8 ms·

The Cryptocurrency Singularity

70 points by ramontayag 9y ago

jchanimal 9y ago
Completely agree. Thanks for bringing Gresham's Law into it. Now I'm terrified I need to diversify.
- ramontayag 9y ago
  Apologies! I wasn't planning to terrify people ;) kidding aside, I think it'll a while before we get there, so there is a lot of time.
PierreRochard 9y ago
Excellent writeup! I came to the same conclusion a few years ago with Thiers' Law: good money drives out bad, http://nakamotoinstitute.org/mempool/speculative-attack/ http://nakamotoinstitute.org/mempool/speculative-attack/
- ramontayag 9y ago
  Thank you! I knew I was just lacking in Google-fu when searching for other articles that expressed this idea I had been forming in my mind.
zupa-hu 9y ago
I'm confused. Gresham's law sais "bad money drives out good". Inflation is bad, so from that follows that the money that inflates more will be more used. Okay, I buy that. Then this: > When the singularity is reached, I think people will be more likely to choose to spend their inflationary fiat currency instead of their deflationary cryptocurrency. I'm lost here. People already prefer to spend USD over Bitcoin. So I understand the change would be if Bitcoin inflates faster, because then people will prefer to spend Bitcoin. But the article sais the opposite. Or doesn't "stable against USD" mean that Bitcoin will inflate/deflat at around the same rate as USD? Interesting article, I'd love to understand it! Anyone?
- gbaygon 9y ago
  I thought the same thing, the core idea of this article is in direct opposition of its conclusion. Bitcoin is going up in value, and according to the market predictions it will go way higher, so it's deflationary. Bitcoin holders will prefer to spend cash money to bitcoins anytime in speculation of future gains. I see bitcoin more of a speculative investment at the moment, than a type of currency. Only the ones that are riding the bitcoin trains seems to think this is the future of money. Outside that bubble nobody really uses it.
  - bga 9y ago
    Bitcoin seems like an investment in proving the ideas that may eventually come to form a truly practical cryptocurrency.
    - kylnew 9y ago
      Yes. Thank you. I honestly feel like it is a solution seeking a problem. Not to say it isn't solving any problems already, but I think it's still seeking a big enough problem that the general public starts paying attention and believing in its value. Just as an example: I don't see why the US government couldn't adopt the best parts of crypto (e.g. the public ledger) but also be able to control it and how that kind of move wouldn't make it instantly the most trusted cryptocurrency vs all the ones we speculate on today.
      - ramontayag 9y ago
        The interesting part for me is the more people speculate, the higher the price becomes, and the higher the price becomes, the more useful it is in the institutional level because the markets are deeper.
  - Rmilb 9y ago
    I think its unfair to dismiss the currency aspect of bitcoin. The use case for the developed world is 95% speculation 5% buying contraband online however, for people in Venezuela[1], girls learning to code in Afghanistan[2], or women in Saudi Arabi who can't legally open a bank account, Bitcoin is solving problems that under banked people have now. Of course the ecosystem needs to mature so grandma can use it safely, but that will come with time. [1] https://www.cnbc.com/2017/08/24/bitcoin-mining-is-popular-in-venezuela-because-of-hyperinflation.html https://www.cnbc.com/2017/08/24/bitcoin-mining-is-popular-in... [2] https://www.coindesk.com/how-bitcoin-helps-afghan-girls-achieve-financial-freedom/ https://www.coindesk.com/how-bitcoin-helps-afghan-girls-achi...
sagitariusrex 9y ago
Whenever I read articles like this I'm reminded of this quote by Richard Buckminster Fuller "You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete." IMHO this is what Bitcoin is all about. Not a get-rich-quick scheme or whatever insults some people throw at it, but a sound, arguably better alternative to fiat currencies. Aside: If you haven't yet gotten into the fancy dancy, drama sprinkled ICO, Scamcoin, and Altcoin world I cannot recommend it enough. It's hilarious, like the cambrian explosion of cryptomoney.
- QAPereo 9y ago
  https://en.m.wikipedia.org/wiki/Ordovician–Silurian_extinction_events https://en.m.wikipedia.org/wiki/Ordovician–Silurian_extincti... See them while they last.
- root_axis 9y ago
  Bitcoin is not "better" than fiat currencies, it's worse in every way except for the fact that it is not operated by a central authority. In terms of convenience, security, and ease of use it is clearly worse. The world does need a "back channel" currency, and bitcoin is a perfect fit for this, but it will never move beyond that because there's simply no reason for the masses to use it.
  - jron 9y ago
    Is there a reason for the masses to hold it?
  - clarkmoody 9y ago
    Each type of currency has advantages on different dimensions. I disagree that fiat is better is every way except for decentralization. Fiat money is great as a medium of exchange in your local jurisdiction. Start moving across borders and you have problems. Save long-term in your bank account, and inflation will eat its value away. Have political or religious views that run counter to an oppressive regime, and you will find your accounts seized or frozen. Live through a war or serious economic downturn, and you may find that all your previous cash and savings are completely worthless. Bitcoin doesn't have take-backs if you mess up: a bit of lax security and a hacker can get all your money. Insufficient backup solution also loses all your coins. Using on-chain transactions for daily point-of-sale purchases is slow due to the block times. Speculative pressures drive wild swings in prices due to illiquid markets for crypto. There are plenty of reasons to avoid each type of currency, and each has its own advantages.
jms18 9y ago
> Will governments around the world begin to make their currency deflationary in order to make it attractive? rofl If you want people to use currency more, you make it inflate faster. This guy does not understand macroeconomics.
- clarkmoody 9y ago
  Q: How do you know macro economists have a sense of humor? A: They use decimals.
