Bitcoin – P2P Foundation

Bitcoin

a fresh open source P2P e-cash system, originally developed by Satoshi Nakamoto

Significant January two thousand sixteen status update: Why has bitcoin failed? By Mike Hearn, leading developer.

Contents

Definition

“Bitcoin is an open source peer-to-peer electronic cash system developed by Satoshi Nakamoto. The system is decentralized with no central server or trusted parties. Bitcoin relies on cryptographic principles to create unique, unreproducible, and divisible tokens of value. Users hold the cryptographic keys to their own money and transact directly with each other, with the help of the network to check for double-spending.” (http://en.wikipedia.org/wiki/Bitcoin)

“Bitcoin bills itself as “the very first digital currency that is totally distributed.” In essence, that means that it’s managed collectively by a global network of users, so no bank or payment processor is required inbetween buyers and sellers in any transaction. Users begin with Bitcoin by downloading its client program for Linux, Mac or Windows, thereby creating a digital wallet and associated Bitcoin address for themselves. Next, very puny quantities of Bitcoins are available for free from the Bitcoin faucet, but to get larger ones, users can visit various currency exchanges and sites. They can also accept Bitcoins as payments for goods and services. Either way, once they have Bitcoins — abbreviated “BTC” — users can spend them at various participating online merchants for a broad multitude of goods and services. It’s free for merchants to accept Bitcoins, and there are no chargebacks or fees. Presently, there is no charge for processing Bitcoin transactions, but eventually a puny fee of about one bitcent will be charged every transaction to one of many challenging Bitcoin “miners,” who create Bitcoins in a managed way by running a dedicated program.” (http://www.springwise.com/financial_services/bitcoin/)

Description

“It’s entirely decentralized, with no central server or trusted parties, because everything is based on crypto proof instead of trust.

The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is utter of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in flaps of credit bubbles with scarcely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micropayments unlikely.

A generation ago, multi-user time-sharing computer systems had a similar problem. Before strong encryption, users had to rely on password protection to secure their files, placing trust in the system administrator to keep their information private. Privacy could always be overridden by the admin based on his judgment call weighing the principle of privacy against other concerns, or at the behest of his superiors. Then strong encryption became available to the masses, and trust was no longer required. Data could be secured in a way that was physically unlikely for others to access, no matter for what reason, no matter how good the excuse, no matter what.

It’s time we had the same thing for money. With e-currency based on cryptographic proof, without the need to trust a third party middleman, money can be secure and transactions effortless.

One of the fundamental building blocks for such a system is digital signatures. A digital coin contains the public key of its possessor. To transfer it, the possessor signs the coin together with the public key of the next proprietor. Anyone can check the signatures to verify the chain of ownership. It works well to secure ownership, but leaves one big problem unsolved: double-spending. Any holder could attempt to re-spend an already spent coin by signing it again to another possessor. The usual solution is for a trusted company with a central database to check for double-spending, but that just gets back to the trust model. In its central position, the company can override the users, and the fees needed to support the company make micropayments impractical.

Bitcoin’s solution is to use a peer-to-peer network to check for double-spending. In a nutshell, the network works like a distributed timestamp server, stamping the very first transaction to spend a coin. It takes advantage of the nature of information being effortless to spread but hard to stifle. For details on how it works, see the design paper here at http://www.bitcoin.org/bitcoin.pdf.

The result is a distributed system with no single point of failure. Users hold the crypto keys to their own money and transact directly with each other, with the help of the P2P network to check for double-spending.”

Bitcoin is an open source peer-to-peer (a.k.a “p2p”) electronic cash system that’s downright decentralised, with no central server, trusted authorities or middle boys. The availability of bitcoins can’t be manipulated by governments or financial institutions. Bitcoin already has a number of exchanges for converting to and from other currencies; BitcoinFX, Fresh Liberty Standard, Bitcoin Exchange and Bitcoin Market.

Bitcoin may last for years and become a popular global currency, or it could be just a flash in the pan, but either way I think this is an significant sign of the times to come. This is one of the very first truly decentralised currencies and has paved the way for hundreds more to rival together in the fresh arena of Cipherspace over the coming years. This is one of the key factors in the transition of global society into the post-nation-state economy talked about in The Sovereign Individual.

In a p2p computer network there are no servers, the entire network is composed of users running instances of the application on their computers. Each running example offers a petite amount of processing and storage resource to the network so that it can produce the services it was designed for such as redundant storage, anonymity or voice-over-IP applications.

In the case of a p2p currency system, some of the services the network is designed to suggest are privacy, verification, authentication, currency creation and transfer of ownership. To ensure a reliable and tamper-proof system requires a lot of resource, and that amount is proportional to the amount of coins in the network. The network is able to pay the users for the resource they suggest by making the coin-creation process part of the network protocol itself instead of being treated by a central trusted authority. This creates a natural and incorruptible link inbetween the supply of currency in the network and the request for it.

Even aside from the capability to exchange bitcoins for other currencies, it still makes a very useful instrument for independent organisations and groups because it permits them to trade and lodge accounts amongst themselves independently and privately. It effectively gives them a “bank” that has a trustworthy system of accounts that can’t be tampered with and requires no corruptible central authority to operate. See the Bitcoin Whitepaper for more detail about how it works.

To attempt Bitcoin, download the Bitcoin software, then once it’s running, click ‘Generate Coins’ which will pay you bitcoins in exchange for your computer working to validate bitcoin transactions. Check the exchange rate to calculate how many bitcoins need to be sent. The payer can purchase extra bitcoins if needed. The payer’s previously generated bitcoins permit for a lower out of pocket payment. The payer then sends the bitcoins to the receiver using the Bitcoin software. The receiver can then sell their bitcoins for dollars. The receiver’s previously generated bitcoins permit a higher dollar payout.” (source?)

How does Bitcoin work

A. Bitcoin is a peer-to-peer currency. Peer-to-peer means that no central authority issues fresh money or tracks transactions. These tasks are managed collectively by the network.

Q. How does Bitcoin work?

A. Bitcoin utilises public-key cryptography. A coin contains the possessor’s public key. When a coin is transferred from user A to user B, A adds B’s public key to the coin, and the coin is signed using A’s private key. B now wields the coin and can transfer it further. A is prevented from transferring the already spent coin to other users because a public list of all previous transactions is collectively maintained by the network. Before each transaction the coin’s validity will be checked.” (https://en.bitcoin.it/wiki/Main_Page)

Two. IEEE Spectrum’s By Morgen E. Peck:

“The simplest way to understand Bitcoin is to think of it as a digital ledger book. Imagine a bunch of people at a table who all have real-time access to the same financial ledger on laptops in front of them. The ledger records how many bitcoins each person at the table has at a given time. By necessity, the balance of each account is public information, and if one person wants to transfer funds to the person sitting across from him, he has to announce that transaction to everyone at the table. The entire group then appends the transaction to the ledger, which they all need to agree on. In a system like this, money never has to exist in a physical form, and yet it can’t be spent twice.

This is basically how Bitcoin works, except that the participants are spread across a global peer-to-peer network, and all transactions take place inbetween addresses on the network rather than individuals. Address ownership is verified through public-key cryptography, without exposing who the proprietor is.

The system turns traditional banking privacy on its head: All transactions are made in public, but they’re difficult to link up with a human identity. Maintaining the dissociation takes vigilance on the part of the Bitcoin user and careful decisions about which outside applications and exchange methods to use, but it can be done. “Anonymity is typically compromised by means outside of Bitcoin’s control, in other words,” says Jeff Garzik, who is on the team of programmers now responsible for developing the Bitcoin software. Bitcoin is often described as providing pseudoanonymity, by creating enough obfuscation to provide users with plausible deniability.

People who own bitcoins have a program—called the Bitcoin client—installed on their computers to manage their accounts. When they want to access their funds, they use the client to send a transaction request. The innovation of Bitcoin is to use the processing of these transaction requests as the mechanism for creating fresh currency.

As requests pile up in the system, individual computers, running “mining” programs, bundle them into chunks called transaction blocks. Before each block of transactions becomes part of the accepted Bitcoin ledger, or block chain, the mining software must convert the data using cryptographic hash equations. The Bitcoin client accepts the resulting hash values only if they meet rigorous criteria, so miners typically need to compute many hash values before stumbling upon one that meets the requirements. That process costs a lot of computing power—so much that it would be prohibitively difficult for anyone to come along and redo the work. Each fresh block that gets added and sealed strengthens all the previous blocks on the chain.

The “miner” whose computer very first finds an acceptable hash value is rewarded with freshly minted bitcoins. The Bitcoin system adjusts the difficulty of the hashing requirements to control the minting rate. To its proponents, this is one of Bitcoin’s fattest attractions: Unlike the printing of “fiat” currency, which can be done on request, the creation of Bitcoins will step by step taper until it reaches a limit of twenty one million coins.

As more and more miners rival to process transactions, mining requires more computing power. Brock Tice, who mines bitcoins in St. Paul, Minn., has a entire room jammed utter of enough mining computers to warmth his office in the winter. But Tice very first became interested in the network for a different reason. He thought it would be a better way to accept money from customers online.” (http://spectrum.ieee.org/computing/software/bitcoin-the-cryptoanarchists-answer-to-cash/Trio)

Three. Data-driven intelligence by Michael Nielsen:

“It may seem surprising that Bitcoin’s basis is cryptography. Isn’t Bitcoin a currency, not a way of sending secret messages? In fact, the problems Bitcoin needs to solve are largely about securing transactions — making sure people can’t steal from one another, or impersonate one another, and so on. In the world of atoms we achieve security with devices such as locks, safes, signatures, and bank vaults. In the world of bits we achieve this kind of security with cryptography. And that’s why Bitcoin is at heart a cryptographic protocol.” (http://www.michaelnielsen.org/ddi/how-the-bitcoin-protocol-actually-works/)

Details

“The total number of bitcoins is programmed to treatment twenty one million over time. The money supply is programmed to grow as a geometric series every 210,000 blocks (harshly every four years); by two thousand thirteen half of the total supply will have been generated, and by 2017, Three/Four will have been generated. To ensure sufficient granularity of the money supply, bitcoins are divisible down to eight decimal places (a total of Two.1 × 10^15 or Two.1 quadrillion units).” (http://en.wikipedia.org/wiki/Bitcoin#Monetary_differences)

Note: the eight decimal places are only an artifact of the datatype used in current implementations. Should the need ever arise, this can be switched in the code. [1]

Context

Rainey Reitman (EFF):

“To understand digital currency, one must very first note that money in the digital age has moved from a largely anonymous system to one increasingly laden with tracking, control and regulatory overhead. Our cold hard cash is now shepherded through a series of regulated financial institutions like banks, credit unions and lenders. Bitcoin, created in two thousand nine by Satoshi Nakamoto, is a peer-to-peer digital currency system that endeavors to re-establish both privacy and autonomy by avoiding the banking and government middlemen. The purpose is to permit individuals and merchants to generate and exchange modern money directly. Once the Bitcoin software has been downloaded, a user can store Bitcoins and exchange them directly with other users or merchants — without the currency being verified by a third party such as a bank or government. It uses a unique system to prevent multiple-spending of each coin, which makes it an interesting development in the movement toward digital cash systems.

