The Blockchain Is Bigger Than Any Bubble
bloomberg.com
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I feel like that should be the other way around. When all the "blockchain startups" and ICOs blow up, Bitcoin will be left standing. The true innovation behind the "blockchain" was its decentralised consensus mechanism. That mechanism is only secure as long as no single entity controls over 50% of the hash rate. Some of the largest Bitcoin miners have so much hash rate today that they could attack any (SHA-256 based) blockchain but the Bitcoin one.
"The Internet is a poor network and a crazy investment -- but TCP/IP is a real breakthrough."... Sure!
The moment you take incentive (bitcoin) out of the equation, whole blockchain will lose its strenght.
You can not take out greed^H^H^Hincentive out of the picture.
p.s. this is black and white written in bitcoin whitepaper.
Bitcoin is not the only incentive that can be had in implementing blockchain technology.
There are a number of very promising use cases for blockchain, in education, healthcare, energy... none of which involve bitcoin at all.
If you want to do interesting things with a trust-less, decentralized system, you need the mining and mining rewards.
Mining allows for high value transactions in a low trust environment, but lower value transactions are very possible without that.
IMO Tit for Tat is a much more interesting form of consensus building as it can be very low resource. But it's really all about the goals not the protocol.
I'm not asking for dissertations but could someone briefly explain how any of these problems/industries will be effected by blockchain.
But then the value would go low enough that the fees wouldn't be that bad and miners would probably still get their worth from it. It would be a strange blockchain though :/
This assumes that the compute power of the miners who are left after the incentive is gone will not be sufficient to prevent attacks.
It also assumes that the miners who quit, whose hardware would seemingly be ripe for use in attacks, would have no other purpose to use it for, such as another cryptocurrency.
FWIW I'd also point out that I would not be surprised if a fork were to occur that prolonged the incentive. Consider the finite incentive something that was necessary to create the initial coordination among participants in Bitcoin, but once it reaches sufficient scale if continuing to have an incentive benefits the ecosystem then surely it will (by then).
Follow this:
- The core technology here is a crypto-backed distributed ledger. We call this the 'blockchain'.
- You need a unit of trust to enable the blockchain to work. We call this unit of trust a 'bitcoin', or to be more precise, the smallest divisible unit thereof. (1 Satoshi = 0.00000001 BTC)
- These units of trust have value, which also gives you incentive to create ('mine') them.
If we stop here, that's all well and good. The problem with 'bitcoin' and the currency argument is that we're basically going back to the barter system. Instead of gold or foodstuffs, we're trading one good (a unit of trust) for another (whatever you're buying with BTC). Then, on top of that (and as a result), we've created a speculative commodities market in BTC. There's no true scarcity here.
This is why the arguments get so confusing. I could transfer any currency on the blockchain and get the so-called benefits of bitcoin: immutable transactions, low transaction costs, etc.
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Then you also get gems like this, from the article:
A more radical idea is to use digital currency, issued
and supervised by the central bank, at the retail level
to replace physical cash.
If you really think that, you don't understand bitcoin.
How do you load your USD on to this hypothetical block chain? How do you prove you destroyed the physical notes? Is there a mechanism to turn it back into physical notes? How do you hand out a block reward without creating counterfeit USD?
For bitcoin to work, it needs to be its own currency.
So to answer your question, a couple points:
0. You can use the blockchain without bitcoin as the token of choice. You create your own limited tokens and go from there. This has already happened with various altcoins.
1. You can create private chains. Bitcoin mining and the associated value (currency) therein is one way to create a (public) ledger, but not the only way.
2. You don't 'load your USD' onto the blockchain. That ignores the point of a distributed ledger.
Emphasis on that last word, because what we're talking about here is a trusted record of transactions. That's why the blockchain isn't just about currency, and gives participants a way to immutably record all kinds of things.
How does the first $1 come to exist on your ledger?
Are you thinking of something like Tether?
Monero is a one good example (feasible only on GPU and CPU, probably needs some R&D for ASICs with memory). litecoin is BTC-ASIC resistant with ASICs tailored for litecoin are coming.
