcoin client, the counterfeit coins can’t be transfered to your wallet (or anyone else’s who isn’t purposefully using the modified and dishonest client). Trust is NOT needed in the bitcoin network.
…You continue repeating your argument, even though I’ve showed it would plainly and simply not work. Address it and then talk like you have some idea about what’s going on.
I’m not discussing whether bitcoins will end up succeeding here mind you, just that none of your scenarios are possible. Bitcoins might very well end up not gaining critical mass, but it won’t be because of anything you’ve proposed.
as long as you continue to use the “honest” bitcoin client
That’s the whole point. How does the user know it’s the “honest” client? Most people will just take whatever client their software vendor provides them with. Or, if they’re using an e-wallet service, they won’t be running a client at all. So if the major Bitcoin software vendors and/or ewallet providers want to change the protocol, the vast majority of users will go along with it.
“How does the user know it’s the “honest” client?”
a) because (at least the official client, and probably a lot more will end up being so) it’s open source, and the protocol itself is an open standard.
b) because not everyone updates their software the second it comes out (and actually most people are behind the current versions of arbitrary software by a matter of weeks/months), and it would be a little fishy to suddenly NOT be able to spend your bitcoins with anyone else since your last update.
c) because merchants are bound to use non-user-oriented clients (and big chains will probably use their own implementation of the protocol), and the same thing would happen as in b)
d) did I mention it was open source, and the protocol itself is an open standard, that would be immediately incompatible with “funny” variations to the protocol? Yeah, that too.
“if they’re using an e-wallet service, they won’t be running a client at all. So if the major Bitcoin software vendors and/or ewallet providers want to change the protocol, the vast majority of users will go along with it.”
You’ve failed to mention WHY ON EARTH any such company would choose to do that, seeing as it would devalue their own money reserves, create doubt and uncertainty around the currency (and thusly killing their own business), and more than likely be ILLEGAL (false advertisement and all that… assuming people would agree that they’d be signing up for a BITCOIN SERVICE [and the bitcoin protocol is more than publicly available]) and make them all liable? Oh yeah, all of this with no upside whatsoever.
Did I also fail to mention that e-wallet services that did this would make their customers be unable to spend their bitcoins with the rest of the world? I’m guessing that could be a little bad for business too.
Please do explain, because you say those things so nonchalantly that I’m beginning to think I’m missing something obvious.
I’ve explained all of this before. Please don’t make me repeat myself again.
You’ve failed to mention WHY ON EARTH any such company would choose to do that
Again, because the ability to mint new Bitcoins would be valuable, and the people running major e-wallet services would likely also be running mining nodes. This doesn’t seem like a very hard point to understand, and I’m afraid I don’t know how to make it any simpler.
@ DL Davis:
How do you (forcibly) tax an anonymous and untraceable transaction? And no, “uncle sam would find a way” is not a real scenario…
Now, I’m not saying if bitcoin became mainstream it should be exempt from the income, and sale taxes that “regular” money has to pay. But that would simply require the same techniques the IRS used before electronic money to figure out how much a citizen owed. In fact, I don’t think banks will be put out of business even if bitcoin became the primary (and even international) currency, so in reality it wouldn’t differ a lot from current currencies.
But suggesting that a government would tax the USE of a particular currency… that’s just nonsense. And with absolutely no historical or legal foundation. Take off the tinfoil hat for a second. And as I said, even if 1984 came to be and precisely the unthinkable happened, then bitcoin could still be used anonymously (the only requirement would be that you ran your own client instead of depositing your bitcoins in a bank). But honestly, if this scenario came to be, the last thought on my mind would be what the future had in stock for a particular currency.
“and the people running major e-wallet services would likely also be running mining nodes”
That’s a pretty huge assumption (an another thing for your checklist of things that would need to happen in order for your “prophecies” to work), and one that I just don’t see happening. Right now, mining bitcoins doesn’t make economic sense (except for those who are counting on bitcoins to be worth much more in the future, but even then it’d just make more sense to buy bitcoins), do you see the CPU capacity of the network diminishing in the future for mining to start making economic sense? Those are 2 very different and not at all connected business models for you to assume that…
…and still it wouldn’t solve the issue of the people using those e-wallet services suddenly finding themselves not being able to interchange their f-bitcoins with the rest of the people using true bitcoin clients (and as I said, major chains which are bound to make their own implementations as part of their accounting departments. What about banks? Would they join the conspiracy too?). Care to address the issue of the legality of these e-wallet (and mining, evidently) services suddenly changing the practices of the service the agreed to provide to their customers?
In a world where bitcoins are perfectly accepted and used regularly, to suggest that a portion of the network (even a major portion of the network) would simply decide to make a change in the status quo for ILLICIT and criminal intents no less, and succeed in “converting” the rest of the network over… is just ridiculous.
It would be on par with suggesting that a few major banks right now could decide to create money out of thin air (after all, they *are* just numbers in a database, right?), and agree that they would accept eachothers’ forged money… If the major ones do it, who are the other ones to refuse, right? They most definitely have the capacity to do just that, right now. So why don’t they do it if there’s so much to gain? Heck, it wouldn’t even require expensive hardware to mine it…
I forgot to add, feel free to pick and choose a single phrase from any of my posts to focus and respond to. It’s not like it makes you seem like you’re at your wits’ ends and just looking for minor points to respond to and ignoring everything else you can’t address or anything…
So why don’t they do it if there’s so much to gain?
