Alaric,
* Alaric Snell-Pym ([email protected]) [110621 03:33]: > On 06/20/11 20:13, Jon Cox wrote: > > > Hold on a moment. > > > > Because 100% of the worth of a Bitcoin is in its > > "gamed network value" (it has zero "intrinsic local value"), > > special importance is placed on faith its real-world > > institutions. Saying that it was "just mtgox" sounds > > absurd. They are the largest Bitcoin exchange. > > Sure, but my point was that this wasn't a flaw in the bitcoin system > itself. Yes, the value of bitcoin is defined by its external exchanges, > but *bitcoin* is a system for tracking the ownership of resources in a > distributed manner - which is a difficult problem that it, so far, seems > to have solved securely. An inappropriately narrow "software only" definition of "Bitcoin" is exactly why the actual Bitcoin currency was so prone to collapse. The boundaries of Bitcoin as a currency system were widely misunderstood. Calling Mt Gox "external" is only accurate if you just think about Bitcoin as software. However, when you take a systems-level perspective though, calling Mt Gox "external" is plainly wrong. Here's why: We all know that the algorithms within Bitcoin software were designed to reflect the importance of handling security issues. This is essential to its proper function a viable real-world currency. These algorithms also reflect a concern for how market dynamics are effected by having a cap on the total supply of coins. Why? Because the author(s) of Bitcoin software recognized that these things have an effect upon Bitcoin as an actual currency. Therefore, if the authors acknowledge a difference between Bitcoin software and Bitcoin currency, then so should we when we analyse it as a currency. I want something like Bitcoin to succeed. That is why I'm so critical of its shortcomings. As realists, we all know that the world is sometimes very unkind to things that change old and established power relationships. As a real-world currency, Bitcoin is a combination of algorithms, supporting institutions, and the emergent properties produced by them in the marketplace. Institutions like Mt Gox must be included in the analysis of Bitcoin as a currency because they *are* part of Bitcoin as a currency every bit as much as the algorithm that caps coin production to sculpt macro behavior. Institutions with the market share of Mt Gox become part of the de-facto monitary policy. Hence they are not external to "the currency" at all. > > Bitcoin is therefore a 100% faith-based immature currency > > with full code transparency but almost no institutional > > transparency or independent auditing. > > For sure. However, it's got to start somewhere. Plainly. I am asking raising some specific issues here that go above and beyond that obvious fact. o Is this the only option for an anon/decentralized currency? o How decentralize is Bitcoin mining in the long run anyway? o What out-of-band factors influence its __effective__ anonymity? o What trade-offs / dynamics are implied by the trust model? o Is the trust model used the best option available, overall? o Is it having zero intrinsic local value a necessary feature? o Can audited digital commodity/credit receipts be used instead? Commodities markets can be decentralized over the long term more robustly highly efficient computation; however, the auditing business tends to centralize to some extent as well. Even when you create "webs of trust", you still have high-degree hubs. We need to move beyond comparing our best possible hopes for each system, and look at likely outcomes based on economics, game theory, real-world differences in access to cheap energy and cheap government-based fiat dollars that have the ability to subvert the intent of those designing this "people's currency". Once we accept that we're making trade-offs in the area of de-facto centralization, anonymity, validation, security, and coupling to the underlying real economy of goods and services, a different picture emerges. The mathematical guarantee validating that a quantity of (otherwise worthless work) was done has some good and bad properties that are not contained within the code itself. This is the kind of analytical dialogue that I'm hoping we can engage in. > > That's a recipe for trouble. > > > > An institutional problem like the one at Mt Gox > > should not be able to crash the currency from > > $17.50 down to $ 0.01 in 5 min, then put the > > people who *do* buy in a state of uncertainty. > > All bets are that those who bought at $0.01 > > probably won't be able to cash out because of > > the rollback. > > Why shouldn't it? The bitcoin economy is tiny; Mt Gox dominates it like > the Bank of England dominates GBP. However, Mt Gox has no de jure power, > and in due course, competitors will challenge it, thereby decentralising > the economy again. The reason is simple: the goal is to design something better. Doing that involves questioning the basic assumptions about what problems are inevitable, and attempting to work out the details of a better solution. The problem is that problems like this go unchallenged, just like the fully centralized creation of currency went unchallenged before the advent of Bitcoin. The mining feature of Bitcoin is a very clever first attempt at the total decentralization of currency creation. However, the emergent long-term behavior isn't really a meaningful decentralization of currency production at all, as I've described earlier. Unequal access to cheap energy and cheap USD give certain players an overwhelming advantage in blocks/$ efficiency. Effectively, verifiable efficient computation is centralizing scheme, due to the real-world economic system in which it's embedded. Apart from that, the live transaction & coin splitting parts of Bitcoin seem pretty well thought through. Again though, I wonder what the *effective* anonymity might actually be in a world of IP address logging, quantum computing, and other out-of-band security problems. It's interesting to think about. The person who has most influenced the way I approach questions like this is undoubtedly Bruce Schneier. Applied Cryptography is a great book, but it isn't until Beyond Fear that he addresses the real challenge: the entire system. Crypto is only a small part of the entire system. To address system-level problems, you must look at the entire thing. Otherwise, you're like who already has 10 locks on the front door, but their screen door in back is wide open. Putting an 11th lock on the front door doesn't help at all. It might make nice theatre, but it isn't about security. > > All