Find a coin in the top 100 that's not a Bitcoin fork and uses SHA256.
Also this is already being done with point of sale machines that accept bitcoin. The POS machine simply goes to an exchange to see how much one bitcoin is worth then tells the buyer to pay xyz amount in bitcoin that is equivalent to the value that USD represents.
Orthodox macroeconomics holds that your currency needs to be slightly inflationary, but it doesn't consider what happens in the face of credible competition with a deflationary currency.
It might very well be the case that the economy runs better when everyone uses an inflationary currency. But if everyone wants to hold the deflationary currency instead of the inflationary one (which, all else being equal, they do, for obvious reasons) no amount of theorising will save it.
We haven't yet seen a credible competitor to the inflationary currencies of nation states, but bitcoin is rapidly heading in that direction.
And the cat is out of the bag now. If deflationary currencies do outcompete inflationary ones, then it's only a matter of time until it happens, even if it's not bitcoin.
Switching to a deflationary currency might be "bad for the economy", but if it's good for individuals, they'll do it.
Frankly your argument is incoherent. If something is bad for the economy its bad for individuals. If the economy goes down most people starve.
You also seem to argue that people hold onto more of a currency than another that currency "wins" but the currency that "wins" is the one in circulation. If by "win" we mean the currency that survives, then the one that survives is the one in circulation. Again this is all eco 101.
In the past, it was difficult to use 100% crypto to live on but now it is a real possibility.
The truth is we have not had any real deflationary currencies compete against state issued currencies. Even commodity monies like gold and silver aren't deflationary since the existing in-ground resource base is still very large and can continue to be mined for millions of years.
Crypto, on the other hand, will eventually stop creating new coins based on programming. It is essentially the ultimate deflationary currency.
From the end-user stand point, the currency of choice is always going to be deflationary. The end-user has absolutely nothing to gain by using an inflationary currency. The benefits of the inflationary currency is that is encourages people to get rid of their currency as fast as possible because it is losing value. That doesn't benefit the end-user. It benefits businesses and the people those businesses employ. The inflationary currency ideals are mostly based on the socialist ideas that we need to spend our money as fast as possible to "move the economy forward" but that does not benefit the user of the money. It benefits other people.
I believe that most people are self-interested and will do actions that maximize their benefit in most situations. Thus, it is easy to see that users will prefer to keep their money in deflationary currency rather than inflationary. Will it seize up the entire economy? My theory is no it won't and it will have the side effect of encouraging people to wisely spend their money. People will only buy stuff they really want or need rather than this idea of "I better buy it right now before the price goes up (due to inflation)".
Yep.
> and since USD is used to buy stuff they will want to have USD on hand to buy stuff when they want to
Nope! Starting from a position of only having BTC (because you've already got rid of the USD you had, and you immediately convert any USD you receive into BTC), what is the advantage of buying USD to spend instead of spending your BTC directly?
Based on a false premise. Under no scenario will people only have BTC. With regards to what people will be paid in, insofar as people are planning to spend money, they'll want it paid in USD.
Perhaps real deflationary effects of bitcoin will probably kick in after 3 halvings (about 10 years?), when the number of bitcoin that is being lost naturally becomes greater than the inflation. However, at that stage, bitcoin fees would need to dramatically increase from what they are now.
This is probably a paradox of deflationary crypto-currencies: They need to raise revenue from fees to pay for validation/security, however if there's more incentive to hold rather than spend them, their revenue raising ability becomes constricted. Whenever this is true, I'm excited that we'll find this out in the future.
Already there is an awful lot of money being paid in bitcoin tx fees, and it's rising over time, and I can't see any reason for it to start going down, so I don't think it'll be a problem.
There are different definitions of inflation/deflation, but the price is always a function of supply-and-demand, therefore it all boils down to the supply, where the issuance rate & eventual supply cap is what gives a crypto-currency its inflationary/deflationary properties.
We don't need to debate it because it is obvious what individuals will decide to do.
The whole point is we DON'T want people to just hold onto a currency. If everyone stops spending their USD and just saves them, the economy will collapse. Think about all the businesses that will go under because no one is buying anything. I could go on but really this is economics 101.