What do you think the Federal Reserve does?
I forgot to add, feel free to pick and choose a single phrase from any of my posts to focus and respond to.
Thanks, I think I will! 🙂
I’m fairly busy this evening so don’t have time to respond to every argument point-by-point.
“What do you think the Federal Reserve does?”
I’m aware that the Federal Reserve prints money out of nowhere, but that’s because it has the authority to do it. Banks don’t do it (and they do have the ability to do it), so I find myself wondering why, since your arguments point towards this being the only logical next step.
I’m sorry to hear you’re so busy. Surely that does it. You “win” the argument, it’s just that you can’t prove it. Did I get that right?
The rules of bitcoin are enforced by the miners. For any collusion to happen, the miners have to do it, and it has to be at least 50% of the network hashrate. The current hashrate is approximately 700 ghps. The estimated top 4 miners run about 100 ghps. http://www.bitcoin.org/smf/index.php?topic=6169.msg91235#msg91235 After that, will be lots of small hashrate miners. I’d say you’d need at least every top-50 miner to switch their code to new rules. “two or three” is a gross misrepresentation of reality.
Dude as Jerry said it has nothing to do with computing power. The only thing a bunch of miners could accomplish by colluding more than 50% of the power are double-spending attacks, nothing else.
“The only thing a bunch of miners could accomplish by colluding more than 50% of the power are double-spending attacks, nothing else.”
That is very naive to say. If the miners wanted to increase the reward of completing blocks, here is what would happen
– they would argue it should be done for some reason that may sound plausible or not to most users
– as the bitcoin network depends on their power to verify transactions the incentive to agree is quite high.
– well ahead of any changes apply for the actual running clients, there will be a consensus of what to do, and it will be one of
1. the reward is increased some amount that is generally agreed on,
2. there is a fork and a new currency with the breakout miners powering the new fork, possibly triggering the the first of many new competing crypto-currencies.
Not arguing a fork isn’t possible (or even probable), just that it wouldn’t affect the “real” bitcoin network, much less subvert it. So allow me to address your points one by one:
“- they would argue it should be done for some reason that may sound plausible or not to most users”
Not sure how they would do that, given that the increased rewards would benefit ONLY the miners, and in fact devalue everyone else’s bitcoins, not to mention the following erosion of faith in the currency and whatnot. But go ahead and try to pitch such a change to us, maybe there’s something I haven’t thought of.
“- as the bitcoin network depends on their power to verify transactions the incentive to agree is quite high.”
Nope, it absolutely and completely doesn’t (depend on the miners). If the miners “wanted out” they could go out, and even a couple measly computers run by end users mining the bitcoins would be enough to process all the transactions, since the protocol would lower the difficulty in the hashing algorithms (to maintain the constant 6 blocks/hour average speed). Of course, at that point those 2 people would end up becoming immensely rich off of their generated bitcoins (or transaction fees at a later date), and thusly more people (be them end-users or dedicated miners) would want in on the bounty, raising the collective CPU power again. This effect BTW is what will keep the collective CPU of the network at an average just on the fringe of profitability from mining. Good luck trying to convince the small-time miners from quitting the current network when their winnings would exponentially increase. This is all basic game theory stuff.
“- well ahead of any changes apply for the actual running clients, there will be a consensus of what to do, and it will be one of
1. the reward is increased some amount that is generally agreed on,”
Here is where the argument actually starts to fall apart. It doesn’t really matter whether the protocol assigns 50 bitcoins/block or 50 trillion. If the same number of miners continue to do the mining, the whole bitcoin economy will work on those amounts of money. So, instead of bitcoins being worth a little over a USD as they are right now, the exchange rate would be something like 1USD = 1 trillion bitcoins. But nothing else would really change, and miners who switched to this wouldn’t actually be any richer.
This is another fatal flaw of Tim’s argument; the supposed incentive for wanting to do this simply does not exist, because it would only be an advantage if you could generate more coins than everyone else but still spend them on the mainstream network. If they somehow manage to convince the whole network to change to a more “generous” protocol (and I think I’ve more than explained why this would be a little more than impossible in a real world scenario), then the advantage isn’t there anymore. And since the current protocol wouldn’t allow forged coins to be accepted into the network, this whole scenario is pointless.
I do think the protocol lacks one thing though: a way to compensate for lost coins (coins can be destroyed if the physical device where they’re stored stops functioning). Currently what the creators say is that it wouldn’t be a problem because the currency would just deflate to compensate for it (that’s where the 8 decimal places after the point come in handy), and it’s totally true, but to me that seems
b) unsustainable over a VERY long term (I’m talking centuries here, not even decades). Theoretically there would come a time when even those 8 decimal places wouldn’t be enough, and that’s what bugs me.
Of course maybe designing a currency meant to last more than a few centuries might sound a little too ambitious, but that’s my personal gripe with the current state of the protocol. Of course it’s technically still in beta, so hopefully they will address that before deeming it “ready for mass consumption”.
Anyways, I’ve digressed enough.
To me the interesting question isn’t whether bitcoin itself will succeed, but what currency will look like in 100 years. It seems likely that it will be even more digital than dollars are today, but how decentralized will it be? As Tim points out, there’s something inherently democratic about decentralized systems, and it’s hard to figure out what that means for a currency.
