Why Bitcoin is a significant breakthrough, but perhaps not as a currency
106 points by dpkendal 11 years ago | 103 comments- rthomas6 11 years agoI am convinced that many problems with Bitcoin would be solved if we could come up with a way to tie mining difficulty to the currency's demand instead of only to the mining computing power. Instead of ensuring a predictable generation rate, this could ensure a predictable value. When demand wanes, the currency is harder to mine and becomes more scarce, and when demand surges, the currency becomes easier to mine and more available. This would stop some of the volatility in BTC prices. You could plan the rough change in value over time, and build it into the algorithm, perhaps making gains unlimited at first, then making it very deflationary for several years, and gradually easing gains to something like 0-2% deflation per year. A currency with a known long term future value is obviously very useful, and a stable value is also more useful.
I can't think of a decentralized way to measure demand, though, so maybe this is not possible.
- swalsh 11 years agoI proposed a way of tying the difficulty level to the quantity theory of money a while ago on economics and alt currency forums of bitcoin talk.
I think if you're going to be successful, you'll have to find a different set of early adopters. Bitcoin is as much ideological as anything, and while some people don't want to see another alt currency because of their level of investment, others just generally don't believe there's anything wrong with the system today.
Anyways, i'd love to actually develop the idea... but I didn't want to spend time on "just another altcoin" unless I had faith it might get some adoption.
- rthomas6 11 years agoI did toss out a less thought-out version of the idea on bitcointalk and /r/bitcoin a while back, and you're right, they were not interested. Those communities seemed to think that a non-predetermined amount of coins meant the same thing as a fiat currency. But maybe if something like this is actually built, people that believe in more mainstream economic ideas would get attracted to it and start to use it?
- XorNot 11 years agoOnce you acknowledge mainstream economic thought (or at least mainstream academic economic thought) might actually be a useful field of study, you've pretty much defeated the point of running Bitcoin with a non-central bank model.
Bitcoin appeals to people who have decided it's outrageous they have to invest their money in productive enterprise to get more of it, and it specifically appeals to greed which says "get in early and get rich easily!"
- XorNot 11 years ago
- oscilloscope 11 years agoDoesn't Peercoin behave this way to some degree?
- wmf 11 years agoThis doesn't sound much more stable than Bitcoin. If demand increases, say, 10x in one year the money supply cannot increase correspondingly.
- wmf 11 years ago
- jljljl 11 years agoCan you share a link to the forum post? I think this is a really interesting idea, and I'd like to see what you proposed and bounce some ideas around, as well as see the altcoin community's objections.
I wonder if there is another community that would be more interested in such a currency's adoption.
- hershel 11 years agoCan you please link to your solution ?
- rthomas6 11 years ago
- Aqueous 11 years agoI think the jury will be out on this until BitCoin achieves a saturation point where its deflation due to rapidly fluctuating demand stops and its deflation due to being limited in supply starts. Which means, not for a while. We won't really know how deflationary BitCoin is intrinsically until the noise in our graph goes down - i.e., it stops being so susceptible to speculative bubbles. Maybe this never happens, but I think as there is more regulatory uncertainty it will.
Any coin that tries to adddress the problem of deflation right now will also have to go through a cycle of gaining widespread adoption before we know whethre or not the monetary policy built into the coin works. PeerCoin if it ever gains wide adoption will almost certainly seem just as volatile as BitCoin as it becomes more widespread. And we wont know until it becomes widespread if it successfully combats deflation.
- maratd 11 years ago> You could plan the rough change in value over time, and build it into the algorithm, perhaps making gains unlimited at first, then making it very deflationary for several years, and gradually easing gains to something like 0-2% deflation per year.
You want inflation, not deflation. The value of the currency should decrease at a 2% clip per annum.
This would make it into a realistic currency, where people get annual raises in their salary, prices gradually climb making merchants happy, etc.
You need to conform to basic human psychology for wide adoption. And don't worry about the miners, they will mine regardless, even if it's worth less and less each year ... now the speculators? Those will be gone and good riddance.
