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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
To be honest, they really shouldn’t. (Unless they want them, obviously, then I don’t see a problem with it.)
It’s like dollars, really, nobody should take them unless the really want them, like to get something else that they want even more than what they had to give up to get them. In that case, of course, they’d be crazy not to take the bitcoin or dollars or any other money, for that matter.
In Broward County, on the other hand…
Fun fact though; we can actually make more gold. You just add a proton to the element immediately before it and presto! brand new gold. You just need to make it out of platinum….
Lemme get back to you on that one.
While we’re at it, google’s glass and similar things should give you an idea of the fly in the ointment.
You know how Alexa has to be on and listening all the time in case her name is called? And how that means Amazon hears everything that happens in your home? To get your smart glasses to provide your HUD you’ll have to have them connected to a massive cloud computing center which necessarily has access to everything you see, all your location information, whatever else.
There have been a few cases where the feds have nabbed people this way. In one they nabbed a guy running an online drug exchange when he came to Texas for an international beard competition. (Ask me why I remember it.)
At a minimum here I’m just happy that they had to do some actual detective work rather than float a warrant past an invisible judge and ask Amazon to turn ’em in.
Not only that, you have to pay in dead presidents and they tax the crap out of you if you find a currency that works better as a store of value.
Supposedly, this scheme advances human flourishing.
Regarding…
…the folks you buy stuff from would accept dollars if they had to do either one but not the other.
The lesson is:
Don’t make taxation more important as an incentive to accept dollars (or gold, or bitcoin) than it really is.
The fact is this. Since the beginning of the (a) division of labor and (b) trade, people have always had a need for money to facilitate exchange. Bitcoin could become money without it being used for taxes. If it became money, government would have an incentive to accept it for taxes and to spend it
In theory. In practice, we’d have to find an enormous amount to significantly impact the value of the 300 million or so pounds of the stuff currently extant. It seems to me more likely that there will be a storage mishap with bitcoins leading to the loss of a substantial number than that there will be a comparably large change in the world gold inventory. (One source I read suggested that as much as 20% of all bitcoins “mined” to date may have been irretrievably lost.)
Hank, I agree: we are living in an ever more connected world. Already our location privacy is compromised by cell phone technology; self-driving cares will put the coffin nail in whatever’s left of that. I resisted inviting Alexa into my home until the nest was empty, just to avoid having our conversations monitored. (Now she sits on my desk, where she plays music and occasionally reminds me of things)
You’re absolutely right — but it’s going to happen anyway.
No, it doesn’t need what you see. It does need location to retrieve the coordinates of nearby local fixed content and public dynamic content. “Painting” the view is a local process. Pretty much has to be to offer smooth interaction.
It’s about as privacy-revealing as the smartphone you probably are carrying around anyways. Not that that is great, but AR isn’t the root of that problem.
Phil, I think it depends on the degree to which the augmentation is performed based solely on location and viewing angle versus scene analysis.
For example, the traffic-sign augmentation you mentioned could perhaps be done with only minimal scene processing — just enough to register the sign shapes and precise locations.
But imagine that I pick up a sheet of paper from my desk, a page containing a bunch of numbers, and that I’d like to see the columns totaled at the bottom of the page. Or that I look at a page written in French or Spanish, and would like to read it in English. That will require actually processing the content of the page, which will presumably be something that requires more computing power than either my glasses or my linked smart phone can provide. That, in turn, probably means a 5G trip to the cloud.
I think the richer it gets, the more attractive it is — and the more interconnected we have to be to achieve it.
Gilder is a smart man, but that particular expression is generally credited to John Gage, a Sun employee. (Sun trademarked the phrase.)
I’m not saying other things aren’t money, I’m just saying that legal tender laws hamper other things ability to be money. The reason they do that is so the Fed can force the economy around, which among other things creates statist and geopolitical political power.
Other than the fact that we get to live in a hegemonic country, I don’t see what good it does the average individual.
Maybe I’m missing something, but I don’t see why “being money” is important, in the sense you mean. Converting any particular store of value from one form to another is a detail, analogous to whether someone wants to be paid by cash, check, or money order. Steve C. alluded to this in #53.
So, absent laws expressing prohibiting the store of value in certain forms (e.g., the outlawing of crypto-currencies), or the unwise choice of a store of value so illiquid as to preclude its conversion to actual money when necessary, I don’t see how legal tender laws are a practical disadvantage.
Incidentally, the utility of Bitcoin as a store of value is a separate, but very interesting, issue from the one I brought up in the post — that of its role in eliminating intermediaries in financial transactions. I think Bitcoin represents a speculative investment, and so, unlike gold, should not be assumed to be an effective inflation hedge.
It’s artificial demand forced by the government.
If you throw some Mongolian tögrög into a safe, they go up five times, and then you want to spend them in America, you have to pay tax on the gain if you convert it to dollars first.
The Fed can’t push the economy around without legal tender laws.
Ah, got it. So the question becomes: do the benefits of having a national currency — stability, liquidity, contractual convenience, and (and probably most importantly) a consistent and effective communicator of pricing signals — outweigh the tax on conversion from inflation hedges back into the national currency?