It makes me sad that most commenters here seem to assume that Tim is an idiot. If it seems like he’s saying something obviously wrong, you probably don’t understand what he means. He might not be right, but he’s almost certainly not obviously wrong.
“He might not be right, but he’s almost certainly not obviously wrong.”
Well, this is certainly nonspecific and apologetic. Care to elaborate?
I think the fundamental problem of bitcoin is not one of the constraint on new currency creation. Bitcoin actually succeeds precisely because there is a way to create it at a limited rate. A growing money supply is an explicit feature, and although that will eventually stop, there will forever be the problem of subdivision of individual bitcoin.
The real problem is that bitcoin does not exist in a vacuum. It will have competitors. It must operate within the context of sovereign currencies. It cannot have inherent value except as a medium of exchange. For all intents and purposes, Bitcoin is money, with all of its merits and limits. It just so happens that as a distributed protocol it has greater political barriers to changing its absolute supply, much as though there were once a central banker who made all the decisions for us and then died.
So, what is the big elephant in the room? The dollar. What advantages does the dollar have over bitcoin? $15 trillion in economic output every year. Robust, highly regulated securities and commodities markets that operate denominated in dollars. Extremely reliable debt issued by the U.S. government in a variety of maturities. Thousands of Ph.D. economists constantly debating what policies would best account for the pressures being put on the supply of the currency by the market. The result? Stable prices, predictable value, widespread use, and reliable interest-bearing investments.
Bitcoin is more like gold in the fundamental sense that it is not regulated. But just like gold, it will be subject to asset bubbles and crashes. Its attractiveness as a medium will depend on what other competitors are available. And most importantly it will never have any intrinsic value except in relation to its market price, whether that price is denominated in dollars, goods and services, or other assets.
My advice is to treat with very strong skepticism anyone who tells you that bitcoin is going to supplant the dollar. I would suspect that they would sell you every last bitcoin they had if you offered them a good enough price… in dollars.
The much more likely end result is that bitcoin will operate as a medium of exchange that is converted into dollars in a fluid market. But watch out… where there are exchange rates there is a profit in offering futures contracts. And futures contracts are subject to regulation by the federal government.
And to those of you who talk a big game about the “secrecy” of bitcoin, if the transaction register is out there in the public, then it doesn’t seem so secret to me. But the basic fact is that the way the IRS gets your records is not by going to the bank and yanking them. It’s called a subpoena, and failure to comply is punishable by severe penalties.
Tim is onto something. Especially when you consider what a disproportionate amount of computational power the incumbent has at its disposal. Consider is the NSA devoted all of its resources to generating bitcoin. It would very quickly generate more blocks than anyone else and probably could easily hijack the currency.
These “new” Bitcoins which would be the “valuable” motivation for the e-wallet services to switch would not be *valuable* if nobody used the new “Bitcoins”.
I only see one risk with bitcoin other than it simply not being accepted by people, and that is governments. Governments might say that it is illegal to run nodes without a proper license. This might sound reasonable enough for uneducated people to accept..
Later on the government can require anything for those licenses in the name of saving the economy.
It will have to be a big global cooperation between governments, so it’s not easy. But similar things has been done before…
nothing else would really change, and miners who switched to this wouldn’t actually be any richer.
If suddenly the 21 million limit grows to, say, 42 million, then you’d expect bitcoins to halve in value. If you’re mining 100 in stead of 50 bitcoins a pop, this doesn’t affect you. So if your income from mining (which is inflation-resistant, as you just jack up the amount you mine to cause inflation in the first place) is higher than your expected losses due to inflation, then inflation is a good thing for you. Likewise if you’re in debt.
There’s always a way to make money from either inflation or deflation.
Bitcoin is like the dollar, it is not tangible. It also depends on trust and faith. It can be printed out of thin air like the dollar, a digital ledger entry. Its never going to have the value of gold since it does not meet all of the following criteria: being rare, divisible, fungible and easy to store. Its not rare since there is nothing to stop it from going to whatever number. There is a limited amount of gold on the planet and production is dropping. Gold can be divided and still have its value, divisible. Gold is accepted world wide as being valuable thereby fungible. Gold is easy to store, don’t have to worry about the computer crapping out. All fiat that there ever was has collapsed.
1. Rare: Bitcoins are rare because of the tremendous amount of energy required to create them and because of the rules about how much Bitcoin creation the rest of the network will tolerate — rules which are baked into every client.
2. Divisible: Bitcoins are currently divisible to eight places after the decimal point. Have you ever tried to sell a hundred-millionth of an ounce of gold? You couldn’t even *see* that minuscule an amount of gold.
3. Fungible: I don’t think you know what fungible means. It means any unit of the currency is indistinguishable from and interchangeable with any other unit of the same currency. My 1 BTC is exactly as valuable (or as valueless) as your 1 BTC. Being digital, bitcoins are even more fungible than dollar bills (I might not want your dollar bill because it has a coffee stain on it).
4. Easy to Store: Bitcoins consume no volume and have no mass, and their authenticity can be verified all the way back to the moment of their creation by any computer that has a record of the block chain. Safeguarding one’s stash of bitcoins is a simple matter of encrypting one’s wallet with passphrase. Cracking AES-256 is a hell of lot more time-consuming and energy-intensive than cracking even the most secure bank vault.
“Theoretically there would come a time when even those 8 decimal places wouldn’t be enough, and that’s what bugs me.”
