7 ms·

If you want to hold assets as a store of value, go buy assets. The desire for currency to have "intrinsic value" appears to be driven by the fear of a sudden c

If you want to hold assets as a store of value, go buy assets. The desire for currency to have "intrinsic value" appears to be driven by the fear of a sudden collapse of currencies that exist only as a system of accounting (like the US dollar). Or the desire to have a store of value that never suffers deflation or inflation. We all want that, but most of us acknowledge that it is no more possible than a utopia. You can't freeze the economic system. Whether you back your money with energy, cryptography, flowers, or seashells, you can never control all the other factors, and thus your currency will fluctate.

fchollet 14y ago
The point of cryptocurrencies is not to "back" the currency with cryptography (or energy) as an intrinsic value, it is to prevent double-spending for a decentralized currency. Cryptocomputations and the energy they consume have nothing to do with value, they're just an enabler of this decentralisation.
- betterunix 14y ago
  Unfortunately, the meaning of "double spending" is exceedingly vague for Bitcoin; there is no formal and precise definition. The systems developed by cryptography researchers invoke a central issuer of currency in their security definitions, which is useless for Bitcoin.
  - javert 14y ago
    How is the meaning of "double spending" vague? It means spending the same units of a crypto-currency more than once. If you can do it, there is a flaw in your crypto-currency. > The systems developed by cryptography researchers invoke a central issuer of currency in their security definitions, which is useless for Bitcoin. The first part of that sentence is not completely true, because Bitcoin itself was (presumably) developed by cryptography researchers.
    - rubinelli 14y ago
      Here's a thought experiment: what if a random chance of "double spending" was built into the cryptocurrency? Then people would have an incentive to make the money circulate, and you could calibrate it to prevent deflation. (Obviously, it would be meaningless if people could just move money from wallet to the other.)
      - javert 14y ago
        That's a pretty novel idea, which would probably be appreciated by the (small) community of people who have a problem with the "deflationary" nature of bitcoins and are actually interested in doing bitcoin forks.
    - betterunix 14y ago
      "How is the meaning of "double spending" vague? It means spending the same units of a crypto-currency more than once." First of all, that is not a good definition, since it rules out the possibility of a unit of currency "coming back" to the party that spent it (imagine if I gave you a dollar, and then you were not allowed to give it back to me). It also fails to rule out the possibility of dividing one 1BTC unit into two 0.75BTC units, which is another form of double spending. There are deeper problems too. You say that if you "can" do it, it is a security problem, but there is no restriction on the attacker's computing power. What if the attacker forges ECDSA signatures? What if the attacker finds SHA256 collisions? What if the attacker computes a longer block chain, which is a polynomial time problem, reversing his transaction and getting the chance to spend the money again? The reason I said the security notion is vague is that there is no precise definition that Bitcoin actually achieves. If someone can develop one, and if it actually captures a meaningful notion of security, great! So far, no such definition exists. "The first part of that sentence is not completely true, because Bitcoin itself was (presumably) developed by cryptography researchers." I seriously doubt that, given that the original Bitcoin paper made absolutely no mention of the decades of previous work on digital cash that preceded it, nor any of the work on secure multiparty computation, nor did the paper give a security definition, nor did the author seem to be bothered by the fact that there is a polynomial-time attack on the system. It reads like a paper written by cryptography amateurs or enthusiasts, the sort of people who make most of the posts in sci.crypt and comp.compression. In a pedantic sense, Bitcoin is the product of research, but if the term "researcher" means anything beyond "human being," I think it is fair to draw the line at being familiar with and building on previous work. [Edit: Of course, that definition of "researcher" is not quite what we want, since it does not account for people who open entirely new fields. That is a rare edge case, however, and the issue was whether or not Satoshi was a researcher in an already established and well-developed field.]
  - erikpukinskis 14y ago
    If transaction A, drawing from source G, is confirmed six times in blockchain M, the longest blockchain, with length 20, and transaction B shows up, also drawing from source G, but confirmed in blockchain fork N, and N becomes longer then M, then that is a double spend. Edit: changed one to six.
    - betterunix 14y ago
      OK, but Bitcoin allows that to happen; in the original Bitcoin paper, a polynomial time algorithm for doing exactly what you described is presented. Even if we accept that definition of double spending, it is not clear how that is useful for formalizing Bitcoin's security. How can you rule out someone computing a longer block chain, when doing so involves simply duplicating the work done by the rest of the parties in the system? What actually stops someone from doing this? In other words, under your definition, what does it mean to be secure against double spending?