- rthomas6 11 years agoI can see this once it's up and running with a large market cap, but in my opinion you need the deflation in the beginning to attract users. There's much less of an incentive to use the new 'coin if it doesn't appreciate over time.
- saalweachter 11 years agoWell, that's the problem.
If the digital currency doesn't have any significantly attractive qualities outside its use as a store of value, it's a shitty currency.
If you can make a currency that people will use on a day to day basis, voluntarily, despite having 4% inflation (which is a much better target, economically -- the 2% is the weaksauce compromise with the anti-inflationists), then you've created something which has real utility.
- saalweachter 11 years ago
- johndevor 11 years ago> You need to conform to basic human psychology for wide adoption.
I don't think inflation is a part of basic human psychology.
- maratd 11 years ago> I don't think inflation is a part of basic human psychology.
Regardless of your thoughts, it is.
Most jobs do not experience constant annual productivity gains, but everyone wants a raise at the end of the year and feels like shit when they don't get it. Nominal inflation allows you to give them a raise without impacting your bottom line. Win/win.
Most merchants what to see their prices go up, it signals to them that there is demand for their goods. A steady, slow, increasing demand for their goods makes them feel good. Even if the costs of operating their business are going up at a similar clip, it makes them feel good that they can increase their prices. Having to keep your prices the same or drop them is frustrating, as if you're not making progress. Win/win.
A steady, slow pace of inflation is ideal.
It allows for short term saving, like for a downpayment on a house, but discourages unhealthy hoarding over long periods of time. Again, win/win.
Look, I get it, Economics is an art, etc. but this stuff has been established over a long period of time and it works.
- maratd 11 years ago
- fthssht 11 years ago2% per annum clip is nonsense dogma. As close to 0 as possible is probably ideal.
- yxhuvud 11 years agoIf you can achieve that regardless of how deep a recession becomes, sure.
- yxhuvud 11 years ago
- rthomas6 11 years ago
- richcollins 11 years agoWhen demand wanes, the currency is harder to mine and becomes more scarce
If its harder to mine then its harder to transfer. At some point you're stuck with something worthless.
- rthomas6 11 years agoThat's true, and a good point. Perhaps instead of varying the mining difficulty, the reward for confirming a new block could be varied. That ensures that as long as there are enough people interested in mining, you won't have this problem. The miners would still get the transaction fees even if the reward level was at zero. If that kills mining interest enough to have insufficient miners, Bitcoin will someday face a similar problem.
- rthomas6 11 years ago
- wcoenen 11 years agoInstead of trying to come up with a way to measure demand, you could just have each block contain a vote for what the mining reward should be. When the difficulty is adjusted, the block reward could be updated to the median of the votes.
The same could be done for other parameters (like the targeted time between blocks) or maybe even for more complicated things, like what kind of digital signature algorithms are acceptable.
I'd call it "votecoin".
- yxhuvud 11 years agoIf you bind the amount of xcoins to demand, what is the difference to normal currency? The vast majority of the money that exist right now is created on demand by banks, when there exist people that want to loan and have the ability to pay back the loan.
I wouldn't mind a distributed currency with this property, but you really should be aware that this is the basic operation of the banking system.
- rthomas6 11 years agoA slight but significant difference would be that the currency would not create credit or debt when it was created. People will either mine the currency, which is trading a service for the currency, or buy it on an exchange, which is trading one store of value for another. So the economy would be value-based instead of debt-based.
With a commodity like gold, when its value increases, people mine more of it because people want more. This increased supply reduces its value.
To me, the ideal currency is one in which you can get paid for performing a service, and 20 years later, the payment is still worth exactly the cost of that service. A long-term store of value, a way of remembering the value of everything.
- rthomas6 11 years ago
- _mhr_ 11 years agoI'm working on this problem, and I'm going to put out a paper soon that explains my solution.
- wmf 11 years agoI have also thought about this topic because I'm not a fan of pyramid schemes or open-loop money supply. Difficulty is already a proxy for demand (or perhaps the demand/supply ratio) because increasing demand increases the exchange rate which increases mining profitability which increases mining. If the block reward was set equal to difficulty then you'd close the loop. I am concerned that such a system would never be adopted in the first place because it wouldn't benefit early adopters and it may also stabilize at a low hash rate which would make 51% attacks too easy.
