BitCoin skeptics and boosters debate

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82 Responses to “BitCoin skeptics and boosters debate”

  1. Anonymous says:

    Well, I do have some knowledge of crypto. I may not have the extensive background or reputation of Ben Laurie, but I do know that he’s barking up the wrong tree when complaining about proof-of-work based value.

    The proof of work algorithm is used to make it very difficult for any single entity to become the arbiter of which transactions ‘canonical’ and which aren’t. The goal is to make sure that an attacker has to out-compute all of the honest bitcoin nodes.

    As for bitcoins being minted out of thin-air because someone did the computational equivalent of walking in circles, then why is gold acceptable to you (as I presume it is)? Gold as acquired by digging holes in the ground and sifting through dirt. As a metal on its own, it has its uses, but it’s nearly so useful as its valuation would suggest.

    The Spaniards made the gigantic mistake of thinking that acquiring gold would make them economically powerful. It didn’t, even though all the currencies at the time were gold backed. What’s important in an economy is the ability to attract money. The ability to manufacture it isn’t particularly useful and gives you only temporary wealth.

    Personally, I would prefer to be paid in bitcoins. I think they’re a harder and more substantial currency than even gold.

    To address a different concern, and this one raised pro-bitcoin. The rise of P2P technologies has absolutely nothing to do with the success of bitcoins. David Chaum, while a genius when it comes to cryptography, was an idiot when it came to business. He kept his stuff patented and wouldn’t partner with anybody to get it out and used.

    I also think that Chaum’s digital cash in its original inception required a clearinghouse to issue it and redeem it. The flow was bank -> individual -> merchant -> bank. The bank couldn’t tell the merchant who it had issued the cash to. But once it was issued to you could only pass the cash on one hop before it had to go back to the clearinghouse again. It is possible I’m mistaken about this. But if I’m not this makes Chaum’s digital cash very much not decentralized.

    Its only virtue over the current system was that it didn’t require a credit card company to approve transaction when it happened, so the transaction could happen relatively anonymously and the merchant could believe that indeed they had the money when they received the appropriate bits.

    As another point, the “Proof of Work proven not to work” paper that Ben Laurie cites is about spam, and is not directly applicable to bitcoin. While miscreants having hundreds of thousands of compromised machines at there disposal is a tricky issue in bitcoin, it’s not the same kind of tricky as it is with proof of work schemes for email spam. Even an attacker who has control over 100% of the CPU power of the bitcoin network is still limited in what they can accomplish, and their manipulations would be relatively easy to notice. They would have to have that much CPU power and be able to split the network (which is much harder to do) in order to do more than cause a lot of confusion and havoc.

    – Eric Hopper (aka Omnifarious)

    • Don says:

      I also think that Chaum’s digital cash in its original inception required a clearinghouse to issue it and redeem it. The flow was bank -> individual -> merchant -> bank. The bank couldn’t tell the merchant who it had issued the cash to. But once it was issued to you could only pass the cash on one hop before it had to go back to the clearinghouse again. It is possible I’m mistaken about this. But if I’m not this makes Chaum’s digital cash very much not decentralized.

      This is correct. You could of course agree to accept a Digicash coin from me without instantly clearing it online. But you’d risk having someone get to the bank first with a copy of that coin. The bank would honor the first copy presented, and reject all others as double-spent.

  2. togi says:

    “2) Try paying for a shot of Balvenie in London with a ‘Clydesdale Bank’ note. See what happens even though it says ‘Twenty Pounds Sterling’ on it.”

    Bartender: “Oh I don’t know if we accept these” (to boss) “Do we accept Scottish notes?”
    Boss: “Yes.”
    Bartender: “Oh. Sorry about that there, just thought I’d check. Here’s your change.”
    Me: “Ouch. Must remember never to buy a drink in London.”

    • PaulR says:

      Once, in Stirling pub, a card-carrying member of the Pàrtaidh Nàiseanta na h-Alba told me a similiar story. His reply wasn’t ‘Ouch!’ but rather something along the lines of: “Well, Sassenach, you take YOUR fraking money! You can bloody well take ours, it’s the same thing!”

  3. Don says:

    Bitcoin is a fiat currency, the folks promoting it are very clear about that. There’s nothing backing it, there’s no promise to give you anything of value in exchange for the currency. It’s not like the U.S. dollar under the gold standard, when the U.S. government had an obligation to give you gold for dollars on demand. Bitcoins are money in the sense that all fiat currencies are money: they have value because we say so.

    Compared to other currencies, Bitcoin has some interesting properties. The coolest, for me, is the ability to prevent double-spending without the use of a central bank. Something like Chaum’s Digicash depended on a bank: to accept a digital coin in payment, you’d have to deposit it instantly at the bank where it was minted, and anyone trying to double-spend the coin would be turned away at the bank. Bank computer goes down, whole economy stops.

    But it lacks the one thing I want in online cash, which is also the one feature of paper cash that makes it worth using: anonymity. Or maybe I just haven’t heard a proper explanation of the traceability of Bitcoins.

  4. Kingazaz says:

    I became interested in bitcoin a year or two ago when it first popped up on my radar. After generating 250 coins I made some changes to my computer and stopped running the software. Now that it has begun garnering more attention and sparking debates I’ve started paying attention again.

    First thing I did was say “Wow, about $7 for a coin, eh?” Then I bought just under $200 worth of stuff (An N64, controller, games, etc. for my fiance who has been pining for Mario Kart) for 26.26 coins. Cool!

    As Cory pointed out, without having the right level of knowledge of cryptography, or even currencies and economies in general, it’s pretty hard to take a firm stance on whether or not I think bitcoin will remain ascendant for very long. However, it does occur to me that regardless whether or not it is technically sound, or in any way feasible as a real alternative to fiat currencies, there will be plenty of articles to read for each of us that will say both that it will work, and that it won’t work.

    Lots of folks smarter than me will fall on both sides of the debate, so I say the net gain of personal confidence in either direction is 0. It almost seems silly to even argue about it when bitcoin is being put to the test as we speak. Time will tell and all that.

