Bitcoin and the block chain have been getting bad PR lately.
Bad PR is when even your friends turn on you.
Bitcoin ex-friend #1 is Mike Hearn, writing in Medium. He opens with his credentials…
I’ve spent more than 5 years being a Bitcoin developer. The software I’ve written has been used by millions of users, hundreds of developers, and the talks I’ve given have led directly to the creation of several startups. I’ve talked about Bitcoin on Sky TV and BBC News. I have been repeatedly cited by the Economist as a Bitcoin expert and prominent developer. I have explained Bitcoin to the SEC, to bankers and to ordinary people I met at cafes.
… and then, after a short digression, brings out the knife:
But despite knowing that Bitcoin could fail all along, the now inescapable conclusion that it has failed still saddens me greatly. The fundamentals are broken and whatever happens to the price in the short term, the long term trend should probably be downwards. I will no longer be taking part in Bitcoin development and have sold all my coins.
Why has Bitcoin failed? It has failed because the community has failed. What was meant to be a new, decentralised form of money that lacked “systemically important institutions” and “too big to fail” has become something even worse: a system completely controlled by just a handful of people. Worse still, the network is on the brink of technical collapse. The mechanisms that should have prevented this outcome have broken down, and as a result there’s no longer much reason to think Bitcoin can actually be better than the existing financial system.
Think about it. If you had never heard about Bitcoin before, would you care about a payments network that:
- Couldn’t move your existing money
- Had wildly unpredictable fees that were high and rising fast
- Allowed buyers to take back payments they’d made after walking out of shops, by simply pressing a button (if you aren’t aware of this “feature” that’s because Bitcoin was only just changed to allow it)
- Is suffering large backlogs and flaky payments
- … which is controlled by China
- … and in which the companies and people building it were in open civil war?
I’m going to hazard a guess that the answer is no.
Then comes Bitcoin friend #2: Fred Wilson, with Bitcoin is Dead, Long Live Bitcoin. Fred hedges the headline in the text below, which he should since his firm has investments in the category. He also offers some hope, and a call to action:
I personally believe we will see a fork accepted by the mining community at some point this year. And that will come with a new set of core developers and some governance about how decisions are made among that core developer team. But it could well take a massive collapse in the price of Bitcoin, breakdowns in the Bitcoin network, or worse to get there. And all of that could cause the whole house of cards to come crashing down. Anything is possible. Even the return of Satoshi to fix things as an AVC regular suggested to me in an email this morning.
The Bitcoin experiment is six years old. There has been a significant amount of venture capital investment in the Bitcoin ecosystem. There are a number of well funded companies competing to build valuable businesses on top of this technology. We are invested in at least one of them. And the competition between these various companies and their visions has played a part in the stalemate. These companies have a lot to gain or lose if Bitcoin survives or fails. So I expect that there will be some rationality, brought on by capitalist behavior, that will emerge or maybe is already emerging.
Sometimes it takes a crisis to get everyone in a room. That’s how the federal budget has been settled for many years now. And that may be how the blocksize debate gets settled to. So if we are going to have a crisis, let’s get on with it. No better time than the present.
Much tweetage is going on. The best of it, to me at least, involves Vinay Gupta (@Leashless), who does an amazing job of unpacking Bitcoin politics, which seems to be most at issue here. (As Craig Burton (@craigburton) says, “All technical problems are technical and political. And you can always solve the technical stuff.”)
So take a look at this 12-minute video of Vinay holding forth on Bitcoin last August, when at least some of today’s problems were already surfaced. In it he talks about Bitcoin having “anarchist infrastructure producing a libertarian trading environment,” among other wise one- (and few-) liners. Great make-ya-think stuff there.
Bitcoin and the blockchain matter for VRM, because they can both help liberate individual customers (and groups) from the highly centralized systems that have reduced the free market to “your choice of captor.” And, though flawed, they are already in the world. If we are to prove that free customers are better than captive ones, we need systems that break us out of captivity. Bitcoin and the blockchain can do that.
I also want to pause here to express my love for Chris Ellis‘ Protip (@ProtipHQ), which allows anybody to pay whatever they want for anything on the Web, facilitated by a bit of open source code added to a site or service. One click and the cash moves. No intermediators required. No governments. No settlement systems. No credit card cruft. Consider the implications of that.
To solve Bitcoin’s problems (if they can be solved), I believe we need what Brian Behlendorf calls minimum viable centralization. That’s what Fred proposes in his post, and what — in some way or other — we will have at the end of the day. (Or the week, year or decade.)
The best example I know of mimimum viable centralization is Linux, which has a cluster of kernel maintainers at the top. All are benevolent dictators who earned their roles by proven merit. At the top sits Linus Torvalds, who started the whole thing and remains no less involved than he was in the first place. Linux isn’t in everything, but it’s close enough. Consider the implications for Bitcoin/Blockchain and other things like it.