The model proposed by Bitcoin is in many ways a response to some of the privacy and autonomy concerns surrounding our current financial system. Current money systems now increasingly come with monitoring of financial transactions and blocking of financial anonymity. A peer-to-peer currency could theoretically suggest an alternative to the bank practices that increasingly include sharing information on their customers who don’t actively opt-out, and who may even then be able to share data with affiliates and joint marketers. Bitcoin is particularly interesting in the wake of latest events that demonstrated how financial institutions can make political decisions in whom they service, showcased by the decisions of PayPal, Visa, Mastercard and Bank of America to cut off services to Wikileaks. Bitcoin, if it were to live up to the fantasies of its creators, might suggest the kind of anonymity and freedom in the digital environment we associate with cash used in the offline world.

But Bitcoin’s current implementation won’t resolve all of the issues surrounding autonomy and privacy. Notably, the anonymity on Bitcoin is not entirely secure at this time, which makes its merits as a more private form of currency tenuous at best. There are also other weaknesses to the system, some significant, which should be understood before using Bitcoin. And as of this writing, Bitcoin can’t be used to donate to Wikileaks. But even more significant than these concerns is the fact that governments around the world may raise legal issues with any digital cash scheme — ranging from money laundering to tax evasion to a range of other regulatory concerns. Nonetheless, Bitcoin is an intriguing project and worth watching to see how it develops in the coming years.” (https://www.eff.org/deeplinks/2011/01/bitcoin-step-toward-censorship-resistant)

Characteristics

Bitcoin’s problematic deflationary design

“The Bitcoin system has what emerges to be a built-in deflationary architecture.

When the Federal Reserve System was created, it was charged with providing the US with an “elastic currency”. That means that the quantity of Fed-issued dollars in circulation is supposed to vary in response to the switching dynamics and needs of the real economy. The Fed is expected to monitor economic activity, and conduct a monetary policy that provides us with a stable but nimble medium of exchange.

Bitcoin, by contrast, is much more rigidly designed so that fresh bitcoins are introduced into the system at a mathematically predictable rate that is almost entirely independent of any economic activity for which bitcoins might be used. Fresh bitcoin production is supposed to take place at an exponentially decreasing rate so that production decreases by about 50% every four years. As a result, the number of bitcoins in existence will effectively flatten out at twenty one million in about two thousand forty – if anybody is still using the Bitcoin system by then. But long before two thousand forty the rate of bitcoin growth will slow very dramatically.

The Bitcoin system therefore possesses a hard-coded and enormously rigid monetary policy determined by the software itself, software which lives on the computers of everyone who is participating in that system. Now, you could say this means Bitcoin’s monetary policy is decentralized. That’s certainly how Bitcoin enthusiasts tend to describe it. But another way of looking at it is that it is that Bitcoin’s monetary policy is very centralized in the persons of the people who wrote the Bitcoin code, and who established a weirdly inflexible Bitcoin monetary policy regime in advance – determined for all time.

Now what does this mean for the future value of Bitcoin as a medium of exchange? That all depends on whether the Bitcoin economy – the universe of producers of goods and services who accept bitcoins in payment – resumes to grow, or instead lodges into a petite and unchanging niche economy for a limited number of enthusiasts. But suppose as a thought experiment that the Bitcoin economy resumes to grow, and that the volume of goods bought and sold with bitcoins resumes to increase, as the rate of bitcoin creation very first slows and then flattens. Then one of two extremes might occur: either (i) prices in bitcoins remain stable as the rate of bitcoin transactions increase, or (ii) the rate of transactions stays toughly the same, but bitcoin prices fall as the finite quantity of bitcoins is spread over more and more transactions. Since the tempo of transactions depends on real-world constraints on production and consumption, the effect that is likely to be the superior one is that prices will fall. In other words, there will be a deflationary spiral in the Bitcoin economy. This makes Bitcoin a poor long-term candidate for a stable, alternative medium of exchange.

Deflation might emerge to be an attractive thing at very first look. Wouldn’t it be nice for our money to appreciate in value as the prices for goods and services continually fall? But economists associate deflation with two negative phenomena: Very first, if prices are falling then the incentive to hoard the currency increases, since anybody who possesses that currency is eyeing its value increase each day. Thus, the currency itself becomes an appreciating investment vehicle for its possessor, so long as it isn’t spent. Hoarding by an individual agent is no big deal, but it is clearly bad news for the economy when hoarding is widespread, since if people stop buying things, then producers stop producing things and stop paying workers to produce things. That’s one reason why downturns are often associated with deflation, and growth is usually associated with modest inflation.

The other problem with deflation is that contracts and debts are usually motionless in nominal terms, and so deflation makes debt more onerous. Imagine an office worker, Sal, with a $50,000 annual salary and a $200,000 debt, such as a mortgage debt. Now suppose there is a general deflation, and both consumer prices and wages drop 20% over some period of time. Sal’s wages fall to $40,000. Sal’s capability to buy groceries is unaffected since grocery prices have also fallen by 20%, but the $200,000 debt is now worth five times Sal’s annual salary rather than four times the salary, and has become much more burdensome. If the deflation resumes, Sal will be wiped out. But before that happens, Sal’s creditor makes out handsomely as the real value of Sal’s monthly payments increases.

Bitcoins are infinitely divisible, so while there is an ultimate cap on the quantity of bitcoins, there is no lower limit on Bitcoin denominations: there is no Bitcoin “penny” that can’t be subdivided further. So Bitcoin’s designers seem to have built these deflationary prospects into the system as a feature, not a bug. And here we must look at another nosey feature of the Bitcoin system, the feature its developers determined to call “mining”. As we have noted, Bitcoin has a built-in mechanism for adding fresh bitcoins to the system at a decreasing geometric rate. But note that fresh bitcoins are not simply sprinkled evenly among all bitcoin users when they are added to the system. They are awarded to “miners” – in practice, people who have substantial computing power and computing speed at their disposition – in exchange for those miners using some of their computer power to win online races to authenticate fresh blocks of bitcoin transactions.

So you can see why you would very much like to be a miner in a thriving Bitcoin economy and why early adopters of Bitcoin are so fanatical about keeping the system going. Those who manage to accumulate bitcoins in the earlier stages when the rhythm of bitcoin creation is high, could profit handsomely when the deflationary phase kicks in. These miners would, if the world-conquering desires of the Bitcoiners ever came to pass, be something like the descendants of medieval vassals who acquired some poor land from their lords in an early era when there was still much land to be claimed and lodged, and who then became fabulously wealthy over time by suspending onto their holdings as the finite stock of land was all brought into private holder ship and production while the population continued to increase.

So it looks to me like the developers of Bitcoin were thinking like this: “Mining system + deflationary architecture = we’re rich. ” (http://neweconomicperspectives.org/2013/04/talking-bitcoin.html)

Bitcoin is not Anonymous

Jeff Garzik notes:

If you visit the bitcoin wiki page on anonymity [Two]], the very first sentence is

While the Bitcoin technology can support[link] strong anonymity, the current implementation is usually not very anonymous.

With bitcoin, every transaction is written to a globally public log, and the lineage of each coin is fully traceable from transaction to transaction. Thus, /transaction flow/ is lightly visible to well-known network analysis technics, already employed in the field by FBI/NSA/CIA/etc. to detect suspicious money flows and “chatter.” With Gavin, bitcoin lead developer, speaking at a CIA conference this month, it is not a open up to surmise that the CIA likely already classifies bitcoin as open source intelligence (no pun intended).

Further, if Silk Road truly permits deposits on their site, that makes it even lighter for law enforcement to locate the “hub” of transactions.

Attempting major illicit transactions with bitcoin, given existing statistical analysis technics deployed in the field by law enforcement, is pretty damned dumb.” (private email, cited [Trio])

A ‘Commons Aspect’: Triple Accounting and the Verification by the entire network of peers

“The most remarkable innovation brought by Bitcoin deals with the system of accounting that we use today.

Double-entry bookkeeping is what we use today to make sure that earnings and expenditures match, basically authenticating the flow of money and making sure “nothing is duplicated”.

From an historical perspective, the double-entry bookkeeping system is very ancient and scarcely actualised through the ages: it was described by an Italian mathematician and Franciscan friar named Luca Pacioli in his book “Summa de arithmetica, geometria, proportioni et proportionalità” published in one thousand four hundred ninety four in Venice.

The 2nd half of his book, dedicated to geometry, is a section titled “Trattato de computi e delle scritture” in which he describes the necessity of mathematics in accountancy. Those principles were certainly not invented by Pacioli, but mostly actualised, formalised and translated in his tractatus, as demonstrated by the existence of a previous book “Della mercatura e del mercante perfetto” by Benedikt Kotruljević published in Latin some decades before, or as hinted by the presence of another figure behind his portrait in the famous painting attributed to Jacopo de’ Barbari who is believed to be Albrecht Dürer, an artist and traveler who collective Pacioli’s passion for geometry and magic.

Such a system is still, as of today and despite its flaws, the one in use on large scale around the world by most accountancy systems. Being a system that ensures the univoque matching of what is written with what is real, it can be seen as gateway to the digital dimension and can undoubtedly benefit from the technical innovation through digital contraptions. Hence my argument that Bitcoin is basically this innovation or, more precisely, the implementation of an innovation as the triple-signed receipt method.

Quoting Ian Grigg:

– The digitally signed receipt, with the entire authorisation for a transaction, represents a dramatic challenge to dual entry bookkeeping at least at the conceptual level. The cryptographic invention of the digital signature gives powerful evidentiary force to the receipt, and in practice reduces the accounting problem to one of the receipt’s presence or its absence. This problem is solved by sharing the Dyne.org Digital Press – seven – six April 2013Bitcoin, the end of the Taboo on Money D.J. Roio records – each of the agents has a good copy. In some rigorous sense of relational database theory, dual entry book keeping is now redundant.

The accounting system of triple-signed receipts in Bitcoin respects the original role of money as contract (and digitized speech, I’d argue).

Quoting Marco Sachy’s research on complementary and alternative currency:

– The ontology of money is as relational, abstract and cogent as agreements are in general and the possibilities to formulate these agreements are unimaginable, bearing in mind that the orthodox process of currency design and creation is – drawing from Adorno and Horkheimer’s Dialectic of the Enlightenment – an arbitrary and historically determined one.