I believe the creators specifically addressed that eventuality. It would be as simple as extending the protocol to store/transmit more than 8 digits of precision after the decimal point. It couldn’t happen overnight, of course. There would be an adjustment period. Liken it to the conversion from 32-bit to 64-bit CPUs or the conversion from IPv4 to IPv6.
On the demand side – I dont have to pay taxes on bitcoin income, and businesses can avoid reporting income. While this is not something I’m currently engaged in, it certainly makes the prospect of doing business more attractive as our government seems more interested in using my tax income for welfare, special interests of no interest to me and useless wars abroad.
On the Supply side – think about the fixed supply a little differently. For all other forms of currencies prior to now, there’s been an ever increasing supply. Advantage (and wealth) went to those who control that supply. Bitcoin creates an artificial ceiling for one reason – to create a foundation to build a fractional currency on. That is, in order to create 1000 1/1000BTC fractional notes I may use as lending devices, I have to control 1 BTC. This prevents the problems that happened with the ‘run on gold’ back in 1971 by creating a fixed basis to build future currencies from.
You may favor the dollar. But it, like shells, like gold – even like the bitcoin – are all faith based mechanisms of establishing common value to trade goods and services. There’s considerably less restriction and more freedom in exchanging via an anonymous currency, and banks – quite simply – can’t control the supply EVEN IF they convert their assets to it. There is no central bank managing bitcoins, no centralized source. This makes the advantage simple and clear: the cycles of and volatility of currencies will become a thing of the past when the bitcoin you hold will never lose it’s value.
>How do you (forcibly) tax an anonymous and untraceable transaction? And no, “uncle sam would find a way” is not a real scenario…
I didn’t read all the comments, so maybe this is repetitive, but couldn’t the government run a client (node) to get logs of all transactions?
Tim’s 1st article (the demand side) was weaker, but this one is much better (maybe because it’s related to technology and not to finance?).
The incentive to game and attack this system would increase dramatically if it were to start becoming viable.
One attack I would personally entertain would be the split-brain attack on areas with high use (rich bitcoin ‘hoods, so to speak). For example, severe outside Internet connectivity (either physically or by attacking the protocol or gateway nodes), spring enough nodes in the area to overwhelm “real” clients, rob them blind, convert to “real” money and cash in.
@skeptical: Interesting idea for a localized attack, but technologically it wouldn’t work. If you cut off the vast majority of the Bitcoin network from a small neighborhood, suddenly that neighborhood, even with your rogue drones added to it, would have insufficient computational power to find even one block per week with any reasonable probability. And any informed user will not trust a transaction until it has been confirmed by many blocks stacked on top of it, so no one there would buy your bitcoins off of you for “real” money because their transactions would not confirm. Moreover, the abrupt decrease in the block generation rate would very quickly alert everyone in the neighborhood that something was amiss.
“It would be on par with suggesting that a few major banks right now could decide to create money out of thin air (after all, they *are* just numbers in a database, right?), and agree that they would accept eachothers’ forged money…”
Ummm, this is oversimplifying things a bit, but this is not far from how derivatives work.
When you suggest that it is “nonsense” to consider the possibility of a government taxing a currency, I immediately discount your argument. Income taxes and the federal reserve are considered by some to be unconstitutional, and yet there they are. I really don’t see how it is “nonsense” to consider the possibility of the government taxing anything. They’re kind of in that line of work.
I don’t see why a government wouldn’t simply outlaw this. Outlaw the possession of the software. Of running of a node. Outlaw conversion into other currencies. Granted, there are all sorts of constitutional issues with that, but I don’t see that an insurmountable hurdle to something that might become a threat to government interests.
While I don’t think you could ever stamp out a peer to peer network, I think you push it sufficiently underground as to limit it’s global use. In this scenario, you would essentially have a black market currency which may also be useful for money laundering.
In terms of scaricity…well, okay, there is a limited amount of bitcoins, but because they are digital, they are essentially infinitely divisible. I’m not thinking this through very well, and know very little about monetary theory, but somehow, the fact that it can be divided into smaller and smaller units says to me that there’s some avenue through which inflation could still occur. I get that each smaller unit is part of a larger unit that is theoretically fixed or growing in value, so it’s not immediately obvious to me how this would work (and maybe it wouldn’t), but something about the scarcity argument seems lacking. Gold IS scarce, and can only be divided into individual atoms -any further dividing and it ceases to be gold. But you can always just add another decimal place if you need more bitcoin units.
Finally, for my brief and not-well-considered remarks I will point out that the US government (others too, I imagine), are not too fond of the private “minting” of money. From what I recall, that is a right specifically reserved to the federal government. If Bitcoin were to become in any way threatening to government interests, they will do their best to thwart it. I’m not saying this is inevitable, and I’m not saying that Bitcoin, or some heir thereto, won’t become an important part of the global economy, but I don’t think this is the end all be all of currency genius. at least not yet.
Still it seems like its creation is adding to human knowledge and experience so far. So yay for that!
“From what I recall, [minting of money] is a right specifically reserved to the federal government.”
Two problems here.
Firstly, your statement is factually incorrect. The U.S. Constitution, Article I, section 10, clause 1, states, in part: “No State shall […] coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts […].” This is only a restriction on what states may do; it does not limit individuals, co-ops, or other private organizations. To head off a possible retort, Liberty Dollar didn’t get shut down because it was a private currency; it got shut down because it mimicked official U.S. government currency (with inscriptions like “USA,” “Trust In God,” and “Liberty”).