      - javert 14y ago
        > How can you rule out someone computing a longer block chain, when doing so involves simply duplicating the work done by the rest of the parties in the system? What actually stops someone from doing this? I responded to another comment from you elsewhere, and I hate to confuse things by having one conversation in two places, but this is a really good question, and there is a straightforward answer. To make a longer blockchain, you have to have enough computing power to "catch up" to all the other people mining bitcoins, and then mine faster than they are. So, you have to have > 50% of the total hashing power. If you look into the mining "business," I think you will become convinced that only a nation-state or maybe Google could perform this kind of attack right now, and once ASIC mining technology is widely diffused, even that would be difficult. The "6 confirmations" thing the grandparent said is kind of arbitrary, but that is the number of blocks that bitcoin devs widely agree is enough to wait before you can be "effectively certain" that your transaction is in the longest block chain, and always will be. So that's how long you wait before handing over the keys when somebody purchases your mega-yacht with bitcoin. By "kind of arbitrary" I mean, in the context grandparent used it. If you do the math (as is given somewhere near the end of the bitcoin white paper), that is where you start approaching a 0% chance of the transaction not ending up in the longest chain.
- bradleyland 14y ago
  The goal to "prevent double-spending" is just a means to fix the money supply. You still have the problem that the value of your money will fluctuate, and the then you end up back at the problem of deflation. If you want the "value" of your currency to remain static, then the amount of currency in circulation must correlate to the size of your economy. New value is created all the time through increased productivity, increased population, and the creation of new markets. If your money supply remains fixed to any of the factors I've listed, you have a deflationary currency. The "prevention of double-spending" is a means, not an end. You have to ask yourself why you don't want "double-spending".
  - erikpukinskis 14y ago
    > If your money supply remains fixed to any of the factors I've listed, you have a deflationary currency. This seems sensible on it's face, but you're ignoring the effect that speculators have on the market. If consensus is that a commodity will increase 10% year over year then investors will pile on, driving up the price until the expected return is 0%. When the expected return is 0% (like it is for buying a bushel of corn on a random Tuesday and selling it a month later) then your currency is no longer deflating. In other words, expected economic growth will be priced in to Bitcoin. Of course, when the speculators turn out to be wrong about economic growth, you will see the price move. But it won't be deflationary just because the economy is growing.
    - bradleyland 14y ago
      > In other words, expected economic growth will be priced in to Bitcoin. Yeah, that's kind of the point. When economic growth is "priced in to" a currency that is tied to a fixed commodity, it results in value fluctuations of the currency.
randallsquared 14y ago
The interesting thing about using energy as a currency is that its inflation naturally tracks the real world: if everyone has double the currency (and it's backed by real energy), then people are richer in purely material terms as well, in much the way that we're richer on average than people were in 1950. A major issue is that we don't have anything that's usefully dense in energy content to use as money (except nuclear fuels, I suppose, but I have a hard time seeing them in circulation with the current fear of nuclear power...).
- bradleyland 14y ago
  The amount currency "required" by an economy correlates to the size of the economy. The available energy commodities are not guaranteed to track the size of an economy. That's why we see fluctuations in the cost of energy. > A major issue is that we don't have anything that's usefully dense in energy content to use as money. I don't really understand this comment. If you're going to design a commodity backed currency, the energy density of the commodity is irrelevant. You don't have to swap uranium bars at the store in order to use an energy commodity as currency. You issue contracts representing your ownership of a specific amount of the commodity in a warehouse somewhere. Sound familiar? Commodity backed currency is not new. Swapping out the commodity just ties you to another system of supply & demand.
  - randallsquared 14y ago
    Having a piece of paper that says you owe me 6 trillion kJ is fine until it turns out you can't pay up. Ultimately, someone has to have the actual backing commodity. This is no problem with USD, since it's all just numbers anyway. It's less of a problem for gold than for energy, since 1 400oz bar is worth over half a million USD. Half a million USD in barrels of oil is more than 5000 barrels. Ideally you'd want something that was easy to store to base your economy on. :)
- notahacker 14y ago
  Energy inflation doesn't naturally track the real world at all. You're not richer in real terms for travelling on a thirsty old MD-80 than a new A320neo using little more than half the fuel, and the US is not better off in real terms than 1980, when per capita energy use was higher than it is now. A Google search or Kindle download is not materially less beneficial than a drive to the library/bookstore. In fact, for a developed country like the US the anticipated trend in energy use is in the opposite direction to the anticipated trend in real GDP. http://www.eia.gov/forecasts/aeo/MT_energydemand.cfm http://www.eia.gov/forecasts/aeo/MT_energydemand.cfm An energy-based theory of value is more wrong than the labour theory was in the time of Smith and Marx, and similarly it's increasingly wrong. This forum is full of people who create economic value with computer technology that decreases the demands on physical infrastructure.