Also I don't buy into the economy will collapse argument. The economy will restructure itself to produce items that people want and need. That will never change. You can't eat currency or digital bits. Your arguments are primarily based on FUD.
If you have a currency that is increasing in value, and one decreasing, which do you choose to spend? You would not "use" deflationary currency, only hold onto it.
Yes the economy will restructure. People will spend USD and keep Bitcoin in their pocket. People will want to be paid in USD because they can use it to buy stuff. Bitcoin is and will stay relegated to an interesting experiment people invest in, and only use if they need its anonymity.
>If you have a currency that is increasing in value, and one decreasing, which do you choose to spend? You would not "use" deflationary currency, only hold onto it.
Like I said, you can't eat bits of currency. I would spend the deflationary currency but I would be more hesitant to spend it. I would buy stuff that I really want or need. People aren't going to starve to death or go homeless because they want to hold on to their deflationary currency. That's not reality.
>Yes the economy will restructure. People will spend USD and keep Bitcoin in their pocket. People will want to be paid in USD because they can use it to buy stuff. Bitcoin is and will stay relegated to an interesting experiment people invest in, and only use if they need its anonymity.
You are seeing the situation for what it is now, not for what it will be in the future. Crypto is gaining more acceptance world wide. Yes, currently people prefer to be paid with USD or similar but in the future it could be possible that people prefer crypto. Also there are lots of businesses and services that directly or indirectly accept crypto.
I disagree with your last sentence. Like all things, bitcoin started as an experiment but it will go on to change the world similar to how the internet changed the world. Entire industries will be disrupted as a result. I have been in crypto since 2011 and to even be having this discussion today already shows me that the experiment has been a monumental success. In 2011, I would have never even imagined that bitcoin would reach 10k per coin.
Yes but if you had the choice between spending a deflationary currency or inflationary, which would you spend? Unless you want to outlaw USD in general, because USD is decreasing in value you have an incentive to spend it.
"You are seeing the situation for what it is now, not for what it will be in the future. Crypto is gaining more acceptance world wide. Yes, currently people prefer to be paid with USD or similar but in the future it could be possible that people prefer crypto. Also there are lots of businesses and services that directly or indirectly accept crypto. I disagree with your last sentence. Like all things, bitcoin started as an experiment but it will go on to change the world similar to how the internet changed the world. Entire industries will be disrupted as a result. I have been in crypto since 2011 and to even be having this discussion today already shows me that the experiment has been a monumental success. In 2011, I would have never even imagined that bitcoin would reach 10k per coin."
I want to engage with you but I don't see an argument here. You are only asserting that "this is the way things are, but they will change!" without saying why.
So?
> Based on behavioral economics, people are mostly self-interested and will do actions that maximize their benefit.
I'm sure you know this, but this is exactly the opposite of what behavioral economics has shown.
> You can't eat currency or digital bits.
True, but if your currency is gaining value, you will be less inclined to spend that currency to start or invest in businesses, e.g.
That's a big problem because you need to force people to do something. How are you going to force someone to not use an asset that benefits them over an asset that does not benefit them. You have to convince them to use the inferior asset because it benefits society. That's hard to do in reality because most people are selfish by virtue of human nature.
>I'm sure you know this, but this is exactly the opposite of what behavioral economics has shown.
Really? That's news to me. I think you are confused by what the science is actually telling us. It is telling us that people make bad decisions because of biases. The person was still thinking that they are doing something the benefits them but due to these biases they make decisions which are not rational in hindsight. The science is not telling us that people make non-rational decisions on purpose. PBS NOVA did a good documentary on the topic called mind over money.
>rue, but if your currency is gaining value, you will be less inclined to spend that currency to start or invest in businesses, e.g.
I find nothing wrong with that. If businesses want the money then they will need to provide exceptional value to the customer as always.
I understand that that is the point you're making.
The point we're making is that it does not matter what you want. Given the opportunity to hold deflationary currency instead of inflationary, (all else being equal) rational actors will prefer to hold the deflationary currency.
This is economics 101 indeed.
Hence in a world of rational actors the only currency in circulation will be inflationary currencies.