Edit: I'm not trying to criticize your ideas; I almost completely agree with you.
- rthomas6 11 years agoIf large deflation was planned in the beginning, it would very much benefit the early adopters. Also you're misunderstanding me a bit: I didn't mean the difficulty would only be tied to demand, but to have it factored in in addition to the current hash rate. Of course difficulty would still increase in proportion to the hash rate. I mentioned elsewhere that it might make more sense to vary the mining reward based on the demand, instead of the difficulty, such that blocks are still verified at a predictable rate, but the reward for each block can change.
- rthomas6 11 years ago
- zmanian 11 years agoDemand is closely tied to the velocity of money. When the transaction rate on the blockchain is high, coins should be hard to generate. When transaction rate is low, coins should be easier to mine.
- hippich 11 years agoMay be opposite?
- hippich 11 years ago
- hershel 11 years agoThe closest i found to a solution to bitcoin stability is here:
https://bitcointalk.org/index.php?topic=171539.msg1862790#ms...
Although at the beginning it should not be stable , but rising to get people involved with the coin., and at some pre defined point become stable.
- bachback 11 years agoThis is impossible. The network can never put a limit to its own value. The valuation must come from outside. How should a network possible describe what its worth? The money network should not predict demand. One could in theory have predictors of demand, but that would be an algorithm for pricing a set of cryptocoins.
- swalsh 11 years agopretty easily actually. The block chain gives us a pretty reasonable way to estimate the supply of currency, the velocity of it, and we can kind of estimate price. That's enough. I think if we modified the protocol a bit we could make it even more accurate too.
- bachback 11 years agoestimate price. you must be centi-millionaire then.
- bachback 11 years ago
- swalsh 11 years ago
- jokoon 11 years ago> You could plan the rough change in value over time, and build it into the algorithm
Are you sure of what you're saying ? Because bitcoin doesn't seem to work in a very simple fashion already, it's decentralized and it's already a miracle if it's working as the programmer intended.
- jv22222 11 years agoI was thinking exactly the same thing.
- swalsh 11 years ago
- fragsworth 11 years agoI think we almost all agree that cryptocurrency is a revolutionary thing. It's difficult to see how revolutionary, because we are only beginning to understand what can be made possible by it.
I often see it compared to the advent of the early Internet in the 1980s, when nobody really knew how big it would get, just that it was "revolutionary" and would become huge.
This may be an overestimation caused in part by bitcoin stakeholders trying to promote the idea. But a very similar thing happened in the 90s when everyone was buying tech stocks.
- BlackDeath3 11 years agoThe difference between the 1980s and now is that people now can use the Internet to learn about Bitcoin for themselves, from the source, instead of basing all they know on hype. It's a shame that so many people seem to love to talk more than they learn.
- fragsworth 11 years agoYeah, that difference definitely exists now, and accelerates the learning process quite a bit.
I think most people don't generally go to the source when learning about something, though, even today when it's easily possible. Usually what people do is learn what is fed to them from whatever outlets they prefer (TV, news websites, reddit, etc.) and hear about stuff in passing.
- BlackDeath3 11 years agoWell, while we're on the subject, for anybody who is interested in going to the Bitcoin source: www.bitcoin.org/bitcoin.pdf
- BlackDeath3 11 years ago
- fragsworth 11 years ago
- swalsh 11 years agoI don't like bitcoin, I hate that it has a fixed supply. I think in a good economy prices should fluctuate based on the supply and demand for the product (not the currency). Bitcoin as it is today doesn't really account for that.
That said, I owned some, and I recently sold some. Going through bitstamp (in slovania) was a pain. Getting the coins in was a breeze. However the international wire transfer took days, and cost about $60. Global transactions using bitcoin seem very lucrative here. Credit cards are another way, but they're expensive to the merchant. Bitcoin makes commerce on the web pretty nice in a lot of ways.