Man, I’m guessing they do.
Right, this is where the fun starts.
If the dollar is always losing purchasing power–they shoot for 2% annually–what good does that do you?
Then you get into “the Fed is the only reason for asset bubbles” and then half of the people you tell this to think you’re nuts.
On and on.
True. But legal tender pre-existed the Fed. Legal tender evolved, in part, because it reduced transaction costs. The lord of the manor might have been satisfied with food rent paid in kind. At some level in kind payments become unwieldy. Taxes are then paid in specie. Specie becomes standardized in the form of “the coin of the realm”. No Fed required.
Right, but what are the other side effects?
If everyone could pick their own money with no penalty, The Fed could not push economy around.
There is a lot to criticize in the Fed. But the Fed didn’t create the Tulip Bubble, the South Sea Bubble, the Panic of 1837 or 1873. I don’t think it’s nuts to attribute the Fed as the source of some problems. I’d like to see tighter control, more limitations. I think the full employment mandate is a silly relic of Progressive thinking on par with Free Silver and direct election of Senators.
It’s central planning by propeller heads. There is as much value added as from the stupid GOSPLAN Committee. Freely set, market interest rates would be better.
Just to be clear, at least in theory, it’s a good idea to have a central bank to back up financial institutions.
I concur with both.
Everything I just talked about grows government unnaturally and creates inequality. It’s a scam. The problem is it gives us geopolitical power and and it’s better that we keep global trade routes open instead of the Chinese. It’s all about war and hegemony.
The other thing is, I think it’s very hard to sell conservative and libertarian ideas under this Fed regime. I’m not even sure they work that well.
Good thing Maxine Waters is in charge of all of this now.
So you’ve been reading Murray Rothbard, too?
I read and listen to stuff from hedge fund guys that are Austrian-oriented. Same thing with Mises.org.
If you want to hear some non-kooky people discuss this stuff try the guys from Bearing Asset Management.
I tried googling for this. Where exactly do you go for these discussions?
They were all over the place like a year ago. I think one of them was on financial repression authority. I don’t remember their names. Google the individual names.
Here’s my opinion.
I’ve never heard of that happening, although in theory it could. But only indirectly, and only slightly.
A legal tender law is never passed until after the monetary unit has already become money. For example, when the first legal tender laws were passed in the United States, the dollar was already firmly established as the monetary unit, from the first days of colonization. The new law said that the new US coins (coins being a currency) had to be accepted in payment of, say, a 100 Dollar obligation (Dollars being a money) incurred 25 years before anyone thought of rebelling against England. But the debt, and the monetary unit already existed.
When the current US statute making the currency marked “Federal Reserve Note” legal tender for obligations denominated in the monetary unit called “US Dollar”, the US Dollar was already the money of the United States.
In any case, a legal tender law places no restriction, nor direct practical disadvantage on any other monetary unit.
The only way a unit of fungible trade goods becomes a monetary unit is through market demand for it. If that demand is sufficient to drive other candidate moneys out of the running, then nothing can stop it, legal tender law or no. (A legal tender law, like any law standardizing commercially important weights and measures, does decrease the risk, cost and inconvenience of validating the trade goods that are measured in that unit.)
It is hard to explain the above opinion I give . And of course it is only an opinion, and I am no scholar of economics: my arguments have no intellectual credentials to support them. They are their own credentials, confirmable and falsifiable only through critical reading.
The difficulty is this. It requires first understanding (a) what a legal tender law is and is not, which requires first understanding (b) the difference between the currency and money, which requires first understanding (c) what money really is, and that is hard. At the beginning, one thinks he already knows. When the first error is discovered, the explorer once again thinks he’s reached the goal. But he still has many more errors to eliminate, one by one, with each step seeming to be the last.
I understand (c) what money is a lot better than I did when I started. But I’ve learned from experience that I don’t really understand it, and I keep trying to learn more.
When the Bible says that the love of money is the root of much evil, it’s saying a mouthful. Evil and false knowledge are intertwined, and everything we think we know about money is false knowledge. (In my opinion, as I mentioned above.)
Legal tender laws make any other currency be demanded less than it would otherwise, that’s all.
Not quite. First, the government requires you pay government taxes and fees in US dollars. Not chickens or lira or gold. Second, US dollar currency is legal tender for all debts. If you and I want to trade or barter in chickens, lira or gold, we can do that. Sellers/debt holders want something reliable and convenient (low transaction costs), US dollars are the preferred medium. The whole evolution of money is an attempt to gain those advantages.
I don’t think so.
I am not a law scholar, but I suspect that the interpretation of the law has always been is “all US dollar obligations”, not “all obligations“.
So if I owed you 20 beaver pelts (another common monetary unit of the time), and I took you to court saying that you had to accept 20 (or some other quantity) US Mint coins from me in settlement of the obligation, the court would have held in your favor. You would not have to accept the coins, and the court would order me to pay the 20 beaver pelts.
Maybe an expert can resolve the question for us. I’ve always wondered about it.