- kylnew 9y ago
  thank you. I'm glad I'm not the only one who feels this article doesn't properly understand the intricacies of inflation/deflation in an economy
  - ramontayag 9y ago
    Yes, I certainly can't say I'm an economics expert. Mind sharing with me what part of the article you think is misguided?
    - kylnew 9y ago
      Yes. I posted my thoughts in another comment > https://news.ycombinator.com/item?id=15184382 https://news.ycombinator.com/item?id=15184382 Honestly, I'm kind of scared/surprised more people aren't talking about this.
      - ramontayag 9y ago
        Thanks for the link. I'm not sure where in the article I said inflation is worse than deflation. I don't feel I know enough about economics to express an opinion about this. What I'm trying to say is that if people have a choice, they'll keep their wealth in a currency that destroys their wealth the least slowly. This, I suspect, will have a runaway effect. We probably wouldn't be able to stop it if we tried, which sounds a lot like the AI singularity.
maxander 9y ago
The argument makes some intuitive sense (more people buying X over Y makes the value of X go up, which makes holding X more desirable, so more people buy X instead of Y...), but if this effect actually happened I don't see why it would happen with a cryptocurrency and not, say, gold. Nothing about the argument seems specific to cryptocurrencies- it's used here simply as a commodity whose value has historically been going up for awhile, and which people feel pretty bullish about. There are other reasons, also, why Bitcoin or it's ilk would be particularly bad commodities to show this effect- notably, that the Bitcoin system can handle only a finite volume of transactions efficiently, and while it's capacity can be increased, the community managing it is (so far) still too disorganized to do so quickly (and without dramatic measures like forks and such.) Gold trading, as far as I know, already has none of these limitations, so cryptocurrencies have catching up to do, on that front.
- ramontayag 9y ago
  Yes, you're right to bring up confirmation times and community. I didn't include that on purpose in order to focus on the good vs bad money part. My hunch is the scaling issues will (eventually) get addressed when we hit the barriers. Might not even be Bitcoin.
kylnew 9y ago
I think there's a critical discussion about inflation vs deflation missing from this article. Inflation is bad, but so is deflation because it encourages saving your money which, in turn, hurts liquidity in the marketplace (i.e. the amount of cash freely flowing around). Liquidity is essential to keep the economy moving. Isn't what we want really a currency with just a little bit of inflation that keeps people spending their dollars today rather than saving them for tomorrow?
- millettjon 9y ago
  If you live under the influence of a failing government, the liquidity of bitcoin may well be higher that the local failin currency as you can move value to/from the outside world.
  - kylnew 9y ago
    This is certainly true. All foreign currencies are not alike in their viability, but this does not address the long term concern of the cryptocurrency itself and its inflationary/deflationary direction.
- eosophos 9y ago
  This is a really good point. Why would anyone spend their crypto on amazon if it could be worth 30% more in a week?
  - vocatus_gate 9y ago
    By that rationale, why would anyone buy a flatscreen TV today, when they know they could wait a few months and it would be a lot cheaper?
    - kylnew 9y ago
      exactly that sort of thing DOES happen though - particularly with goods that have planned obsolescence cycles annually, so I'm not sure it's even a good comparison in the first place TBH Think of it more from a general level and on even bigger purchases like a house. Everyone stopping buying houses for a year because they think sitting on their own currency (regardless of interest rates and the housing market) will make it cheaper is not a good thing.
clarkmoody 9y ago
Rothbard's History of Money and Banking in the United States: The Colonial Era to World War II[1] wades through hundreds of years of Gresham's Law in action. Special attention is devoted to par laws and legal tender laws in exacerbating the tendency of banks to print more notes than there is metal in the vault. [1] https://mises.org/library/history-money-and-banking-united-states-colonial-era-world-war-ii https://mises.org/library/history-money-and-banking-united-s... (free audio book, epub, and pdf available)
- c3534l 9y ago
  Aw, you had me until mises.org. I prefer to get my economics from reputable sources.
  - clarkmoody 9y ago
    Seriously? I was of the opinion that Hacker News readers had enough intellectual fortitude to evaluate content on its merits.
leot 9y ago
Per the other comments here, the applicability of Gresham's law as the author describes is questionable. However, the author's broader point appears to be that the economic impact of a deflationary currency is largely unknown, and as expressed is worth considering. IANAE, but it seems at least conceptually possible that there could be an economy in which every actor's rational decision was to always buy some token because it appreciated so reliably. Consider, e.g., Shubik's "Dollar Auction" paradox, in which a sequence of rational decisions can lead to an ultimately irrational final outcome. Coupled with Bitcoin's expenditure of energy as proof of work, Bitcoin could prove to behave like a kind of superintelligence akin to one of Bostrom's paperclip maximizers, except it's one that consumes more and more energy resources as it attempts to maximize the value of Bitcoin.
- ramontayag 9y ago
  I did send the article to my old economics professor so he can tell me where I misunderstand things, but I haven't gotten a reply yet. ️
eosophos 9y ago
Once Bitcoin gets linked up with Litecoin, lightning network, and atomic swaps, seems like it will become more viable as a payment channel. It still beats me, however, as to why anyone would by anything with it if it might be worth twice as much in 6 months. Of course, it could also be worth half as much.
- montecarl 9y ago
  When I buy things with Bitcoin, I typically convert more fiat currency to BTC to keep my BTC balance constant.