venomsnake 14y ago
Energy based system of currency create a system that is very good at tracking GDP by design. Also it is self adjustable and it creates natural currency sink. The fed has only half the toolsets nowadays - it can create and pump liquidity, but cannot extract excess amount and cannot direct where the liquidity will go.
jules 14y ago
Up to a point, yes. But the whole point of money is that it serves as an intermediary for value, so that you don't need to do barter. If a currency is extremely volatile this function is diminished because when you immediately have to get rid of your money to hold some kind of stable value you get closer and closer to a barter system. In the limit where nobody wants to hold money and immediately wants to get rid of it you get a barter system. For example if bitcoin is so volatile that every time people earn one they immediately want to buy X with it to make sure they hold their value, you might as well skip the bitcoin step and directly use X as a currency, especially since a bitcoin transaction isn't free. X could be stocks, bonds, gold, dollars, etc.
- bradleyland 14y ago
  I agree 100%. One of the goals of a flexible money supply is to reduce the volatility of currency. As your economy grows, so should your money supply. This requires flexibility in money supply and tight analysis of the economy and money supply. There is a separate argument surrounding currency debt. That is, current policy doesn't strictly regulate the money supply in a way that tracks economic growth. They use debt as a means to "create" growth. I won't pretend that this is some sort of foregone conclusion, but the whole debacle involving Reinhart and Rogoff and their Excel error dealt a serious blow to those who object to the theory that debt drives growth. Again, I'm not saying the case is closed, but right now, the debt-driven-growth folks are winning the debate. When you fix your currency to a commodity or other non-controllable factor, you give up control of your money supply, which causes volatility of its own.
- rwj 14y ago
  Real world assets are not immune to fluctuations in value either. The idea that gold or some other physical asset has a fixed intrinsic value is an unfounded opinion. As an example, in the 17th century, the Netherlands experienced a large bubble in the value of... tulips.
dualogy 14y ago
> Whether you back your money with energy, cryptography, flowers, or seashells, you can never control all the other factors, and thus your currency will fluctate. Indeed! And before long, people will want to lend and borrow BTC once usage expands beyond the current early-adopter "hard money" crowd. That's just human nature and is OK on a small scale. But then BTC IOUs may start to circulate. Then some new-fangled "BTC Goldman-Madoff" figures out ingenious ways to "make your BTC work for you, let us do the IOU magic of fractional reserves for you. Just don't all attempt to cash in your chips at the same time, which you won't given the incredible growth in IOU 'returns' (not hard BTC but hey, by now one is as good as the other in the minds of most) we can deliver for a few decades". Bam, here we go again?

fchollet 14y ago

The point of cryptocurrencies is not to "back" the currency with cryptography (or energy) as an intrinsic value, it is to prevent double-spending for a decentralized currency. Cryptocomputations and the energy they consume have nothing to do with value, they're just an enabler of this decentralisation.

betterunix 14y ago
Unfortunately, the meaning of "double spending" is exceedingly vague for Bitcoin; there is no formal and precise definition. The systems developed by cryptography researchers invoke a central issuer of currency in their security definitions, which is useless for Bitcoin.
- javert 14y ago
  How is the meaning of "double spending" vague? It means spending the same units of a crypto-currency more than once. If you can do it, there is a flaw in your crypto-currency. > The systems developed by cryptography researchers invoke a central issuer of currency in their security definitions, which is useless for Bitcoin. The first part of that sentence is not completely true, because Bitcoin itself was (presumably) developed by cryptography researchers.
  - rubinelli 14y ago
    Here's a thought experiment: what if a random chance of "double spending" was built into the cryptocurrency? Then people would have an incentive to make the money circulate, and you could calibrate it to prevent deflation. (Obviously, it would be meaningless if people could just move money from wallet to the other.)
    - javert 14y ago
      That's a pretty novel idea, which would probably be appreciated by the (small) community of people who have a problem with the "deflationary" nature of bitcoins and are actually interested in doing bitcoin forks.
