Building a Better Bitcoin | Hacker News Reader

Building a Better Bitcoin

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Articles like this demonstrate why most people don't get Bitcoin in the 1st place. Let's ignore the factual inaccuracies like bitcoin production bottoming out in 2040 (it's 2140, Justin, and that's a big difference) and focus on how Justin doesn't get it.

Bitcoin is in use right now transferring money around the globe. If I buy 100$ worth of bitcoin (0.478 bitcoin at current prices) and immediately use it to purchase anything, it has served its purpose as a value transfer medium. This is regardless of tomorrow or yesterday's price. It is this efficacy that people pay for when they buy bitcoins.

Bitcoin was not designed as a storage or investment medium it was designed to facilitate the transfer of value. As long as it performs that function it will continue to defy the misplaced expectations of those who refuse to go to the effort of understanding it.

Until the time comes, as it almost certainly will, when your bitcoin crashes in dollar value and the "value" you were trying to transfer, becomes severely depleted.

Bitcoins have real issues and you ignore them or reject them at your peril.

The USD is not going to halve in value overnight - Bitcoins could easily do just that, or worse.

I agree that Bitcoins were designed as an instrument to facilitate transfer of value and not as store of wealth. But the example of a transaction you just gave in your post is not how people spend currency. No one converts a currency (100$) to another currency (0.478 Bitcoins) for immediate spending in the real world. People generally minimize number of currency conversions (to save transaction costs) and store the currency (wallets or banks) for some time before spending it, and storing volatile currencies carries huge risk.

The current price explosion is not good for bitcoin if you look at it as a currency. People who believe this is a bubble will just cash out of bitcoins anticipating a fall and the (apparently) greater number of people thinking the value will rise will just hold on to the coins. The only way this price explosion can be helpful is in providing media exposure to bitcoins and cryto-currencies. Only after we have sustained period of stable prices we can hope of bitcoins becoming a major facilitator of transaction.

Storing volatile currencies creates risk, no doubt, but it also creates demand independent of speculation.

Interestingly, this implies that more convenient bitcoin exchanges could greatly lower the demand for bitcoin.

> According to the Bureau of Labor Statistics, a 2013 dollar has one-tenth the purchasing power of the 1950 version. By contrast, bitcoins have been skyrocketing in value. This sounds like a good thing, but for a currency it's really not. An economy where bitcoins were the means of exchange would have experienced 98% deflation over the past year. No one would be able to repay any loans, or really do business at all. What we want out of a currency is not price appreciation but stability. Monetary economists differ on whether the optimal stability is inflation of 0% or in the low single digits. Nobody thinks 98% deflation is healthy, and all but a small minority seem to think any deflation at all is a bad thing.

This needs to be repeated until exhaustion.

Krugman has been doing it for 10 years now ... no effect.

That's because he's wrong on so many levels.

It's not yet clear whether Bitcoin is money, or whether it is some strange new hybrid of asset and currency for which conventional wisdom does not apply and for which historical analogies fail.

Exactly. I'm also growing tired of people endlessly repeating the 'deflation is bad' mantra. Even if we agree to call what will happen to bitcoin 'deflation', the argument that people will just stop producing and just hold on to their money is bogus. Does it describe you? Because it certainly does not describe me.

Are you willing to loan out your bitcoins?

Do you believe that you will be able to purchase say... a house or a car using bitcoins? Do you think any financial institution will come out and loan you bitcoins?

As a financial instrument, this massive deflation will prevent any form of financing (ie: Credit Cards, Mortgages, Car Loans, etc. etc.) from growing inside of the Bitcoin world.

Are you willing to provide services for a BTC denominated amount?

The guy who's been the head of the central bank in my country for about 20 years or so, once said to make sure you get loans in the same currency you have your income, so any volatility in the currency of the loan is matched by the same currency of the income.

The only reason you think having to repay a loan in Bitcoin would be a problem, is because you think your income comes in dollars. And doing that would indeed be very unwise. But if we get to the point where we can get loans in Bitcoin, I think it's safe to assume the income of many people would be based on Bitcoin, too, so it wouldn't be a problem at all for them.

Even if you get paid in bitcoin, if the real value of bitcoin increases, it's unlikely that you'll maintain the same nominal wage. Your real output is relatively constant, so your real wage (whether it's paid by an employer or is the profit from a business) can't dramatically rise every time the currency fluctuates.

So even if you're paid in BTC, deflation makes it very difficult to repay a loan.

What do you mean by "real wage"? I think you're still taking the wage relative to a dolar in this case. The point is that if you get paid in X, you get paid in X. If X has any traction, your employer also has income in X, so relation of X to other currencies is not that much relevant to your salary or debts if they're both in X.