- Aqwis 11 years agoWhy did you use Bitstamp when you were not in Europe? For me, in Europe, transferring money to Bitstamp was free. It took a couple of days, but that's fine. I'm assuming there are exchanges in your region that are cheaper to transfer to than a European exchange.
- swalsh 11 years agoI'm not aware of any alternatives where I can get USD out. I suppose coinbase maybe, but bitstamp was recommended by someone here.
- swalsh 11 years ago
- Aqwis 11 years ago
- bachback 11 years agoI very much like this line of reasoning, because its only this comparison which points to the magnitude of the potential impact. We don't have even HTTP style protocols used yet, and very little understanding. I have 5 new ideas everyday, and find 5 new projects I find interesting. Not necessarily for what they are, but for what can be.
- BlackDeath3 11 years ago
- gwern 11 years ago> This realization raises interesting questions about the political motivations of Satoshi Nakamoto in presenting their creation as a digital currency when they must have known that they had solved this far more important general problem.
He was well aware: he posted a short essay to bitcoin.org explaining how Bitcoin is a general solution to the Byzantine Generals problem, and if you read his early cryptography/p2presearch ML threads, he specifically says that digital money is but the earliest and most obvious application, and that far more could be built on top of it, and he hoped there would be, and included the dangerously-complex scripting language specifically to support more complex functionality than simply a global ledger.
It's not his fault if everyone else was more interested in applying Bitcoin to financial transactions than exploring approaches like Namecoin.
- aaron-lebo 11 years agoI think this article is on to something really important. It is way too easy currently to get caught up in the frenzy over the specuation surrounding Bitcoin.
This idea of the Bitcoin protocol as a decentralized, secure, and transparent storage system has all kinds of applications, whether Namecoin, smart property or something else.
I played around with using Namecoin as a more consumer-friendly form of drm.
- wmf 11 years agoCheck out this article on software licenses as securities: http://jordanpollack.com/softwaremarket/
Ultimately I think this level of efficiency would probably destroy most developers who used it (especially games).
- wmf 11 years ago
- andrewla 11 years agoI don't think the author realizes how uninteresting a decentralized transaction store is without the currency element.
The trick was to line up economic incentives so that securing the network and accepting transaction fees are the same thing.
The fact that bitcoin serves as a centralized document store is one of the biggest defects in bitcoin as it stands now, and when bitcoin does fall, it will fall to a system that treats the transfer of currency units as a first-class citizen rather than a side effect of a script.
- fragsworth 11 years agoThe currency aspect has to remain, because mining would not exist without it. The devs know this, so they'll do their best to preserve this aspect. However, having the protocol support documents as well is pretty amazing:
Suppose it's 15 years from now. Many cars can drive themselves.
Suppose someone designs a mechanism that allows you to control your vehicle (remotely) only if you own a specific "ownership item" (colored coin, whatever people are calling it) on the bitcoin network. You prove this to the vehicle, and it goes to wherever you tell it to. The item on the bitcoin network means you "own" the vehicle.
Now you can tell your vehicle to go to a public place where someone might inspect it with the intent of purchasing it. That person tells you "OK, I'll buy it for 0.1BTC" and you perform an exchange of your ownership document for 0.1BTC over the bitcoin network.
You don't have to trust anyone with anything. The exchange happens atomically. You don't even have to go anywhere to perform the exchange.
- maxerickson 11 years agoThe buyer has to trust that the mechanism is sufficiently tamper proof.
(and once you have that, escrow service anyway becomes cheap)
- maxerickson 11 years ago
- bachback 11 years agoI strongly believe you vastly underestimate the power that lies in this system. Scripts are in fact one of the most exciting features, although some things have to be figured out yet. How are transactions not "first-class citizens"? That statement makes no sense. In fact the opposite is true. Currently everything is about 1:1 transactions, because higher order protocols have not been build out.
- andrewla 11 years agoThat the system has power is without doubt. The extent to which the power detracts from the currency aspect of the system is what I question.
When I say that a transaction is not a first-class citizen, I mean things like the fact that the question "I have this address, how many bitcoins do I have" is not really answerable; redeeming existing incoming transactions may rely on information outside of your key pair.