If they have a floating exchange rate, the good money will drive the value of the bad money towards 0.
Edit: perhaps read the section of the Wikipedia article entitled "reverse of Gresham's law". It argues exactly the point I'm arguing.
You would do neither. You would spend what is losing value, and hold onto what is gaining value.
Proponents of bitcoin as well as skeptics love to compare bitcoin to the internet. A skeptic will say "bitcoin is in a bubble, it has to burst because the dot com bubble did". Then a supporter will rebut saying "early internet companies also bubbled, but afterwords the amount of growth far exceeded the initial bubble."
Frankly I don't think any of this is relevant. Blockchain is very impressive technology that solves the really tricky infrastructural problem of creating large secure systems. But unless your life involves building these systems, or you are unfortunate enough to live in a region without access to (or operating outside of for legal reasons) existing stable systems, blockchain will have have no noticeable impact on your life. Remember, the internet connected everyone in the world together. The blockchain makes large systems easier to secure. When comparing history to the present, pay attention to the differences, not just the similarities.
On that note I'm going to bring in some more historical context that may also be questionably relevant, but at least is less spoken of. Many people today are still adjusting to the culture shock caused by the internet and computer technology in general. As this area is finally starting to settle somewhat (how many huge companies came up in 2000s vs 2010s?), everyone seems to be hunting for the next big thing. Is it virtual reality? Artificial intelligence? Self driving cars? Blockchain? Some kind of biotech? Investors are dumping money into all kinds of new ideas, hoping for them to change the world. And that's a good thing. But the last 20 years made innovation an expectation, so don't expect another internet just because it feels due.
E.g. your bitcoin denominated student loans suddenly cost the equivalent of millions or billions of dollars to pay back. Good speculative vehicles and good currencies are not identical sets.
Bitcoin has long moved away from being a currency and is now more of a value store like gold. Yes, Bitcoin is horrible as a currency, and that has been the fact for a long time now. This just shows how little Wall Street understands Bitcoin and crypto in general, and is struggling to find their footing.
It's also not a crazy investment. It is about as crazy an investment as gold is. This current 'bubble' is akin to the gold rush days, but look where gold is now, and the purpose it served since.
Crypto currencies are still in its infancy, and I have used them to make purchases and it has been a smooth experience. The fact that I can make purchases from other countries without paying cross border transaction fees and currency conversion fees... let's just leave it at that.
While Bitcoin might have some floor as an investment at this point, it's nowhere near as stable as gold. Equating the two makes very little sense. It would more accurate to compare this to the Tulip bubble than to the gold rush days.
The blockchain is a useful protocol, but what you are describing doesn't even require it, just a few trusted sources, which blockchains have to fall back to, anyway, with trusted oracles.
Their larger point might be that as much a blockchain advocates love it, there's not a single mainstream application outside of Bitcoin 8 years later. Someone yesterday compared it to the hype behind torrents changing everything, though torrents might be more practically useful.
git freebase
The only really novel thing Bitcoin brought to the table was the consensus algorithm (which is in no way, shape, or form a complaint — it's precisely what it should be) — but that consensus algorithm only works for currencies (for a sufficiently loose definition of currency that allows for the current fees and delays). Nakamoto consensus solves the double-spend problem, but only if mining blocks gives you a reward that's denominated in the same currency as the transactions you're mining.
Of course this is only a guarantee that contracts will run as written, not that they're written correctly. There's a lot of research on applying high-assurance techniques to contract development but it'll be a while before that stuff is ready for production.
I feel like they missed the whole point.
So at a basic level quite a few (most) transactions are happening on a digital, abstract level anyway, so really the question is can blockchain be used to improve this model, and is there sufficient incentive for existing players to do so, or is there enough opportunity for someone else to come in and do so.
I think the former is what we're seeing banks start to explore today, while BTC and other cryptocoins have been exploring the latter.
For example the Vollgeld initiative in Switzerland: https://www.vollgeld-initiative.ch/english/
One of the logical extension is to allow anyone to have an account at the central bank, also combining those approaches with a blockchain sounds logical.