It is the very substance of those cogent agreements that money represents and can be verified by matching declarations on two books or, as Bitcoin does, calling the entire network of participating peers to witness every contract and entangling it into a cryptographic blockchain. Simply put, this is bookkeeping in the age of Bitcoin.” (http://jaromil.dyne.org/writings-files/Bitcoin_end_of_taboo_on_money.pdf)

Governance

Bitcoin is not decentralized

“”Why would I call a “decentralized” system like bitcoin centralized? Because it is taken out of the mitts of participants and relegated to an elite, privileged class of algorithm designers or large-scale miners for the determining rules, creating the money supply, approving transactions, and managing records. ” ([Four])

“Brief version: the concentration in mining is a consequence of the architectural features that were strapped to de facto re-centralize the platform. There is one and only one Bitcoin core codebase that all miners use, and one and only one blockchain, albeit there are many replicas of the same blockchain. And the increasingly difficult proof of work was made to order for ASICs, expensive hardware chips that are designed specifically to solve them. (Thus the mining concentration.)” [Five]

“A lot of blockchain developers are working on remedies to some of the re-centralizing architectural features: for example, side chains, ASIC-unfriendly alternatives to proof of work, and some attempts at interoperability inbetween different blockchains. Here’s an example of that kind of discussion in an analysis of Ethereum from LeastAuthority, the group behind Zcash, where Vitalik Buterin of Ethereum is one of their advisors: [6]

So people in the know are aware of these problems. They are actively working on them. But often not on Bitcoin.

By the way, I think the Bitcoin design was brilliant, and the architectural features that led to re-centralization may be necessary for a global digital currency. I’m not sure they foresaw the re-centralization, tho’. But lotsa people did. I am just picking up on their analyses.” (google plus, february 2016)

“There is much confusion in the cryptocurrency discourse about the decentralisation of money and payments. All cryptocurrencies are built on a singleton ledger which is distributed across many machines. Thus the data is distributed but the ledger itself could still be seen as a point of centralisation, as is a single currency, even if there are many copies of the ledger in a distributed data architecture. Advocates of economic and financial decentralisation are very pleased to have witnessed the arrival of blockchain technologies, but cannot feast all the concentrate on a single currency with a single issuance policy (or algorithm) on a singleton ledger. ” ([7])

“A Call for Decentralized Governance”: On the Lack of Democracy in Bitcoin

“Since Hearns post mid january, the Bitcoin price has more or less recovered and an avalanche of advocacies in defense of Bitcoin’s future has rained upon the blogosphere, sounding at least as persuading as Mike Hearn himself. Seems like Bitcoin isn’t dead yet, and as the telling goes: Those proclaimed dead live the longest. However, one crucial point remains standing without a doubt – The Bitcoin community suffers from serious communication issues and lack of maneuverability to say the least.

One of the most influential centers of power in the Bitcoinsphere is the Bitcoin Core Project, which essentially develops the software protocol that operates miners and enables Bitcoin wallets to communicate and exchange value.

Bitcoin Core is not an incorporated entity of any kind. It’s an opensource project that in theory permits for the participation of anyone who’s interested and capable of contributing to it, but since it loves a sort of monopoly position, originating in the need of the Bitcoin network to be synchronized with itself, this principle of permissionless participation stays very much in the sphere of mere theoreticality, or as Hearn phrases it –

“[…] Bitcoin Core is an open source project, not a company. Once the five developers with commit access to the code had been chosen […] there was no procedure in place to ever liquidate one. And there was no interview or screening process to ensure they actually agreed with the project’s goals.” Now, let us make one thing clear – Bitcoin being a decentralized entity, running on forkable open-source software and operating without corporate structures is obviously a feature, not a bug. This is exactly why anyone was interested in it in the very first place. If that wasn’t the case most of us would have sent it to hell a long time ago. But there’s one crucial point that’s being missed all to often: Decentralization doesn’t mean lack of governance, neither does it mean that everyone has to agree with everyone else in order to get things done, nor does it imply that centralized special interest groups have their way in buying staggering influence through brute and unintelligent market mechanisms. If anything, decentralization aims to achieve the accomplish opposite of all these.

Decentralization simply means building mechanisms which permit for a group of peers to efficiently arrive at decisions without having to rely on immobilized hierarchies, central coordination and single points of failure. This, obviously, can’t be achieved by merely pretending that they’re abolished or irrelevant to begin with, but rather by developing contraptions which make them obsolete. Bitcoin Core and various other groups which together could be called the “Bitcoin establishment” lack most, if not all of these devices. Hence the civil war and stagnation we’re witnessing.

In an attempt to deal with this situation, Hearn and his colleges from BitcoinXT proposed to permit Bitcoin miners to vote on the controversial blocksize, a proposition perceived as outright heresy among many leading figures in the Bitcoin scene, or as Hearn cites the admins at bitcoin.org:

– “One of the superb things about Bitcoin is its lack of democracy”’

Could BitcoinXT have prevented or solved the Bitcoin crisis? Maybe. It could have made things worse as well. A lot of brilliant minds differ on this point and the argument won’t be lodged here, anyways that’s entirely beside the point. Even if miners were permitted to vote on a specific update with their hashpower, the governing institutions of the bitcoin community themselves lack any kind of truly efficient decentralized apparatus that would permit for further managing the system and improving it, not to speak of a decent compensation scheme to encourage large scale participation in such an improvement and governance process.

The irony of this situation should scream sky high, since it was Bitcoin itself that introduced the Proof of Work algorithm in order to tackle a very similar problem: The PoW protocol permits the Bitcoin network to reach consensus regarding the contribution of each knot in the system to the authentication process needed to verify transactions. The moment such a consensus is reached, contributors are rewarded with freshly minted Bitcoins.

The PoW model restricts itself to an algorithmically quantifiable and verifiable activity, e.i how much computing resources you’re investing into the network, other value creating deeds – like suggesting improvements to the system, writing code, creating software updates or anything their like, which geniune people have to do, are entirely of the scope. Bitcoin knows how to create and distribute value in a decentralized style, as long as no dirty humans with opinions are involved.

There’s another major problem with the Proof of Work scheme, especially if one would use it to determine the future of the entire system the way Hearn and his colleges from Bitcoin XT suggested (Voting with hash power to determine on the blocksize): Computing resources are a tradable commodity. Everyone with enough resources is capable of centralizing the entire system under his dominion, both in terms of the revenue stream created through mining, and in determining how the system behaves, given voting with hashpower would become a thing. This is most likely the reason why some consider Bitcoins “Lack of democracy” being such a fine trait.

In the early days, many were appalled that some financial interest group like the Fed or some other statist syndicate, consisting of cigar smoking man in black, might bring Bitcoin down in exactly this way. Fortunately, that didn’t happen. You only have a hashpower triopol generating about ⅔ of the network’s total hashrate, most of which resides in the People’s Republic of China, behind a stasi-type firewall, making the system badly slow.

There are alternatives to PoW, like “Proof of Stake”, where the amount of minable blocks is restricted to the amount of Bitcoins a miner holds. This would make it very costly to establish a monopoly position, but would officially transfer the ownership of the network to the 1% Bitcoin oligopoly, which presently holds about 99% of the entire Bitcoin supply (sounds familiar?).

So it seems that all of these schemes do a very good job in decentralizing the technical contribution needed to keep the network up and running, but have very little to do with making decisions, improvements and progress. However, it should be self evident that every system that involves genuine people, as automated and well designed as it very first may emerge to be, will at some point require adjustments, all of which will most most likely necessitate decisions, have consequences for various interest groups and be subject to criticism. All these decisions and adjustments do not only require means to form an informed conesus, they also require a compensation mechanism that encourages improvement and gains the attention of very skilled professionals – and above all – a sybil proof scheme to keep the system truly decentralized.

But is that even possible? Could we play the same trick, PoW plays on computing power, on human contributions to an evolving organisation? Including assessment of value, establishment of consensus and compensation via cryptocurrency?

At Backfeed we believe that the response to this question is yes, and we’ve developed exactly such a mechanism, which not by accident goes under the name Proof of Value, or PoV, ” (http://magazine.backfeed.cc/the-bitcoin-debacle-making-the-case-for-decentralized-governance/)

History

“Nakamoto himself mined the very first fifty bitcoins—which came to be called the genesis block—on January Trio, 2009. For a year or so, his creation remained the province of a lil’ group of early adopters. But leisurely, word of bitcoin spread beyond the insular world of cryptography. It has won accolades from some of digital currency’s greatest minds. Wei Dai, inventor of b-money, calls it “very significant”; Nick Szabo, who created bit gold, hails bitcoin as “a superb contribution to the world”; and Hal Finney, the eminent cryptographer behind RPOW, says it’s “potentially world-changing.” The Electronic Frontier Foundation, an advocate for digital privacy, eventually commenced accepting donations in the alternative currency.

The petite band of early bitcoiners all collective the communitarian spirit of an open source software project. Gavin Andresen, a coder in Fresh England, bought Ten,000 bitcoins for $50 and created a site called the Bitcoin Faucet, where he gave them away for the hell of it. Laszlo Hanyecz, a Florida programmer, conducted what bitcoiners think of as the very first real-world bitcoin transaction, paying Ten,000 bitcoins to get two pizzas delivered from Papa John’s. (He sent the bitcoins to a volunteer in England, who then called in a credit card order transatlantically.) A farmer in Massachusetts named David Forster began accepting bitcoins as payment for alpaca socks.” (http://www.wired.com/magazine/2011/11/mf_bitcoin/all/1)

Prehistory: the wish of anonymous digital currencies

By Morgen E. Peck:

“The desire of an anonymous, independent digital currency—one where privacy is maintained for buyers and sellers—long predates Bitcoin. Despite obituaries in magazine articles from Forbes, Wired, and The Atlantic, the desire is far from dead.

The pursuit of an independent digital currency indeed got embarked in 1992, when Timothy May, a retired Intel physicist, invited a group of friends over to his house outside Santa Cruz, Calif., to discuss privacy and the nascent Internet. In the prior decade, cryptographic contraptions, like Whitfield Diffie’s public-key encryption and Phil Zimmermann’s Pretty Good Privacy, had proven useful for controlling who could access digital messages. Fearing a unexpected shift in power and information control, governments around the world had begun menacing to restrict access to such cryptographic protocols.

May and his guests looked forward to everything those governments feared. “Just as the technology of printing altered and diminished the power of medieval guilds and the social power structure, so too will cryptologic methods fundamentally alter the nature of corporations and of government interference in economic transactions,” he said. By the end of the meeting, the group had given themselves a name—“cypherpunks”—and the superhero-like task of defending privacy across the digital world. In just a week, cofounder Eric Hughes wrote a program that could receive encrypted e-mails, scrub away all identifying marks, and send them back out to a list of subscribers. When you signed up, you got a message from Hughes:

– Cypherpunks assume privacy is a good thing and wish there were more of it. Cypherpunks acknowledge that those who want privacy must create it for themselves and not expect governments, corporations, or other large, faceless organizations to grant them privacy out of beneficence.

