Bitcoin solved a major technical problem, but not an economic one
krugman.blogs.nytimes.com
krugman.blogs.nytimes.com
Inside every Bitcoin transaction is a small program that contains no loops. If that program when executed returns true, the transaction is valid.
The simplest, most boring kind of transaction--but the one that most people assume "is Bitcoin"--is a transfer from address P to address Q. Where things get more interesting is in using those little programs in more creative ways; e.g., k-of-n escrow, attestation of ownership, etc.
A whole generation of kids is going to grow up soon routinely using small Bitcoin escrows to hedge everyday scenarios. They won't quite able to believe that their parents operated in a world based on centralized authority subject to rent-seeking corruption.
I've read elsewhere that the official client no longer processes any such scripts except for ones that are whitelisted. That reduces the current protocol to a single feature set, instead of the promise of future extension without requiring further agreement from miners.
Can anybody verify this? Does today's client still process arbitrary scripts?
It is miners which run these scripts, and when I was following bitcoin it was miners who decided which script features they would allow. There were some significant mining pools which allowed nonstandard script features.
Some specific kinds of scripts are marked as "standard", all the rest are "non-standard". Non-standard scripts are valid and all miners will validate blocks containing such scripts. But non-standard transactions (i.e. transactions, containing a non-standard script) will not be relayed by default by the bitcoind nodes. Every node and every miner may decide for themselves whether they relay/mine non-standard transactions or not. I'm not sure how many miners accept non-standard transactions, but there are some. You can also pay some miners directly to mine a specific transaction. Or you can mine your non-standard transaction yourself, if you can afford it. Non-standard transactions typically require higher miner fees and take longer to confirm (as not every miner will include them).
The point behind standardness is to contain damage if some complex scripts will turn out to allow DoS attacks, allow losing funds or something like that. In 2012 Bitcoin was extended with P2SH ("pay to script hash") type of transaction (which is also standard) that allows you to define the redemption script during redemption, not during payment. Payer sends coins to a "hash of script" instead of the script itself. Payee then needs to provide not only signatures to redeem the payment, but also the script matching this hash (however complex it is). This has several advantages:
1. Payer does not spend higher miner fees because of the complexity of the script.
2. Payer does not wait indefinitely long till the transaction confirms.
3. Payer may not know the contents of the redemption script until it's being used. In some protocols this could be a useful feature for privacy reasons.
So with P2SH a service may already use arbitrary non-standard scripts shifting the burden of mining non-standard transactions from its customers to itself. For the customer it will look exactly like sending money to a Bitcoin address, although that address will start with "3", not with "1" (which is reserved for the usual "pay to public key hash" script).
It seems there's enough flexibility left to do some interesting things. I see discussions in the forum of things like M-of-N, nLockTime, and anyonecanpay.
Krugman is surely correct that it's silly to waste resources digging gold out of the ground only to re-bury it in a bank's vault.
And if Bitcoin was just another currency, it would be equally silly to waste compute resources mining it.
But if crypto-currencies could disrupt even a small part of the centralized, rent-seeking, mafia-economy, then the cost of mining dwindles to insignificance.
It's not about intrinsic value. It's about changing how people transmit value over distance and time. It's about freeing that process from the gatekeepers who control it and extract rents from the labor of others.
And do you think these gatekeepers are going to relinquish their power quietly? There are many ways that the entrenched powers can stall or even kill bitcoin. One declaration by China saw a loss of 50% of bitcoins value in a day or so. The claim that bitcoin is disruptive to the system is vastly overblown. Guns still rule in meatspace as well as cyberspace.
Just as they fought tooth and nail against digital networks and strong cryptography, they will try to smother crypto-currencies in their crib.
But decentralization, pseudo-anonymity, and free software are powerful forces, maybe even more powerful than men with guns.
In what universite did that happen?
Could you explain this in more detail? Or perhaps provide a specific example? I've heard people talk about DACs and such (which I also don't really understand very well). At the risk of sounding stupid, I honestly don't understand what kind of scenario this would prove useful (or at least simple enough to warrant its use over traditional methods).