  5. whitslack says:

    So, I’ve read every comment on this page, and there are two fnords I saw again and again. My hope is that by pointing them out here and giving my rebuttals, I might spark some new thoughts in the minds of several readers.

    —-

    Premise:

    Inflationary monetary policy encourages borrowing (borrow today, pay back a year later using less valuable money), whereas deflationary monetary policy encourages saving (hold onto your money, and it will buy more a year from now than it can buy today).

    —-

    Fnord #1:

    In a deflationary environment, everyone will put off making purchases because they know the price of what they want to buy will decline over time. This will cause a vicious cycle that will stall the entire economy.

    Rebuttal #1.1: Would you delay buying a new washing machine when yours kicks the bucket purely because you believed you could get more machine for your money next year? How long would you go without? Could you delay buying gasoline or groceries even if you were certain they would be cheaper next month? Do you wait to buy a new smartphone because you know the current month’s models will be cheaper in a few months’ time? No, no, and no, you wouldn’t, you couldn’t, and you don’t. That is not how people behave. People have wants and needs, and they will satisfy those wants and needs even if they know they could do so more cheaply if they were to wait. Now, of course, some people will wait to buy a new appliance until it becomes cheap enough that they can afford it, but isn’t that preferable to their going into debt to purchase it? Not preferable for the bankers, mind you, but I’d argue it’s preferable overall.

    Rebuttal #1.2: Even if demand were to wane somewhat, would that *really* be such a Bad Thingâ„¢? I am constantly surrounded by the fnord that an economy is only healthy when it’s growing and that a contracting economy is diseased, but I don’t understand it. The natural tendency of anything moderated by negative feedback is to cycle. Free markets (if they existed) would cycle. Manipulated markets (which are the norm) cycle too (maybe more severely than if they weren’t manipulated). An economy in a continuous state of growth is unsustainable because natural resources are finite. And since debt-based money requires continuous economic growth, it too is unsustainable. So it seems to me that if demand were held in check by a deflating monetary system, we might actually achieve a sustainable economic equilibrium rather than perpetuating this pipe dream of infinite growth.

    —-

    Fnord #2:

    When saving turns into hoarding, then the currency somehow loses its usefulness, or “not enough” remains in circulation for the currency to remain functional.

    Rebuttal: I don’t know where this idea comes from, but every time I encounter it, my brain does a core dump. I question whether the people who reach this conclusion have a firm grasp of what price is. Let’s say everyone in the world were to start hoarding gold. That is, no one would sell it because they believed they could get more for it by holding onto it and selling it much later. This would effectively nullify the entire supply of gold on the market. The fnord is that gold would stop trading at this point and become useless as a medium of exchange. In reality one of two scenarios would unfold. If there is demand for gold, then the price of gold (i.e., the amount of something else that someone is willing to give up in order to obtain it) will rise until one of the hoarders no longer believes that they can do better by waiting or until the demand disappears due to the high price. That’s just basic economics. If, on the other hand, there is no demand for gold (maybe because everyone forgot about it), then the price of gold will plummet, and many of those who were hoarding it will abandon their belief that its value will only increase over time. In both scenarios, the hoarders will stop hoarding because the incentive for them to do so has evaporated. This is the natural behavior of free markets. Now do a Find & Replace on this paragraph and replace “gold” with “bitcoins.” The argument is exactly the same.

    Bitcoins and gold are functionally very similar: both are exceptionally difficult to create/find/extract, both have essentially no intrinsic value (you can’t eat or burn gold, and it makes for rather lousy tools — just ask any Minecraft player), and both satisfy the fundamental properties of good money: portable, divisible, durable, fungible, verifiable, and rare. In fact, I am unable to think of any property that is not shared by gold and bitcoin, aside from gold’s being a physical substance.

    Keynesian readers will now smugly point out that the world no longer uses gold as a currency, so why should we expect anyone to adopt bitcoin if its functionally so similar to gold? My only response is: whose decision was it to stop using gold as money? In every country of the world, the decision was made by a government. Governments hate commodity-based money and love debt-based money because they can create and control the latter as they see fit. We didn’t stop using gold as money because there wasn’t enough of it to go around (that would simply cause gold money to be deflationary, which it is, just like Bitcoin), and we didn’t stop using it because it was too volatile (futures contracts are the market’s way of counteracting volatility); no, we stopped using it because governments can’t create it at will. Gold is still used today as a store of value, but it’s not used much as money because it has the disadvantages of being difficult to transact and verify. (Is the coin you gave me really pure gold? Is there really a share of a gold bar backing this warehouse receipt? The answers to these questions were assumed implicitly when government-issued currencies were gold-backed.) Bitcoin, however, is trivial to transact and verify, so in this way it’s far superior to gold and could actually function as money.

    —-

    Oh, and one other thing I’ve read in these comments that is plainly not true: Bitcoin is *NOT* a fiat currency. Fiat currencies are decreed as having value by governments, which then attempt to force individuals into accepting such currencies as having value. By contrast, nobody is decreeing that bitcoins have value, and nobody is forcing anyone else to accept them. Bitcoins are not a fiat currency; they are a digital commodity.

  6. Omnifarious says:

    @Kingazaz: You are absolutely correct, in a sense. Unfortunately, part of putting it to the test is all the furor and hubub of people talking about whether it will work or not. This is part of the survival process for a meme. The success of bitcoin as a meme is somewhat predicated on its worthiness both cryptographically and economically, but its success as a meme is what will determine its success as a currency.

    • Kingazaz says:

      That’s a good point.

      I’m not trying to be all “Get off my lawn.” about the debate. However, I am pretty amused at all the self-assured proclamations on both sides.

      I think it’s odd that the debate is so polarizing. Do national currencies really lie so close to the hearts of citizens? Maybe some folks are . . . jaded? . . . towards the idea of a currency such as bitcoin based on their knowledge/experience with other past ventures.

      Again, I don’t know much ’bout anythin’, but I don’t think any one person knows enough about what is and what could be to be able to call the endgame for this li’l experiment.