currencies are systems; they need to be > > analyzed from a systems perspective, or else > > you'll wind up like one of those poor people > > holding Bitcoins: $17.50 to %0.01 in 5 minutes. > > I hole 18 bitcoins; I'm not too worried that it's dropped like that - > because I think it'll rise again. In fact, now would be a good time to > buy some more... > People lose more at Las Vegas. Have fun! Further devaluations are bound to create quite a roller-coaster ride for those holding on to a lot of USD as well! Regulatory structures in the US are so weak that most folks will remain in a state of nervous denial until it's too late for them. When all debt obligations are factored totaled, we supposedly owe $500k/person. I can only think of 5 options that have been used (alone or in combination) by countries that get into this kind of difficulty: [1] Devalue/debase the national currency. This is the easiest option of all. Most folks look at their nominal wealth, a lot more carefully than the power of those dollars in real terms. If a thief takes half the money from your wallet, you feel robbed. If prices for everything suddenly goes up, and you see bankers living high of the hog while your cash savings are eroded down to a pittance, that's inflation. Inflation can be made so mysterious it seems more like a weather pattern than the theft it in fact is. Inflation here we come. It's a given. [2] Raise taxes / cut services. This is a good way to get booted out of office, plus, it won't be enough to matter anyhow. This will get harder as we go along too, because our population is aging, and old people vote. You can rig elections and fill the airwaves with nonsense, but that's a losing game in the long run. Proposals to make big cuts to Medicare and Social Security are nothing but hot air, though we'll probably see some window-dressing. [3] Plunder the resources of another country. Capturing the labor of populations at slave wages, and/or taking control of their natural resources is an old standby. After a while, greed becomes insatiable, which leads to chronic over-extension. An asymmetric conflict results. This either favors determined masses outright, or the Empire is exhausted trying to hold on to what it can no longer control. We've gone down this road a bit, and aren't at the end of it yet, by any means. The cracks are visible, from the Middle East, to the China/Russia gas deal, to the growing independence of Latin America, and beyond. Can plundering another nation really even be seen as a way to escape national debt anymore? When the institutions are so corrupt and outsourced that they no longer serve their so-called "homeland", probably not. That said, wars can be sold as a way to give everybody cheap fuel, but in the end, public debts only increase, rather than decrease. Profits gained though wars of aggression end up in private hands, while everybody else is worse-off than before. That's called "Mission Accomplished". [4] Borrow enough to make it someone else's problem, later. This works pretty well until it doesn't anymore, and China is growing impatient with the current arrangement. Doubling the supply of USD in about 6 months didn't help, as they get funny money in return for slave labor. The workers get increasingly upset about how the sweat from their brow doesn't translate into the standard of living they've come to expect. China can tap-dance around the problem by setting up things like a space program to boost nationalism, host the Olympics, and stuff like that. After a while though, more and more Chinese workers will want wage equity, and it simply can't go on like this forever. When the music does stop, it may not be government policy that stops it. It may be the people themselves. Everybody sort of knows this, but nobody cares to admit it, or can admit it (for fear of disappearing). [5] Default This is mostly unthinkable, but let's try A default can be disguised by claiming that one's creditors actually owe something of equal or greater value. This can be used a pretext for wiping out a official debt. Given that the complaints about how China's currency manipulations have cost the USA export revenue, the stage seems set for a maneuver like that. The natural counter-response is an escalating service embargo. This looks like a pretty good reply because the US economy is addicted to cheap Chinese labor. Therefore, to pull it off, we'd need a replacement population for the disaffected Chinese wage slaves. It would be prudent to get the ball rolling in advance, so if start obsessing over labor pool diversification, that seems like a pretty good tip-off to an impending default-in-sheep's-clothing. Who will manufacture the toys needed to keep Happy Meals so happy? Wage slaves from India will almost certainly play a role. However, once you start puling tricks like this, people catch on pretty fast. So the US will need to diversify further. One constraint is that countries tapped to supply replacement labor will be need to work against the democratic will of their own people. Therefore, the all-seeing eye will cast its gaze upon outright dictatorships, democracies name only, and much weaker nations that aren't in any position to bargain. Countries such as Indonesia, Mexico, Nigeria, Bangladesh, Egypt, and the Philippines come to mind. Is a default with China disguised as a reparation really feasible? I don't know. Maybe? The consequences would be disastrous for nearly everyone, but when power is highly centralized, and those in power feel like they can act with impunity, that's rarely a pressing concern. My central message is very simple: the real-world institutions that sustain currencies are *part* of them, not external to them. Bitcoin is no exception. Bitcoin software is not the sum total of Bitcoin as a currency. Not even close. Liberation from terrors of central banking would be a colossal achievement; that means we should expect that every possible weakness will be exploited: from the capture of monetary policy to deliberate sabotage of servers, to vilification in the press as a "drug/terror currency", to whatever other dirty tricks people with something to lose dream up. The more threatening an alternative currency appears, the more such attacks will intensify. Whole-system thinking will then force us to draw a bigger and bigger box around what we consider to be "the currency". I believe that the sooner we embrace these ideas, the sooner we'll have a digital "people's currency" that's more than a play-thing. Bitcoin is a groundbreaking play-thing, but we need more than that. Cheers, -Jon