  - TACIXAT 9y ago
    So you're buying things with fiat currency.
  - encryptThrow32 9y ago
    So why not just use fiat? Coinbase used to offer this service, where you would 'auto-topup' your balance, but removed this because it was silly as it generated multiple tx's just to do what paying in fiat would achieve in the first place. As time goes on, the notion that coffee or meals are suitable to be paid in bitcoin seems more absurd. You would no more pay for a meal with a gold bar than you would with a Krugerrand. It will be seen as decadent for all those pizzas, controlled substances and ransoms to have been paid in BTC -- a kings ransom for pizza? Bitcoin will likely never be a general purpose payment network. Lightning MAY if it obtains support from legacy services like VISA and MASTERCARD. I suspect V/MC will be the lightning nodes with the most payment channel volume.
banku_brougham 9y ago
'People spend lesser valued currency and hoard higher valued currency' + 'people are hoarding bitcoin' (does not imply) 'bitcoin is a higher valued currency'
ineptech 9y ago
I don't understand how someone can talk about making everyday purchases with BTC without addressing the transaction fees and confirmation times. Doesn't it currently cost several dollars to spend a dollar? Is there some reason to think that in the far future confirmation times and transaction fees will trend towards zero?
- antocv 9y ago
  Bitcoin is not the only cryptocurrency, and not all cryptocurrencies are based on a blockchain data-structure. There are other currencies which are not-inflationary, trustless and decentralized, and many more currencies with various levels of those properties, some are more centralized and require trust in a few in various ways, and some are decentralized trust-less but still inflationary. There is even cryptocurrencies which do not use Proof-of-Work, or Proof-of-Stake, or Proof-of-Anything - but still can reach consensus in open distributed network.
  - ramontayag 9y ago
    I didn't bring it up because I suspect that we'll eventually find a scaling solution, whether it be sidechains, tree chains, riding on Moore's law, multiple cryptocurrencies connected through an interleger. It's a more long term view of the impact of cryptocurrencies concerning government issued currencies.
  - formula1 9y ago
    I appreciate your sharing awareness of iuch systems. Are you talking about something like iota? Reaching consensus to avoid double spending is a very real problem. Additionally, if we are talking about smart contracts, the order of the transactions can often be very important. Additionally what happens if a contract is interacted with by two parties with neither transactions being aware of the other?
  - ineptech 9y ago
    Sure, but this is an article specifically about BTC; none of its conclusions hold for cryptocurrencies generally. I guess it just seems really deceptive to talk about fiat's "hidden cost" of inflation while ignoring BTC's not-at-all-hidden cost. Similarly, I'm unclear on why confirmation times aren't considered a serious problem. It seems like BTC enthusiasts like to discuss a hypothetical future in which the BTC infrastructure is so mature that you can buy coffee without worrying about fees and confirmation times, but I don't see how we get there from here. Either the payment takes hours to confirm (leaving the coffee shop vulnerable to double-spending) or it goes through an off-chain processor (who would demand to know my identity). Either way you're losing one of the main selling points of using a cryptocurrency in the first place.
BenoitEssiambre 9y ago
This is full of misunderstandings about monetary policy. Currencies that are not designed to lose value over time can not be stable. Intrinsically worthless tokens engineered to have better than market risk adjusted, liquidity adjusted, real returns compared to real productive investment will always be unstable and fluctuate increasingly wildly as they get more popular. This is a result of physical limits of production. As people hoard worthless tokens, their price increases which causes more people to hoard them instead of investing in real businesses with real production capacity. This eventually causes production capacity to drop. That's right, when enough people do it, token hoarding displaces investment in businesses and factories and lowers global production capacity. This means token hoarding causes a future drop in things available to buy with these tokens. Eventually there will be people who want to buy real things with their stock of tokens. The tokens will be chasing fewer goods which means prices for stuff will rise (tokens will lose value). This might happen suddenly when people with large stockpiles of tokens notice that value is dropping and that there are tons of other tokens waiting on the sideline to make it drop even further. Hoarders might rush to get rid of their stockpile all at the same time before they're worthless which will cause their fall to worthlessness. This drop will bring the tokens closer to their natural intrinsic value of zero. The cycle can then start again, such is aggregate economics. The 1920s and 1930s suffered from this type of production drop but with gold tied currencies instead of cryptocoins. It happened to a lesser extent in 2007 when western world central banks failed to keep inflation rates high enough. It's important for the world's sake to not let deflationary currencies become too popular. When savings or financial promises are insufficiently tied to future production or to accumulation of real goods, there will be disappointment when many people try to exchange them for real stuff. That is true for crypto currencies as well as government currencies (that is why the system is designed to make banks invest people's money in real businesses and minimize the proportion of money that is stockpiled idly). It's true that crypto currencies are currently not widely held enough to significantly affect the aggregate economy but speculation already keeps them volatile and the knowledge that as they get more popular, there will be more macroeconomic pressures towards volatility keeps the speculation wild and cryptocoins unstable.
- ramontayag 9y ago