Sure - 100x change over a year is going to be a problem for other reasons, but have a look at GBP/EUR exchange rate. It changed between 1,28 and 1,16 over the last couple of months. Nobody corrected my salary by 10% just because of this.

But companies such as Nintendo post losses in Revenue because of USD / Yen fluctuations.

When all USD transactions are hurt by 7% because of a stronger Yen, Nintendo's business in America is worth 7% less all of a sudden. True, wages in Nintendo probably didn't change, but their American Investments have been damaged by the stronger Yen.

What do you mean nobody? Austrian economists are a legitimate school of economics and they are in favor of deflation. It was Austrians who were able to predict most of the collapses we've seen over the century. When Keynesians said it's impossible to have inflation and high rates of unemployment, it was Austrians who said they were wrong, which was proved in the 1960-70s.

[citation needed]

Here's a list of predictions: http://wiki.mises.org/wiki/Austrian_predictions

I would like to point out that the Austrian school teaches that economic predictions are impossible to make which is incredibly convenient when one of their theories breaks down completely (e.g. the Austrian Business Cycle Theory has been shown to be empirically false during all recessions we have data for).

Also, mises.org isn't exactly an objective third party.

Austrians are fine with price deflation, but not monetary deflation:

"If a man has been hurt by being run over by an automobile, it is no remedy to let the car go back over him in the opposition direction." -- Ludwig von Mises (http://mises.org/mmmp/mmmp5.asp)

Just to clarify, Austrians define monetary deflation as a contraction in the total supply of a given money. In this case, it would mean a decrease in the total number of Bitcoins.

Supply contraction won't happen in Bitcoin until sometime before 2140, when the number of coins lost to hard drive crashes or which are otherwise difficult to spend start to outrun new coins minted.

There is also a big difference between "some deflation" and run-away thousand percent exponential deflation. The Austrians may not have been contemplating the later. Or not have been contemplating that any sober person would propose a currency scheme with that as a fundamental feature throughout it's adoption phase.

Not to make excuses about this issue and Bitcoin, but the main problem here is that while Bitcoins limited supply solution brings with it lots of other problems (including frequent but not 100% reliable deflation) - no one has yet even postulated a fully distributed and mathematical means of reliably producing either inflation, deflation, or steady-state value.

Limited supply is a dirty, sloppy hack - but the only known one to most likely maintain the value of a cryptocurrency over time.

Before Bitcoin no one thought it was possible to solve the double spend problem using a P2P network.

Maybe someday we'll learn how to control inflation of future crypto currencies using P2P networks as well.

Even today there is at least one crypto currency with a built in 5% internal demurrage rate (freicoin).

One idea is, for each block mined in a crypto currency, the miner votes on a target inflation rate. Every so many blocks, perhaps every month or so, the P2P network would take the median proposed inflation rate and either demurrage all existing coins or adjust the number of newly generated coins for the next month.

I'm not downplaying the innovations that Bitcoin introduced and demonstrating - just honing in that the money supply issue is not yet well understood.

I would love to see what would happen with a miner-voting system - actually, while I'm dreaming, I'd like to see a proof-of-stake inflation voting mechanism.

Too bad all of this hype is about Bitcoin instead of the general concept of cryptocurrencies.

There is a growing subreddit for discussion of cryptocurrencies:

http://www.reddit.com/r/cryptocurrency

A thousand times this. A currency that is designed to be radically unstable in value is not a currency. Out of control deflation is just as bad as out of control inflation.

Bcoin is nothing but a bunch of runaway tulip bulbs. Have fun if you want to buy on the way up and... sell in time, woe to you if don't.

Deflation is when counterfeited money (deposit liabilities/other side of debt-asset journal entry) are written off. Deflation in a debt-asset based financial system means money is destroyed and becomes more scarce and valuable. Since debts are exponentially increasing cost contracts, when the monetary supply--based on exponentially increasing cost contracts--contracts, you get exponentially increasing appreciation of the currency.

Governments are running trillion dollar deficits because they have to because the private sector isn't borrowing enough to expand the debt-assets required to service previous debt contracts that require service in debt contracts.

Bitcoin's relative appreciation to fiat currencies and other benchmarks is not driven by a contraction in money supply due to debt-asset write-offs.

Bitcoin itself could be declared legal tender and suitable for payment of taxes if a government decided so. Financial crises are ALWAYS about lenders lending money that doesn't exist. The fancy name used to be fractional reserve lending, but since we went to a floating currency system, it's just asset-based lending and no reserves required.

Value isn't something anyone can "fix."

You will see similar arguments happen about real life currencies backed by small nation-states. It's entirely plausible for mass market speculation to, say, quintuple the price of the Botswanan note.

It's basically a brand new currency. Of course it hasn't settled down yet. It wont for a long time. Maybe the price it's being sold at is increasing so much, because they're worth a lot and they haven't reached as high as their stable value is going to yet?