Secondly, even if your statement were technically correct (which it’s not), it still wouldn’t represent what’s actually going on in the present day. The Federal Reserve is not an agency of the federal government (despite its misrepresentative name). It’s a cartel of private banks. It was set up this way to side-step the potential unconstitutionality of the federal government issuing a paper currency. (Article I, section 8, only grants the federal government the power to coin money, not to print it or to conjure it into existence on a computer screen, though even despite this, there do exist United States Notes issued by the Treasury, as opposed to the Federal Reserve Notes issued by the Federal Reserve. I don’t believe the Constitutionality of U.S. Notes has ever been tested in court.)
My main concern over bitcoins is that since the algorithm and program is widely published, new private fiat currencies will be launched to compete with bitcoin. This is particularly likely since bitcoins are becoming very valuable. I was skeptical that a fiat currency could be launched from scratch. Typically, governments have their currencies be redeemable for commodities, then lie and cheat and suspend redemption. Since bitcoins are so successful, I have become more willing to think that a fiat currency might be viably launched. Either that or bitcoins are the latest version of a cabbage-patch-kid-type mania. Assuming bitcoins are a stable, widely desired currency, there is one possibility that might preclude competing bitcoin-type currencies from being launched, namely the “network effect.” Since bitcoins are the first and most successful anonymous fiat cybercurrency, new entrants might not ever achieve the popularity of bitcoins, thus locking bitcoins status as the primary anonymous fiat cybercurrency. Otherwise, I question the sustainability of bitcoins. Nevertheless, I am a buyer because I think prices will rise at least above $100 before they crash. I can easily see the market value of the 5 million bitcoins rising above $500 million or more.
“but it strikes me as highly improbable that the world’s government’s would leave the Bitcoin central bank unregulated. So I don’t see any major advantages over the fiat money we’ve already got.”
Except that it’s anonymous. Which is either good or bad, depending on your point of view.
I think its biggest Problem is the strict deflationary nature of the currency. Its biggest pro is, that its value does not suffer from certain politics! I very well think, that will stay so even in the future.
Your argument that entrepreneurs can do a fork of the network protocol with roughly the same technology, but a different policy is the real value of the new cryptocurrency technology: It allows tremendous innovation in the type of money systems! As the technology stays the same, clients can easily be adapted. Even mulit protocol clients may be feasible. All you need is a few servers to do initial mining and a marketplace to do currency trade. Here the same thing is true: Marketplace software already developped for bitcoin can easily be adapted and thats it.
You can easily create a similar network with a different policy. I am awaiting new currency systems. The current bitcoin system is based on a “gold” policy. But imagine the possibilities:
– A currency system with built in inflation of 1%, given to the miners.
– A currency system giving a certain amount of money every month to every human and devaluating all the other coins by the same amount. It needs the registration of clients after birth and the deletion after death, and resembles the basic income idea on monetary means.
– A currency degrading the numeric value of each coin by 0.0001 percent with each block generation. This would be the free money concept by Silvio Gesells theory
– tax systems hardwiring certain transaction costs etc. impossible to fraud yet without strict bureaucratic control necessary.
I hope i have inspired you with the examples. They are the key argument for the bitcoin technology, not just necessarily now implemented “gold” system with known properties (known form real gold!). Bitcoin technology is something many Ph.Ds will prove their ideas on. And the coolest thing: Innovation is possible anytime because a good system can start from scratch and grow of the money system has systemic value.
> But suggesting that a government would tax the USE of a particular
> currency… that’s just nonsense.
Umm, they actually do that now. In the glorious state of Arkansas, if you use US dollars to buy stuff, the state government makes the seller collect and remit 6% to them (they give you a break on food at the grocery store- they only grab 2% 🙂 )
If you pay your seller in tomatos, or Mexican pesos, that’s another matter. It seems to fry their computers, and they only seem to demand taxes on commercial users of commodity barter or foreign currency. So there’s differential taxation on the use of different currencies.
In Nevada there’s a special set of taxes & legislation around using casino chips as currency, although some state & municipal gov’t are trying to stamp out the practice.
The catch is, of course, that catching Bitcoin users & making them pay up will be even harder than catching contractors who do stuff under the table strictly for cash, when the customer doesn’t want a receipt.
@ all the folks talking about “Constitution,” “rights,” “minting coins vs. printing dollars” &tc:
This is all great stuff, but forget about it ITRW. Bottom line: when modern governments are faced with a group of people that have found an effective way to avoid taxation, they jump on it Big time, no matter what their foundational documents say.
It’s happened before, with Swiss numbered bank accounts, Austrian passbook bearer savings accounts, bearer-share corporations, Caribbean bank secrecy havens . . . and on and on . . .
They work both at the macro level (banking privacy laws have been subverted in almost every juridiction in the world after decades of effort) and the micro level (spying on individuals to determine whether their ‘lifestyle’ can be explained on the income reported to them, buying stolen bank information from moles in foreign banks, etc.)
Can everyone thinking and commenting about this please consider that in order for Bitcoin to “succeed”, it isn’t necessary to displace any other currency; it is sufficient that real people use it for real transactions (including conversions to/from other currencies).
Because I think that would cut down comments by about 50%…
Vandroiy’s last post hit the nail on the head. It is totally impossible to execute this kind of attack on the modern Internet because of the lightning speed at which information disseminates. Especially among the tech-savvy types who make up Bitcoin’s entire userbase.
