Funny how apparently the biggest Bitcoin company is a bank for centralized storage and management of Bitcoins, which was the exact opposite goal (according to the idealists) of bitcoins. Next up they'll probably offer interest and loans/mortgages.
The interesting thing here is that it's build on an open protocol rather than on legislation and so this I believe will at least give the opportunity to create all sorts of interesting solutions that are currently impossible to do within the current banking system because technology moves faster than legislation.
So even if we are talking centralization or clustering as I like to call it, we are not talking exclusion.
I think there is a real risk that we'll see bitcoin processing completely swallowed up by these big players.
Email's a great example. You could set up your own email server, but doing so in such a way that you don't harm your ability to get emails into people's inboxes is problematic in all sorts of ways: you've got a good chance of being classified as spam. So even though the system is decentralized, the fact that most users are centralized within a few big players means that those parties can unilaterally impose rules that cut off users who don't participate in the centralized ecosystem.
In short: if Coinbase becomes sufficiently large, they could have the de facto power to disadvantage people who choose to use bitcoin outside of major centralized services.
This isn't to say that a system can't tend more or less to centralization: sure, it can, and Bitcoin could have a strong tendency to make unilaterally enforced centralization hard. But even good technical solutions are vulnerable to social forces, and social forces can be very powerful.
Git is decentralized, that means I can quit Github any time I want and use another service to host my repositories.
Bitcoin is the same: I'm not locked into Coinbase, I can switch them for another service, personal wallet on a phone, a hardware wallet, or a combination of them. Move my coins to a company in another jurisdiction etc.
Just the very fact of how easy it is to switch, creates a pressure on your provider and makes them work harder.
US banking is not decentralized. I cannot simply take dollars out to some other service or wallet. Moving them takes a lot of time, there is no privacy, there is suspicious reports and interrogation everywhere, civil forfeiture laws and for another jurisdiction, I have to sell dollars for another currency which incurs fees, risks etc.
In short: Bitcoin is like Git, fiat money and banking is like CVS.
Luckily, with Bitcoin, it's trade what you can lose. Keep the rest by yourself. Yes, there were some losses, but it's a trading platform. Somewhat expected.
If you don't believe me research what happened with the Swiss Franc recently. It has closed a lot of FX trading platforms from sheer losses [1].
This isn't limited to bitcoin — that's a naive and ignorant point of view.
[1] http://www.bidnessetc.com/32853-swiss-franc-shock-highlight-...
Apparently Coinbase now offers a multi-signature feature, so people could do the same.
You could move your open source project away from GitHub, but if GitHub is sufficiently popular that most people don't understand how the patch system works in git, and hence don't know how to contribute without using the affordances that GitHub offers, then you will incur a cost by doing so.
The point I'm making is that if the majority of people using a decentralized system via a centralized wrapper, and if interaction with those people is a priority, then it is possible for the provider of that centralized wrapper to make it harder for you to interact with their customers without yourself using the centralized wrapper. The more they do so, the less value there is to you (the decentralized user) in the millions/billions of people using decentralized service X through centralized wrapper Y, because they're effectively unreachable unless you also use said centralized wrapper.
This can happen by continuing to use the decentralized infrastructure, but penalizing participants who aren't accessing the infrastructure through a popular system. Alternatively, it can happen by having the decentralized infrastructure co-opted, so even though the service to some extent interacts with it, most user interaction actually exists entirely within the centralized system.
I mean, it doesn't seem crazy for me to imagine a world in which (eg) as a Coinbase user there's some monetary advantage to receiving payments from Coinbase members vs the wider Bitcoin world. At which point maybe merchants want you to pay via "Coinbase Send" (or w/e this hypothetical service is called) rather than pure Bitcoin transactions. At which point, sure, Bitcoin is the underlying unit of value, but no-one is actually using Bitcoin transactions (Coinbase is just moving around their internal accounting DB records), and hence the fact that things are counted in Bitcoin is basically a historical artifact.
I have no idea what will happen. My argument is just that I don't think that it is impossible for decentralized systems to be functionally neutered when people mostly interact with them through centralized wrappers.
The reason some banks take so long to do transfers is not because USD is somehow analog, it's for institutional reasons that are entirely rectifiable - which is why it's not true of all banks or often, true outside the US.