      • Don says:

        I think the way people think about money is indeed close to their hearts. And the invention of any new form of money is going to expose a lot of strongly held wrong beliefs about what money is and how it acts. People who think fiat currencies are inherently wrong, for instance, are well represented here, though reputable macroeconomists consider them cranks.

        • TomInAK says:

          Don: I think what you meant to say was ” . . . though Paul Krugman considers them cranks.” Big difference . . .

          • Don says:

            Don: I think what you meant to say was “… though Paul Krugman considers them cranks.” Big difference …

            Krugman is more likely to be accurate in his predictions than other pundits, based on actual observable facts, so I find his opinions on macroeconomics pretty persuasive. Perhaps there’s some standard you like better than factual accuracy?

  7. Super Nate says:

    As for the anonymity angle there already exist bitcoin laundering operations. You put in bitcoins from your up and up account, and receive different coins with different chain of ownerships delivered into your single use ‘gray wallet’. Spend and dispose of the account.

    • Don says:

      So with Bitcoin laundering, nobody knows who is spending from the “gray” wallet. Except the Bitcoin launderer, who knows everything?

  8. Meloncov says:

    Would it be possible to create something similar to BitCoin, but with each coin backed by a U.S. dollar? Have a bank that dispenses coins in exchange for traditional currencies that go into a reserve?

    • Don says:

      Sure it would. And there would be some advantages to that kind of a scheme, starting with the fact that everyone would know the exact value of a Bitcoin. That’s very useful at tax time.

      There’s a local currency in New York state called BerkShares, backed by dollars. There’s a fixed exchange rate, $0.95 to one BerkShare. But they spend at face value, so you can buy a $1 item for 1 BerkShare. This gives the recipient an incentive to spend the BerkShare (and get a dollar worth of something) rather than converting it back to $0.95.

  9. mick travis says:

    “the idea is to make something unforgeable as cheaply as possible. This is why all modern currencies are fiat currencies instead of being made out of gold.”

    Yeah – we have fiat currency because gold coins are too hard to make – haven’t heard that one before.

    • spejic says:

      “Yeah – we have fiat currency because gold coins are too hard to make – haven’t heard that one before.”

      Didn’t you see “cheaply” in the sentence you quoted? A gold coin the size of a dime would be worth about $250. All the gold in Fort Knox wouldn’t be enough to make enough 3 of those coins per American. It sounds like it would be too hard to make gold coins to me.

  10. eMansipater says:

    For a smart guy, Ben didn’t read very carefully. Processing power isn’t used to create bitcoins (the same number are created regardless of the total computing power in the BitCoin network) but rather to solve the distributed timestamping problem without any trusted entities. In this regard the processing power requirement is not only elegant but quite innovative. I’ve yet to see any other cryptocash that provides this feature. Signing to create coins would be perfectly acceptable for trading, say, debt or IOU’s with some sort of trust/social overlay. But if you wanted to spend that debt as money to arbitrary entities you’d STILL need either a trusted authority to timestamp transactions, or a system exactly like BitCoin’s to remove the possibility of any single entity manipulating transaction ordering for gain. I wish I’d caught this article earlier so I could have posted this near the top.

    • Anonymous says:

      eMansipater – you’re spot on about the reason for the work not being about coin creation.
      Ben Laurie’s statement “why on earth make them expensive to create?” shows he’s done an appallingly shallow analysis of the system (at least at the time of that quote).
      Even once the theoretical maximum number of coins is approached – the network is designed to have this processing power applied to keep it’s integrity – and the reward via competing for transaction fees provides an ongoing incentive for network participants to provide this.
      There are a few reasons why bitcoin might not take off or might fail, but it’s sad to see so many otherwise intelligent people write it off based on their poor understanding.

  11. hobbit_feet says:

    What I’d like to see is some universities with supercomputers come in and mine an unthinkable amount of bitcoins and then take over the bitcoin economy.

    • Omnifarious says:

      They could mine at most 300 bitcoins an hour and that rate is shared over the all the miners in the whole network, so in actuality, if several university supercomputers started doing this, each would likely make much less than that.

      And they would likely still not be able to take over the economy. But they would disappoint a lot of eager miners. :-)

  12. Anonymous says:

    ok, so i am terrible late apparently but i have to say this:
    Bitcoin miners are not rewarded for stupid calculations like walking in circles.
    They are minting the coins which is obviously an important job to make any currency usable.
    Also they are processing transactions of people using the currency.
    No miners = no bitcoins, no transactions

  13. Anonymous says:

    I’m not sure why people are concentrating on the crypto for Bitcoin, as opposed to, say, the economics of Bitcoin. Consider this post from Marginal Revolution, which expresses skepticism about Bitcoin’s properties as a currency, primarily convertibility:

    http://marginalrevolution.com/marginalrevolution/2011/04/the-economics-of-bitcoin.html

    The crypto discussions are something like arguing the graphical design of your currency, as opposed to how the currency would actually function in the economic system. Yeah, not quite like that — the crypto will help determine how it’ll function — but it’s still a somewhat peripheral subject.

  14. Anonymous says:

    Almost all the criticism of Bitcoin seems to focus on the technology – “If/when SHA256 gets cracked we loose all our money”, “Someone will figure out how to forge Bitcoins and the system will be worthless”, “Proof of work is a waste of time, X is better” etc. Some of these critiques stem from ignorance as to the workings of Bitcoin, and are simply incorrect. Others have basis in reality nonetheless do not reveal any actual flaw in the Bitcoin system, as it is proposed by it’s author.

    What I haven’t seen given much coverage by the critics, is what seems to me to be the low-hanging-fruit of criticisms – the fact that Bitcoins are designed to deflate! The system is designed such that there will only ever be a finite number of coins, and on top of that, it’s possible to irrecoverably loose (destroy) coins, meaning that over time, the pool of coins in circulation will gradually decrease, ceteris paribus, driving up the value.

    When I first came across Bitcoins about 18 months ago, I fired up the client and left it running for a couple of weeks and by the end I had about 540 coins. At the time the market value of a coin was as I recall, about 1c, giving me a grand total of $5.40 if I sold all my coins. I remember a VPN provider offering 1 month for 40 Bitcoins or 5 euro – a bargain if you do the conversion. Luckily I decided to hang onto mine and see what happened.