Even if a cartel was formed in secret and launched a coordinated hijack of the network, there would be a Reddit post less than 5 minutes after the fork goes public detailing the attack and warning everyone to switch to an unaffected client. It would have thousands of upvotes within the hour. There wouldn’t be a single Bitcoin user who didn’t know about it by the end of the day, and there would be a mass exodus from affected clients, rendering the fork a dead end.
Gaming the system is impossible when everything is transparent and information travels instantly. Even somehow managing to release a malicious version of the official client would fail in the same way, within a matter of hours.
Speculation and hoarding may bring down Bitcoin; a collusion gaming the system certainly won’t
I would just like to request that you (and probably millions of other bloggers) get a custom WordPress theme made, or at least change the header image. It is extremely confusing when probably millions of sites look exactly the same. Thank you.
Now, onto this topic, the way I understand Bitcoin (I’m not an expert) is that it is decentralized by nature, and that an “attack” like the one you’re supposing would be improbable. There’s a lot of enthusiasts that “mine” and all that. To change the architecture, a lot of people would have to agree to switch. I also don’t think the government will be able to regulate it unless they do things which are currently considered unconstitutional; like monitoring and filtering Bitcoin-specific internet traffic.
The problem with Bitcoin is that the people raving about it follow the Marxist saw “it doesn’t work in fact, but does it work in theory?”
The discussions surrounding Bitcoin can generally be characterized as a nerdfight with lots of handwaving. The fact is the currency has essentially zero operating history compared to other currencies and media of trade. Opinions are like assholes. Everyone has one.
The Dollar, Pound Sterling, gold and other instruments have decades or centuries long histories that have survived many tests (Great Depression, WWII, 2008 Banking Collapse), and have been studied closely by economists and historians. As a business person, I am much more comfortable working in Dollars because it represents a
15 trillion economy, and has a long history.
Bitcoins need to prove their worthiness as a financial instrument over a period of years or decades. Otherwise it’s just another form of script. Flooz anyone? I also have some worthless stock in a failed dot com I’d be happy to pay you with.
What bothers the most about Bitcoin is that the system is so complex that few people really understand how it operates. I am wary of anything that is developed by someone pseudonymously, and that is comprehensible only to people with a background in cryptography. Is the system truly trustworthy? Most of us have no way of judging that, and have to rely on “experts”. Maybe it is, may it isn’t.
Remember Long Term Capital Management? The firm was packed with very smart people, including a few Nobel laureates, and look what a mess they created.
So I’ll stick with dollars in an FDIC insured account and ACH transfers, thank you very much.
multi chains bitcoins, alvin toffler, star trek, the third wave utopian future tribes nations and true sovereignty:
well, i think that this theoretic nonzero chance of collusion is a good thing! i even advocate that, and in this way bitcoins can overcome the supply side of bitcoins which is in a fixed quantity ..
what if any bitcoin of this first generation, let’s name it it gold bitcoins or generation zero seed bitcoins can be a point of inflexion, a gatekeeper, from where a new network of silver bitcoins can be generated? not divisible by eight decimals like is now but theoretically infinite divisible!
bitcoin p2p infrastructure can do that and still avoid actual poor fiat money policy with periodic bubble bust to adjust derailed money supply in a very simple way:
like you told here, treat all this forked networks as different currency! not alien, not invalid, but splitted networks with different policies of money generations a
with different policies of minting money, maybe some central governments want a quick money printing for good reasons like money injections in real economy to fuel investments!
this can be done without destroying gold bitcoins values and without demantling p2p bitcoin protocol of efficient money distribution if in this inflection points, at gold bitcoin p2p network point where a particular bitcoin block will be splitted and forked in a silver bitcoin network, can be established bitcoins exchanging points where gold bitcoins and silver bitcoins can be exchanged in a free market with commonly agreed rules
is so easy to avoid gold bitcoin perpetual deflation! is exactly like you describe here, with an initial network branch collusion!
but instead of full split and two isolated networks can be cooperating networks if silver bitcoin branch will agree to be part of gold bitcoins in an p2p bitcoin exchange market
of course initially because silver bitcoins network is a split and division of a fixed amount of global gold bitcoins network the sum of value of all silver bitcoins denominated in gold bitcoins must be a equal to this initial gold bitcoins splitted!
and only an p2p bitcoin exchange market can control future value between two competing networks, gold bitcoins, generation zero seed bitcoins, and silver bitcoins! only free marked demand for gold bitcoins or silver bitcoins will drive gold bitcoins value against silver bitcoins value
and because in that distant future, gold bitcoins will be more hard to generate and more scarce this means will be more valuable and NEVER total sum of silver bitcoins will not exceed a tiny and fixed amount of gold bitcoins!
and in an ever more distant future even silver bitcoins will begin to be a scarce resorce! then this p2p network split can fork again a copper bitcoins network from a fixed amount of silver bitcoins!
all that is need for a global stabilization of bitcoin deflation is a minimal set of rules for an global exchange market for all bitcoins variants!
everybody wins! FED is busted!
central governments, if there will be something in the future to survive will be more careful how spend money and ask tax payers fees! will not have the same sovereign power of taxation as far as money will be outside government control! if they want to issue any currency will have to follow the rules! p2p global bitcoin network rules!
and this rules is simple, if you print money at your sovereign national discretion don’t print too many if you want to have any value when you ask to join our global p2p bitcoin network because in our exchange market will worth nothing! you can not devaluate gold bitcoins value at you discretion generating too many silver bitcoins!
beware! gold bitcoins will keep market value and only silver bitcoins will be cheaper! p2p bitcoin network can handle that quite easy with his infinite power of divisibility!
and not gold bitcoins network need to obey silver bitcoin network rules, silver bitcoins network need to prove that use same rules participating in a common bitcoins exchange market!
is simple like that!