Makes me think maybe it’s time for Satoshi Nakamoto (whoever he or she really is) to step up.
Bonus links:
- Bitcoin’s Bold Experiment: A Goldmine for Economic Researchers, by Michael Casey in Medium (plus the list of related posts below)
- Bitcoin Price Crashes as its Branded a ‘Failed Experiment’, by Anthony Cuthbertson in Newsweek
- Bitcoin has died for the 89th time, by Mario Aguilar in Gizmodo — with HTs to @starkness and 99Bitcoins Obituary Stats
It is important to distinguish BitCoin from BlockChains. BlockChains are a useful technique to give certainty that existing entries in a ledger or list can only be changed if all following entries are changed. That is a clever idea that makes it difficult to rewrite history.
BitCoins use BlockChains but the idea could be implemented (and is implemented) in a variety of ways. Unfortunately the way our regular currency works is similar to BitCoins. The way we create most new money is to guarantee the new money using money we already have. This is the same idea as BitCoin except BitCoin has taken it to its purest form. Most money is now created in the derivatives market which is money backed by assets twice removed. The next big source of money is money created using existing money which is backed by assets.
All this money is built on the creation of money for productive (profit making) purposes. The amount of money created to actually build something that is profit making is today way less than 1%.
The problem is that money created for derivatives is indistinguishable from money created to build a productive asset.
Don’t believe me? Look at the amount of money traded on the stock exchange compared to the amount of money going into new investments. Look at the size of the derivatives market compared to the money market. Look at the amount of money exchanged on foreign exchange markets compared to imports and exports.
The system is the wrong way around. Money exists to enable the creation of assets. The way the system now works is that assets exist to create money.
There is a simple way to make this nightmare go away. We can distinguish between money created for productive purposes and money created where the money is backed by money. We give interest on the first and not on the second. We tax the second and not the first.
An even simpler way is to forget about interest altogether and give more value for the same amount of money invested over a period of time. We call that a discount.
If we did this, and with modern technology, it is a simple process, then money would cease being unreliable and its value would stabilise. (ie no inflation, and no wild swings of currencies, few variations in discount rates, stable interest rates).
Instead of borrowing money to buy a house you rent the house at its market rate. The owner of the house gets more days to rent the longer you rent (the discount rate). The rent comes off the money owed. That is, each time you pay the rent more of the house becomes yours.
What we have done is get rid of interest on interest or the ability to create money from more money.
This process means that both buyers and sellers get more value because less is wasted in unnecessary friction. The amount is considerable. Typically over a thirty year period for house it either doubles the value received for the property or halves the cost of buying the house. Or it could be some other variation such as 50% more for the house and 50% less to purchase.
Where does this extra money go? It goes to the unproductive FIRE section of the economy (Finance, Insurance, Real Estate). All of these are transfers of value. It is estimated that this about doubles the real cost of transferring value. (ie doing business).
Good one, Kevin. I’m copying and pasting it here to respond point by point.
It is important to distinguish BitCoin from BlockChains.
Agreed. I mostly mentioned Block Chain to keep the topic in the loop.
BlockChains are a useful technique to give certainty that existing entries in a ledger or list can only be changed if all following entries are changed. That is a clever idea that makes it difficult to rewrite history.
That’s a good summary of something good the blockchain does. It does have issues, however, such as the distributed ledger that only grows larger.
BitCoins use BlockChains but the idea could be implemented (and is implemented) in a variety of ways.
This is where I’d like to see a discussion of those other ways blockchains can be used. But this is a post about Bitcoin, and you’re running with that here:
Unfortunately the way our regular currency works is similar to BitCoins. The way we create most new money is to guarantee the new money using money we already have. This is the same idea as BitCoin except BitCoin has taken it to its purest form.
Interesting. I’d like to see that unpacked too. But maybe not here, because you’re making another important point:
Most money is now created in the derivatives market which is money backed by assets twice removed. The next big source of money is money created using existing money which is backed by assets.
… which is usually “money we already have.”
All this money is built on the creation of money for productive (profit making) purposes. The amount of money created to actually build something that is profit making is today way less than 1%.
Got a source for that? I’m sure it’s true, but I’d like to see a link here.
The problem is that money created for derivatives is indistinguishable from money created to build a productive asset.
Really important point.
Don’t believe me? Look at the amount of money traded on the stock exchange compared to the amount of money going into new investments. Look at the size of the derivatives market compared to the money market. Look at the amount of money exchanged on foreign exchange markets compared to imports and exports.
Again, I’d like to see numbers. This also cries out for visualzation. (I’m sure it already exists somewhere, but hey, I’m asking again.)
The system is the wrong way around. Money exists to enable the creation of assets. The way the system now works is that assets exist to create money.
I think money exists for more reasons than that, but I get the point.
There is a simple way to make this nightmare go away. We can distinguish between money created for productive purposes and money created where the money is backed by money. We give interest on the first and not on the second. We tax the second and not the first.