You're correct that as it stands, 1:1 transactions are pretty much all we have to deal with, so long as IsStandard doesn't change. The fact that the script language exists is worrisome, as is the fact that IsStandard only applies to relying of transactions by clients, not transactions in blocks.
- bachback 11 years agoInteresting, I don't understand how this should be worrisome - the receiver has to know what kind of transaction he is engaged in. Sending BTC which is not redeemable is the same as sending no money at all. It is exactly analogous to signing a contract. If you don't understand the terms you shouldn't sign it. So a sender might trick the receiver into believing that the contract does something he didn't know. But if you have a network of trust you hope that the sender gets punished for this behavior. Most of these issues haven't been solved yet, but it's a bit like saying the internet is worrisome because its peer to peer. I mean its exactly this part that is the most fascinating about the network. Sending from A to B we can already do with paypal.
- bachback 11 years ago
- andrewla 11 years ago
- fragsworth 11 years ago
- wildbunny 11 years agoThis article misses the true breakthrough which bitcoin represents which is a trustless, decentralised store and exchange of value.
- praxeologist 11 years agoOn that note, I want to point people to Protoshares and the concept of DACs (Decentralized Autonomous Corporations):
http://letstalkbitcoin.com/bitcoin-and-the-three-laws-of-rob...
http://letstalkbitcoin.com/dacs-that-spawn-dacs/
The use of the word "corporation" is kind of wonky to me and the whole concept took me a little time to wrap my head around it, but these are the types of things we can expect to see with blockchain technology and hopefully IMO eventually the abolition of states worldwide.
- fragsworth 11 years ago> hopefully IMO eventually the abolition of states worldwide.
These kinds of comments do nothing to help promote bitcoin as a legitimate technology and only increase the risk that cryptocurrencies become generally illegal to use. I'm really disappointed with the anti-government garbage spouted by so many people in the community.
- praxeologist 11 years agoBitcoin is inherently libertarian: http://rudd-o.com/archives/bitcoin-without-the-politics
If all the libertarians who are into bitcoin suddenly cut down the rhetoric, you think that this will "make bitcoin legitimate technology"? What does that even mean? You mean that governments are going to suddenly be more friendly to bitcoin users? That seems like an incredibly naive belief, sorry.
In general, it is disappointing that people still hold to backwards and primitive beliefs such as democracy and state worship. Statism is institutionalized violence and injustice writ large. I totally understand how your perspective on this can be different, but please understand that what you are calling garbage I see as a call for justice.
- smokeyj 11 years agoCan you voice your disagreement without getting angry? Everyone has an opinion. Being passionate about yours doesn't make theirs wrong.
- praxeologist 11 years ago
- whyenot 11 years agoI read the whitepaper. It is extremely poorly written and filled with largely meaningless jargon. Maybe the idea is brilliant but it is not being communicated very well.
- fragsworth 11 years ago
- julespitt 11 years agoI'd say "less trusting" than "trust less."
You still have to trust SHA-256 and that no one can afford to do a 51% attack, for instance.
- praxeologist 11 years ago
- api 11 years agoA bit reason I think Bitcoin is a fundamental innovation is that nobody quite seems to know what it is. It's clear to me that it is not a currency in the classical sense in that it does things that no classical currency does, but it's also not just a payment mechanism or a wire service or anything else simple and easy to define.
- chipsy 11 years agoI agree; the narratives surrounding Bitcoin examine small facets and magnify their importance. It is like the "blind men and the elephant" parable.
- chipsy 11 years ago
- emin-gun-sirer 11 years agoLet me use this opportunity to point out http://virtual-notary.org, an online witness to facts that can be checked online, where these facts are recorded in the Bitcoin blockchain. These go beyond the types of document proof of existence cited in the article, and can cover facts such as exchange rates, DNS address ownership, WHOIS info, weather conditions, housing prices, employment status, etc.
This article describes the usage scenarios in detail: http://hackingdistributed.com/2013/06/20/virtual-notary-intr...
- bachback 11 years agoAnyone interested should study the script system and Namecoin.