• global always-on connectivity
• encryption constructs
• easy discovery/formation of communities-of-interest
• open source collaboration
• instant rich search and giant archives of past behavior
• delegation of policy to ever-improving software/automation
• cheap powerful handheld computer-phones
• ...etc
These may not seem to be similarly novel breakthroughs; we're getting used to them, over the last 5-20 years. But now they're being applied to a monetary domain, via Bitcoin (and other cryptocurrencies), where progress was formerly bottlenecked.
So while I'm wouldn't generally put a lot of weight on the cheap, shallow shot against Krugman – "he thought the net wouldn't have more impact than the fax machine" – there is a somewhat similar failing here. By looking at one aspect of Bitcoin in reductionist isolation, he (and his tech friend) are missing the combinatorial effect of all these new possibilities together.
In practise, individuals will now have the power that only large corporations used to.
The context was applications for mobile phones.
Also, while regulations and state monopolies always have an surface rationale based on solving actual problems, sometimes the real reason they're put in place, or maintained even as circumstances change, is because they benefit certain narrow entrenched interests.
We owe older regulatory arrangements some respect, for the effort that went into their initial crafting and their longevity across eras where (whatever other problems we have) we've survived and thrived beyond the past. (I agree with the "Chesterton's Fence" principle: don't take down a fence until you know why it was put up.)
But we shouldn't fear that old regulations and traditions are the only thing protecting us from 'horrors' of the past. The world has changed, some old risks are obsoleted by new levels of understanding and wealth, while all-new risks have arrived – including many created by the privileges and inflexibility of older 'solutions'.
Moreover, Krugman is blissfully unaware of the hundreds of millions of people that don't have access to stable or reliable banking. How does opening the markets to untold millions, via peer-to-peer transactions, not solve an economic problem?
We want that will think on Wednesday the same they thought on Monday, no matter what happens in the world on Tuesday. (Shamelessly stolen from colbert)
AKA he's justifying his dumb thoughts...
This is like a religious fanatic retreating from a god of the gaps corner, but never considering the possibility that he might be fundamentally wrong.
Of course I can show you irreducible complexity! Look, Eyes! No wait, that doesn't work, I mean blood clotting! No no no hang on, I mean flagella based molecular motors! Ok, look, that's wrong too, but I'm still right, just, look, let me get back to you on this, OK?
Alright, good, are you there? Forget irreducible complexity. That's just hokum, but this will just knock you out of the park, are you ready? Ok, here; Bananas are clear proof of intelligent design!
Hello? Where did you go? Why is nobody listening to me? Anybody? Bombardier Beetles!
Just need to work on that blockchain size given GSM speed limits.
EDIT: Apparently there are clients that don't need the full blockchain now?
Bitcoin will succeed if enough people believe that it will succeed, and bitcoin will fail if enough people believe it will fail.
Krugman is attempting to damage the future prospects of the system by spreading asinine notions about how it's not "economically viable". This really hits a nerve, because it serves no purpose other than to gain readership and to make him feel better for not investing in it. There is a risk that he, and others, could destroy bitcoin's future by convincing enough people that it shouldn't be trusted.
No economic arguments (especially Krugman's) about it are valid. Bitcoin's success or failure is entirely a self-fulfilling prophecy.
Two factions will form (or have already formed) - supporters and haters. The system needs enough supporters (and their investments) for it to be viable. The hope is that the supporters will grow in number or at least remain unchanged. Krugman is trying to turn supporters into haters, reducing the viability of the system.
It seems like this could have been done 15 years ago with Chaumian digital cash (which requires no mining and is more anonymous than Bitcoin) or even earlier with plain public-key crypto if you don't care about anonymity. Why hasn't it?
Uh, the problem is that this is not a one-time succeed or fail thing. If one fine day, enough people think bitcoin will fail (or just think it no longer serves their purpose, say, it no longer has a chance of significant value increase), the consequences for many people may be very painful - even if for many previous days, most people thought bitcoin would succeed, even if some imaginary point had reached where some commentator could say "wow, looks like bitcoin has actually succeed".
I think you're misunderstanding the risk here. If the mining network reaches a point that it is no longer secure, because the market cap and trade volume is not high enough to support a large computational network, then a single widely publicized 51% attack can cause a near-complete loss of faith in the system.
The damage to cryptocurrencies after such an event is probably irreparable.
Unless we think banks taking 3% of all Internet transactions is a good thing.