Has anybody with serious influence proposed this? I know it’s politically difficult or impossible because too much money is made from money alone, and too much of the world’s economy is tied up in that. But it makes sense to me.
An even simpler way is to forget about interest altogether and give more value for the same amount of money invested over a period of time. We call that a discount.
If we did this, and with modern technology, it is a simple process, then money would cease being unreliable and its value would stabilise. (ie no inflation, and no wild swings of currencies, few variations in discount rates, stable interest rates).
Instead of borrowing money to buy a house you rent the house at its market rate. The owner of the house gets more days to rent the longer you rent (the discount rate). The rent comes off the money owed. That is, each time you pay the rent more of the house becomes yours.
I know you’ve explained this in more detail elsewhere. Care go point to that — or those?
What we have done is get rid of interest on interest or the ability to create money from more money.
I think that’s a long shot. But I do think distinguishing between “money created for productive purposes” and “money made by money” is a good place to start fixing an economy that has become financialized at too many other costs.
This process means that both buyers and sellers get more value because less is wasted in unnecessary friction. The amount is considerable. Typically over a thirty year period for house it either doubles the value received for the property or halves the cost of buying the house. Or it could be some other variation such as 50% more for the house and 50% less to purchase.
Where does this extra money go? It goes to the unproductive FIRE section of the economy (Finance, Insurance, Real Estate). All of these are transfers of value. It is estimated that this about doubles the real cost of transferring value. (ie doing business).
Not sure I follow there, but that’s me. All this stuff is a bit over my head, I hate to admit. But I keep learning…
Doc
We can fix the monetary system by individuals getting autonomy and control over their own information. The information, that we call money, is a promise to repay money received. We as individuals can issue our own money. We can do this just as well as a bank or the government or a company by working together in a mutual cooperative. This is why VRM, Promise Theory, Mutual Cooperative organisations are important. We have the technology and the means to make it happen. (The original Visa Corporation was a for profit Mutual – but the only members were banks. Visa would not have fallen into private hands if merchants and individuals were members. The finance industry might have been very different if Visa worked for individuals as well as the banks).
Here is a visualisation of money
http://money.visualcapitalist.com/all-of-the-worlds-money-and-markets-in-one-visualization/
A graph of USA government debt from Thomas Greco’s blog.
https://beyondmoney.files.wordpress.com/2015/10/usdebtdeficits.jpg
This is important because almost all countries have the same shape graph. (including China)
A graphic on USA perceptions of economic security (towards the end of the article) http://www.publicbankinginstitute.org/this_graphic_shows_disturbing_levels_of_economic_insecurity
Lots of graphs many showing the distribution of wealth and income at
https://rwer.wordpress.com/
Margrit Kennedy is a critic of the FIRE industries.
http://www.margritkennedy.com/
Some of her sayings.
Instead of paying interest to those who have more money than they need and in order to keep money in circulation, people should pay a small fee if they keep the money out of circulation.
In the new money system we abolish interest and inflation, thereby reducing the prices of all goods and services as well as taxes by about 40%.
The monetary system we have inherited is more than 2,000 years old.
Women overwhelmingly carry the load of the economic chaos and social misery caused by the present money system everywhere in the world.
Social justice, ecological survival and freedom are threatened where we allow the proliferation of societal structures which in themselves tend to work against these goals.
Michael Hudson is one of the best known economists to critique the system.
https://en.wikipedia.org/wiki/Michael_Hudson_(economist)
His book The Bubble and Beyond,[21] (2012) explains how a corrosive bubble economy is replacing industrial capitalism, via debt-financed, asset price inflation. Hudson says this intended to increase balance-sheet net worth, benefiting a select few while spreading risk among the general population.
Here is a short description of the way we can create money by prepaying taxes to build infrastructure and get at least twice as much money for infrastructure as we would if we use traditional debt. The spreadsheets to support this are simple to produce and understand. I can supply them if requested. http://kevinrosscox.me/2015/11/30/removing-government-external-debt/ (I have many others along the same lines in the blog)
Here is a scientist’s description of token money
https://stableproductivemoney.wordpress.com/2009/03/18/properties-of-token-money/
The Public Banking movement in the USA is an attempt to take the creation of money away from private hands and into cooperative public banks.
http://www.publicbankinginstitute.org/
The American Monetary Institute has been recommending reform of the monetary system for many years. They say all new money should be created by the government.
http://www.monetary.org/
Bernard Lietaer has been working on money and how to fix it for a long time.
http://www.lietaer.com/
Thomas Greco biography gives many sources and much information about local currencies that attempt to solve the problem from the bottom up. https://en.wikipedia.org/wiki/Thomas_H._Greco,_Jr.
Here is a critique of the FIRE industries. The Henry George movement of social credit has similar ideas.
http://www.wealthandwant.com/themes/FIRE.html