Regarding the earlier discussion on Constitutional powers of the federal government: the feds have enormous power to regulate interstate and international commerce (also under Article I, Section 8). That power would include regulating Bitcoin, regardless of any concerns about who has legal power to mint currency.
Also, the minor point about “coining” versus “printing” is absurd. You have to interpret the Constitution in a sensibly modern context. Such arguments will not keep you out of federal prison. (See: Wesley Snipes)
Maybe the possibility of collusion is in fact to be considered as a feature. It is not so much different from the way the internet works: a set of rules agreed by the majority. And as of today, the internet was not subverted by a rogue secondary internet. However, it evolves. And if some day the majority of the bitcoin network agrees upon some improvements, it may also evolve, rather than being bound to dumbly follow some inappropriate rules from the past.
However, in contrast with the internet, bitcoin is supposed to be much more stable. The bitcoin rules as of today are not designed to be adapted upon by every participant, as the internet RFCs are. So, it will only evolve if there was really a consensus reached throughout the community. And this is probably good as it is, because people expect that the rules money is based upon do not mutate every day.
@totedati: a more interesting area of exploration for multi-root bitcoins (in my opinion, as I regard the coin supply issue as really uninteresting – the market will just adapt the prices as appropriate) would be to have a competition of different cryptographic algorithms for the hashing and public key cryptography. This way, bitcoin users who are concerned about cypher quality can invest their funds into different algorithms, thereby reducing the chance of losses due to cryptoanalytic progress. As a side effect, the exchange values between the different coins would reflect the trust into the different ciphers as perceived by the community.
Why would anyone want to create a fork of the Bitcoin chain?
One reason could be to destroy the value of Bitcoins, since it could increase the value of other competing currency.
Example. Paypal or any other similar central payment solutions might want to do this. To keep people using their service.
It might even be done, to make it look like it was another payment solution, government or even a country who did this. Like a smear campaign.
Which in the future could be a “great” way to start a war, because anyone who has any Bitcoins and see the fall in value would want to get rid of the government/dictator who they think did it.
Governments who ban Bitcoins might want to do this.
To create misstrust in Bitcoins, keeping people from using Bitcoins.
Since bitcoins means that its harder to collect taxes and make it possible for “terrorists” mafia and other to transfer money across the world.
I´m not saying Bitcoins will be used for this, or that this will happen.
But this is what governments could say. Which means its a risc investment and anyone should be a little careful to not put everything into Bitcoins.
Wow… I’m going to have to come back and read all the comments but I’m jiving with the writer on this one. I see where he’s going with this and it makes sense to me. He’s not looking at how it’s operating today but if it starts to build critical mass and big business sees the movement and throws there $$$ at it to build inside they theoretically could take over the network. The issue here is: when and if it becomes to expensive to run miners than to not… Business would then operate as a loss which is more than likely unsustainable unless data was being collected and used…
At critical mass what is the incentive to even mine coins and hash problems?
Bitcoin Expiration Dates
Bitcoins will be lost over the years as wallets are deleted or the computers on which they are stored are destroyed. Thus, the 21 million bitcoin cap will erode over time. This loss will be slow, but it will continue to build over many decades and centuries. How could the current rules be changed to resolve this problem?
I’d suggest we add an expiration date to each bitcoin on the order of 200 years from the last transaction (not from the creation date). An expired bitcoin would get flagged in the global database so it could never be used again, and a new bitcoin would be generated to replace it.
Below are the benefits of this additional rule.
1. Lost bitcoins are replaced so the cap of 21 million bitcoins is maintained over the long term.
2. As long as a bitcoin stays in circulation (i.e., is transferred at least once every 200 years) it will never expire, so the vast majority of bitcoins will never expire. (Also, you don’t need to worry about someone dumping nearly expired coins on you days before expiration because the transaction itself will automatically reset the expiration 200 years into the future.)
3. A person could “renew” their own bitcoin expirations by simply creating a new wallet and transferring the coins from the old wallet to the new one. This works because a transaction is made, which is registered with the global database. This transaction automatically resets the expiration date, and the original owner never relinquishes ownership. This renewing would rarely be needed, however, except in the event that a very old wallet is found, inherited, etc.
4. 200 years was chosen as a balance between the risk of having one’s life savings go poof overnight because they forgot to renew their bitcoins, and solving the lost bitcoin issue we face with the current rules. If the expiration time is too short, say 10 years, then many people will face the “poof” problem. If the expiration time is too long then bitcoin loss becomes significant. 200 years is longer than any human lifespan to date. Even an extreme miser, who holds on to his bitcoins for life and spends them very sparingly, should only need to renew his bitcoins once in his lifetime, if ever. For example, if the miser inherited the coins when he was a boy via a hand passed disk, which does not renew the expiration dates, he may need to renew the coins to allow himself a lifetime to spend them. Of course, no one living today would need to worry about pre-mature expiration (unless our life spans greatly increase) because the first possible expiration will not occur until the year 2209, 200 years from the start of bitcoin generation in 2009.
