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The Myth of Bitcoin Disintermediation
I’m going to explain why the hype about both Bitcoin and blockchain is overblown, and then, at no extra charge, tell you what the real Next Big Thing is going to be in the world of computing.
But let me start with an admission against interest: I have a spotty track record as a prognosticator. I played with the internet before it was born, when it was something called NSFnet, and didn’t think it was going to be a big deal. I scoffed at the introduction of color displays on early personal computers, and thought moving video on a PC was pointless. (Certainly, I never intended to have use for such frills.)
On the other hand, I remember saying, at the end of the 1980s, that disk storage would soon be so inexpensive that lack of space would never again be an issue, and so we could stop devising needlessly cryptic schemes for compressing business data. And I knew, the moment I saw it, that the Apple Macintosh would forever change the way we talked to our machines, and they to us.
I’m a Luddite who occasionally gets it right.
Bitcoin
You’ve read that Bitcoin is a distributed, secure, immutable public transaction ledger with an integral currency. That’s all true. It is also, for almost everyone, irrelevant.
The salient feature of Bitcoin is that no one is in charge. Bitcoin transactions occur safely and securely yet without the involvement of any central authority nor the need for the buyer and seller to meet, to exchange personal information – even to know each other’s identity. Clearly, for the small percentage of the population for whom transaction anonymity is crucial, Bitcoin offers some advantages that are difficult to achieve by other means. For another few, those who send money to third-world countries with insecure banking systems for example, circumventing possibly-corrupt central authority is useful. For the rest of us, Bitcoin offers few, if any, benefits.
Where, exactly, does Bitcoin keep your money? What exactly is a distributed, decentralized public ledger anyway? If your Bitcoins are safe, yet no one is in charge, where are they and how are they safe?
The answer is that Bitcoin, with its blockchain, keeps your money everywhere and nowhere. There really is no such thing as a Bitcoin, merely a record of the transactions that have credited to you fractional portions of bitcoinage that you have not yet credited to someone else. That’s what the ledger is, a list of transactions. There isn’t even a Bitcoin balance, per se – a number somewhere of the total bitcoinage credited to you. Rather, there is that long list of transactions, some of which increased your Bitcoin worth, some of which decreased it, and most of which have nothing to do with you. Only by walking through the ledger can you construct a sum of your Bitcoin wealth (unless, like me, you already know it to be zero).
So there’s no Bitcoin balance, but there is that enormous and ever-growing ledger, the famous blockchain. And that is the part of Bitcoin that is everywhere, stored in its entirety on millions of computers, no one of which is any more authoritative, secure, special, or otherwise privileged than any of the others. Your Bitcoins are secure because they’re mixed in with everyone else’s, and they are stored in so many places that the odds of losing them all are infinitesimal.
Okay, so having millions of copies means that most of them won’t be lost or damaged, but what prevents people from changing those copies, from doctoring the ledger to take some of your Bitcoins and give them to someone else? After all, if everyone has a copy of the whole ledger, how do we know whose copy is accurate and whose copy has been changed?
That’s where the encryption comes in, the thing that makes Bitcoin a crypto-currency. Each copy of the blockchain, of the ledger, is full of codes – cryptographic hashes – that are calculated from the ledger itself, and that prevent the ledger from being changed, even a small amount, without making all of those calculated codes invalid. Anyone who tried to make a change to the ledger would soon be discovered, as each computer would quickly find that its own ledger codes differed from those in the manipulated ledger.
Without going into the numbingly boring details, suffice it to say that the only practical way to corrupt the ledger is to amass computing power equal to about half of the total computing power engaged globally in “mining” Bitcoins, and to dedicate it all to committing Bitcoin fraud by creating a false ledger more believable than the real one.
There are easier ways to make money.
So it’s secure from fraud and accidental loss, and it allows anonymity for those who want it. What’s not to like about Bitcoin and its admittedly clever blockchain technology?
For starters, it’s ludicrously inefficient. Bitcoin takes a transaction ledger that would fit on a typical, modern laptop’s disk drive and multiplies it millions of times over, distributing it around the planet in countless near-identical copies. It then uses computing horsepower that dwarfs the world’s total supercomputer capacity to add another handful of transactions to that ledger – an operation that, in a traditional, mediated financial system such as Paypal, would be orders of magnitude faster and orders of magnitude less expensive. Given its demands for disk storage, bandwidth consumption, and energy use, Bitcoin might have been invented to sell hardware and electric power.
Okay, so it’s inefficient. It’s still secure and anonymous. Who cares if my Bitcoin pizza purchase consumes as much power as a small developing nation if I don’t have to foot the bill?
That would be a fair point (assuming you’re an Earth-hating nihilist with a poorly developed sense of value) if Bitcoin were really secure and anonymous. But, for most people, it isn’t.