    Fast forward to now, less than 2 years on, my pool of 540 coins has a market value of about $3,800 – and that VPN provider is charging 1.2 coins per month. Coins have become (as intended) ridiculously hard to mine (it would take about 10 years to mine another 500 coins), the market has grown, and the value has gone through the roof. If this path of deflation continues (as it seems destined to) then there is no incentive for me to sell, rather than horde, my coins. The value will just keep going up as they become more and more scarce.

    This, to me, seems the real flaw in Bitcoin.

  15. Anonymous says:

    the value of a thing is determined by what the participants of the currency deem it’s worth. tying it to an existing currency is absolutely pointless.

    if say i am willing to write 1000 lines of debugged and consolidated code for 10 bitcoins does this not immediately give 10 bitcoins value, regardless of what that would mean in USD or YEN or whatever?

    if i decide that i love seashells and am willing to produce work or product for that seashell does that not give seashells an inherit value?

    it’s all about a secure system that makes it easy to “get” coins and “give” coins. if that’s established it doesn’t matter what the “thing” is that is valued.

    • Don says:

      the value of a thing is determined by what the participants of the currency deem it’s worth. tying it to an existing currency is absolutely pointless.

      On the contrary, it’s useful to know the worth of the alternative currency in terms of the national currency. For one thing, people know how to price things more easily. For another, you have to convert it to national currency anyway to figure out how to pay sales and income taxes. It’s OK to have a floating exchange rate (as with Bitcoin) rather than a fixed one, it’s just that some tasks are easier with a fixed exchange rate.

      if say i am willing to write 1000 lines of debugged and consolidated code for 10 bitcoins does this not immediately give 10 bitcoins value, regardless of what that would mean in USD or YEN or whatever?

      It does. If you’re also in a jurisdiction where you have to pay income tax, though, someone is going to want to know the value of that labor in (say) USD, and will tax your income based on its value in USD.

  16. Anonymous says:

    How do you suggest distributing the BitCoins if not through mining? Randomly, without using computational power, might be one solution. Or selling them all. However, that would pose other problems.

    I think the way it is being done now is a fair attempt, and not necessarily better or worse than any other.

    However, it would be nice if they were more convertible and easier to use, but that might come. I am excited about this project.

  17. Anonymous says:

    Christ, this is why I love BoingBoing! I’ve just spent about 15 minutes reading about this who-the-hell-knows-what-it-is technology and I’m about to spend about 30 minutes more. If nothing else this ensures that in the near future when some asshole with the bit-currency division of Goldman Sachs proposes we base all equity transactions on this new tech I’ll know to begin digging my underground apocalypse bunker.

  18. heymypasswordispassword says:

    I guess this guy doesn’t consider decentralization to be a beneficial feature of the Bitcoin system.

  19. turn_self_off says:

    Btw, some reading materials related to money:
    http://www.monetary.org/lostscienceofmoney.html

  20. Anonymous says:

    Well, whilst all you skeptics are pondering at the sidelines, the bitcoin bulls and I plan to have some fun and make a pile of money building the world’s most valuable chain of cryptographic hashes.

  21. Anonymous says:

    Proof-of-work based on computational complexity is an elegant concept, and that’s probably why so many people buy into it.

    Unfortunately, as the attacks on PlayStation Network have recently demonstrated, it’s very easy for someone with suitable incentive to rent cloud VMs for crunching computational complexity. Worse, this is cheapest for the most nefarious type of person, those that use stolen credit card information for paying for cloud VMs.

    And this trend will accelerate. CPU power is so cheap these days that programming problems revolve around saturating the CPU with work. That’s different from a decade or more ago when the problem was more in getting enough CPU for your problem.

    • Anonymous says:

      “Unfortunately, as the attacks on PlayStation Network have recently demonstrated, it’s very easy for someone with suitable incentive to rent cloud VMs for crunching computational complexity. Worse, this is cheapest for the most nefarious type of person, those that use stolen credit card information for paying for cloud VMs.”

      The Bitcoin network has several times more computing power than the world’s fastest supercomputer. No ordinary hacker would be able to hack it by renting cloud VMs.

  22. Anonymous says:

    It’s not like the number-crunching is doing anything useful…just the opposite…all that computing power, all that electricity, for what?

    • Anonymous says:

      How much energy is put into creating, transporting and storing conventional cash?

    • Michael Smith says:

      It’s not like the number-crunching is doing anything useful…just the opposite…all that computing power, all that electricity, for what?

      Other currencies rely on metals being hard to mine or intricate pictures being hard to reproduce. Its all wasted effort from one point of view.

      • asuffield says:

        Other currencies rely on metals being hard to mine or intricate pictures being hard to reproduce

        None of the significant ones do. The currency you normally use almost certainly relies on the ability of a group of armed thugs to track down anybody who reproduces it and stop them with force. It’s not a very nice system, but it does work well enough.

  23. Anonymous says:

    After reading these posts etc., I’ve come to the conclusion that I like the idea of a currency that is not tied to a nationalist agenda and there is a good chance many others will to.

  24. jungletek says:

    This says perfectly what I was always unable to put into words regarding Bitcoins, which I thought were otherwise pretty cool and clever.

    Makes perfect sense too.

  25. asuffield says:

    It seems what this comes down to is a fundamental disagreement on the purpose of money. The gold-standard and proof-of-work principles come from the camp which believes the purpose of money should be to prevent growth, while the fractional-reserve-banking and the proof-of-transaction ideas come from the camp which believes the purpose of money should be to promote growth.

    Which in the end is just the same old boring debate between the “change things” and “keep things the same” attitudes.

    • Anonymous says:

      How does the gold standard “prevent growth” exactly? It’s nothing more than straight up barter: trading one thing (gold) for another (whatever you’re buying).

      Gold (and bitcoins) are limited-supply currencies, where the participants generally know an approximate rate of expansion (e.g. how fast gold is being mined, or the targets for block production which are adjusted by the “difficulty” factor for bitcoins).

