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This is an excellent article explaining very well the Byzantine general's problem and how bitcoin provides a solution. However, even if I agree with the answer

by guylhem 14y ago

This is an excellent article explaining very well the Byzantine general's problem and how bitcoin provides a solution. However, even if I agree with the answer, I don't agree with its "jump to the conclusion". Here is my take on that: Whether one's believes in decentralization or in centralization, another of bitcoin core assets is that it is not deflationary for prices. All currencies have price deflation built it, for some macroeconomic reasons about motivating agents that I don't fully understand yet. It could be a good thing for economic growth, or it may not be. Let's leave that issue aside. The important thing is that Bitcoin doesn't. Being convertible with other currencies means its value can only rise (following the definition of deflation!) So the only question is whether the rise in relative value - bitcoin inflation - will be faster than the fall of the goods prices' in the other currencies. And that's where the decentralization part plays its role and the article gives the right answer : if you believe in decentralization and in parties acting in their own best interests, it will be faster. If you believe in centralization and people acting for the others best interest, it won't be faster. Bitcoin is a fun experiment on human behaviour :-) In the end, bitcoin value will still rise - if only because it provides a way to escape from the deflationary currencies. The only question is how fast. There are negative interest government bonds being sold right now - IIRC, Germany and France do that. Why one would make sure to take a fall when a conversion in bit coin means that the value can be preserved? The question of whether it is a good thing for economic growth remains. It doesn't seems to be. I don't have bitcoin wealth. I wish I did because it seems like a very good placement at the moment.

seanalltogether 14y ago
All currencies have price deflation built it, for some macroeconomic reasons about motivating agents that I don't fully understand yet. It could be a good thing for economic growth, or it may not be. Let's leave that issue aside. Just to be clear, the reason that governments increase the currency supply is that citizens will do it with or without them. The most fundamental currency is a promissory note, an I.O.U. Every time you write someone an IOU you inflate the supply of currency, because the holder of that IOU can pass that around to others in the form of payment. Instead of sending your bushel of apples to the shoemaker who made your shoes, you now have to send half to the bread baker, and half to the candle maker as that IOU was spent. A currency that doesn't grow will be naturally replaced by one that does. This is my biggest problem with bitcoin.
- limonbd 14y ago
  http://www.ideabdl.com/ http://www.ideabdl.com/ Making Difference...|All kind of IT Solution ideabdl.com,You can bayer, provider or contractor of outsource for software, we offering you come,see & make.
- guylhem 14y ago
  "A currency that doesn't grow will be naturally replaced by one that does." seems right, as long as the minimal discrete value of the currency that doesn't grow cause a problem for the economy. But if you can move from discrete to continuous space (bitcoins can be cut up to 1E-8, and according to what I've read this is not a fixed limit), why bother moving to the other currency ? (I hope I get it right - it's an area I don't fully understand)
  - enki 14y ago
    yes, bitcoins in theory can be infinitely divided. classical observations about hoarding and "bad currency driving out the good" likely don't apply. if you want to spend, you just spend however little you want to spend.
- YokoZar 14y ago
  There is no reason we can't start issuing tradable IOUs for bitcoins without actually having our hands on the bitcoins. There could even be a billion bitcoin derivatives market with only a million real bitcoins (just moving around a thousand times each)
DavidSJ 14y ago
The important thing is that Bitcoin doesn't [inflate]. Being convertible with other currencies means its value can only rise Value is a function of supply and demand, not just supply. The value of a bitcoin can fall, as it has done many times in the past.
- guylhem 14y ago
  Yes, it can fall at any point whenever demand goes down. But on a longer run, I believe demand won't go down but up, since it has this competitive advantage over other currencies.
  - eru 14y ago
    If you believe that, I encourage you to start your own bitcoin clone, and take in at least half of all mined coins. (Or just put money in current standard bitcoins.)
    - guylhem 14y ago
      I don't even gave a 2 digits amount of BTC IIRC, but I do accept donations. And yeah, I'd like to have an alternative when bitcoin suffer the napster fate, because too many computing in the government hands could result in a bitcoin takeover
hristov 14y ago
I think you are confusing the concepts of inflation and deflation there.
- guylhem 14y ago
  Depending on how you read the message and on the perspective you take, yes I did. When I checked my text just prior to posting I thought it wasn't clear enough, so I added the "price" thing and posted. Oops.) I though about editing and clearing up the original post but as it stands it can easily be figured out and doesn't impact the meaning. EDIT: just posted a reply to define the vocabulary I used and the perspective I took.
- YokoZar 14y ago
  This is not uncommon when criticizing bitcoin. "It can only increase in value, therefore it is worthless" is clearly a contradictory statement -- it's essentially arguing that no one will want to buy bitcoins because too many people want to buy them.
rprasad 14y ago
I don't think you understand how currencies or economics work. Currencies are by nature inflationary in a growing economy. This is a good thing, because inflation encourages spending and/or investment. Deflation is fatal to an economy: because the value of the currency will grow with non-use, deflation inhibits spending and investment. Bitcoin's fatal flaw is that it is deflationary. At any given monent, you're better off not spending your bitcoins, because that same quantity of bitcoins will be worth more in the future. Bitcoins other fatal flaw is that roughly half of all bitcoins mined thus far are held in the hands of the inventor of bitcoins and his closet buddies. They haven't been spending their bitcoins--but they're encouraging others to spend bitcoins as they are mined. This is close to (but not quite) the definition of a Ponzi scheme.
- davidw 14y ago
  > Currencies are by nature inflationary in a growing economy. That depends on the supply of the currency though, no? If it's not expanding, but the economy is growing, it will cause deflation, which is indeed viewed as 'bad'. Right? Or am I missing something?
  - rprasad 14y ago
    That would be true in a strictly hard currency world, as each dollar in circulation would become more valuable (because it would be increasingly more difficult to find another dollar to spend). However, when you take into account credit-based spending (i.e., loans, credit cards, etc.), the "limit" at which deflation kicks in gets pushed up significantly. I know there are papers/studies on this, but as I haven't had access to a university library subscription in a while, I couldn't provide sources.
  - nhaehnle 14y ago
    It's never that simple. First of all, the currency supply is kind of a red herring. What really matters here is the relation: Real GDP = Nominal GDP * Price level So if you care about growth in Real GDP (ostensibly because you consider Real GDP to be a proxy for Living Standards, and that's what really should matter), then obviously the right hand side of the equation must somehow move accordingly. But: that's not the only constraint on what can happen. Not all trajectories of the variables in this equation are equally plausible, even when they all satisfy the equation. I read your statement as an implicit one-directional causality. Let me rephrase your statement with the goal of clarifying what we're talking about (and please correct me if I mis-interpreted): if the economy grows (Real GDP is growing), and then nominal GDP is somehow forced to remain constant, then that will cause prices to go down. But why would it? The main direct driver of real growth is demand. Having more customers is what ultimately causes firms to produce more, build new factories, hire employees. Somewhat more indirectly, the belief of being able to get more customers in the future also causes firms to produce more, build new factories, hire employees. Now if you force nominal GDP to remain constant, then the first signal that firms receive is that demand stops growing. Hence the first signal that firms receive will most likely cause them to stop increasing production. Granted, it is conceivable that firms interpret the signal of flat demand differently, and that they react by reducing their prices. This is an empirical question, which seems to be answered mostly in the direction that prices are "sticky". So in summary, if you force Nominal GDP to remain constant, you will most likely stop the economy from growing. Note that the reverse of your implied causality is more plausible in a limited sense: if for some reason prices decrease, then this could well cause Real GDP to grow while Nominal GDP remains constant (this is true as long as wages do not decrease along with prices, because then nominal demand can remain the same, while more goods are moved for the same nominal demand). But then you somehow have to explain how that decrease in prices is caused.