  If I understand this right, I don't think I necessarily disagree with you. My question is: if people can choose one or the other to spend, what do you think they'll choose? A currency that inflates quickly, or one that inflates less quickly?
arthurjj 9y ago
I was hoping this article was going to be a serious look at if an AI could run on a currency like Ethereum. A few months back I wrote a tongue in cheek version about if the DAO hack was to prevent the singularity [1]. But I'd be curious if it were actually possible. 1. http://arthur-johnston.com/essay/2016/06/26/Rokos_DAO.html http://arthur-johnston.com/essay/2016/06/26/Rokos_DAO.html
- dsr_ 9y ago
  If an AI can run on a universal Turing machine, then it can run on a Turing-equivalent platform like ether. That doesn't make it a good or economical idea.
  - ubernostrum 9y ago
    On the contrary, it's a great solution for AI risk: run the AI on a blockchain, and hackers will find plenty of ways to disable it if it starts to get out of hand.
- ramontayag 9y ago
  That would be interesting!
deleted 9y ago
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fpgaminer 9y ago
Software is eating the world. Those who think a digital currency of some kind _won't_ displace cash are going to be made fools. About the article ... there are a lot of questions here. I guess the main thrust of the article is that Bitcoin's volatility is declining, and thus it is becoming more attractive for use as a tool for buying lunch (where lunch is a stand-in for common day-to-day transactions). That hinges on the idea that Bitcoin wasn't attractive for that purpose before, because its value was too volatile. 1) The graph the article uses to demonstrate that Bitcoin is becoming less volatile seems to indicate, to me, that Bitcoin is just as volatile as it ever was. If I'm reading the graph correctly, the average of volatility is the same, but the std deviation of volatility has been decreasing. In other words, Bitcoin is just as volatile, but it's more consistently volatile. That's ... a weird metric to measure. Either I'm reading the graph incorrectly, or OP is. 2) The OP says "I wanted to keep them because Bitcoin has, since its inception, on average increased in value at about 150% per year". So why bring up volatility? Volatility isn't relevant to whether Bitcoin goes up in value over time or not. It's clear that, as long as Bitcoin continues to be useful, it will continue to deflate long term. So it's clear that Bitcoin will always have this "issue". 3) But that presumes that deflation is an issue to begin with. Is it? I'm naive on the subject. For the majority of human history we used deflationary currencies; precious metals. The world didn't stop turning then. But then the question is, are inflationary currencies better? Is our modern use of them an evolution, then? On the one hand, we can think of it as horrible that the majority of people are storing their value in a currency that is decreasing in value over time. Their work, their labor, earns them wealth that decreases over time. That's disturbing. But maybe it _should_ be that way? Having people store their wealth in inflationary stores of value implies that work is only valuable in the immediate time frame. And that kind of makes sense. A burger I flip today is valuable today, but not so much years from now, let alone decades from now. Paying me a deflationary currency today for that burger flip is weird, then, because you've traded something that increases in value over time for something that decreases in value over time. So you could argue that in today's economy employers trade cash, something that decreases in value over time, for work that also decreases in value over time. And ... doesn't that make sense? And yet, if given the opportunity and knowledge, wouldn't everyone want to store their value in deflationary vehicles? And if that's the case, wouldn't everyone, as the article implies, only _have_ deflationary vehicles to trade with ... so we'd just re-evolve to using deflationary currencies again. Does the average person even _know_ that their currency is inflationary? I doubt it. Maybe the choice of deflationary/inflationary doesn't even matter. I dunno, it's just a complicated question. I don't think it's clear cut that a deflationary currency is better or worse. My point is, the deflationary property of Bitcoin doesn't necessarily preclude its use as a daily driver. Volatility sure might, but deflation I'm not so sure. It's probably irrelevant to the average person. The average person will see value in replacing HSBC, who would normally freeze their bank account randomly and destroy their business. 4) It's important to mention that, at this point, we have reason to believe that Bitcoin and clones based on its model can never be used to buy lunch (and other such small transactions). The cost of decentralization is too high, and we have no way to decrease those costs by the orders of magnitude needed to handle the transactional loads of things like buying lunch. We are working to decrease them, and have recently succeeded in a modest improvement on the Bitcoin network, but orders of magnitude is ... out of reach without some massive innovation. It's more likely that on-top-of networks like Lightning Network and its evolutions built on top of Bitcoin will be the thing people interact with on a daily basis. The average person will get their paycheck in Bitcoin, but do their daily transactions using IOU networks like Lightning that settle behind the scenes on a less frequent basis. This allows the average person to use Bitcoin as their store of value, giving them by default the advantages that traditionally only a small fraction of the population have had, but still allowing cheap daily transactions for buying lunch. That doesn't change the meaning of the article. But it's important to mention how Bitcoin is evolving to fulfill the future the article proposes. So ... maybe that's the future. Or maybe a side chain will evolve with inflationary properties and we just use that to buy lunch and get paid. Maybe every country will have their own cryptocurrency, pseudo-centrally controlled, with atomic swaps for global trade. But one thing I know for sure. Software is eating the world. You either choose to ride that wave, or you get eaten by it.
javajosh 9y ago
A carbon tax on miners could slow down this singularity.