The reality is that, for most people, running Bitcoin software is a risky, inconvenient business. It requires that you download Bitcoin software from a trusted source; that you manage the safe storage of your Bitcoin information – your “Bitcoin wallet” – on your computer, as well as on removable storage media like a thumb drive or external disk; that you have sufficient storage space and bandwidth to download and process the entire blockchain; that your computer is powerful enough to handle the extra workload of all that hashing and transaction verification; and that you keep your anti-virus software up-to-date so that no one sneaks in and gets their hands on your “wallet” and steals your Bitcoins.
It’s work, and it takes a computer enthusiast’s level of interest, and some responsibility, to be a truly disintermediated Bitcoin node, a standalone peer in the Bitcoin blockchain universe.
Of course, instead of all that, you could do what most Bitcoin users do: store your Bitcoins online with a trusted Bitcoin service, one that manages all of those details for you. But, at that point, they have your Bitcoins and your passwords and your identity. They are your intermediary.
And you’re really just back to Paypal.
Oh, the Next Big Thing?
Augmented Reality. Seriously.
Published in Technology
Even further back, Gilder had the original observation, “the network is the computer”.
Aaron, great comment and nice details.
Imagine lifting the hood and looking at your automobile’s engine, and seeing a floating annotation beside every component: oil here, radiator fluid level, power steering fluid here, and specs for everything. Look at the fuse box and see what each fuse does without having to dig out the manual.
Imagine walking through a factory looking at equipment and seeing the last maintenance date, the operating temperature, whether or not the device has been locked out at the panel, the part numbers of each component.
Imagine returning from a trip and looking across the airport parking lot to see a big blinking arrow pointing at your car.
If you watch football on television, you’ve seen a kind of augmented reality in the synthesized scrimmage and first-down lines and other on-screen annotations. Imagine seeing that stuff — or not, as you choose — when you watch a game in real time.
Imagine sitting in a meeting and seeing, over the heads of everyone present, their names and what they do, and what their stake is in the matter at hand.
Imagine traveling abroad, without a guidebook or a guide, and seeing information about the places and buildings and monuments you’re viewing. Or walking through the forest and seeing names and information about the plants and birds you see. Walking through a store and seeing one-to-five star ratings for the products you’re seeing. Walking across a construction site — or your yard — and seeing the buried cables and gas lines beneath your feet.
Imagine walking by a restaurant, a store, a movie, a bar, and seeing the opinions your friends virtually spray-painted on the door the last time they were there.
It’s going to be an interesting mess.
Unfortunately, instead of all that, we’re a lots more likely to see ads and have products from the lowest bidder covered up, like Coke paying to have Pepsi cans virtually disappear.
So talking on your phone while driving will be illegal but reading on your windshield will be ok?
Sounds to me like it would require exactly that. After all, wouldn’t you need to focus on the display on your windshield rather than the road in order to see what it’s telling you?
I think you misspelled scary.
Oh, I’m sure you’re right. And people will sugar-coat the world: imagine San Francisco with all the homeless people conveniently (digitally) removed. (You’d still have to watch where you step, of course.)
I imagine it’ll look a lot like Blade Runner — though I hope with less rain.
Windshield heads-up displays are already here on some vehicles.
I assume that the focal point for the projections will be set to infinity, so that you don’t have to shift your focus to see them. I don’t know if that’s how it works now but, if not, we’ll get better at it.
Regarding distraction, I think there’s something fundamentally different about things that distract us from driving versus things that augment our awareness of driving.
You mentioned cell phones. I remember reading once of a study that suggests that it isn’t merely holding the phone that is distracting, but rather the call itself. Those who use headsets while driving — as I do, constantly — are also at heightened risk. (Shoot, I have to turn the podcasts off when navigating unfamiliar streets, or I miss things. But then, I miss things anyway.)
high-end cars have nightvision displays to help (infrared or lowlight). going in reverse, the backup camera has path and distance markers. There is also synthetic 360 view for parking. In a Tesla there is a display of vehicles in adjacent lanes. All of this is coming to a car near you. These are high profit and low liability addons.
No more than you currently need to lower your eyes to check your speed, fuel, or radio. And that’s only for information like the current speed limit.
Otherwise, you would be looking exactly where you normally look — at the lane you are in, at the road sign ahead, at the upcoming store — but seeing those things more clearly than normal because the objects are overlayed with digital outlines.
AR means looking at the physical world and seeing it completely, but with digital information or visuals layered on it.
Like anything, AR can be poorly implemented and thereby fail to help. But it is empowering and customizable in the hands of good developers.
Sky Map, SkyView, and Star Walk are the names of three popular, straightforward, and free examples of AR that you can download to your phone today. These apps enable you to point your phone at the night sky and see the stars or planets there identified, along with the constellations those stars might belong to. The apps will also reveal the stars in that direction you are not seeing because of light pollution. Or point the phone at your feet and see what constellations are hidden on the other side of Earth!
Education is one of many potential applications of AR already being explored.