      Fiat currencies, on the other hand, *force* (not just encourage) constant growth because everyone is always in more and more debt (debt is what creates new money). IMO, “fixed”-supply currencies are much better as they allow an economy to decide that they’re doing quite well and don’t need to grow, or that they consume too much and wish to shrink.

      The latter two are impossible with fiat-based economic systems, but we KNOW we need to shrink our consumption: we’ve eaten and made into trinkets pretty much everything.

      I agree that it seems wasteful to piss away CPU/GPU cycles on “mining” bitcoins, but any “signing” based system would have to be based on centralized, “trusted” money issuers, and I think it’s obvious from our last few decades that doesn’t work so shit-hot.

      An alternative which allows money to be “purely” a medium of exchange are mutual-credit currencies but these are even more difficult to get correct, and I really don’t see how they could work anonymously or on a hugh scale.

      • Don says:

        but we KNOW we need to shrink our consumption: we’ve eaten and made into trinkets pretty much everything.

        Consuming natural resources isn’t necessarily involved in all economic activity. I plan to spend a lot of money this year so I can use LESS electricity by generating some of it myself, for example.

        Deliberately shrinking the economy, which you seem to be proposing, would mean putting millions (more) people out of work for a decade or more. Surely you’d agree that would be a bad thing.

        • mikewarren says:

          I do not agree that would be a consequence of shrinking the economy. One way to shrink it, for example, is for everyone to work less. If we all worked 4 days per week instead of 5, we’d shrink the economy by 1/5th and still have a way higher ability to consume than we did even a few years ago. (Notwithstanding the money-supply system, mind).

          In fact, if you look at many predictions from the 50′s etcetera this is what people were talking about: the coming glut of leisure time due to all our efficiencies. If we lived at the standard we did then (or any time in the past) we’d use less stuff than we do now.

          It is true that certain individuals can make choices like this (or like you’re going to do), but if *everyone* did that we’d be fucked because the financial system would collapse (the dreaded “deflation”, which is ONLY “bad” due to debt-created money). I work 70% time, for example, and buy almost all my food from local producers.

          • Don says:

            I’m with you on shortening the work week, but that has nothing to do with whether we use a fiat currency or a gold-backed currency or a beef-backed currency.

            Deflation isn’t bad because of debt-created money. Deflation is bad because debt becomes harder to pay back, so debtors have even less money to spend. People who aren’t debtors expect prices to fall, so they have a motive not to spend their money either. Both cause demand to fall, which is the opposite of what we need to get people back to work in the short run.

            This is a side-track to the discussion of Bitcoins in any case, since Bitcoin is a fiat currency. It’s not backed by anything, its value is entirely based on an agreement that it has value.

          • mikewarren says:

            I’m talking about debt-created money; bitcoin is NOT this.

            Anyway, EVERYthing “only has a value” because we agree on that value. The problem with our current money is how it’s created, and it really does FORCE us to always consume more and more every second (whether than consumption is actual “stuff” or “just” services). Bear in mind that articles like the one you linked are presuming the current debt-created monetary system; I’m talking about fixing that.

            If you really do believe a shorter working week is a good idea, the first step is to fix how we create money.

            Whom do you think *isn’t* a debtor in our system? (Except maybe bankers?)

          • Don says:

            OK, Bitcoins are not borrowed into existence, in that sense they’re different than national currencies. Point taken.

            On the other hand, alternative currencies can exist which ARE borrowed into existence, but do not exist simply to enrich bankers. E.g., I’ve read an example of a local currency, issued by a laborers collective, backed by a promise of labor, which I would argue is debt-created money. E.g., the LETS system, in which all money is created out of nothing by borrowing. Those may lack features you and I would like to have, but they’re pro-social and they’re debt based.

            I can also envision a shortening of the work week without meddling in the money system, the same way we did it in the U.S. in the late 19th Century: pick a number n, require employers to pay overtime wages for more hours per week than n. Probably don’t even need bloodshed this time around.

          • mikewarren says:

            Yes, I suppose you could shorten the week without a new moneytary system. There’s also the work less party in this vein.

            LETS seems most like a mutual-credit currency to me: it has to be local because it’s based on individual trust (i.e. that you’ll honour your hour-dollars promised) and each transaction creates both a credit and a debit of equal amount. There is also no interest (key point).

    • turn_self_off says:

      Not sure about the prevent growth. I guess people just want to avoid price inflation. If that means preventing growth then they may accept that as the price to pay (heh).

      The problem with inflation is that it eats into the value of savings. Put 100 units of some currency in a box, and given a year or so it will be worth perhaps what 90 units used to be worth at the start.

      This may be why people love gold style money, as the supply is not based on some arbitrary action by a bank or government. This because while neoclassical economics likes to think that banks collect savings first and then loan out based on that, they more often loan out first and then go looking for some way or other to cover their ass if things go south. And conflicts are equally bad, as this will tempt government to print up bills as they see fit to cover their expenses. But once the dust settles the resulting inflation will send the economy into a nose dive as prices go ballistic.

      In both cases the basic problem is a lack of hard limits.

      But hard limit currency (gold and such) have the issue of hoarding. The main use of currency is as a go between so you do not need to bring bags of flour or slices of meat to pay for a chair or table. If that go between vanishes (from say someone hoarding it all in a vault) then the economy grinds to a screeching halt.

  26. Anonymous says:

    “Fast forward to now, less than 2 years on, my pool of 540 coins has a market value of about $3,800 – and that VPN provider is charging 1.2 coins per month. Coins have become (as intended) ridiculously hard to mine (it would take about 10 years to mine another 500 coins), the market has grown, and the value has gone through the roof. If this path of deflation continues (as it seems destined to) then there is no incentive for me to sell, rather than horde, my coins. The value will just keep going up as they become more and more scarce.”

    This is because it is undergoing rapid growth in adoption. It’s not related to the fixed final supply, as at the moment the supply is expanding rapidly. The rapid adoption growth will inevitably come to an end, and then the price will stabilize.