70 points by ramontayag 9y ago

jchanimal 9y ago

Completely agree. Thanks for bringing Gresham's Law into it. Now I'm terrified I need to diversify.

ramontayag 9y ago
Apologies! I wasn't planning to terrify people ;) kidding aside, I think it'll a while before we get there, so there is a lot of time.

PierreRochard 9y ago

Excellent writeup! I came to the same conclusion a few years ago with Thiers' Law: good money drives out bad, http://nakamotoinstitute.org/mempool/speculative-attack/ http://nakamotoinstitute.org/mempool/speculative-attack/

ramontayag 9y ago
Thank you! I knew I was just lacking in Google-fu when searching for other articles that expressed this idea I had been forming in my mind.

zupa-hu 9y ago

I'm confused. Gresham's law sais "bad money drives out good". Inflation is bad, so from that follows that the money that inflates more will be more used. Okay, I buy that. Then this: > When the singularity is reached, I think people will be more likely to choose to spend their inflationary fiat currency instead of their deflationary cryptocurrency. I'm lost here. People already prefer to spend USD over Bitcoin. So I understand the change would be if Bitcoin inflates faster, because then people will prefer to spend Bitcoin. But the article sais the opposite. Or doesn't "stable against USD" mean that Bitcoin will inflate/deflat at around the same rate as USD? Interesting article, I'd love to understand it! Anyone?

gbaygon 9y ago
I thought the same thing, the core idea of this article is in direct opposition of its conclusion. Bitcoin is going up in value, and according to the market predictions it will go way higher, so it's deflationary. Bitcoin holders will prefer to spend cash money to bitcoins anytime in speculation of future gains. I see bitcoin more of a speculative investment at the moment, than a type of currency. Only the ones that are riding the bitcoin trains seems to think this is the future of money. Outside that bubble nobody really uses it.
- bga 9y ago
  Bitcoin seems like an investment in proving the ideas that may eventually come to form a truly practical cryptocurrency.
  - kylnew 9y ago
    Yes. Thank you. I honestly feel like it is a solution seeking a problem. Not to say it isn't solving any problems already, but I think it's still seeking a big enough problem that the general public starts paying attention and believing in its value. Just as an example: I don't see why the US government couldn't adopt the best parts of crypto (e.g. the public ledger) but also be able to control it and how that kind of move wouldn't make it instantly the most trusted cryptocurrency vs all the ones we speculate on today.
    - ramontayag 9y ago
      The interesting part for me is the more people speculate, the higher the price becomes, and the higher the price becomes, the more useful it is in the institutional level because the markets are deeper.
- Rmilb 9y ago
  I think its unfair to dismiss the currency aspect of bitcoin. The use case for the developed world is 95% speculation 5% buying contraband online however, for people in Venezuela[1], girls learning to code in Afghanistan[2], or women in Saudi Arabi who can't legally open a bank account, Bitcoin is solving problems that under banked people have now. Of course the ecosystem needs to mature so grandma can use it safely, but that will come with time. [1] https://www.cnbc.com/2017/08/24/bitcoin-mining-is-popular-in-venezuela-because-of-hyperinflation.html https://www.cnbc.com/2017/08/24/bitcoin-mining-is-popular-in... [2] https://www.coindesk.com/how-bitcoin-helps-afghan-girls-achieve-financial-freedom/ https://www.coindesk.com/how-bitcoin-helps-afghan-girls-achi...

sagitariusrex 9y ago

Whenever I read articles like this I'm reminded of this quote by Richard Buckminster Fuller "You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete." IMHO this is what Bitcoin is all about. Not a get-rich-quick scheme or whatever insults some people throw at it, but a sound, arguably better alternative to fiat currencies. Aside: If you haven't yet gotten into the fancy dancy, drama sprinkled ICO, Scamcoin, and Altcoin world I cannot recommend it enough. It's hilarious, like the cambrian explosion of cryptomoney.

QAPereo 9y ago
https://en.m.wikipedia.org/wiki/Ordovician–Silurian_extinction_events https://en.m.wikipedia.org/wiki/Ordovician–Silurian_extincti... See them while they last.
root_axis 9y ago
Bitcoin is not "better" than fiat currencies, it's worse in every way except for the fact that it is not operated by a central authority. In terms of convenience, security, and ease of use it is clearly worse. The world does need a "back channel" currency, and bitcoin is a perfect fit for this, but it will never move beyond that because there's simply no reason for the masses to use it.
- jron 9y ago
  Is there a reason for the masses to hold it?
- clarkmoody 9y ago
  Each type of currency has advantages on different dimensions. I disagree that fiat is better is every way except for decentralization. Fiat money is great as a medium of exchange in your local jurisdiction. Start moving across borders and you have problems. Save long-term in your bank account, and inflation will eat its value away. Have political or religious views that run counter to an oppressive regime, and you will find your accounts seized or frozen. Live through a war or serious economic downturn, and you may find that all your previous cash and savings are completely worthless. Bitcoin doesn't have take-backs if you mess up: a bit of lax security and a hacker can get all your money. Insufficient backup solution also loses all your coins. Using on-chain transactions for daily point-of-sale purchases is slow due to the block times. Speculative pressures drive wild swings in prices due to illiquid markets for crypto. There are plenty of reasons to avoid each type of currency, and each has its own advantages.