Hughes and May were deeply aware that financial behavior communicates as much about you as words can—if not more. But outside of cash transactions or barter, there’s no such thing as a private transaction. We rely on banks, credit card companies, and other intermediaries to keep our financial system running. Will those corporations save and even share a dossier of your spending habits? Even using cash requires trust that the bill will maintain its worth. Will governments print too much currency or too little? Many cypherpunks would say that the only way to response these questions is to build an entirely fresh system.

Step by step, their mistrust germinated into an anarchist philosophy. Most simply desired to be able to buy things without someone looking over their shoulders. But others on the mailing list imagined liberating currency from governmental control and then using it to lash back at their perceived oppressors.

Jim Bell, a onetime Intel engineer, took these fancies further than anyone, introducing the world to an odious thought experiment called an assassination market. Citizens needed an effective way to penalize politicians who acted against the wishes of their constituents, he reasoned, and what better penalty than murder? With an anonymous digital coin, argued Bell, you could pool donations from disgruntled citizens into what amounts to bounties. If a politician made enough people angry, it would only be a matter of time before the price shoved him out of office or cost him his life. Bell’s essay, “Assassination Politics,” eventually attracted the attention of federal agents. His spiral through the U.S. court system commenced with an IRS raid in one thousand nine hundred ninety seven and ended this March with his release from prison.

While cypherpunks like Bell were dreaming up potential uses for digital currencies, others were more focused on working out the technical problems. Wei Dai had just graduated from the University of Washington with a degree in computer science when he created b-money in 1998. “My motivation for b-money was to enable online economies that are purely voluntary,” says Dai, “ones that couldn’t be taxed or regulated through the threat of force.” But b-money was a purely individual project, more conceptual than practical.

Around the same time, Nick Szabo, a computer scientist who now blogs about law and the history of money, was one of the very first to imagine a fresh digital currency from the ground up. Albeit many consider his scheme, which he calls “bit gold,” to be a precursor to Bitcoin, privacy was not foremost on his mind. His primary aim was to turn ones and zeros into something people valued. “I began thinking about the analogy inbetween difficult-to-solve problems and the difficulty of mining gold,” he says. If a puzzle took time and energy to solve, then it could be considered to have value, reasoned Szabo. The solution could then be given to someone as a digital coin.

In Szabo’s bit gold scheme, a participant would dedicate computer power to solving cryptographic equations assigned by the system. “Anything that works well as a proof-of-work function, producing a specific binary string such that it can be proved that generating that string was computationally costly, will work,” says Szabo. In a bit gold network, solved equations would be sent to the community, and if accepted, the work would be credited to the person who had done it. Each solution would become part of the next challenge, creating a growing chain of fresh property. This aspect of the system provided a clever way for the network to verify and time-stamp fresh coins, because unless a majority of the parties agreed to accept fresh solutions, they couldn’t embark on the next equation.

When attempting to design transactions with a digital coin, you run into the “double-spending problem.” Once data have been created, reproducing them is a elementary matter of copying and pasting. Most e-cash scripts solve the problem by relinquishing some control to a central authority, which keeps track of each account’s balance. DigiCash, an early form of digital money based on the pioneering cryptography of David Chaum, transferred this oversight to banks. This was an unacceptable solution for Szabo. “I was attempting to mimic as closely as possible in cyberspace the security and trust characteristics of gold, and chief among those is that it doesn’t depend on a trusted central authority,” he says.

Bit gold proved that it was possible to turn solutions to difficult computations into property in a decentralized style. But property is not fairly cash, and the proposal left many problems unsolved. How do you assign decent value to different strings of data if they are not identically difficult to make? How do you encourage people to recognize this value and adopt the currency? And what system controls the transfer of currency inbetween people?

After b-money and bit gold failed to garner widespread support, the e-money scene got pretty quiet. And then, in 2008, along came a mysterious figure who wrote under the name “Satoshi Nakamoto,” with a proposal for something called Bitcoin.” (http://spectrum.ieee.org/computing/software/bitcoin-the-cryptoanarchists-answer-to-cash)

Status

  • Bitcoin functions as a reserve currency in the Cypriot crisis, http://www.newyorker.com/online/blogs/elements/2013/04/the-future-of-bitcoin.html
  • “According to the MIT Technology Review, bitcoin was four times more volatile in two thousand thirteen than the average stock, and the dollar-bitcoin exchange rate was ten times more volatile than the dollar rate with major currencies like the euro or yen.” [8]

Bitcoin inequality statistics

  • “It turns out that the distribution of bitcoins among users is even more skewed than the distribution of traditional wealth across the globe. This is understandable, since bitcoin favours early adopters who either mined or purchased their coins a few years ago. Furthermore, the amount of bitcoins in circulation is capped at twenty one million, which also helps create an unequal distribution of wealth. Interestingly, the FBI has the 2nd largest known stash of bitcoins, a whopping 174,000 BTC from the Silk Road seizure.”
  • “North America has twice the number of Bitcoin-related, venture-backed businesses that Asia does. Overall, Canada and the United States account for sixty percent of such companies, according to a examine released last week by Coindesk. Seventy percent of all Bitcoin venture capital goes to U.S.-based firms.” [9]
  • “the drawback to consolidation is that those benefits will be concentrated in the arms of a relative few. That dynamic is already playing out among individual holders of Bitcoin, with a growing gulf inbetween the Bitcoin-rich and the Bitcoin-poor. According to Risto Pietilä, a Finnnish entrepreneur, the staggering share of Bitcoin wealth is held in just a few dozen wallets. Half of all bitcoins belong to around nine hundred twenty seven “individuals.” If those figures are right, then half of the world’s twelve million or so bitcoins is held by a tenth of a percent of all accounts. That’s a stunning statement of inequality, since in the real world forty six percent of the world’s wealth belongs to one percent of the global population. The Bitcoin world, then, is even less equal than the real world.”[Ten]
  • “The “average Bitcoin user” is masculine (95.2%), 32.1 years old, libertarian / anarcho-capitalist (44.3%), non-religious (61.8%), with a total time job (44.7%), and is in a relationship (55.6%). [11]

Discussion, by Alice Martin, NEF:

“Often when Bitcoin is written about we’re given the impression it’s ‘us’ – the general public – who have the capability to participate in the fresh digital public. But this vision of egalitarianism is far from the truth. With 95% of transactions being made by studs – and we can assume, as I will go on to explain, fairly well-off studs – Bitcoin is not a currency of ‘the people’. It’s a currency for those already most well represented in politics, business, and generally any position of power. If you are a woman, if you are not white, if you do not have significant wealth – you are very likely not a player in the Bitcoin world.

The fact that the average Bitcoin user is a white man in his mid-thirties is most likely not a surprise to many. Brett Scott’s valuable contribution to this debate lays out possible reasons for the stark gender imbalance – and others have pointed to why it appeals to a relatively affluent, internet savvy group. But beyond discussions of who is able to play in the tech game, the Bitcoin story points to two more systemic issues about who has economic power, and how it’s set to reproduce itself:

  • Without capital you won’t get a look in. Each time bitcoins are mined, more processing power is needed to mine the next. Custom-built mining machines are expensive to purchase, and expensive to operate. Unsurprisingly then, bitcoin procurement is a lucrative business.
  • Make profit now, think later. In this story we see a good demonstration of how the broader financial system is programmed to encourage speculation and a never ending search for fresh markets. Two of the top five Bitcoin trends to have emerged so far this year are “big name retailers leaping on board” and “venture capital firms betting big”. With a thriving sector of start-ups providing payments systems, mining pools and currency exchange platforms, London and Fresh York, home to the two thickest financial sectors in the world, are emerging as incubators for this fresh industry. Fuelling this boom, global investment in the fintech industry has tripled since the two thousand eight banking crisis and presently stands at almost $Three billion. With so much money going in – extracting profits out from these technologies is high on the agenda.”

Bitcoin Alternatives

See in our entry on Bitcoin Alternatives, i.e. other currencies

  • 1 The 2nd wave: Bitcoin forks
  • Two Is Freicoin in competition with Bitcoin?
  • Trio Can Ripple be integrated with Bitcoin
  • Four What is the difference inbetween Coinbase and every other Bitcoin wallet service?
  • Ethereum: Cryptocurrency Two.0

Interview

Excerpted from a more detailed interview:

“Klint Finley: Could you give us a brief overview of what Bitcoin is for the unacquainted?

Gavin Andresen: Sure. Bitcoin is the very first peer-to-peer currency – it is money created by people instead of by a central bank or government.

And how does it work?

Everybody attempting to create bitcoins and everybody trading bitcoins is connected by a peer-to-peer network. And the code everybody is running makes sure nobody else is cheating – nobody else is creating more bitcoins than are permitted, nobody is attempting to spend their bitcoins more than once, and that bitcoins are only being spent by their rightful owners.

The indeed novel idea is a mechanism for preventing bitcoins from being spent more than once WITHOUT relying on a central authority.

The other mostly fresh idea is limiting the supply of bitcoins without relying on a central authority.

How do you accomplish these things without a central authority? And how do Bitcoin clients and servers find each other?

Let me tackle the effortless one very first – how do Bitcoin clients find each other:

All p2p networks have “the bootstrapping problem” – without central servers, knots (machines) on the network need to be able to find each other. Bitcoin solves it using three mechanisms:

1. By default, Bitcoin clients join an IRC talk channel and witness for the IP addresses and ports of other clients joining that channel. The name of that channel (and the name of the IRC talk server) is hardcoded into the Bitcoin software.

Two. There is a list of “well known” Bitcoin knots compiled into the software in case the IRC talk server is unreachable for some reason.

Three. You can by hand add (via configuration file or command-line option) IP addresses of other machines running Bitcoin to connect.

Once you’re connected to the Bitcoin p2p network, other machines send you messages containing IP addresses (and ports) of other machines they know about, so after bootstrapping you find other Bitcoin knots via the Bitcoin network itself.

There is a lot of discussion about alternative bootstrapping mechanisms, so I wouldn’t be astonished if alternative Bitcoin implementations that use something else pop up in the next year or so.

I’m guessing you can also switch the IRC server and channel by hand as well?

Aspects of Bitcoin

General Aspects

  • see the overview of Needed Improvements for Bitcoin: The fifteen weaknesses of Bitcoin and what is being done about it; by Jem Bendell[12]

Its basic design flaw: gold-like design

“Notwithstanding these revolutionary breakthroughs, Bitcoin does suffer from a basic flaw. It’s designed to behave like Gold. Nakamoto clearly believes Austrian Economics to the last word, including the idea that hyperinflation is the main threat to the system.

As a result Bitcoin suffers from the same problems as Gold: it is deflationary and expensive. There is never enough of it. True, Bitcoins can be divided in ever smaller denominations, so ‘physically’ there will never be a shortage, but it means Bitcoin is designed to appreciate for ever and this is the definition of deflation.