This is something especially important considering we live in a world where nation-states are increasingly weak, politicians are either seen as incompetent at dealing with economic issue or just straight up overpowered by transnational entities while people are more and more nomad (not hesitating to just abandon their countries for another one when they are not satisfied instead of trying to enhance it). The problem with this trend is that currently moving your capital with you is hard (e-banking is a progress but it's still not enough for most people, especially the poorest).
Finally there is this economic warfare aspect, not all countries are like the USA where the currency is a tool for global hegemony and a fundamental pillar of the state, in fact with the EU we have strong countries which for the first time in history have willfully abandoned their monetary sovereignty (they still keep control but it's not one-sided). Best examples of this dynamic is Japan which has seen the yen bleed badly during the last decades and is the first big country to have a pro-cryptocurrency attitude.
No, it means trusting Bitcoin exchanges in addition to your bank, because at the end of the day you still need to at least get enough money to pay your taxes. So until you live under a government that recognizes Bitcoin as money, you still need to cash out at least sometimes. Even if you somehow have no taxes to pay, you still need to do business with people who do, and they are either going to demand the government's money or they are going to take the relative value of Bitcoin to that money into account when setting prices.
You seem to underestimate the power of governments, especially when it comes to money. Governments tend to enforce laws dealing with taxes and debts, and those are the laws that give fiat currency its value.
"Japan...is the first big country to have a pro-cryptocurrency attitude"
Ironically, Japan is also the source of the clearest example of the role of debt laws in determining the value of money:
https://qz.com/1003609/bitcoins-soaring-price-means-mt-gox-c...
TLDR: MtGox is paying its creditors in Yen, despite having lost their BTC, because of the debt laws in Japan.
But sure, the governments as today can easily cripple cryptocurrencies if they decide to and I'm not underestimating their power but as I said there is a competition between states, if my country adopts a hostile behavior toward cryptocurrencies then I'm pretty sure another country with a more lenient attitude will be happy to welcome my capital and workforce (not really a new concept, it was already like that with huguenots 400 years ago and it weakened badly the top dog that France while boosting immensely second or third ranked powers like England and Prussia).
I think the leaders in first world countries already understood that, that's why the general attitude is to say "it's none of our business" right now, especially in places like Europe or Japan which kind of missed the first wave of the "third industrial revolution" like internet is called by regulating too much or having a top-down approach to develop the sector and in result got crushed by the USA.
In short: ban cryptos at your own risk.
Oh the number of cryptocurrencies which have tried to stabilize their currency. There was BitsharesX which was abandoned quickly. Then there is USDT. The answer is there can never be a "trusted monopoly producers" in a decentralised world.
Stablecoins are a very interesting concept. They are a game-theoretically incentive compatible way to stabilize a currency WITHOUT a trusted monopoly producer. [2]
1 - https://coinmarketcap.com/currencies/bitusd/ 2 - https://blog.ethereum.org/2014/11/11/search-stable-cryptocur...
and I am saying this as someone who invested in Bitshares and it's precursor Protoshares. I still hold ~100k of BTSX.
> They are a game-theoretically incentive compatible way to stabilize a currency WITHOUT a trusted monopoly producer.
This is the biggest fallacy in cryptocurrency scene. People think everything can be mathematically modeled. Absolutely not. Everyone will act rationally in a given situation. Absolutely not.
If that were the case we would solved all the problems in the world using some kind of game theory function.
Edit: Oops looks like I deleted the SNB example. Here's what happened:
https://www.reuters.com/article/us-swiss-snb/swiss-draw-line...
SNB drew and held a line at 1.20 for EUR/CHF pair. No cryptocurrency can repeat that feat.
...but I'm not a trading or financial expert.
To play Devil's Advocate, is Gold's current value where it is today because it is useful in jewelry and electronics? Why does Bitcoin necessarily need something to provide its value besides the value we give it?
That's how bitcoin is different to fiat.
A central bank can print more money at its whim. Bitcoin follows a set of rules that can't change.
Make of it what you will, but it's a fundamentally different approach
Think about it as gold and it starts to make sense in the long term (short term is anyone's guess)