jms18 9y ago

> Will governments around the world begin to make their currency deflationary in order to make it attractive? rofl If you want people to use currency more, you make it inflate faster. This guy does not understand macroeconomics.

clarkmoody 9y ago
Q: How do you know macro economists have a sense of humor? A: They use decimals.
kylnew 9y ago
thank you. I'm glad I'm not the only one who feels this article doesn't properly understand the intricacies of inflation/deflation in an economy
- ramontayag 9y ago
  Yes, I certainly can't say I'm an economics expert. Mind sharing with me what part of the article you think is misguided?
  - kylnew 9y ago
    Yes. I posted my thoughts in another comment > https://news.ycombinator.com/item?id=15184382 https://news.ycombinator.com/item?id=15184382 Honestly, I'm kind of scared/surprised more people aren't talking about this.
    - ramontayag 9y ago
      Thanks for the link. I'm not sure where in the article I said inflation is worse than deflation. I don't feel I know enough about economics to express an opinion about this. What I'm trying to say is that if people have a choice, they'll keep their wealth in a currency that destroys their wealth the least slowly. This, I suspect, will have a runaway effect. We probably wouldn't be able to stop it if we tried, which sounds a lot like the AI singularity.

maxander 9y ago

The argument makes some intuitive sense (more people buying X over Y makes the value of X go up, which makes holding X more desirable, so more people buy X instead of Y...), but if this effect actually happened I don't see why it would happen with a cryptocurrency and not, say, gold. Nothing about the argument seems specific to cryptocurrencies- it's used here simply as a commodity whose value has historically been going up for awhile, and which people feel pretty bullish about. There are other reasons, also, why Bitcoin or it's ilk would be particularly bad commodities to show this effect- notably, that the Bitcoin system can handle only a finite volume of transactions efficiently, and while it's capacity can be increased, the community managing it is (so far) still too disorganized to do so quickly (and without dramatic measures like forks and such.) Gold trading, as far as I know, already has none of these limitations, so cryptocurrencies have catching up to do, on that front.

ramontayag 9y ago
Yes, you're right to bring up confirmation times and community. I didn't include that on purpose in order to focus on the good vs bad money part. My hunch is the scaling issues will (eventually) get addressed when we hit the barriers. Might not even be Bitcoin.

kylnew 9y ago

I think there's a critical discussion about inflation vs deflation missing from this article. Inflation is bad, but so is deflation because it encourages saving your money which, in turn, hurts liquidity in the marketplace (i.e. the amount of cash freely flowing around). Liquidity is essential to keep the economy moving. Isn't what we want really a currency with just a little bit of inflation that keeps people spending their dollars today rather than saving them for tomorrow?

millettjon 9y ago
If you live under the influence of a failing government, the liquidity of bitcoin may well be higher that the local failin currency as you can move value to/from the outside world.
- kylnew 9y ago
  This is certainly true. All foreign currencies are not alike in their viability, but this does not address the long term concern of the cryptocurrency itself and its inflationary/deflationary direction.
eosophos 9y ago
This is a really good point. Why would anyone spend their crypto on amazon if it could be worth 30% more in a week?
- vocatus_gate 9y ago
  By that rationale, why would anyone buy a flatscreen TV today, when they know they could wait a few months and it would be a lot cheaper?
  - kylnew 9y ago
    exactly that sort of thing DOES happen though - particularly with goods that have planned obsolescence cycles annually, so I'm not sure it's even a good comparison in the first place TBH Think of it more from a general level and on even bigger purchases like a house. Everyone stopping buying houses for a year because they think sitting on their own currency (regardless of interest rates and the housing market) will make it cheaper is not a good thing.

clarkmoody 9y ago

Rothbard's History of Money and Banking in the United States: The Colonial Era to World War II[1] wades through hundreds of years of Gresham's Law in action. Special attention is devoted to par laws and legal tender laws in exacerbating the tendency of banks to print more notes than there is metal in the vault. [1] https://mises.org/library/history-money-and-banking-united-states-colonial-era-world-war-ii https://mises.org/library/history-money-and-banking-united-s... (free audio book, epub, and pdf available)

c3534l 9y ago
Aw, you had me until mises.org. I prefer to get my economics from reputable sources.
- clarkmoody 9y ago
  Seriously? I was of the opinion that Hacker News readers had enough intellectual fortitude to evaluate content on its merits.

leot 9y ago

Per the other comments here, the applicability of Gresham's law as the author describes is questionable. However, the author's broader point appears to be that the economic impact of a deflationary currency is largely unknown, and as expressed is worth considering. IANAE, but it seems at least conceptually possible that there could be an economy in which every actor's rational decision was to always buy some token because it appreciated so reliably. Consider, e.g., Shubik's "Dollar Auction" paradox, in which a sequence of rational decisions can lead to an ultimately irrational final outcome. Coupled with Bitcoin's expenditure of energy as proof of work, Bitcoin could prove to behave like a kind of superintelligence akin to one of Bostrom's paperclip maximizers, except it's one that consumes more and more energy resources as it attempts to maximize the value of Bitcoin.