Worse still, Bitcoin does not address the interest issue. There is no possibility for cheap credit and if the unit matures, a banking system will be necessary to provide credit based on deposits.

Not only will this exacerbate the scarcity of money, it will also lead to very high cost for capital.

Yet another problem is that with a total reserve banking system as required by bitcoin (and Gold too, by the way) would permit the Money Power to mop up the money supply through compound interest within one or two decades, as you can find out here..

The basic conceptual flaw is, that Austrian Economics believes a currency should be a good store of value very first and foremost. This is the fatal mistake: money is a means of exchange, and it is the agreement to use it as such that gives it value, not the other way around. This is even true of Gold today: the reason Gold is now expensive, is because many investors are speculating it will be currency again.

Because of this design flaw, Bitcoin is being hoarded by its users. They choose to have it sit in their ‘account’, instead of spending it, hoping it will appreciate. As a result turnover is lower than it could be. The unit is already an object of speculation, hindering its primary function: to finance normal trade.” (http://realcurrencies.wordpress.com/2012/05/Eighteen/bitcoin-impressive-but-flawed/)

Rich get Richer effect empirically observed

“In 2011, however, BitCoin began to get significant media coverage which attracted many more users. The currency also became more attractive after an exchange was set up that permitted bitcoins to be traded for dollars. During this 2nd phase, bitcoins commenced to function as a real currency.

The team’s key finding from this 2nd phase is related to wealth accumulation. Kondor and co say that the network grew by preferential attachment. In other words, a knot with a large number of links is likely to attract more links than a knot with only a few links.

This is a well-known effect in network science. Economists call it the Matthew effect after the biblical observation that the rich get richer.

Examples of the Matthew effect occur in many networks. Popular websites are likely to grow more rapidly than less popular ones, for example. And a similar process is thought to occur in real economies where the rich indeed do seem to get richer.

The Matthew effect is thought to be the origin of the 80:20 distribution of wealth– that twenty per cent of the population own eighty per cent of the wealth.

Kondor and co say a similar phenomenon is clearly observable in the BitCoin network. Not only are popular knots likely to attract more links, their wealth is also likely to grow more quickly than less popular knots. “The capability to attract fresh connections and to build up wealth is fundamentally related,” they say. “The “rich get richer” phenomenon is indeed present in the system.”

An interesting aspect of this currency is that the transactions are largely anonymous. As a result, the buying and selling of illegal goods and services is most likely overrepresented in the network. If so, the Matthew effect must be at work even in this shadowy world.

This kind of treatment has significant potential for future studies. Kondor and co say the transparency of the network means that this system could be hugely valuable for econophysicists wishing to evaluate and refine their models. In no other system of currency is it possible to explore what goes on in such detail.

Could bitcoins eventually substitute ordinary cash? Kondor and co avoid making any predictions, but the evidence they have unearthed is that the BitCoin network already functions in a way that is uncannily similar to real world currencies. So in that respect, there is nothing to stop it being more widely adopted.” (http://www.technologyreview.com/view/518541/rich-get-richer-effect-observed-in-bitcoin-digital-currency-network/)

Ref: arxiv.org/six pack/1308.3892 : Do The Rich Get Richer? An Empirical Analysis Of The Bitcoin Transaction Network

  • Gini Coefficient = 0.87709 ; Bitcoin Wealth Distribution enormously unequal (Bitcoinica data) http://ow.ly/trKoy, the 1% own 50%
  • the top one hundred have gone from holding 1,776,434 coins to holding Two,254,634 Bitcoins, a whopping 27% increase! [13]

Bitcoin Research

Publications including research and analysis of Bitcoin or related areas, https://en.bitcoin.it/wiki/Research

list of researchers, via [14]

  • Jerry Brito (@JerryBrito), senior research fellow at the Mercatus Center at George Mason University. [15]
  • Russell Roberts (@EconTalker) of the Library of Economics and Liberty. He hosted an EconTalk gig on Bitcoin: [16]
  • economist Jon Matonis (@JonMatonis) who recently introduced on using Bitcoins as a currency to monetize game play: [17]
  • Timothy B. Lee (@BinaryBits) sees problems with Bitcoin (bubbles, vulnerable to cartel, etc.): [Eighteen]

The problems of Bitcoin

“What Bitcoin doesn’t provide or doesn’t provide in an effective manner:

Energy Usage Aspects

Bitcoin’s Energy Use

“Blockchain.info, a site that tracks data on Bitcoin mining, estimates that in just the last twenty four hours, miners used about $147,000 of violet wand just to run their hardware, assuming an average price of fifteen cents per kilowatt hour … That’s enough to power harshly 31,000 U.S. homes, or about half a Large Hadron Collider.

It’s a stunning stat, but does this indeed count as a “disaster”? That’s less clear. After all, we need to consider the counterfactural: Is it possible that these computers would be used for other activities and calculations anyway, if they weren’t mining Bitcoins?

In any case, Gimein’s chunk does touch on a red-hot topic in energy circles — how much electro-stimulation does all of our computing and Internet infrastructure actually consume? A two thousand eleven examine by Stephen Ruth of George Mason University estimated that the entire global information and communications technology industry accounts for “only about 3–5 percent” of the world’s tens unit use. So it has a much smaller environmental footprint than, say, cars, trucks, and planes (which account for twenty five percent of all energy request.)

On the other palm, the Internet’s energy needs are expected to erect significantly in the coming years — even tho’ computing keeps getting more energy-efficient. An interesting fresh examine in Science by Diego Reforgiato Recupero finds that Internet traffic volume tends to dual every three years. But network energy-efficiency isn’t keeping rhythm. As a result, the world’s IT infrastructure will consume nineteen percent more energy in two thousand thirteen than in 2012.

Interestingly, as Alexis Madrigal explains here, most of the energy used by our computing infrastructure comes from wireless and cellular networks — by contrast, data centers themselves only use about ten percent of the tens unit involved. What’s more, those wireless networks don’t seem to be improving their energy efficiency all that quickly. That’s why overall energy use could keep growing, particularly as cloud computing becomes more widespread.

Bottom line: On the vast scale of environmental disasters, Bitcoin scarcely registers. And, in the grand scheme of things, the Internet is still relatively green (that’s particularly true if it cuts into other activities, like driving). But it’s also true that our computing infrastructure is becoming an increasingly significant part of the world’s energy request.” (http://www.washingtonpost.com/blogs/wonkblog/wp/2013/04/12/what-bitcoin-teaches-us-about-the-internets-energy-use/)

“According to Bitcoin Witness, the entire Bitcoin network hit a record-breaking high of one exaFLOPS this weekend. When you’re talking about FLOPS, you’re truly talking about the number of Floating-point Operations a computer can do Per 2nd, or more simply, how rapid it can rip through math problems. It’s a pretty common standard for measuring computer power. An exaFLOPS is 1018, or 1,000,000,000,000,000,000 math problems per 2nd. The most powerful supercomputer in the world, Sequoia, can manage a mere sixteen petaFLOPS, or just 1.6 percent of the power geeks around the world have brought to bear on mining Bitcoin. The world’s top ten supercomputers can muster five percent of that total, and even the top five hundred can only muster a mere 12.8 percent.

And that one exaFLOPS number is most likely a little low. Because Bitcoin miners actually do a simpler kind of math (integer operations), you have to do a little (messy) conversion to get to FLOPS. And because the fresh ASIC miners—machines that are built from scrape to do nothing but mine Bitcoins—can’t even do other kinds of operations, they’re left out of the total entirely. So what we’ve got here is a representation of the total power spent on Bitcoin mining that could theoretically be spent on something else, like real problems that exist naturally.

Because of the way Bitcoin self-regulates, the math problems Bitcoin mining equipments have to do to get more ‘coin get firmer and tighter as time goes on. Not to any particular end, but just to make sure the world doesn’t get flooded with Bitcoins. So all these computers aren’t truly accomplishing anything other than solving super difficult and necessarily arbitrary puzzles for cyber money. It’s kind of like rounding up the world’s greatest minds and making them do Sudokus for nickels.

Projects like [email protected] and [email protected] use similarly networked power for the less-pointless practices of parsing information that could lead to more effective medicines or finding extra-terrestrial life, respectively, and either are hard-pressed to scrounge up even half of a percent of the power the Bitcoin network is rocking. And with specialized Bitcoin-mining hardware on the rise, there’s going to be an army of totally powerhouse PCs out there that are good for literally nothing but digging up cybercoins.

It’s incredible to think about the amount of power being directed at this one, singular purpose; power that’s essentially being “donated” by thousands of people across the globe just because they have skin in the game. It’s by far the most computational effort that has ever been dedicated to a single purpose. And sure, Bitcoins are fine and all, but can you imagine what we could do if this energy was put behind other rough problems? We’ll you’re going to have to imagine, because so long as mining Bitcoins can earn you money and folding proteins can’t, it’s pretty clear which one is gonna get done.” (http://gizmodo.com/the-worlds-most-powerful-computer-network-is-being-was-504503726?)

Trio. BY MICHAEL CARNEY:

“At today’s value of toughly $1,000 per bitcoin, the violet wand consumed by the bitcoin mining ecosystem has an estimated carbon footprint – or total greenhouse gas emissions – of 8.25 megatonnes (8,250,000 tonnes) of CO2 per year, according to research by Bitcarbon.org. That’s 0.03 percent of the world’s total greenhouse gas output, or equivalent to that of the nation of Cyprus. If bitcoin’s value reaches $100,000, that influence will reach three percent of the world’s total, or that of Germany. At $1 million – which seems farcical but which may not be out of the area of possibility given the artificially limited bitcoin supply – this influence rises to 8.25 gigatonnes, or thirty percent of today’s global output, and equivalent to that of China and Japan combined.

Bitcoins aren’t mined from the earth’s crust like most physical commodities – albeit at least that leaves tangible evidence of its environmental influence. Rather, they are “mined” by computers solving a set of complicated computational problems. These problems are designed to get more difficult over time, until the year two thousand one hundred forty when the twenty one millionth (and final) bitcoin is mined. Early in bitcoin’s existence, it was feasible to run a successful mining operation with a standard PC. Now the task requires custom-built mining equipments that can run orders of magnitude more processes per 2nd.

The top of the line model, which is presently made by a Swedish company called KnCMiner, costs around $13,000 and can mine at a rate five hundred fifty gigahashes per 2nd: They’ve sold $28 million worth, and soon these too will be obsolete. The total computational power of the global bitcoin mining network today is more than seven million gigahashes, and climbing. That’s two hundred fifty six times greater than the world’s top five hundred supercomputers, combined.