    • Anonymous says:

      “This is because it is undergoing rapid growth in adoption. It’s not related to the fixed final supply, as at the moment the supply is expanding rapidly. The rapid adoption growth will inevitably come to an end, and then the price will stabilize.”

      OP here – I’m sure that the insane rate of increase in value is a short-term trend due to adoption, but as the resource (coins) become more scarce, and the user-base goes up, there will be less coins to spread around more people.

      Until people decide that they don’t want to play the Bitcoin ball-game and just start walking away, I can’t see what would drive the price down.

  27. Anonymous says:

    This debate should converge upon the same problems surrounding electronic voting. Unless an encryption is discovered which is properly verifiable and functionally uncrackable, (“functionally” meaning time/expense of even an exhaustive search is not rewarded), then the system is flawed and should not be implemented by honest folks.

    In my (bone-fides elided because presenting them seems boorish) experience these goals have not be achieved in either domain.

  28. programmer says:

    The problem in discussing Bitcoin is that the purpose of the Proof of Work algorithm is poorly understood by most.

    This article Inside Bitcoin – virtual currency does a reasonble job of explaining how it works and why it is use (but it is technical).

    It isn’t there just to make things difficult but to avoid the multiple update problem in the database of transactions.

  29. bardfinn says:

    The crypto — as it stands — in BitCoin is strong, but only as strong as the weakest link in the implementation.

    The implementation, as does all forms of security, involves tradeoffs. The currency can be anonymous, but then a piece of malware on your machine can nab the coins in the wallet and claim them or use them.

    It’s possible (though unlikely, possible) for someone with a large amount of hardware and/or custom hardware to spend an inordinate amount of resources to screw up the accounting, so long as they control the network around someone trying to claim a block. We are talking about state-level attackers.

    Denial of service can be achieved by state actors unless tunneling is standard between all nodes (it is not, currently – it uses custom ports and irc, and individual nodes need to NAT to disguise port number signatures, which is a OS – level function, making it vulnerable to traffic analysis unless the node controls their OS and/or their upnetwork router and is sophisticated enough to set up a NAT for just that application. )

    It doesn’t work offline for non-trivial exchange. DoS can be achieved that way.

    The core of the linked article is, indeed, a question of what the benefits and problems of fiat versus standard currency in their affects on various scales and types of economies.

    As with all such problems where there is not a single universal solution, BitCoin is not a single universal solution – and isn’t a solution to some issues that some people have touted it to be.

  30. Anonymous says:

    Sounds like the comments are missing the boat so far. The question is if there is a valid method other than the proof-of-work calculation that would provide a defense against hijacking a non-centralized system such as bitcoin.

    The point is not just to make up some fake work to install a sense of value, the calculations are inherent to removing the requirement of htrust between any nodes.

  31. PaulR says:

    Links downloaded and queued for reading and proper commenting, but:
    Bitcoin doesn’t use “proof-of-work” as a basis for a virtual currency. The basis for any currency is the value that the users give to it. Bitcoins’ value, in the real world, is what we give them. Might I suggest that Mr. Laurie reads up on Gresham’s Law?

    A time stamp that everyone agrees on is required to eliminate the double-spending of the same BitCoin. With paper money, this is easy: you hand over a piece of paper.

    Rather than using unreliable NTP time updates or, say, texts from published newspapers as time stamps (y’know, like kidnappers do when they photograph their victims holding up newspapers), BitCoin uses a series of difficult-to-discover-the-next-one hashes.

    Some of you may recall that the set of blocks of text which can hash to a specific-ish hash value is very large – in this case a hash that starts with series of zeroes. In BitCoin, the block of text to be hashed include the previous time stamp hash, so as to create a verifiable chain of time stamp hashes.

    Finding ANY member of the ‘set of blocks which follow the rules and hash out of an acceptable hash’ is very, very, very, very, very difficult.

    Finding any member of that set is so difficult that it can only be brute-forced. This difficulty makes is very, very difficult for one person or group to game the system. Especially if the cost of brute forcing the time stamp mining is much greater than the reward – at the present time, 50 BTCs.

    From the BitCoin Paper:
    http://www.bitcoin.org/bitcoin.pdf
    “The proof-of-work also solves the problem of determining representation in majority decision [of what the next time stamp is] [..and is..] essentially one-CPU-one-vote. The majority decision [of which time stamp is acceptable] is represented by the longest chain [of time stamps], which has the greatest proof-of-work effort invested in it. If a majority of CPU power is controlled by honest nodes, the honest chain will grow the fastest and outpace any competing chains. To modify a past [time stamp] block, an attacker would have to redo the proof-of-work of the block and all blocks after it and then catch up with and surpass the work of the honest nodes. We will show later that the probability of a slower attacker catching up diminishes exponentially as subsequent blocks are added.”

    The “proof of work” is to keep the system honest, not to boost the value of BTCs.

    Phew! Hope there’s not too many typos.

  32. bardfinn says:

    One of the major technical implementation issues is this: if there is a crypto implementation problem that makes cracking and forging the wallets feasible, then all of the “proof of work” will have to be re-done. In the meantime, any wallet for which the work isn’t redone would have to be frozen. There’s no way to freeze them – which makes the system collapse, and all value invested vanish.

  33. Clifton says:

    It seems like most of the BitCoin boosters really have not taken into account the paper from 2004 Ben Laurie linked to, estimating the relative computing power of ISPs and botnet herders. In a sense I don’t blame them; the idea that a wide assortment of criminals can access an effective super-computer for little or no cost is a bitter pill.

    However, it does need to be taken into account, and the few responses people have given to this are pitifully off-point.

    “CPUs are less powerful than modern graphics cards!” Well, 1) if you have 100,000 CPUs that’s no longer true, and 2) it assumes none of those botted PCs have graphics cards that could be pulled into use. If even 1% of them do, the crooks now have access to 1000s of times the BitCoin “value” that the average person does.

    The justifications people give for why it’ll work now when it didn’t before are pretty strange too. Most of them seem to be “Now we have BitTorrent, so peer-to-peer exists which it never did before!” Wrong: Napster – 1999. If you want to take a more general view of P2P file sharing, consider Usenet – 1980 – which predates all of the earlier digital cash systems.