Old coins seem to hold their value but as collectors’ items, so expiring the guarantee of actual tender value seems reasonable. I generally agree with the once-per-lifetime renew scenario, though I would prefer a rule based on average global lifespan or generation, not a fixed timeline. Perhaps an assumed deflation, losing 1/7th of their value every measured generation (the average age at which females are bearing children worldwide). This would encourage spending/circulating the coins but not wholly discourage them as an intra-generational store of value. Inheriting them could actually trigger the renewal or devaluation, just to make sure they don’t get distorted by misers/hoarders.
Most of the problems outlined re collusion seem to be solvable by simply trademarking “bitcoin” so strongly that nothing that obeys an aberrant protocol can be called by that name, use those particular cryptographic authentications, etc. The “honest” client is one that passes a number of rigorous spot audit tests, period. Then the sheer weight of trust and acceptance of the name and keys would make it prohibitive to try to start some higher-overhead competitor which would have to have a different name by definition. If there is not some really good fundamental reason for this higher overhead (not just profit for the transaction cartel, but preventing unethical or dangerous transactions, taxing transactions for the benefit of the whole system, or etc.) it is hard to imagine the public not just shifting services as they did with social networks and search engines, to keep using the lowest-overhead service. Ideology aside, we all pay something for safety and will use more expensive transactions if they assume more of the liability/downsides.
That’s why every G20 nation has a mixed economy with fiat currency, income tax, etc.. I don’t see this situation changing soon, but I do think bitcoin could have ethical offshoots that guarantee social justice (hard) or ecological responsibility (easier), using existing certification and audit regimes. These could impose higher transaction costs but likely attract so many new users willing to pay them for the assurance of non-involvement in an unethical transaction, that it could make an effective competitor to plain old bitcoin.
Whose name is becoming increasingly associated, fairly or not, with drugs and absurd libertarian ideologies that quack the nonsense that private transactions don’t owe the public anything for public infrastructure and protection (access to the courts and etc.). No market exists without public protection and there has to be some “vig” paid for that, one way or another. Better to define exactly what’s protected and how, and if that can be done by more efficient entities than governments (say NGOs) so much the merrier.
Peter Barnes’ “Capitalism 3.0” proposes a “trust sector” separate from public or private that represents public trusts including ecosystems but also knowledge bases such as science or Wikipedia. Perhaps that analysis is a starting point for real bitcoin competitor currencies – ones based on existing trusts and bodily dependencies that we all recognize.
Bitcoin Expiration Dates (continued)
I chose a fixed bitcoin expiration timeline because I’m assuming we want to minimize changes to the rules (algorithms). If the expiration period is chosen correctly we may be able to go for centuries or more without rule changes. If we used average global lifespans we would need to input new data into the algorithm on a continual basis. I was trying to avoid this dilemma. Further, the original problem of lost coins eroding the total bitcoin count means there is a practical upper limit to the expiration period. 200 years seemed to be a good value so that most people would never have to worry about the issue at all. Their lifespan would be much shorter than the expiration period so any bitcoins they acquired in their lives would never expire.
Having said that, I also anticipate longer lifespans in the future, which is why I chose an expiration about three times today’s average lifespan. With continuing research in longevity, and especially genetics, we are quite possibly on the verge of unimaginable extensions in average lifespans. The maximum potential lifespan of a human is essentially programmed into our genes. It’s only a matter of time before we figure out how to reprogram it. What if future lifespans are extended to something like 500 years? Does that mean the 200 year bitcoin expiration needs to be changed. Probably not. It just means people would need to be more conscious of renewing their coins once every 200 years. This would be a small and infrequent annoyance to ensure we recover lost bitcoins. The alternative to not having expirations is the eventual loss of ALL bitcoins.
No rule changes are necessary. Lost wallets are a problem right now because the software infrastructure surrounding bitcoin is immature and the value of a bitcoin is (relatively) small. If bitcoin becomes widely adopted, the infrastructure will be more mature and the value will be greater. This will provide people with the tools necessary to keep their wallets safe and secure, and they will have more incentive to do so because losing it would be a greater loss.
Absolutely challenging! Even so the reality is truly contributing factor? I prefer laptop computers and would like to chunk the little data along with you.
It is unlikely that all these “banks” would be in the same country. They will not all nessesarily be controlled by companies. It might cooperatives as well. Who knows. Secondly I see little evidence from the real world that corporations have been able to subert open source software for their own gains. Most users will likely stick to versions condoned by the community of open source developers. Just look what happened when Oracle tried to excert too much controll over open source projects such as OpenOffice and MySQL, they quickly lost all users who moved over to forked versions by the open source community. Thirdly these banks could not take all the money over night. A lot of time would have to pass where people would be made aware of what was going on, and these banks would be very well known publicly. They would lose their reputation and credability for their actions. Most corporations care a lot about their reputation.
Changing the bitcoin protocol (the agreement between all parties using it), is like changing the HTML spec — it can be done, but it needs to be through huge amounts of collaboration, conversation and agreement. If a government ever tried to insist that the HTML spec had to change, half the world would laugh at them and all the world would ignore them. It’s just like that. If a cartel started changing the rules without discussion, you can be your britches that a huge competing operation would get funded and built in no time flat 🙂