These computers are consuming so much violet wand that it’s already unprofitable to mine in some regions of the world. According to Blockchain.info the total electrical play cost of all mining acticity conducted over the last twenty four hours was $Nineteen,652,986.38, as the system consumed 131,019.91 megawatt hours. In April, Bloomberg Sustainability called bitcoin mining it a “real-world environmental disaster.” At the time, the system was consuming just 7,000 megawatt hours per day – things have enhanced 142-fold in the last eight months.” (http://pando.com/2013/12/16/bitcoin-has-a-dark-side-its-carbon-footprint/)

The tremendous Environmental and Human Costs of Bitcoin and the Blockchain

“What is bitcoin, indeed? You can think of it as a machine contagion—a network of devices amped to their spectacle tolerances—machines that do nothing but reprocess every transaction that ever occurred on their network (thus achieving ‘consensus’) while, at the same time, ‘mining’ fresh blocks of coins (presently worth about twenty five btc) by solving a purposefully cumbersome mathematical formula which doesn’t actually accomplish anything other than enforcing computational difficulty. That is: making millions of machines grind away madly at nothing.

This mining process is both the reprocessing of transactions, and a ‘weight’ factor that is incremented to insure that the average time for the entire network to ‘solve’ a block (that is, to produce an accurate guess close enough to a mathematically supplied target) is ‘about ten minutes’. When you initiate a fresh machine into the network, you download the current transaction record (a 6-gigabyte file) of the entire history of bitcoin and reprocess it (this takes around twenty four hours). You then either ‘mine’ alone (an almost worthless endeavor which would take

98 years to solve a block) or you join a pool of machines. By joining a pool, you get statistically better spectacle in terms of satoshi (presently: USD $0.0000046543 each) earned as you are ‘rewarded’ for work done by your machine’s participation in the pool.

The more processing power (raw computational force over time) you can bring to bear on ‘the problem’ … the better a chance you have to earn incremental additions to your ‘wallet’ or account. Of course, most of the problem is invented… to be this kind of problem—one that requires more and more computational activity to qualify as finish. And we have now invented specialized machines and chips just to solve this problem.

Machines involved in mining are pressed to the boundaries of their power consumption and spectacle profiles; they are ‘pinned’ at 100%+ of their computing power, ceaselessly, and thus generate warmth (as well as consuming copious quantities of electrical power).

Because they remain hot, they have to be electronically ventilated. This process of power-heating something we must in turn power-cool, for the phony ‘sake’ of mathematical processes intended to make more work each time they are implemented is deranged. We’re essentially turning computers into heaters that we have to cool to recompute previous computations with. On purpose. A single day of the environmental costs of this process are so catastrophic that if we ever did the accounting — if anyone did — we would instantaneously understand that this entire idea is a mode of ‘fracking the entire environment’ whose costs rise explosively with every moment we proceed the process. Only a species that had gone entirely insane, and consciously intended to wipe out life on Earth would ever consider such a process. But any species that could actively feast and expand it — must be understood as both emphatically suicidal and openly omnicidal. In brief: they intend to kill everything, anything, and themselves — and are hell-bent on the continuous and unlimited expansion of this agenda.

The activity of the blockchain networks are not only searing down the future; they are also obliterating the history of humanity and life on Earth, quicker and more aggressively every moment, by ruining the living results and opportunities established by this history, and insuring that the benefits that might otherwise blossom into astonishing ‘interest on investment’, are killed off by the necessity of breeding, operating, heating and cooling millions of machines that do makework for a resource that only exists as numbers in machines.” (https://medium.com/ill-ixi-lli/-da9326e97d1f)

Business Aspects

  • 1 Bitcoin Business and Economics
  • Two Bitcoin as a legitmate investment vehicle
  • Three Bitcoin’s Business Uptake, 2013
  • Four What are Bitcoins spent on?: September two thousand thirteen calculation
  • Five Bitcoin Speculation as a ‘Greater Idiot’ Pump and Dump scheme
  • 6 Warren Buffet: Bitcoin has no intrinsic value
  • 7 Bitcoin’s Business Potential

Technological Aspects

Review of incidents related to Bitcoin, by Benjamin Wallace:

“Even the purest technology has to live in an impure world. Both the code and the idea of bitcoin may have been impregnable, but bitcoins themselves—unique strings of numbers that constitute units of the currency—are discrete chunks of information that have to be stored somewhere. By default, bitcoin kept users’ currency in a digital “wallet” on their desktop, and when bitcoins were worth very little, effortless to mine, and possessed only by techies, that was sufficient. But once they embarked to become valuable, a PC felt inadequate. Some users protected their bitcoins by creating numerous backups, encrypting and storing them on thumb drives, on forensically scrubbed cherry computers without Internet connections, in the cloud, and on printouts stored in safe-deposit boxes. But even some sophisticated early adopters had trouble keeping their bitcoins safe. Stefan Thomas had three copies of his wallet yet inadvertently managed to erase two of them and lose his password for the third. In a stroke, he lost about 7,000 bitcoins, at the time worth about $140,000. “I spent a week attempting to recover it,” he says. “It was pretty painful.” Most people who have cash to protect put it in a bank, an institution about which the more zealous bitcoiners were deeply leery. Instead, for this fresh currency, a primitive and unregulated financial-services industry began to develop. Fly-by-night online “wallet services” promised to safeguard clients’ digital assets. Exchanges permitted anyone to trade bitcoins for dollars or other currencies. Bitcoin itself might have been decentralized, but users were now blindly entrusting enhancing amounts of currency to third parties that even the most radical libertarian would be hard-pressed to claim were more secure than federally insured institutions. Most were Internet storefronts, run by who knows who from who knows where.

Sure enough, as the price headed upward, disturbing events began to bedevil the bitcoiners. In mid-June, someone calling himself Allinvain reported that 25,000 bitcoins worth more than $500,000 had been stolen from his computer. (To this day, nobody knows whether this claim is true.) About a week later, a hacker pulled off an ingenious attack on a Tokyo-based exchange site called Mt. Gox, which treated ninety percent of all bitcoin exchange transactions. Mt. Gox restricted account withdrawals to $1,000 worth of bitcoins per day (at the time of the attack, toughly thirty five bitcoins). After he broke into Mt. Gox’s system, the hacker simulated a massive sell-off, driving the exchange rate to zero and letting him withdraw potentially ems of thousands of other people’s bitcoins.

As it happened, market coerces conspired to thwart the scheme. The price plummeted, but as speculators flocked to take advantage of the fire sale, they quickly drove it back up, limiting the thief’s haul to only around Two,000 bitcoins. The exchange ceased operations for a week and flipped back the postcrash transactions, but the harm had been done; the bitcoin never got back above $17. Within a month, Mt. Gox had lost ten percent of its market share to a Chile-based upstart named TradeHill. Most significantly, the incident had shaken the confidence of the community and inspired explosions of bad press.

In the public’s imagination, overnight the bitcoin went from being the currency of tomorrow to a dystopian joke. The Electronic Frontier Foundation calmly stopped accepting bitcoin donations. Two Irish scholars specializing in network analysis demonstrated that bitcoin wasn’t almost as anonymous as many had assumed: They were able to identify the treats of a number of people who had donated bitcoins to Wikileaks. (The organization announced in June two thousand eleven that it was accepting such donations.) Nontechnical newcomers to the currency, expecting it to be effortless to use, were disappointed to find that an extreme amount of effort was required to obtain, hold, and spend bitcoins. For a time, one of the lighter ways to buy them was to very first use Paypal to buy Linden dollars, the virtual currency in 2nd Life, then trade them within that make-believe universe for bitcoins. As the tone of media coverage shifted from gee-whiz to skeptical, attention that had once been thrilling became a source of resentment.

More disasters followed. Poland-based Bitomat, the third-largest exchange, exposed that it had—oops—accidentally overwritten its entire wallet. Security researchers detected a proliferation of viruses aimed at bitcoin users: Some were designed to steal wallets total of existing bitcoins; others commandeered processing power to mine fresh coins. By summer, the oldest wallet service, MyBitcoin, stopped responding to emails. It had always been fishy—registered in the West Indies and run by someone named Tom Williams, who never posted in the forums. But after a month of unbroken muffle, Wagner, the Fresh York City bitcoin evangelist, eventually stated what many had already been thinking: Whoever was running MyBitcoin had evidently gone AWOL with everyone’s money. Wagner himself exposed that he had been keeping all 25,000 or so of his bitcoins on MyBitcoin and had recommended to friends and relatives that they use it, too. He also aided a vigilante effort that publicly named several suspects. MyBitcoin’s supposed possessor resurfaced, claiming his site had been hacked. Then Wagner became the target of a countercampaign that publicized a successful lawsuit against him for mortgage fraud, costing him much of his reputation within the community. “People have the mistaken impression that virtual currency means you can trust a random person over the Internet,” says Jeff Garzik, a member of bitcoin’s core developer group.” (http://www.wired.com/magazine/2011/11/mf_bitcoin/all/1)

Vitalik Buterin on the 11/12 March two thousand thirteen blockchain fork:

“The other aspect of Bitcoin’s decentralization that this incident calls into question is that of mining pools. The reason why the managed switch to the 0.7 fork was even possible was that over 70% of the Bitcoin network’s hash power was managed by a petite number of mining pools and ASIC miners, and so the miners could all be individually contacted and coaxed to instantly downgrade. Another article on the fork reads [Russian]: “the real problem is not even in the code supporting the Bitcoin network; bugs are everywhere. Rather, it’s the matter of who controls it. This event clearly displayed that even such a well thought-out system is managed by the will of a very puny number of people – particularly, the operators of mining pools. Over 70% of fresh blocks right now are being found on pools, and not on individual solo miners. The underlying idea of the system was that the benevolent majority can stop a puny number of attackers, but in the present time it is simply not working. The winner in a possible takeover will be the one with greater computing power, and no one else.” Bitcoin is clearly not at all the direct democracy that many of its early adherents imagined, and, some worry, if a centralized core of the Bitcoin community is powerful enough to successfully undertake these emergency measures to set right the Bitcoin blockchain, what else is it powerful enough to do? Force dual spends to switch roles million-dollar thefts? Block or even redirect transactions known to originate from Silk Road? Perhaps even modify Bitcoin’s sacred twenty one million currency supply limit?