by guylhem 14y ago

seanalltogether 14y ago

All currencies have price deflation built it, for some macroeconomic reasons about motivating agents that I don't fully understand yet. It could be a good thing for economic growth, or it may not be. Let's leave that issue aside. Just to be clear, the reason that governments increase the currency supply is that citizens will do it with or without them. The most fundamental currency is a promissory note, an I.O.U. Every time you write someone an IOU you inflate the supply of currency, because the holder of that IOU can pass that around to others in the form of payment. Instead of sending your bushel of apples to the shoemaker who made your shoes, you now have to send half to the bread baker, and half to the candle maker as that IOU was spent. A currency that doesn't grow will be naturally replaced by one that does. This is my biggest problem with bitcoin.

limonbd 14y ago
http://www.ideabdl.com/ http://www.ideabdl.com/ Making Difference...|All kind of IT Solution ideabdl.com,You can bayer, provider or contractor of outsource for software, we offering you come,see & make.
guylhem 14y ago
"A currency that doesn't grow will be naturally replaced by one that does." seems right, as long as the minimal discrete value of the currency that doesn't grow cause a problem for the economy. But if you can move from discrete to continuous space (bitcoins can be cut up to 1E-8, and according to what I've read this is not a fixed limit), why bother moving to the other currency ? (I hope I get it right - it's an area I don't fully understand)
- enki 14y ago
  yes, bitcoins in theory can be infinitely divided. classical observations about hoarding and "bad currency driving out the good" likely don't apply. if you want to spend, you just spend however little you want to spend.
YokoZar 14y ago
There is no reason we can't start issuing tradable IOUs for bitcoins without actually having our hands on the bitcoins. There could even be a billion bitcoin derivatives market with only a million real bitcoins (just moving around a thousand times each)