ramontayag 9y ago
I did send the article to my old economics professor so he can tell me where I misunderstand things, but I haven't gotten a reply yet. ️

eosophos 9y ago

Once Bitcoin gets linked up with Litecoin, lightning network, and atomic swaps, seems like it will become more viable as a payment channel. It still beats me, however, as to why anyone would by anything with it if it might be worth twice as much in 6 months. Of course, it could also be worth half as much.

montecarl 9y ago
When I buy things with Bitcoin, I typically convert more fiat currency to BTC to keep my BTC balance constant.
- TACIXAT 9y ago
  So you're buying things with fiat currency.
- encryptThrow32 9y ago
  So why not just use fiat? Coinbase used to offer this service, where you would 'auto-topup' your balance, but removed this because it was silly as it generated multiple tx's just to do what paying in fiat would achieve in the first place. As time goes on, the notion that coffee or meals are suitable to be paid in bitcoin seems more absurd. You would no more pay for a meal with a gold bar than you would with a Krugerrand. It will be seen as decadent for all those pizzas, controlled substances and ransoms to have been paid in BTC -- a kings ransom for pizza? Bitcoin will likely never be a general purpose payment network. Lightning MAY if it obtains support from legacy services like VISA and MASTERCARD. I suspect V/MC will be the lightning nodes with the most payment channel volume.

banku_brougham 9y ago

'People spend lesser valued currency and hoard higher valued currency' + 'people are hoarding bitcoin' (does not imply) 'bitcoin is a higher valued currency'

ineptech 9y ago

I don't understand how someone can talk about making everyday purchases with BTC without addressing the transaction fees and confirmation times. Doesn't it currently cost several dollars to spend a dollar? Is there some reason to think that in the far future confirmation times and transaction fees will trend towards zero?

antocv 9y ago
Bitcoin is not the only cryptocurrency, and not all cryptocurrencies are based on a blockchain data-structure. There are other currencies which are not-inflationary, trustless and decentralized, and many more currencies with various levels of those properties, some are more centralized and require trust in a few in various ways, and some are decentralized trust-less but still inflationary. There is even cryptocurrencies which do not use Proof-of-Work, or Proof-of-Stake, or Proof-of-Anything - but still can reach consensus in open distributed network.
- ramontayag 9y ago
  I didn't bring it up because I suspect that we'll eventually find a scaling solution, whether it be sidechains, tree chains, riding on Moore's law, multiple cryptocurrencies connected through an interleger. It's a more long term view of the impact of cryptocurrencies concerning government issued currencies.
- formula1 9y ago
  I appreciate your sharing awareness of iuch systems. Are you talking about something like iota? Reaching consensus to avoid double spending is a very real problem. Additionally, if we are talking about smart contracts, the order of the transactions can often be very important. Additionally what happens if a contract is interacted with by two parties with neither transactions being aware of the other?
- ineptech 9y ago
  Sure, but this is an article specifically about BTC; none of its conclusions hold for cryptocurrencies generally. I guess it just seems really deceptive to talk about fiat's "hidden cost" of inflation while ignoring BTC's not-at-all-hidden cost. Similarly, I'm unclear on why confirmation times aren't considered a serious problem. It seems like BTC enthusiasts like to discuss a hypothetical future in which the BTC infrastructure is so mature that you can buy coffee without worrying about fees and confirmation times, but I don't see how we get there from here. Either the payment takes hours to confirm (leaving the coffee shop vulnerable to double-spending) or it goes through an off-chain processor (who would demand to know my identity). Either way you're losing one of the main selling points of using a cryptocurrency in the first place.

BenoitEssiambre 9y ago

This is full of misunderstandings about monetary policy. Currencies that are not designed to lose value over time can not be stable. Intrinsically worthless tokens engineered to have better than market risk adjusted, liquidity adjusted, real returns compared to real productive investment will always be unstable and fluctuate increasingly wildly as they get more popular. This is a result of physical limits of production. As people hoard worthless tokens, their price increases which causes more people to hoard them instead of investing in real businesses with real production capacity. This eventually causes production capacity to drop. That's right, when enough people do it, token hoarding displaces investment in businesses and factories and lowers global production capacity. This means token hoarding causes a future drop in things available to buy with these tokens. Eventually there will be people who want to buy real things with their stock of tokens. The tokens will be chasing fewer goods which means prices for stuff will rise (tokens will lose value). This might happen suddenly when people with large stockpiles of tokens notice that value is dropping and that there are tons of other tokens waiting on the sideline to make it drop even further. Hoarders might rush to get rid of their stockpile all at the same time before they're worthless which will cause their fall to worthlessness. This drop will bring the tokens closer to their natural intrinsic value of zero. The cycle can then start again, such is aggregate economics. The 1920s and 1930s suffered from this type of production drop but with gold tied currencies instead of cryptocoins. It happened to a lesser extent in 2007 when western world central banks failed to keep inflation rates high enough. It's important for the world's sake to not let deflationary currencies become too popular. When savings or financial promises are insufficiently tied to future production or to accumulation of real goods, there will be disappointment when many people try to exchange them for real stuff. That is true for crypto currencies as well as government currencies (that is why the system is designed to make banks invest people's money in real businesses and minimize the proportion of money that is stockpiled idly). It's true that crypto currencies are currently not widely held enough to significantly affect the aggregate economy but speculation already keeps them volatile and the knowledge that as they get more popular, there will be more macroeconomic pressures towards volatility keeps the speculation wild and cryptocoins unstable.