However, a strong argument can be made that such fears are very unlikely to materialize. The reason why has nothing to do with the specific identities of the Bitcoin mining pool operators or the cohesiveness of the Bitcoin mining community; rather, it’s the fact that Bitcoin mining is still in fact fairly decentralized; it simply is decentralized in a different way. Taking a political analogy, the closest equivalent would be a liquid democracy: a hybrid of direct and representative democracy where people can either vote for individual bills by themselves or assign politicians – with the proviso that if they do not like what a given politician is doing they can switch to assigning their voting power to someone else at any time. Back in the world of Bitcoin, albeit much of the Bitcoin network’s hash power is concentrated with mining pool operators in practice, every individual miner can switch from one pool to another almost instantly, so if a coalition of mining pool operators determines to begin violating the Bitcoin protocol miners can simply switch to any pool that remains fair, instantly depriving the miscreants of their power. Albeit no mining pool has attempted to actively subvert the Bitcoin protocol so far, this kind of “voting” has been done before; in 2011, there were several incidents where the mining pool Deepbit shoved above 50% of the total network hash power, and in each case there was a mass exodus of miners toward other pools to balance things out. Albeit the nominal power may rest with the mining pool operators, the feedback of the community is always only one step away.” (http://bitcoinmagazine.com/3668/bitcoin-network-shaken-by-blockchain-fork/)

Bitcoin as cryptograpic breaktrhough

by Benjamin Wallace:

“In November 1, 2008, a man named Satoshi Nakamoto posted a research paper to an obscure cryptography listserv describing his design for a fresh digital currency that he called bitcoin. None of the list’s veterans had heard of him, and what little information could be gleaned was murky and contradictory. In an online profile, he said he lived in Japan. His email address was from a free German service. Google searches for his name turned up no relevant information; it was clearly a pseudonym. But while Nakamoto himself may have been a puzzle, his creation cracked a problem that had stumped cryptographers for decades. The idea of digital money—convenient and untraceable, liberated from the oversight of governments and banks—had been a hot topic since the birth of the Internet. Cypherpunks, the 1990s movement of libertarian cryptographers, dedicated themselves to the project. Yet every effort to create virtual cash had foundered. Ecash, an anonymous system launched in the early 1990s by cryptographer David Chaum, failed in part because it depended on the existing infrastructures of government and credit card companies. Other proposals followed—bit gold, RPOW, b-money—but none got off the ground.

One of the core challenges of designing a digital currency involves something called the double-spending problem. If a digital dollar is just information, free from the corporeal strictures of paper and metal, what’s to prevent people from copying and pasting it as lightly as a chunk of text, “spending” it as many times as they want? The conventional reaction involved using a central clearinghouse to keep a real-time ledger of all transactions—ensuring that, if someone spends his last digital dollar, he can’t then spend it again. The ledger prevents fraud, but it also requires a trusted third party to administer it.

Bitcoin did away with the third party by publicly distributing the ledger, what Nakamoto called the “block chain.” Users willing to devote CPU power to running a special chunk of software would be called miners and would form a network to maintain the block chain collectively. In the process, they would also generate fresh currency. Transactions would be broadcast to the network, and computers running the software would contest to solve irreversible cryptographic puzzles that contain data from several transactions. The very first miner to solve each puzzle would be awarded fifty fresh bitcoins, and the associated block of transactions would be added to the chain. The difficulty of each puzzle would increase as the number of miners enlargened, which would keep production to one block of transactions harshly every ten minutes. In addition, the size of each block bounty would halve every 210,000 blocks—first from fifty bitcoins to 25, then from twenty five to 12.Five, and so on. Around the year 2140, the currency would reach its preordained limit of twenty one million bitcoins.” (http://www.wired.com/magazine/2011/11/mf_bitcoin/all/1)

The problem with mining

“As the value of bitcoins swelled against the dollar over the course of 2013, a mining arms race began. People realized that their computers’ graphics chips were better suited to Bitcoin’s mining algorithms than standard CPUs, so they built specialized machines overcharged with graphics processors, which enlargened their chances of reaping a prize. Beginning in the very first months of that year, ASICs arrived—application-specific integrated circuits designed with the foot purpose of mining coins. Before long the lone miner with a regular computer was a lost cause, incapable to contest with the fresh mining syndicates, or “pools,” and multi-million-dollar data centers in places around the world with the most profitable combination of cold weather and cheap electricity—45,000 miners in a Swedish helicopter hangar, for example, or twenty million watts in the Republic of Georgia. Together Bitcoin’s miners amount to hundreds of times more computing power than the combined output of the world’s top five hundred supercomputers. Processing and protecting the more than $Trio billion worth of bitcoins in circulation requires more than $100 million in electrical play each year,Three generating a volume of carbon emissions to match.

“From a technological perspective, the Bitcoin network is unprecedented,” says Dave Hudson, an analyst who blogs about mining at hashingit.com. “As far as I’m aware there’s never been anything as big in the past.” All that computing power, which could be curing cancer or exploring the starlets, is locked up in machines that do nothing but process Bitcoin-type transactions.

The prospects for democracy in the system have grown dimmer still. By the middle of last year, the largest mining pools came within reach of a fifty percent market share—making it possible for them to endanger the entire system by falsifying transactions. What prevents them from actually doing so, evidently, is that it would reduce confidence in the value of the bitcoins they invest so much to mine. They also prevent switches to the Bitcoin software that would lessen their dominance. A distributed network of users now has to trust an oligarchy of capital-intensive miners.” (https://newrepublic.com/article/121089/how-small-bitcoin-miners-lose-crypto-currency-boom-bust-cycle)

Political Aspects

The Blockchain as a path towards centralized control by the state and corporations

“Instead of defanging governments and big corporations, the distributed ledger offers those domains enormous incentive to consolidate their power and influence. For people like Eddie Lee Holloway, Jr, who’s African American, that might mean even greater exclusion, as the very institutions that locked him out of the voting booth might suppress his transformation into a digital-ledger citizen in the very first place.

Or if not, other traumas might yet face citizens like Holloway in a society run by blockchain. A mandated DNA-test could accompany citizens’ blockchainification, permitting their ethnic origins and medical predispositions to become fastened to an identity record. Financial assets would also be connected, thanks to an underlying cryptocurrency account through which they make debits and credits. Not to mention all the individual insights already consolidated by services like Facebook.

Businesses might subscribe to this data. Thanks to distributed ledger, it could be used to prevent their automated doors from opening for people whom a smart-contract risk-assessment service rates below a threshold of desirability. Left outside, privately-contracted security robots might deploy ledger-backed ID scanners to sweep loiterers from private property. Once delivered and booked into jails, wise courts could automate sentences based on an automated assessment of future crime potential.” (https://www.theatlantic.com/technology/archive/2017/05/blockchain-of-command/528543/)

Bitcoin and the Blockchain Are Stiffly Anchored in Anarcho-Capitalist Visions of a Hyper-Capitalist Society

“Bitcoin is an expression of extreme technological libertarianism. This school of thought goes by many names: anarcho-capitalism (or ancap for brief), libertarian anarchy, market anarchism. Central to the philosophy is a distrust of states in favor of individuals. Its adherents believe society best facilitates individual will in a free-market economy driven by individual property owners—not governments or corporations—engaging in free trade of that private property.

Imagining the end of both nation-states and corporations is even tighter than imagining the end of capitalism itself.

Anarcho-capitalism is far more extreme than Silicon Valley’s usual brand of technological individualism. For one, the tech sector’s libertarianism is corporatist in its leaned, and amenable to government, if in a strongly diminished capacity. And Silicon Valley takes a broader treatment to the liberating capacity of technology: Facebook hopes to connect people, Google to make information more accessible, Uber to improve transit, and so on.

The ancap worldview only supports sovereign individuals engaging in free-market exchange. Neither states nor corporations are acceptable intermediaries. That leaves a sparsely set table. At it: individuals, the property they own, the contracts into which they come in to exchange that property, and a market to facilitate that exchange. All that’s missing is a means to process exchanges in that market.

Ordinarily, money would be sufficient. But currency troubles market anarchists. The central banks that control the money supply are entities of the state. Financial payment networks like Visa are corporations, which aren’t much better. That’s where Bitcoin and other cryptocurrencies inject the picture. They attempt to provide a technological alternative to currency and banking that would avoid tainting the unspoiled individualism of the ancap ideal.

This makes Bitcoin’s design different from other technology-facilitated payment systems, like PayPal or Apple Pay. Those services just provide a more convenient computer interface to bank accounts and payment cards. For anarcho-capitalism to work in earnest, it would need to divorce transactions entirely from the traditional monetary system and the organizations that run it. Central banks and corporations could interfere with transactions. And yet, if individuals alone maintained currency records, money could be used fraudulently, or fabricated from lean air.

To solve these problems, Bitcoin is backed by mathematics instead of state governments. The Bitcoin “blockchain” is a collective, digital record of all the transactions (or “blocks”) that have ever been exchanged. Every transaction contains a cryptographic record of the previous succession (the “chain”) of exchanges. Each one can thus be mathematically verified to be valid. The community of Bitcoin users does the work of verification. To incentivize the onerous work of cryptographically verifying each transaction in the chain that precedes it, the protocol awards a bounty—in Bitcoin of course—to the very first user to validate a fresh transaction on the network. This is the process known as “mining”—a confusing and aspirational name for what amounts to computational accounting.

There’s a lot more detail that I am omitting. But the key to Bitcoin is that the network distributes copies of one common record of all Bitcoin transactions, against which individuals verify fresh exchanges. This record is the blockchain, which is sometimes also called the “distributed ledger”—a much more elucidating name. This is the missing element that’s supposed to permit the hypothetical anarcho-capitalist techno-utopia to flourish.” (https://www.theatlantic.com/technology/archive/2017/05/blockchain-of-command/528543/)

Yanis Varoufakis: Bitcoin’s two fundamental flaws

As with all things digital, there are a number of concerns to do with security; with the fear of hackers and e’spivs. Imagine a world that has shifted entirely to bitcoin. Would we not live in fear that some ingenious hacker will get the better of Nakamoto’s algorithm and manipulate it to his benefit? Would it be wise for humanity simply to assume that the bitcoin algorithm is un-hackable (especially so in the absence of some authority that can intervene and save the day if something horrible happens to the algorithm)? Besides, even if the algorithm is safe, there is always the danger of waking up to the realisation that one’s bitcoin stash was e’looted during the night. And if one entrusts one’s stash to some company with better firewalls and computer security, what happens (in the absence of a bitcoin Central Bank) if that company goes broke or simply vanishes into the Internet’s darker crevices (with its customers’ bitcoins)?

These concerns would very likely suffice to put a dent in bitcoin’s prospects. But they are not the main drawbacks of the currency. No, there are two insurmountable flaws that make bitcoin a very problematic currency: Very first, the bitcoin social economy is strapped to be typified by chronic deflation. Secondly, we have already seen the rise of a bitcoin aristocracy (a term ‘coined’ by Greek blogger @techiechan) which, besides the issues of distributive justice which it raises, evokes serious fears about the capacity of very few entities or persons to manipulate the currency in a manner that enriches them at the expense of financial instability. Let us look at these two problems in some detail.