DavidSJ 14y ago

The important thing is that Bitcoin doesn't [inflate]. Being convertible with other currencies means its value can only rise Value is a function of supply and demand, not just supply. The value of a bitcoin can fall, as it has done many times in the past.

guylhem 14y ago
Yes, it can fall at any point whenever demand goes down. But on a longer run, I believe demand won't go down but up, since it has this competitive advantage over other currencies.
- eru 14y ago
  If you believe that, I encourage you to start your own bitcoin clone, and take in at least half of all mined coins. (Or just put money in current standard bitcoins.)
  - guylhem 14y ago
    I don't even gave a 2 digits amount of BTC IIRC, but I do accept donations. And yeah, I'd like to have an alternative when bitcoin suffer the napster fate, because too many computing in the government hands could result in a bitcoin takeover

hristov 14y ago

I think you are confusing the concepts of inflation and deflation there.

guylhem 14y ago
Depending on how you read the message and on the perspective you take, yes I did. When I checked my text just prior to posting I thought it wasn't clear enough, so I added the "price" thing and posted. Oops.) I though about editing and clearing up the original post but as it stands it can easily be figured out and doesn't impact the meaning. EDIT: just posted a reply to define the vocabulary I used and the perspective I took.
YokoZar 14y ago
This is not uncommon when criticizing bitcoin. "It can only increase in value, therefore it is worthless" is clearly a contradictory statement -- it's essentially arguing that no one will want to buy bitcoins because too many people want to buy them.

rprasad 14y ago

I don't think you understand how currencies or economics work. Currencies are by nature inflationary in a growing economy. This is a good thing, because inflation encourages spending and/or investment. Deflation is fatal to an economy: because the value of the currency will grow with non-use, deflation inhibits spending and investment. Bitcoin's fatal flaw is that it is deflationary. At any given monent, you're better off not spending your bitcoins, because that same quantity of bitcoins will be worth more in the future. Bitcoins other fatal flaw is that roughly half of all bitcoins mined thus far are held in the hands of the inventor of bitcoins and his closet buddies. They haven't been spending their bitcoins--but they're encouraging others to spend bitcoins as they are mined. This is close to (but not quite) the definition of a Ponzi scheme.

davidw 14y ago
> Currencies are by nature inflationary in a growing economy. That depends on the supply of the currency though, no? If it's not expanding, but the economy is growing, it will cause deflation, which is indeed viewed as 'bad'. Right? Or am I missing something?
- rprasad 14y ago
  That would be true in a strictly hard currency world, as each dollar in circulation would become more valuable (because it would be increasingly more difficult to find another dollar to spend). However, when you take into account credit-based spending (i.e., loans, credit cards, etc.), the "limit" at which deflation kicks in gets pushed up significantly. I know there are papers/studies on this, but as I haven't had access to a university library subscription in a while, I couldn't provide sources.
- nhaehnle 14y ago
  It's never that simple. First of all, the currency supply is kind of a red herring. What really matters here is the relation: Real GDP = Nominal GDP * Price level So if you care about growth in Real GDP (ostensibly because you consider Real GDP to be a proxy for Living Standards, and that's what really should matter), then obviously the right hand side of the equation must somehow move accordingly. But: that's not the only constraint on what can happen. Not all trajectories of the variables in this equation are equally plausible, even when they all satisfy the equation. I read your statement as an implicit one-directional causality. Let me rephrase your statement with the goal of clarifying what we're talking about (and please correct me if I mis-interpreted): if the economy grows (Real GDP is growing), and then nominal GDP is somehow forced to remain constant, then that will cause prices to go down. But why would it? The main direct driver of real growth is demand. Having more customers is what ultimately causes firms to produce more, build new factories, hire employees. Somewhat more indirectly, the belief of being able to get more customers in the future also causes firms to produce more, build new factories, hire employees. Now if you force nominal GDP to remain constant, then the first signal that firms receive is that demand stops growing. Hence the first signal that firms receive will most likely cause them to stop increasing production. Granted, it is conceivable that firms interpret the signal of flat demand differently, and that they react by reducing their prices. This is an empirical question, which seems to be answered mostly in the direction that prices are "sticky". So in summary, if you force Nominal GDP to remain constant, you will most likely stop the economy from growing. Note that the reverse of your implied causality is more plausible in a limited sense: if for some reason prices decrease, then this could well cause Real GDP to grow while Nominal GDP remains constant (this is true as long as wages do not decrease along with prices, because then nominal demand can remain the same, while more goods are moved for the same nominal demand). But then you somehow have to explain how that decrease in prices is caused.