    “Those who do not learn from history are doomed to repeat it.”

    • PaulR says:

      “…the crooks now have access to 1000s of times the BitCoin “value” that the average person does.”

      Um, yes, but it’s 1,000 times almost nothing.

      The only way to create BitCoins out of thin air is to mine for time stamp hashes. And, again, the only way to mine for them is by brute force.

      And those crooks have to compete against – not just ‘the average person’ – every other honest participant who’s also mining for time stamp hashes. It’s a money-losing proposition to try to make money by mining for BitCoins.

      Look at the current stats:
      Round started at: 2011-05-21 20:32:41 UTC
      Round duration: 0:39:01
      Active workers: 3759
      Approx. cluster performance: 400.502 Ghash/s
      That works out to 937,575,182,000,000 hashes tried/tested in this round before one was chanced upon.

      Even if the crooks, with 1,000s time your CPU power, stumble across one of the answers, they’ll only get it about 1/4 of the time – assuming no one of the 3/4 that are left is using networked farms of GPUs and are limiting themselve to ONE core on their CPU. Me, I’m alloting three cores on my computer to the tast; it helps take the chill out of the air, while I’m waiting for the warm weather to kick in.

      For all their work, the crooks will get only 50 BitCoins. As time goes on, the reward will get smaller, and as people sign on the idea, they’ll be outcompeted. The crooks are better off spending their efforts elsewhere.

  34. nitro says:

    As long as money, whether gold standard, fiat or bitcoin, functions as a medium of exchange AND a store of value the system will always remain flawed and unbalanced. The ability to hoard money conflicts with its ability to circulate.

    In this day and age and with all our technology I am amazed why we still depend on fake worthless currencies to trade capital and labor.

    Why can’t we all simply trade x amount of labor for x amount of capital (x being the unit of account)?

  35. songofsixpence says:

    Bitcoins do not make sense. While they look like they’re working it’s the result of them being a bit of a fad. They’re a novelty.

    My number 1 complaint is in how they are generated, which is by doing nothing useful. As someone who owns a business it seems funny to me to accept ‘currency’ from someone who earned it by doing the computational equivalent of walking in circles.

    Another trouble is that all the bitcoin advocates sing praises about how inflation is adjusted for. No, it’s not. Imagine a time when most of these bitcoins have been produced already and the little bitcoin economy is chugging along. All it would take is 1 scenario (bitcoin fraud, massive power outages, laws created against encryption, etc.) to shake confidence and the value of bitcoins would plummet. Inflation has a lot more to do with the psychology of people using the currency than the form and/or control of the currency itself.

    And this isn’t even from anyone who has studied economics, I’m just a math and programmer guy. Sure, the US Dollar, when looked at through the right lens, seems pretty shaky, but a lot of people trust that dollar, making it something you can trust. It’s circular, but it seems to sort of work. Somehow.

    • mikewarren says:

      Generating new bitcoins is not “a waste of time”: you get new bitcoins as a consequence of contributing to the system working; the “miners” are adding to the block-chain, which is the public record/agreement of all transactions in the system (each block is NOT just a timestamp + hash, as some posters have said).

      Transactions are broadcast into the network, and a new block is (eventually) formed (several per hour) containing some of the recent transactions, a timestamp, the previous block and a few other things; if a block with “your” transaction is a few blocks old in the chain, it’s Very Very Hard to change it (you have to generate a longer chain from that block up to the current one, plus a new one before anyone else generates a new block — in other words you’d have to have quite a lot more computing power than the system as a whole).

      So, basically, you’ve got a currency which expands at a known rate (6 blocks per hour) and the nodes participating in producing the block-chain get bitcoins for helping. Think of the nodes in the bitcoin network as a distributed network of banks, if you like, which can only produce new currency at a known rate and who all get a portion of the new currency and where anyone may join, the entry fee being computing-power (contrast with Canadian charter banks, which can create any amount of new currency any time they like and you or I can’t form one).

      The number of bitcoins in circulation will expand towards 21 million; at that point, no new BTC will be issued (but of course the block chain will need to keep growing). I suppose they figure some other motivation will keep people mining for new blocks at that point…?

  36. Anonymous says:

    If you were trying to decrypt something SHA’ed that you weren’t supposed to be able to read, how different would the computational work be from the work bitcoin has you doing to generate “currency”?

  37. asherp says:

    So it’s too difficult to create bitcoins? The network adjusts the difficulty automatically to give miners incentive. Think something other than proof-of-work would be better? Then release your source code for it and we’ll find out!

  38. Creperie says:

    Cory, I don’t think you need “crypto chops” to critique any of these posts. The concerns raised in the first two are pure economics and you don’t need to know the first thing about computers to understand them; the third one is about distributed algorithms.

    • PaulR says:

      You should listen to EconTalk’s podcast about Free Banking:
      http://www.econtalk.org/archives/2008/11/selgin_on_free.html

      Have you ever been to Scotland? I have. Mostly for the whiskey. But I digress…

      They don’t exclusively use the Pound Sterling as currency, retail banks print its own money. It’s all different shapes, colours and designs. Lotsa fun.
      http://en.wikipedia.org/wiki/Banknotes_of_the_pound_sterling#Scotland_and_Northern_Ireland

      After all that, listen to the EconTalk podcast about BitCoin.
      http://www.econtalk.org/archives/2011/04/andresen_on_bit.html

      Russ Roberts, the host, is a Professor of Economics at George Mason University. He doesn’t dismiss BitCoins out of hand.

      • turn_self_off says:

        I am continually surprised by how the UK island is managed…

      • cservant says:

        After all that, listen to the EconTalk podcast about BitCoin.
        http://www.econtalk.org/archives/2011/04/andresen_on_bit.html

        Russ Roberts, the host, is a Professor of Economics at George Mason University. He doesn’t dismiss BitCoins out of hand.
        =============

        And as far as I can tell from the Podcast as well as the written highlights, it’s an hour long btw, it’s more of an interview then a discussion. It still doesn’t address the basic currency issues most people ask at first glance:

        (1) Most countries currency laws would not allow such a thing

        (2) What if not sufficient people accept this as currency.