"Restricting transactions to such a simple form would restrict Bitcoin to exactly the possibilities traditional currencies had (though decentralized). However, Satoshi saw the potential to allow it to do more, and introduced a script system. He wasn't around anymore to bring it to practice, but Mike Hearn wrote down some of the things Satoshi had in mind on the Contracts page of the Bitcoin wiki."
- jere 11 years ago>This realization raises interesting questions about the political motivations of Satoshi Nakamoto in presenting their creation as a digital currency when they must have known that they had solved this far more important general problem.
Why oh why must every mention of Nakamoto imbue him/them with certain politics? We're led to believe Nakamoto is a subversive anarcho-capitalist libertarian who wants to overthrow governments.
There are certainly hackers driven by ideals and politics (e.g. rms), but there are plenty more who solve a problem just because they can. The Morris worm wasn't published in order to promote anarchy. Quicksort wasn't invented as a metaphor for classism. http://dl.acm.org/citation.cfm?id=358561
It seems far more likely that Nakamoto saw an existing problem, solved it in a clever fashion, and published the result.
- richcollins 11 years agoPretty sure Satoshi had political motivations:
- jere 11 years agoPerhaps, but that's kind of thin:
>This was probably intended as proof that the block was created on or after January 3rd, 2009, as well as a comment on the instability caused by fractional-reserve banking.
- jere 11 years ago
- richcollins 11 years ago
- 11 years ago
- ggchappell 11 years agoSo, BTC might fail as a currency, but succeed as -- say -- a basis for the kind of persistent URN scheme that the W3C & others have been mumbling about for a couple of decades. An interesting thought.
- gremlinsinc 11 years agoOne of the biggest problems with bitcoin as a currency that i see, is that everyone still deals in usd amounts and comparison when offering products, when webhosting is a flat btc price regardless of market fluctuations and when people buy and sell items based on their btc price without first translating it into a fiat currency equivalent, that is when bitcoin will truly be mainstream.
- lifeformed 11 years agoSorry to be a bit off-topic, but is anyone else's browser having difficulty rendering the text on this page? http://i.snag.gy/SK7NX.jpg
I've noticed this on a few sites, and I'm wondering if the problem is on my end, or if it's a problem with the website.
- coderzach 11 years agoYou're probably on chrome for windows, which does a really poor job of rendering webfonts.
- coderzach 11 years ago
- T-A 11 years agoNaive question from total outsider to both contexts, popped up while reading this: has there been any speculation that Aaron Swartz = Satoshi Nakamoto, or are there good reasons to exclude it?
- SwellJoe 11 years agoIt's not a theory I have ever heard, and I think there's sufficient reason to rule it out. Swartz never really professed an interest in currency or monetary policy, etc. that I am aware of. He was an extremely prolific individual who worked on many very public projects. Transparency was clearly one of his core values, and never exhibited more than passing general nerd interest in cryptography, anonymity, or the technolibertarian ideal that seems to have been a driving force for Satoshi. Also, he was already pretty damned busy in 2008-2009. I doubt he would have had time to do the huge amount of design work that went into Bitcoin without somebody noticing what he was working on.
So, Aaron was a brilliant dude, who did a lot of cool stuff. I just don't think the personality matches up, at all, with whoever created Bitcoin. If Swartz created a cryptocurrency, which I don't think he would have, I doubt it would look like Bitcoin. (There's also several people much higher on the list of "might be Satoshi".)
- bachback 11 years agoWho are on your list?
Nick Szabo. Mike Hearn. Hal Finney. Wei Dai.
- bachback 11 years ago
- gojomo 11 years agoVanishingly unlikely. Very different politics and economics. (Swartz: very Krugmanesque in views.) Even considering the referenced Swartz write-up after thinking about Bitcoin...
http://www.aaronsw.com/weblog/squarezooko
...you can see his thoughts were more focused on censorship-resistance (a major interest of Swartz) than on stateless money.
- gwern 11 years ago(If it helps, I have some private information on this topic which ~100% rules out Swartz as Nakamoto, but I'm afraid I can't tell you it. If you don't trust me for other reasons, feel free to ignore my claim.)
- SwellJoe 11 years ago