Taking a 3% cut of transactions (or even more in some of the walled garden ecosystems) is obviously too much for a service of irreversible transactions. We'll see whether (a) reversible transactions and the related insurance problems can be solved more cheaply than today's credit cards and friends, and (b) whether irreversible electronic transactions will be accepted by people given the sorry state of computer security.
http://krugman.blogs.nytimes.com/2013/08/18/the-dynamo-and-b...
Edit: I realize I'm not addressing your larger point. He still may not be the guy to go to. But that being said I think his opinions are more nuanced.
Edit 2: Another post by him on the value of ICT: http://krugman.blogs.nytimes.com/2013/10/11/the-ict-revoluti...
There are Bitcoinistas who would like governments to abolish their own currencies and make Bitcoin the currency of the land, or perhaps adopt a Bitcoin-standard akin to a gold standard.
Those are economic policy proposals. Are they good ideas? It makes sense to listen to what economists have to say when you are trying to figure out the answer.
2) Bitcoin maintains a public record of every transaction. There are still ways to anonomize yourself (mixing services, proposed extensions like Zerocoin), but cash would still be my first choice.
Not one of those four characteristics is true for Bitcoin, so saying it's "just like" gold and silver is a bit of a stretch. This doesn't mean Bitcoin is awful, as Krugman's trollish column is titled, but just that it doesn't have the same intrinsic floor value as gold and silver.
Gold and silver have industrial uses today. That may change tomorrow (albeit highly unlikely).
Bitcoin is the currency of cyber criminals today (hence giving it value today). That also may change tomorrow.
If you're right that Bitcoin is a major factor, then yep, that could be an effective price floor (at least until a better rival comes along). It would be interesting to learn how much of Bitcoin purchasing is due to black market transactions. My intuition says it's mostly speculation, but I'd be happy to be proven wrong.
That was the value transacted on the Silk Road. Quite impressive numbers, given that it was a single site and much of that growth occurring in Bitcoin's less user-friendly days.
I found Charles Stross' critique of Bitcoin far more convincing than anything I've read from Krugman. But, not on technical grounds; merely on ethical ones. I do actually worry that we may be replacing a horrible system that enforces and thrives on inequality with a possibly more extreme system that does the same thing (possibly with a few new players at the top).
Regardless, Krugman is in way over his head on the technical aspects of Bitcoin and it shows. There has been much better technical criticism from actual nerds, including nerds who have worked on cryptocurrencies.
I believe we are seeing one of Krugman's famous bits of shortsightedness, and I believe he is falling prey to the very type of bias he claims to be trying to avoid. Bitcoin has a lot going for it, whether you call it a "currency" or something else. I believe that it's impossible to predict how Bitcoin will play out, exactly, since we've never seen anything exactly like Bitcoin. I have some vague feelings, as well (like, I feel like it's likely Bitcoin will be replaced by some other cryptocurrency within a few years...for a variety of technical and social reasons). But, it's all just a hunch, and I'm unwilling to take the kind of stance Krugman is taking, which seems almost naive (certainly on technical issues, probably less so on economic issues) from my perspective.
The reserve bank of Bitcoin is completely immune to coercion, you can't freeze funds, you can't stop transactions, you can't do anything at all to the funds in one of those accounts without the consent of the account holder. If the account holder doesn't want you to, you can't even know who they are. Altogether, the entire system is the exact opposite of the global banking system, it is extremely poorly understood and almost entirely uncontrolled.
And that's just with the bank analogies, if you take it up a notch and compare fiat issuance to bitcoin issuance it gets even more frightening from their perspective. There's no nation they can apply diplomatic pressure to to change the fiscal policy of Bitcoin, that fiscal policy is linked to interests utterly alien to their own, even.
From their perspective it is indeed a dangerous thing, the only question to my mind is A) How long will it take them to figure this out and B) when they do figure it out, what kinds of actions will they take to try to destroy it.
Similarly Bitcoin has a base value in the cost of mining 1 BTC. Right now it is around $800 or so.
Because of the competition in mining, asic chips development, and More's law. The cost of mining 1 BTC is going up exponentially.
If BTC falls below the cost of mining people will stop mining and the network will adjust to the reduced difficulty, making the cost of mining drop.
A problem is that if too few people mine, the network becomes easy to compromise. That's a problem that bitcoin has, and other currencies (and things like gold and silver) do not.