        If anyone have trouble understanding (2), think of the US dollar bill vs. the dollar coin, Sacagawea dollar. It’s in circulation, and I think you’re required to accept it legally. BUT it’s not very popular is it? The dollar bill still stands as common currency.

        • PaulR says:

          it’s more of an interview then a discussion

          Yes, that why I said “he doesn’t dismiss it out of hand”, rather than say “he thinks is a good/bad/neutral thing”. And I urged people to also listen to the podcast on Free Banking – it’s an eye-opener. Some comments in this discussion touched on topics covered in this podcast.

          Russ Roberts is a Hayekian economist. I’m not crazy about Hayek, but I’m also not an economist. I might think differently if I was one.

          As far as the points you raised:
          1) Legality of alternate currency: while I can plainly see the legal minefield posed by BitCoin, for some countries this might not be much of an issue.
          Income is income, that’s what’s taxed. Not labour, I can assure you.

          Whether you’re paid in quatloos, USD, or Euros, you have to convert that income into local ‘coin of the realm’ and pay tax on it. From what I can tell by reading the news, however, when your income is really, really high, you don’t have to pay income tax at all, but that’s another discussion…

          Consider this: for a lot of countries, international transactions are paid in USD, even when both countries aren’t the USA. Why? Why can’t the exchange be performed in BitCoin?

          2) I completely agree with you, BitCoins’ value is only what users feel it is. If enough people consider it ‘bad money’, it’ll fail completely.

          See my first comment about rereading about Gresham’s Law. Cribing from its Wiki: It is commonly stated as: “Bad money drives out good”, but is more accurately stated: “Bad money drives out good if their exchange rate is set by law.”

          The Free Banking podcast delves deeper into Gresham’s Law. And the interviewee for that podcast points out that there were no large failures in Scottish banks. Unlike the last, what thirty-five years in the USA. And I don’t even have to reach back to the Great Depression.

          The first problem here is that we’re still not sure who the BitCoin experts are, so as to figure out whether they’re treating it as bad money or good.

          The second problem is: I should have sunk all my money in BitCoins when I first heard about them a few months ago – they were trading at about 0.85USD at the time and I was tempted to do so.

          Now a BitCoin is worth about 6.00USD. Sigh.

          ps.: Don, BitCoin transactions can easily be anonymous. Think multiple BitCoin wallets and TOR.

          • Don says:

            BitCoin transactions can easily be anonymous. Think multiple BitCoin wallets and TOR.

            Please elaborate, or point me to an article. I get how Tor works, of course, and I understand how making multiple Bitcoin wallets could make me appear to be multiple different identities. Here’s the bit I don’t understand: if any particular Bitcoin can be tracked from transaction to transaction, and if my income is NOT anonymous, how do I spend it—from any wallet—without connecting the expenditure to the income?

            In other words, is there a way to transform a Bitcoin in my possession so that the transaction trail starts fresh? Or is that the wrong question?

          • PaulR says:

            So a day or two ago, I had a friend over and we were talking about BitCoin and this discussion. So…

            I’m explaining BitCoin to him, building up the rough outlines of hashes, public-key crypto, and the like. In the process of explaining how it works, I then said: “And the BitCoin software…” and my voice trailed off as I remembered something.

            Gah! BitCoin software! D’oh! Sigh. I was wrong: Bitcoin can’t (for the time being) use an obfuscating network like Tor…

            The only way you can improve your anonimity is by using multiple BitCoin wallets.

            One, your public real-world BitCoin wallets, handles innocent transactions, say, when you transfer dollars to BitCoin. The money exchange would have your BitCoin address – so there likely will be a leakage of information. Then you transfer from that wallet to another wallet, and from that to another, changing the amounts of the transactions. (In effect, you’d be making your own little, insecure Tor. But it would, might make it a little more obscured.

            Sorry about that, Don, I erred.

          • Don says:

            BAD anonymity! No porn for you!

      • Anonymous says:

        Two points:

        You’re wasting your time drinking whiskey in Scotland, stick to the whisky.

        As the link to including clearly points out, despite the fact that the notes are different shapes and colours, they’re all still pounds sterling. There’s no competing currencies involved there.

  39. phisrow says:

    While I don’t have a strong position of bitcoin generally, I wanted to comment on this particular part of the argument:

    “(it just gives the lion’s share to the guy with the cheapest/biggest hardware)”

    True, just like virtually every other currency/property basis. Fiat currencies have Seigniorage, real-estate ownership trails generally start in some murky mess of war and plunder, metallic currencies reward whoever has the biggest hole-in-the-ground-leaking cyanide, etc.

    Essentially, all currencies and forms of “property”, at the point of creation, end up rewarding some parties more or less arbitrarily. There are various “natural law” attempts to justify this; but the real-world solution is basically just to wait a century or so, and politely forget about the weirdness at the beginning. Once there has been a sufficiently long chain of ‘legitimate’ transactions, the distorted ones in the beginning are forgotten, or seen as being of purely rhetorical interest(eg. just try to find any serious proposals RE: North American real estate and the natives who used to own it, or antebellum cotton profits and the labor conditions under which they were extracted. Those are worse than arbitrary; but time has a way of dignifying things…)

    This doesn’t mean that bitcoin will be a success; but any argument of the form “it arbitrarily assigns newly created value units to certain people” applies to basically all currencies, and most de novo property rights.

    • Don says:

      You might like a form of local currency I read about: a labor collective prints its own money, which is backed by a promise to work a certain number of hours. The workers spend the cash locally, the various merchants who accepted the cash can spend it with other merchants, or “destroy” it by taking labor in exchange for their cash.

      • phisrow says:

        That is substantially closer to being justifiable on some sort of natural-law-ish grounds than most other currency bases. Some people still start with a better “labor mine” than others; but it is far closer to a ‘natural’ distribution than the ‘my ancestor made some shrewd and forceful moves during the $MAJOR_DISTURBANCE of $YEAR_NOW_LOST_TO_LIVING_MEMORY’ theory of value…

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