If a sufficient number of businesses integrate coinbase into their sales, it's not just a matter of the paying customer going elsewhere to process the payment: the entity selling the goods also has to move away from coinbase.
Sure, you can still send coins over the network - but given a large enough foothold that doesn't mean you'll be able to pay for the goods you want, at the merchant you want.
Mere possibility of running a node on your own and sending money directly alters the dynamic. You can use a third party service if you like. You have to use a third party to transfer dollars over the Internet.
I'd say most money lives in banks. Most cash is out in the world.
A downside of having someone else hold onto your BTC on a website is that you can't spend it in the ways that are supposed to make BTC powerful.
On the other hand, you do still reap the benefits of the rock-solid wealth-storage device that is BTC. And where could be a safer place for your BTC than a website on the Internet? Those things never get hacked.
One is that the paradox of bitcoin adoption is that it can't take off without a normal banking system. And if you had a decent banking system, you wouldn't need bitcoin in the first place.
That is, fraud is a big issue in online retail. You buy product X online and then you 'charge back' your transaction and end up with a free product. Merchants then have to solve this by starting legal cases and provide evidence that a product was supplied blablabla. Sometimes this costs more than it's worth. Bitcoin faces a lot of these problems, too. How do you acquire bitcoin? You can't through Paypal because of this fraud, everyone charges it back and Paypal mostly ignores evidence that bitcoin was indeed supplied. As a seller you can't really make a case and win.
So you end up with these big companies that act a bit like banks. They require you to verify your identity, your residence, bank account etc. All to prevent fraud. And of course all of that has costs, so they charge you 1%. And then you pay them not through a credit card, that's 2.5% in fees which doesn't work if you pay $100 to get $100 of bitcoin. So you pay through ACH, which takes a few days but is cheap.
So you end up with a service that sells you bitcoin for 1% that takes a few days. Why? Because there's no way to safely send money cheaply and instantly without fraud, which is what bitcoin allows you to do and solves.
So the paradox is, if everyone had bitcoin, it wouldn't be a problem. But they don't, so we need banks. But if banks worked well, we wouldn't need bitcoin.
Over time this becomes less of an issue of course. This is what made Coinbase big, not its storage, but its exchange function for US customers. As a wallet, it's not the biggest, Blockchain.info which does not see your private keys (it's a software layer) has almost a million more wallets. So it's big for its exchange function which has little to do with centralized or decentralized storage of money.
The second part is centralized storage. This is a function of culture and software sophistication. In the early days most bitcoin software wasn't user friendly and not very well written. Today we're seeing changes. In fact, Coinbase has a multi-sig product, which is a software solution allowing you full autonomy over your money, and Coinbase none. That's not centralized storage, users retain full control over their private keys and Coinbase offers the software to facilitate it, much like how an Excel sheet facilitates your personal data analysis but doesn't award Microsoft ownership of your data. Over time we'll see products like this emerge more and more and people will have a choice to move away from centralized storage, and culture may shift towards that, too.
In short though, bitcoin wasn't about 'never use a centralized company'. It's about a protocol layer that's not proprietary, with a currency that can't be forged or printed to fuel political agendas (like militaristic foreign policy). The fact that centralized and decentralized solutions become available on top of that layer is both fine. Much like how a decentralized internet would be awesome despite the fact it would still see centralized repositories of data like Facebook, it's not about which services become most popular as long as the underlying network remains free and open.
Every inflationary currency system suffers from the same problem. At least bitcoin has a hard cap on the total number of units that will ever be available.
[That was the argument made anyway]
You say that as though it is a good thing. Do you really think the US would be better off with QE? It seems to me it'd look more like the Eurozone.
Increase in money supply != inflation, FWIW.
For one we have the transaction numbers (again just count transactions on the blockchain) for the past 24 hours. It's been averaging about 100k the past few weeks. (averaging about 70k for 2014 for context).
We also know that every 10 minutes a block is mined and 25 bitcoins are rewarded with a value of $200 per coin. So in 24 hours that's $720k.
In short this puts the average supply of bitcoin at $7 per transaction.