Up until this point what you were describing sounded harmless enough.
meh. Those predictions were after the Newton was on the market and the Palm Pilot was nearly ready. A company like Amazon (they sell a *lot* of stuff) has no use for blockchain. They are a transaction engine would do better with their own banking. As for Google, their free stuff will still have business for a long time. Their challenge is getting anybody to pay for something (music, video,…)
That’s the killer app I’m waiting for. I’m terrible with names, I wish everyone would just wear name tags all day.
Bitcoin “mining,” while evocative, is ultimately a misleading metaphor. “Miners” aren’t really creating (or discovering) “coins,” they are actually being paid a small fee for processing transactions on the network.
I think there’s still a crucial difference between an open network (such as the web) vs. a closed network (such as Facebook).
It’s true as you say that most users are going to use a service rather than host their own node. Similarly, while you could run your own web server farm, these days most anyone who wants to put up a web site contracts with some provider to host it for them.
However, contrast that with putting up a Facebook page: your only choice is go to Facebook. If Facebook Inc. decides to deplatform you, you’re off their network, no alternative, no recourse.
By contrast, if your web hosting provider shuts down your site, you have the option to move it to a different provider. If no provider will take you, you can fall back to buying and running your own servers. No one company (or nation, for that matter) controls the web or has the power to kick anyone off of it.
Also, an indication as to whether or not they are deplorable would help.
And his/her/hir/zir preferred pronoun, naturally.
I was with you right up to hir/zir.
Regarding your other comments (Facebook, Web, etc.)…
I agree. And there will always be some of us who host our own sites, for whatever reason. But most people won’t; it isn’t transformative, for normal people. I think blockchain will that way, too: it’ll be a back-room aspect of a lot of corporate information systems, but most of us will still go in through a portal using conventional credentials. Because it really is, generally speaking, safer, cheaper, more flexible, and more efficient to store and access information in conventional ways.
Why do people want crypto currencies or any other type of unorthodox money? That is the question. What good are legal tender laws? How do they advance civilization or human flourishing? When people start asking that question, that’s when the fun begins.
Everyone’s talking about how interest is going to consume the national budget soon. Gee, how did it come to this? I just find it laughable that people think you can control spending with politics.
Interesting post. The one (at least theoretical) advantage of bitcoin that you ignore is it’s immunity to devaluation by money printing governments. I’ve heard it said repeatedly it’s a hedge against inflation and I can imagine how it could be. At present, speculation has made the value so volatile that it’s doing an incredibly poor job of serving that purpose, but in theory you’d think it could (and may someday after the speculative frenzy dies down).
Again?
Supposedly this requires a futures market settled in
cashbitcoin and an options market on those futures. The current bitcoin futures aren’t settled incashbitcoin. There may be other factors.Massive correction on my last post.
This is not perfect a perfect comparison. Suppose you ran your life on a gold standard. Every time you received currency, you converted it to gold. Every time you had to buy goods and services you either converted some of your gold into currency, or you gave some gold to an intermediary. The intermediary did the purchases on your behalf. In this situation your “cost” of goods and services would be more directly related to the market price of gold. Some days your purchasing power would be greater. Other days it would be less.
An interesting difference between gold and bitcoin. The supply of bitcoin is finite. It has been predetermined to be 20 million. The supply of gold is also finite. But we don’t know the upper limit. In theory, over time bitcoins should become more valuable as you approach the upper limit. Gold, on the other hand, responds to both demand and expectations of future supply. Gold is subject to supply shocks. Nobody is going to discover a new vein of bitcoin in South America.
I can see blockchain as having a role in transferring trusted information. Such as, “this lot of vegetables originated on the Jones farm in Iowa and was picked on September 9th and sold to the Iowa Vegetable co-op”. Beyond that I’m not so sure. People are selling it as a supply chain information tool. But I have a hard time seeing the utility. Beyond trusted sourcing.
Thank you. I never really understood all this blockchain stuff. Appreciate the lucidity.
RE Luddite: No one will ever come close to the VP at CompuServe who looked me in the eye and said in all seriousness, “We don’t think the World Wide Web will have that much of an impact on our business.”
I don’t know about cars, but I recall reading that the HUDs on fighter jets were designed that way. So no, you don’t have to shift focus from the road to read them. Pretty sure that’s true of Google’s Glass and similar products.
This is true, but it has rarely happened. Oddly, the growth of the gold supply has matched population growth for forever.
My Ford Expedition doesn’t have the IR stuff yet, and the backup camera system does leave a bit to be desired when trying to hitch up my trailer (for which I entirely blame NHTSA for hard-coding some bad ideas into the specs and not allowing for innovation), but the 360 cameras, the prox sensors, the adaptive cruise control (which will even brake for you, which is a weird experience), and the parking assist functions are all much better than I thought they’d be, and a massive improvement over what they were just a few years ago.
It will be very neat to see where this stuff goes.
Demand creates supply.
Right, but it’s still a real problem with silver, no matter what.
Fascinating article.
My issue with bitcoin is value. What gives bitcoin value? US currency has value because you can pay taxes in it – US treasury must take your dead presidents. Why should anyone take your bitcoins?