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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
One of our legal experts (I ain’t one) might want to jump in here, but I think courts rarely order “specific performance” (i.e., exactly what was agreed to in a contract) when monetary compensation is a viable alternative.
So your risk of being forced to pay in beaver pelts is probably nil.
Failure to fulfill a contract yields damages. If the damages aren’t specified in any form actually payable by the debtor party, the court that enforces the payment of damages will have to assign a monetary value (a fact finding of a jury, typically, if either party requests such). That converts a contractual obligation into a US dollar obligation, here in the U.S.
I want to follow up briefly about something I mentioned in #74, the value of having a single, “standard” currency when it comes to communicating pricing signals.
The market works in part because information flows effectively from buyers to sellers. I wonder how that would change if there were several popular stores of value — forms of money — changing in value relative to each other based on speculation and other forces. Would the pricing signal become less effective, or would the various fluctuations tend to cancel out?
I visualize our current system as a single line that has a modest slope (inflation/deflation) with small waves superimposed on it (various alternative stores of value). The alternative, an economy with several significant, liquid stores of value (Bitcoin, gold, etc.) looks like a series of sine waves that overlap in unpredictable ways. Would they average out, if there were a handful of very popular forms of money? Or would we get the equivalent of monetary rogue waves, big spikes of relative wealth and poverty?
Would having a bunch of crypto-currencies make the economy, overall, more stable, or less stable? Or does it all just average out as countless actors make individual, self-optimizing choices?
No clue.
I don’t think that’s right. If I borrow your lawnmower, and I decide that I would rather pay you back a snowblower, I think that the courts would require specific performance. Not a substitute which I have unilaterally determined to be equivalent.
Now, it is true that a court is often required to issue a judgement (of damages, if that is the right term) for breach of contract, in cases where it is not possible (as opposed to not pleasing) for the defendant to render the specific good promised in the legal obligation.
But that is a completely separate subject.
For example, if the lawnmower were broken beyond repair, and the only means I had to repay were my work as a handyman, a court might well order me to do 40 hours of handyman work for you. Or if I had money, to give you some amount of money which the court (not the contract, nor either party to the case) determined to be “equivalent” in value.
But that is a matter not addressed by legal tender laws. They don’t define a schedule of values for use in determining damages to be applied in the case of a court judgement where the obligation itself can’t be satisfied. They simply define what must be considered as one of the concrete physical representations of a pure abstraction: an obligation to tender money.
I think that legal tender laws are difficult to understand because they require making a distinction between an abstraction and a concrete thing. Logically, an abstract thing and a concrete thing can’t be the same thing. An obligation to do something with a piece of metal, and the piece of metal itself, cannot logically be the same thing, any more than your love of a Shubert song can be the same thing as the sound waves of that song being sung.
But for most people, thinking about pure abstractions is very difficult, so they think entirely in terms of currency (which is concrete) and ignore the other essential subject of a legal tender law: the unit of account, or “money”, which is a pure abstraction.
I think a more pertinent example would be that I borrow your lawnmower and destroy it running over a rock hidden in the grass. Would the court demand that I purchase a new lawnmower equivalent to the first (specific performance), or that I compensate you for damages?
I think the latter.
What could possibly go wrong?!
Gresham’s Law says that bad money drives out the good. That is, bad money circulates, and good money is saved. In the old days, worn or clipped gold or silver coins were circulated and people held on to the new as much as they could. Pre-1964 US coins disappeared pretty quickly. Same thing happened when countries tried to have a bi-metallic monetary standards. Whichever metal was worth more on the market meant that the other would circulate, when there are legal tender laws that officially set the exchange value of the metals.
Private money has circulated from time to time. But typically when the official money supply is very tight, and not in good times.
Yes. Two different issues. If I owe you 20 beaver pelts then that’s what you expect and what I should pay. That’s a specific performance in our verbal contract. It’s also a barter/exchange agreement. I presume it’s legally enforceable. Though I imagine most lawyers, outside of 19th century western novels, would require payment in currency.
There was a time when debt agreements were sometimes written with the proviso that the debt could be settled at the debt holders discretion in currency or specie. Post 1933, when gold private ownership was outlawed there were court suits over those payment terms. As you would expect the courts typically ruled that those provisions were invalid. I’m not enough of a barracks lawyer to explain the legal reasons other than the common sense that you can’t force me to pay in a form that’s not legal.
This is a misunderstanding of Gresham’s Law. It doesn’t say that a bad monetary unit will drive out a good one. The opposite is true: a good money rapidly drives out all other moneys.
Gresham’s Law is about bad currencies denominated in a money driving out good ones in the same money.
https://twitter.com/search?q=%23BankruptPaypal&src=trend_click&vertical=trends
#bankruptPayPal
PayPal has backtracked on their $2,500 fine. Says the change to the policy was made without permission.
https://instapundit.com/546947/
We’ll see if someone there gets fired, but it’s a win regardless.
I think it’s a draw if all those responsible get fired.
We’re in a war to reclaim the free-speech space and it has to be fought everywhere, because the enemies of free speech justify their authoritarian close-minded bigotry with every variety of smugly sanctimonious excuse.
Since this is a post about Bitcoin, I’ll just add that Bitcoin is not an end-run around this kind of social credit garbage. Bitcoin, to be useful, eventually has to have an interface with the real world, and it’s at that point that authoritarians get to exercise control. And that is the whole point of the original post.