In short, you can't call it a 'cost per transaction' because it's not a marginal cost. i.e. if zero transactions were made, there'd still be a supply of 25 bitcoins every 10 minutes up to $700k per day. Same with if 1 trillion transactions were made. In other words, this is simply a supply function, not a per-transaction cost function.
To put this into perspective, here's an example. e.g. if you build a bridge for $1m and you have 1 million users, the average cost per user is $1. But if only 1 person uses the bridge, it's not like the cost of a bridge is $1 million per user. That would be ridiculous. If we went about reasoning like that nobody would build a bridge at that cost, especially not in places where you get many users because you'd get insanely expensive bridges (1 million users costs 1 million * 1 million!)
Now it's true that someone has to pay for all this hashing which secures the blockchain. But that cost is not to secure each individual transaction. It's a cost to secure the system, a systemic cost. A bit like the cost to build a bridge, a global cost, not a marginal one (i.e. it doesn't cost extra to let 10 persons instead of 1 person to walk over the bridge)
The bridge is a poor example because you can't get unlimited people on the bridge. (there is some marginal cost, i.e. there is a cost difference to building a bridge to move 100 people per hour versus 100 thousand people per hour). In bitcoin this difference is trivial. It's like asking what the cost of a tweet is on twitter's bandwidth or storage, it's very tiny like a tiny fraction of a penny. This cost is paid for in transaction fees.
So to return to the systemic cost, you need to come up with enough money to incentivize miners to act honestly. And we can do that by rewarding them with bitcoin. Today that comes from block rewards, but it doesn't have to be like that. In 10 years, if bitcoin is popular, we can see millions of transactions per block, and if each transaction costs a penny then you can easily cover today's block rewards.
For some example numbers: current security costs about $5k per block, and we've just heard bitcoin's Chief Scientist report on tests that he did with large blocks. His tests showed he can power 200 megabyte blocks on his 2012 home PC. That's enough data for more than 400k transactions, meaning that with 0 block rewards you could get transactions as cheap as 1.2 cents, nothing close to the $7 figure I stated before.
And this ability grows at Moore's, Kryder's and Nielsen's law (cpu, storage, bandwidth) meaning that the ability to power larger blocks grows by 80x every decade or so. If you then fill those larger blocks with 80x transactions, then each transaction can get 80x cheaper. Within a decade we could get to fractions of a penny per transaction.
Then combine that with the fact that 1 transaction can carry a ton of data. i.e. you can send bitcoin to thousands of people with 1 transaction if you wanted. Or you could use bitcoin as a settling system for offchain or sidechain systems, meaning you can settle thousands of trades with only a few transactions making the cost of transactions even cheaper.
So these 'cost' figures look a lot scarier than they are. I wrote a similar bit as above about what that all means here: https://news.ycombinator.com/item?id=8922262
In short bitcoin really is very cheap and its cost will not be its downfall. It might fail for other reasons, but I don't perceive costs to be one of its obstacles, rather it's one of its competitive advantages.
And that cost is dropping. Money supply is just inherent to bitcoin's design to kick it off, but it's dropping to near zero within a few decades, unlike systemic costs of printing fiat which remain endlessly.
The long-term reward are transaction fees, and those are certainly quite cheap. You can move millions of dollars with pennies of fees, or you can make one transaction with thousands of outputs, also for mere pennies. Those fees can stay low as when you get 1.000x more transactions, you can pay for the same security with extremely small fees per transaction. (i.e. securing the system is expensive, again it's a systemic cost, but securing each individual transaction isn't, that's just a cheap process of verifying a signature and storing 1/10th the amount of data of a tweet. So if you get enough transactions going, securing the system can be funded by very many very cheap transaction fees. And if you don't get many transactions going, then bitcoin isn't popular and well used anyway and who cares then if it doesn't work? It's like saying Myspace has technical flaws, nobody cares if it already failed to become popular that it would also have failed for technical reasons.
Bitcoin is imo unlikely to ever let you buy a cup of coffee using a single blockchain transaction (I mean, you can now, I'm talking sustaining this over the long term). Instead, it'll be used as the value network on which financial systems are built that will allow you to do this. Whether that's sidechains or offchains, they'll all use bitcoin's blockchain as a settling mechanism, without forcing low-value transactions on a permanent global ledger.