I really wish these articles would just stay off HN. All they do is bring out the armchair economists and the gold bugs.

A much better and less biased article than the 'Bitcon' one. It shows once more that no one really knows what Bitcoin is and what's going to happen to it.

If you must compare Bitcoin to gold, consider the current price of gold, imagine that we didn't know it existed until yesterday and then suddenly it appeared. Bitcoin currently fulfills a niche in the same way that gold did in the past (and still does).

Speaking of a better bitcoin, why can't the proof of work aspect be something that's useful instead of a huge waste of electricity?

Perhaps solving hard problems like protien folding, or a big virtual CPU that people can send processes to?

Because protein folding doesn't validate transactions, and doesn't solve the "Byzantine Generals" problem.

How about not pouring energy into Bitcoin and just doing something more efficient:

http://www.links.org/?p=1179

(Or maybe the Bitcoin community should just calm down, develop a rigorous definition of the security properties they want, and then develop a system that meets that definition. Right now it is all hand-wavy, vague, and it ignores a known polynomial time attack.)

Speaking of a better bitcoin, why can't the proof of work aspect be something that's useful instead of a huge waste of electricity?

It's not a huge waste of electricity. It provides security for the bitcoin ecosystem.

Only as long as nobody comes along with a tiny bit more computing power than the rest of the Bitcoin system and decides to double spend their money. Ultimately, you would need to use half of all computing power in the world for Bitcoin for it to be secure.

Similar things have happened: look into the history of blockchain forks.

PPC coin is more secure against 51% attacks, because existing holders of coin don't need large amount of computing power to generate proof-of-stake blocks.

To launch a 51% attack against PPC, you need 51% of the computing power and 51% of the coin-age, coins times the amount of time that has past since they were last spent.

Is there a better technical paper about PPCoin than the 6 page whitepaper?

There are coins with much lower mining costs, like PPC coins. It uses a "proof of stake" algorithm instead of a "proof of work".

I still haven't quite wrapped my head around the math. Here is the paper: http://www.ppcoin.org/static/ppcoin-paper.pdf

I've been looking for an answer to this question for a while -- why not build a digital commodity currency, where useful computation is a commodity? (I've yet to find a satisfying response to this).

Several problems come to mind:

* There's not enough computation. With BTC-type currencies, the value of the money is far higher than the cost of the backing computation (look up bitcoin mining calculations). If you have a computational commodity currency, they should be closely linked (by definition!). And a home PC can support a trivial amount of computation ($100's at most) -- not enough to be useful.

* Not enough demand for (pure, parallelizable) computation.

* No intrinsic way to "store" computation. You can record the existence of computation, but if this done by a distributed P2P system like bitcoin, the commodity-backing property is lost. A file verifying that a computation was performed is not itself computation: it doesn't solve any problems, it has no intrinsic value. Of course a legal private currency, backed by banks and courts, could keep track of such debts and make them enforceable.

* Security problem: you would need to run arbitrary machine code on a home PC, if this were to have any useful value. This is dangerous and unsolved. Is there any way to run, e.g., untrusted CUDA code in a sandbox? (I believe no)

* Accounting. There's no pure "unit" of computation: you would have many types of computational problems, being assigned to many different types of hardware. In the real world, I think you wouldn't end up with a single currency so much as a market, with many currencies and many fluctuating exchange rates. If you could extract a currency from this, it would be as a currency basket (5% protein folding, 5% linear algebra...)

So I suspect this wouldn't work well today. Maybe in the future.

Quoting from the article: "So ... bitcoins are without intrinsic value as assets, yet they have risen too fast in value to be much use as a currency. Kind of makes your head hurt, doesn't it? But it also sounds a bit like a familiar commodity, gold, that's also been on a roll, with its dollar price quintupling over the past decade. Gold has, over time, not been the greatest of assets to invest in. It's not the greatest of currencies, either: Back when the gold standard was widely adhered to, nations struggled regularly with deflation. There's persuasive evidence that the primary cause of the Great Depression was a refusal to unlink currencies from gold until too late. Still, gold has held onto its purchasing power over time."

I agree with the author: bitcoins are very similar to gold ("the people's currency"), except they're digital and their supply is mathematically fixed. So ... how much would a Bitcoin sell for if the world ever comes to value it like gold?

Granted, that's a big if, but let's entertain the thought for speculative fun. All gold mined since the start of civilization is currently valued at around $8.8 trillion.[1] Divide this figure by the maximum of 21 million bitcoins that can ever be created, and the figure is over $400,000 per Bitcoin. So the answer is, in the order of a few hundred dollars per milli-Bitcoin.