Very first, deflation is unavoidable in the bitcoin community because the maximum supply of bitcoins is immovable to twenty one million bitcoins and approximately half of them have already been ‘minted’ at a time when very, very few goods and services transactions are denominated in bitcoins. To put simply, if bitcoin succeeds in penetrating the marketplace, an enhancing quantity of fresh goods and services will be traded in bitcoin. By definition, the rate of increase in that quantity will outpace the rate of increase in the supply of bitcoins (a rate which, as explain, is severely constricted by the Nakamoto algorithm). In brief, a restricted supply of bitcoins will be pursuing after an enlargening number of goods and services. Thus, the available quantity of bitcoins per each unit of goods and services will be falling causing deflation. And why is this a problem? For two reasons: Very first, because an expected fall in bitcoin prices motivates people with bitcoins to delay, as much as they can, their bitcoin expenditure (why buy something today if it will be cheaper tomorrow?). Secondly, because to the extent that bitcoins are used to buy factors of production that are used to produce goods and services, and assuming that there is some time lag inbetween the purchase of these factors and the delivery of the final product to the bitcoin market, a stable fall in average prices will translate into a permanently shrinking price-cost margin for firms dealing in bitcoins.

Secondly, two major faultlines are developing, fairly inevitably, within the bitcoin economy. The very first faultline has already been mentioned. It is the one that divides the ‘bitcoin aristocracy’ from the ‘bitcoin poor’, i.e. from the latecomers who must buy into bitcoin at enlargening dollar and euro prices. The 2nd faultline separates the speculators from the users; i.e. those who see bitcoin as a means of exchange from those who see in it as a stock of value. The combination of these two faultlines, whose width and depth is enhancing, is to inject a massive instability potential into the bitcoin universe. While it is true for all currencies that there is always some speculative request for them, as opposed to transactions request, in the case of bitcoin speculative request outstrips transactions request by a mile. And as long as this is so, volatility will remain enormous and will deter those who might have desired to come in the bitcoin economy as users (as opposed to speculators). Thus, just like bad money drives out good money (Gresham’s famous ‘law’), speculative request for bitcoins drives our transactions request for it.

Can these two flaws be corrected? Would it be possible to calibrate the long-term supply of bitcoins in such a way as to ameliorate for the deflationary effects described above while tilting the balance from speculative to transactions request for bitcoins? To do so we would need a Bitcoin Central Bank, which will of course defeat the very purpose of having a fully decentralised digital currency like bitcoin.” (http://yanisvaroufakis.eu/2013/04/22/bitcoin-and-the-dangerous-fantasy-of-apolitical-money/)

The Political Vision behind the ledger

“When asked about why Bitcoin is superior to other currencies, proponents often point to its ‘trustless’ nature. No trust needs be placed in fallible ‘governments and corporations’. Rather, a self-sustaining system can be created by individuals following a set of rules that are set apart from human frailties or intervention. Such a system is assumed to be fairer by permitting people to win out against those powers who can manhandle rules.

The vision thus is not one of bands of people getting together into mutualistic self-help groups. Rather, it is one of individuals acting as autonomous agents, operating via the hardcoded rules with other autonomous agents, thereby avoiding those who seek to harm their interests.

Note the underlying dim view of human nature. While anarchist philosophers often imagine alternative governance systems based on mutualistic community foundations, the ‘empowerment’ here does not stem from building community ties. Rather it is imagined to come from retreating from trust and taking refuge in a defensive individualism mediated via mathematical contractual law.

It carries a certain disdain for human imperfection, particularly the imperfection of those in power, but by implication the imperfection of everyone in society. We need to be protected from ourselves by vesting power in lines of code that execute automatically. If only we can lift currency away from manipulation from the Federal Reserve. If only we can lift Wikipedia away from the corruptible Wikimedia Foundation.

Activists traditionally revel in hot-blooded asymmetric battles of interest (such as that inbetween StrikeDebt! and the banks), implicitly holding an underlying faith in the redeemability of human-run institutions. The Bitcoin community, on the other arm, often seems attracted to a detached anti-politics, one in which activity is diminished to the binary options of Buy In or Buy Out of the coded alternative. It echoes consumer notions of the world, where one ‘expresses’ oneself not via debate or negotiation, but by choosing one product over another. We’re leaving Earth for Mars. Join if you want.

It all forms an odd, tense amalgam inbetween visions of exuberant risk-taking freedom and visions of risk-averse anti-social paranoia. This ambiguity is not unique to cryptocurrency (see, for example, this excellent parody of the trustless society), but in the case of Bitcoin, it is perhaps best exemplified by the narrative suggested by Cody Wilson in Dark Wallet’s crowdfunding movie. “Bitcoin is what they fear it is, a way to leave… to make a choice. There’s a system approaching perfection, just in time for our disappearance, so, let there be dark”.

But where exactly is this ideal system Wilson is disappearing to?

Back in the days of roving bands of nomadic people, the political option of ‘exit’ was a reality. If a ruler was oppressive, you could actually pack up and take to the desert in a caravan. The bizarre thing about the concept of ‘exit to the internet’ is that the internet is a technology premised on massive state and corporate investment in physical infrastructure, fibre optic cables laid under seabeds, mass production of computers from low-wage workers in the East, and mass affluence in Western nations. If you are in the position to be having wishes of technological escape, you are very likely not in a position to be exiting mainstream society. You are mainstream society.

Don’t get me wrong. Wilson is a subtle and interesting thinker, and it is undoubtedly unfair to suggest that he indeed believes that one can escape the power dynamics of the messy real world by finding salvation in a kind of internet Matrix. What he is truly attempting to do is to invoke one side of the crypto-anarchist mantra of ‘privacy for the powerless, but transparency for the powerful’.

That is a healthy radical impulse, but the conservative element kicks in when the assumption is made that somehow privacy alone is what enables social empowerment. That is when it turns into an individualistic ‘just leave me alone’ impulse fixated with negative liberty. Despite the rugged frontier appeal of the concept, the presumption that empowerment simply means being left alone to pursue your individual interests is essentially an ideology of the already-empowered, not the vulnerable.

This is the same strain you find in the closely related cypherpunk movement. It is often pitched as a radical empowerment movement, but as Richard Boase notes, it is “a world total of acronyms and codes, impenetrable to all but the most cynical, distrustful, and political of minds.” Indeed, crypto-geekery offers nothing like an escape from power dynamics. One merely escapes to a different set of rules, not one managed by ‘politicians’, but one in the palms of programmers and those in control of computing power.

It is only when we think in these terms that we begin to see Bitcoin not as a sphere ‘lacking the rules imposed by the state’, but as a area imposing its own rules. It offers a form of protection, but ensures nothing like ‘empowerment’ or ‘escape’.

Technology often seems silent and inert, a world of ‘apolitical’ objects. We are thus prone to being blind to the power dynamics built into our use of it. For example, isn’t email just a useful instrument? Actually, it is very questionable whether one can ‘choose’ whether to use email or not. Sure, I can choose inbetween Gmail or Hotmail, but email’s widespread uptake creates network effects that mean opting out becomes less of an option over time. This is where the concept of becoming ‘enslaved to technology’ emerges from. If you do not buy into it, you will be marginalised, and thatis political.

This is significant. While individual instances of blockchain technology can clearly be useful, as a class of technologies designed to mediate human affairs, they contain a latent potential for encouraging technocracy. When disassociated from the programmers who design them, trustless blockchains floating above human affairs contains the specter of rule by algorithms. It is a vision (most likely accidently) captured by Ethereum’s Joseph Lubin when he says “There will be ways to manipulate people to make bad decisions, but there won’t be ways to manipulate the system itself”.

Interestingly, it is a similar abstraction to that made by Hobbes. In his Leviathan, self-regarding people realise that it is in their interests to exchange part of their freedom for security of self and property, and thereby come in into a contract with aSovereign, a deified personage that sets out societal rules of engagement. The definition of this Sovereign has been softened over time – along with the fiction that you actually contract to it – but it underpins modern expectations that the government should ensure property rights.

Conservative libertarians hold taut to the belief that, if only hard property rights and clear contracting rules are put in place, optimal systems spontaneously emerge. They are not actually that far from Hobbes in this regard, but their irritation with Hobbes’ vision is that it relies on politicians who, being actual people, do not act like a detached contractual Sovereign should, but rather attempt to meddle, make things better, or steal. Don’t decentralised blockchains suggest the ultimate prospect of protected property rights with clear rules, but without the political interference?

This is essentially the vision of the internet techno-leviathan, a deified crypto-sovereign whose rules we can contract to. The rules being contracted to are a series of algorithms, step by step procedures for calculations which can only be overridden with excellent difficulty. Perhaps, at the outset, this represents, à la Rousseau, the general will of those who take part in the contractual network, but the key point is that if you get locked into a contract on that system, there is no violating out of it.

This, of course, appeals to those who believe that powerful institutions operate primarily by breaching property rights and contracts. Who truly believes that however? For much of modern history, the key issue with powerful institutions has not been their readiness to break contracts. It has been their preparedness to use seemingly unbreakable contracts to exert power. Contracts, in essence, resemble algorithms, coded expressions of what outcomes should happen under different circumstances. On average, they are written by technocrats and, on average, they reflect the interests of elite classes.

That is why liberation movements always seek to break contracts set in place by old regimes, whether it be peasant movements refusing to honour debt contracts to landlords, or the DRC challenging legacy mining concessions held by multinational companies, or SMEs contesting the terms of exchange contracts written by Barclays lawyers. Political liberation is as much about contesting contracts as it is about enforcing them.” (http://furtherfield.org/features/articles/visions-techno-leviathan-politics-bitcoin-blockchain)

Bitcoin’s Political Sociology

““You have bitcoin purists, who are just about bitcoin because it’s a technology that will help the world,” he said, explaining how some evangelists believe bitcoin will permit citizens of third-world countries to protect their money, free from the interests of financial institutions. (As the popular site We Use Coins puts it, “There’s no wallstreet [sic] banker getting rich by standing inbetween you and the people you want to send and receive money from.”)

The 2nd group, Mr. Waters continued, comprises those who are politically motivated. “A lot of libertarians,” he said.

As for the third group: “You have people with profit incentive. They want to be involved in bitcoin to make a lot of money.” (http://observer.com/2013/04/its-all-about-the-bitcoin-baby/)

Discussion

Amongst the issues raised in our separate discussion entry are:

  • Social Issues
    • How the Bitcoin 1%’s manipulate the currency
  • P2P / Commons Issues
    • A possible p2p critique of the current p2p protocol?
    • Is Bitcoin truly p2p?
  • Economic Issues
    • Jon Matonis on the “Austrian economics” background
    • The deflationary economics behind Bitcoin’s design are libertarian
  • Political Issues
    • The fallacy of a non-political currency
    • The (a)political economy of Bitcoin
    • Bitcoin is incompatible with the state system and should not seek legitimation
    • The Blocksize Limit Decentralist – Centralist Debate
  • Monetary Issues
    • Why Bitcoin is Flawed from a Monentary Reformers’ Point of View
    • Scarcity Aspects of Bitcoin
    • The Difference inbetween Bitcoin and Open Coin
    • Is Bitcoin a deflationary currency?
  • Technical Issues
    • Mining Privileges associated with Bitcoin
  • Energy Issues
    • Bitcoin wastes energy
  • Is Bitcoin Legal?

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