Your identity is already verified for tax purposes. It's a straight up facilitator.
As a shameless plug, the other reason is savings. We've implemented splitting your paycheck up into multiple accounts to incentivise savings, and it's working really well.
They aren't a storage company, they are a company who facilitates transactions and like any other bitcoin business needs to securely store their btc.
The original comment was about them being similar to a bank which just isn't true at this point, it isn't what their business is about.
I don't get how you see a bank? As a storage company or money that just sits there doing nothing? Or as a company that facilitates transactions not unlike Coinbase?
They're very much like a bank in that regard. And yes they do also put a big focus on storage, it's not their only thing but they have one of the most popular wallets (2 million), claim to hold the most amount of bitcoin for users, more than any other company in the world, have a multi-sig product, have a vault product, have an insurance on their wallets, have mobile wallets, an SMS wallet, a web wallet.
This idea they're not about storing bitcoin (as well as other things) is ridiculous.
Are they a bank? In some ways, sure. Is that bad? No. A bank just offers financial services, and that's awesome.
And if you offer those financial services in a currency that can't be forged by criminals or printed and debased to fund an illegitimate military adventure, on a network that can't be blocked, is open to all, transparent and requires no permission, and offer products like a multi-sig wallet that put 100% of control with the user and 0% control with Coinbase as a choice to the user, that's awesome.
That may be a bank in that they offer financial services, but it's a lot better to me.
That's quite simply wrong; they are the most popular online wallet there is. You simply cannot make this claim, it's patently untrue.
Wrong. There's a reason they call one of their services a "wallet" - because they hold other people's bitcoins. And guess what, they now have a USD wallet too, for storing other people's USD (http://avc.com/2015/01/feature-friday-us-dollar-wallet/)
And as gnaritas said, they are not an exchange, they have a broker service.
The original post was about them being like a bank, which is not true in the context of their business model.
Yet. Like the OP said, "Next up they'll probably offer interest and loans/mortgages". Who knows what else they'll divert their attentions to (hint: it's probably where the money is).
Coinbase seems to be going for the Payment Processor route, now with the USD wallet who knows if they'll offer you a CC just like Xapo. Guess who else offers you CCs?
but usd wallets are definitely something novel (bitstamp also allows you to hold usd, but not for the use cases that coinbase is enabling)
So how do they make money from it? By stealing your assets, like most Bitcoin wallet companies?
Doesn't necessarily imply anything about future bitcoin business models, or even current ones that still fly beneath the mainstream investor radars.
It currently costs $40+ for a comparable fiat service (wire transfers).
[1] https://freedom-to-tinker.com/blog/randomwalker/the-low-tran...
Transferring value in the form of maintaining electronic accounts isn't comparable to wire transfers of fiat where the funds are made available in local currency. Banks don't just track numbers in accounts: providing liquidity and ensuring those numbers actually mean something is not trivial. If bitcoins were globally accepted it would be a more competitive service, but even then there would be the issues of fraud protection and compliance with money laundering legislation that bitcoin doesn't handle well.
It's free for most people in Europe. And fast.
The block size limit is in the process of being changed, but there isn't a rush since blocks are not being filled. If they do get filled, transaction costs will go up and tiny (0.01 USD) micro-transactions won't be viable until the block limit is increased. So the only thing that might happen is transactions of a few cents are temporarily not viable (the transaction cost is larger than the amount sent).
I mean we can argue semantics, but if you want to send $100 from the US to the Philippines, bitcoin is generally a lot faster than your bank, even when you have to buy bitcoin and sell it in the Philippines because of international transactions taking much longer than local ones.
As for capacity, bitcoin's 'Chief Scientist' just wrote a blog post on scalability: http://gavintech.blogspot.de/2015/01/twenty-megabytes-testin...
To make a long story short, thousands of transactions per second (Visa averages about 2k) is certainly possible. I'd be more worried about bitcoin adoption (from an interest/tech/growth point of view) as a limit than technical scalability issues as a limit, especially with things like sidechains. (Look at Blockstream's Sidechains for example as a solution, just got a $21m investment.)
It's generally held that it can scale, whether it can grow and become popular and well used remains to be seen (I think it's likely but it's far from certain).