ramontayag 9y ago
If I understand this right, I don't think I necessarily disagree with you. My question is: if people can choose one or the other to spend, what do you think they'll choose? A currency that inflates quickly, or one that inflates less quickly?

arthurjj 9y ago

I was hoping this article was going to be a serious look at if an AI could run on a currency like Ethereum. A few months back I wrote a tongue in cheek version about if the DAO hack was to prevent the singularity [1]. But I'd be curious if it were actually possible. 1. http://arthur-johnston.com/essay/2016/06/26/Rokos_DAO.html http://arthur-johnston.com/essay/2016/06/26/Rokos_DAO.html

dsr_ 9y ago
If an AI can run on a universal Turing machine, then it can run on a Turing-equivalent platform like ether. That doesn't make it a good or economical idea.
- ubernostrum 9y ago
  On the contrary, it's a great solution for AI risk: run the AI on a blockchain, and hackers will find plenty of ways to disable it if it starts to get out of hand.
ramontayag 9y ago
That would be interesting!

deleted 9y ago

[deleted]

fpgaminer 9y ago

Software is eating the world. Those who think a digital currency of some kind _won't_ displace cash are going to be made fools. About the article ... there are a lot of questions here. I guess the main thrust of the article is that Bitcoin's volatility is declining, and thus it is becoming more attractive for use as a tool for buying lunch (where lunch is a stand-in for common day-to-day transactions). That hinges on the idea that Bitcoin wasn't attractive for that purpose before, because its value was too volatile. 1) The graph the article uses to demonstrate that Bitcoin is becoming less volatile seems to indicate, to me, that Bitcoin is just as volatile as it ever was. If I'm reading the graph correctly, the average of volatility is the same, but the std deviation of volatility has been decreasing. In other words, Bitcoin is just as volatile, but it's more consistently volatile. That's ... a weird metric to measure. Either I'm reading the graph incorrectly, or OP is. 2) The OP says "I wanted to keep them because Bitcoin has, since its inception, on average increased in value at about 150% per year". So why bring up volatility? Volatility isn't relevant to whether Bitcoin goes up in value over time or not. It's clear that, as long as Bitcoin continues to be useful, it will continue to deflate long term. So it's clear that Bitcoin will always have this "issue". 3) But that presumes that deflation is an issue to begin with. Is it? I'm naive on the subject. For the majority of human history we used deflationary currencies; precious metals. The world didn't stop turning then. But then the question is, are inflationary currencies better? Is our modern use of them an evolution, then? On the one hand, we can think of it as horrible that the majority of people are storing their value in a currency that is decreasing in value over time. Their work, their labor, earns them wealth that decreases over time. That's disturbing. But maybe it _should_ be that way? Having people store their wealth in inflationary stores of value implies that work is only valuable in the immediate time frame. And that kind of makes sense. A burger I flip today is valuable today, but not so much years from now, let alone decades from now. Paying me a deflationary currency today for that burger flip is weird, then, because you've traded something that increases in value over time for something that decreases in value over time. So you could argue that in today's economy employers trade cash, something that decreases in value over time, for work that also decreases in value over time. And ... doesn't that make sense? And yet, if given the opportunity and knowledge, wouldn't everyone want to store their value in deflationary vehicles? And if that's the case, wouldn't everyone, as the article implies, only _have_ deflationary vehicles to trade with ... so we'd just re-evolve to using deflationary currencies again. Does the average person even _know_ that their currency is inflationary? I doubt it. Maybe the choice of deflationary/inflationary doesn't even matter. I dunno, it's just a complicated question. I don't think it's clear cut that a deflationary currency is better or worse. My point is, the deflationary property of Bitcoin doesn't necessarily preclude its use as a daily driver. Volatility sure might, but deflation I'm not so sure. It's probably irrelevant to the average person. The average person will see value in replacing HSBC, who would normally freeze their bank account randomly and destroy their business. 4) It's important to mention that, at this point, we have reason to believe that Bitcoin and clones based on its model can never be used to buy lunch (and other such small transactions). The cost of decentralization is too high, and we have no way to decrease those costs by the orders of magnitude needed to handle the transactional loads of things like buying lunch. We are working to decrease them, and have recently succeeded in a modest improvement on the Bitcoin network, but orders of magnitude is ... out of reach without some massive innovation. It's more likely that on-top-of networks like Lightning Network and its evolutions built on top of Bitcoin will be the thing people interact with on a daily basis. The average person will get their paycheck in Bitcoin, but do their daily transactions using IOU networks like Lightning that settle behind the scenes on a less frequent basis. This allows the average person to use Bitcoin as their store of value, giving them by default the advantages that traditionally only a small fraction of the population have had, but still allowing cheap daily transactions for buying lunch. That doesn't change the meaning of the article. But it's important to mention how Bitcoin is evolving to fulfill the future the article proposes. So ... maybe that's the future. Or maybe a side chain will evolve with inflationary properties and we just use that to buy lunch and get paid. Maybe every country will have their own cryptocurrency, pseudo-centrally controlled, with atomic swaps for global trade. But one thing I know for sure. Software is eating the world. You either choose to ride that wave, or you get eaten by it.

javajosh 9y ago

A carbon tax on miners could slow down this singularity.