For reference, all bitcoins in existence are currently valued at $0.002 trillion.[2]

[1] http://en.wikipedia.org/wiki/Gold#Production

[2] http://www.bitcoinwatch.com

That is a bit misleading. A lot of gold is not on the markets for various reasons -jewelry, hoarders, some electronics.

So you should count only liquid gold (hehe) ... the amount that you can actually buy. I think it is much smaller than 8 trillion.

Many bitcoins have been lost permanently or are in cold storage. Only a small percentage are available on exchanges.

Bitcoins are divisible up to eight decimal places. So there are rather more units than that potentially available to circulate.

Thus, the Satoshi: the smallest denomination in bitcoin, at 0.00000001 bitcoins. To continue with the above speculative fun, one satoshi would be worth .004 dollars.

If the M3 money supply were replaced with bitcoins overnight (assuming 21 million bitcoins and an M3 of 10.3 trillion circa 2009), a bitcoin would be worth $490,476.19. One satoshi would be $0.004947619; a big mac would cost 806 satoshi. Which is only about half the the current USD->Yen exchange rate.

One thing that I haven't really seen addressed in these discussions is how we're actually measuring the value of bitcoins. The focus is entirely on the USD/BTC exchange rate, but is that really the proper measure of value to use when discussing inflation or deflation? I'm not an economist by any means, so I honestly don't know, but that seems a little wrong somehow.

In particular, when we say the USD is worth 10% of what it was 60 years ago, we're not comparing that to any other currency. We're just saying that things that were $1 USD back in the day tend to be $10 USD now. Then when we talk about BTC being deflationary, we talk about 1 BTC a year ago being traded for $200 USD now (or whatever it is). It seems a bit apples to oranges to me.

So here's a question: when BTC value in terms of USD spikes, does the price of goods in BTC spike proportionally? If so, maybe that's a reasonable metric of value for now. I haven't bought in to BTC yet, so I don't actually know the answer. But in all these discussions about inflation or deflation and instability in a hypothetical BTC economy, does it really make sense to still talk about the USD/BTC rate?

Something with quickly fluctuating value may be useful for trading goods, but very poor for paying wages IN OUR CURRENT ECONOMIC MODEL.

Borrowing in a deflating currency is very difficult, as your future earnings are likely to decrease in number, not value. The lender has no reason to lend if they can't get more from interest than what they expect from just holding the bitcoins.

Some would welcome this model, where there is little or no investment lending, and everything is bought only with readily available funds.

YC funding would probably be radically different. Buying a car, a house, or anything else using credit would be extremely difficult, if not impossible for most people.

While putting things you don't need on credit cards is only really good for the credit card companies, borrowing to expand your business, reliable transportation to work, or even reasonable housing is the grease in the current world economy.

Our economic model is mostly a recent phenomenon, historically, deflation was the norm. I don't think that going backwards is actually going to help anyone except the enormously wealthy, who can easily hold onto the majority of their wealth while it accrues value.

But what stops other people from making their own versions of bitcoin? Why can't somebody else create the AsiaCoin or the Bitcoin II or the OceanCoin? What makes bitcoin special other than it's the first one that was created?

All other currencies have some sort of backing. Either a government or something physical like Gold that can't be easily duplicated. That seems to me the big difference between bitcoin and other assets.

But what stops other people from making their own versions of bitcoin? Why can't somebody else create the AsiaCoin or the Bitcoin II or the OceanCoin?

Absolutely nothing.

What makes bitcoin special other than it's the first one that was created?

Nothing.

Forking is easy. Maintenance can be extremely hard.

Since Satoshi left, Bitcoin has evolved dramatically in terms of security and functionality. Thanks to the core developers and the whole community. Aside from the core Bitcoin system, peripheral infrastructures like exchanges, end-user software clients, and online wallet services, etc., have been and will be created and improved. None of these is easy work. There are many forks of Bitcoin as of now and will probably be more, but it could be hard for all of them to survive in the long run.

It's like building the better "Internet Explorer". Once it becomes de-facto standard - the world will have no choice but to embrace it's global penetration and live and work around it's limitations.

Except it's not entering a completely new market. There are around 200 existing currencies, and for bitcoin to become a de-facto standard it would have to succeed where every one of those 200 currencies have failed.

It has one big advantage going for it - it's not controlled by any government. You expect the euro to be manipulated for the benefits of the Europeans, the USD to be manipulated for the benefits of Americans, and the Yuan to be manipulated for the benefits of the Chinese. But who manipulates the bitcoin?

Best article on Bitcoin so far.

I stopped reading when the article cited Gold as one of the roots of the Great Depression. Ha! Yeah, sure.

This is a truth accepted by economists of basically all political persuasion at this point. The best book on the subject is Barry Eichengreen's "Golden Fetters", but you can get a faster sense of things by going to NBER (nber.org), searching for "great depression" or "gold standard" and walking through the results.

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