  - betterunix 14y ago
    "How is the meaning of "double spending" vague? It means spending the same units of a crypto-currency more than once." First of all, that is not a good definition, since it rules out the possibility of a unit of currency "coming back" to the party that spent it (imagine if I gave you a dollar, and then you were not allowed to give it back to me). It also fails to rule out the possibility of dividing one 1BTC unit into two 0.75BTC units, which is another form of double spending. There are deeper problems too. You say that if you "can" do it, it is a security problem, but there is no restriction on the attacker's computing power. What if the attacker forges ECDSA signatures? What if the attacker finds SHA256 collisions? What if the attacker computes a longer block chain, which is a polynomial time problem, reversing his transaction and getting the chance to spend the money again? The reason I said the security notion is vague is that there is no precise definition that Bitcoin actually achieves. If someone can develop one, and if it actually captures a meaningful notion of security, great! So far, no such definition exists. "The first part of that sentence is not completely true, because Bitcoin itself was (presumably) developed by cryptography researchers." I seriously doubt that, given that the original Bitcoin paper made absolutely no mention of the decades of previous work on digital cash that preceded it, nor any of the work on secure multiparty computation, nor did the paper give a security definition, nor did the author seem to be bothered by the fact that there is a polynomial-time attack on the system. It reads like a paper written by cryptography amateurs or enthusiasts, the sort of people who make most of the posts in sci.crypt and comp.compression. In a pedantic sense, Bitcoin is the product of research, but if the term "researcher" means anything beyond "human being," I think it is fair to draw the line at being familiar with and building on previous work. [Edit: Of course, that definition of "researcher" is not quite what we want, since it does not account for people who open entirely new fields. That is a rare edge case, however, and the issue was whether or not Satoshi was a researcher in an already established and well-developed field.]
- erikpukinskis 14y ago
  If transaction A, drawing from source G, is confirmed six times in blockchain M, the longest blockchain, with length 20, and transaction B shows up, also drawing from source G, but confirmed in blockchain fork N, and N becomes longer then M, then that is a double spend. Edit: changed one to six.
  - betterunix 14y ago
    OK, but Bitcoin allows that to happen; in the original Bitcoin paper, a polynomial time algorithm for doing exactly what you described is presented. Even if we accept that definition of double spending, it is not clear how that is useful for formalizing Bitcoin's security. How can you rule out someone computing a longer block chain, when doing so involves simply duplicating the work done by the rest of the parties in the system? What actually stops someone from doing this? In other words, under your definition, what does it mean to be secure against double spending?
    - javert 14y ago
      > How can you rule out someone computing a longer block chain, when doing so involves simply duplicating the work done by the rest of the parties in the system? What actually stops someone from doing this? I responded to another comment from you elsewhere, and I hate to confuse things by having one conversation in two places, but this is a really good question, and there is a straightforward answer. To make a longer blockchain, you have to have enough computing power to "catch up" to all the other people mining bitcoins, and then mine faster than they are. So, you have to have > 50% of the total hashing power. If you look into the mining "business," I think you will become convinced that only a nation-state or maybe Google could perform this kind of attack right now, and once ASIC mining technology is widely diffused, even that would be difficult. The "6 confirmations" thing the grandparent said is kind of arbitrary, but that is the number of blocks that bitcoin devs widely agree is enough to wait before you can be "effectively certain" that your transaction is in the longest block chain, and always will be. So that's how long you wait before handing over the keys when somebody purchases your mega-yacht with bitcoin. By "kind of arbitrary" I mean, in the context grandparent used it. If you do the math (as is given somewhere near the end of the bitcoin white paper), that is where you start approaching a 0% chance of the transaction not ending up in the longest chain.
bradleyland 14y ago
The goal to "prevent double-spending" is just a means to fix the money supply. You still have the problem that the value of your money will fluctuate, and the then you end up back at the problem of deflation. If you want the "value" of your currency to remain static, then the amount of currency in circulation must correlate to the size of your economy. New value is created all the time through increased productivity, increased population, and the creation of new markets. If your money supply remains fixed to any of the factors I've listed, you have a deflationary currency. The "prevention of double-spending" is a means, not an end. You have to ask yourself why you don't want "double-spending".
- erikpukinskis 14y ago
  > If your money supply remains fixed to any of the factors I've listed, you have a deflationary currency. This seems sensible on it's face, but you're ignoring the effect that speculators have on the market. If consensus is that a commodity will increase 10% year over year then investors will pile on, driving up the price until the expected return is 0%. When the expected return is 0% (like it is for buying a bushel of corn on a random Tuesday and selling it a month later) then your currency is no longer deflating. In other words, expected economic growth will be priced in to Bitcoin. Of course, when the speculators turn out to be wrong about economic growth, you will see the price move. But it won't be deflationary just because the economy is growing.
  - bradleyland 14y ago
    > In other words, expected economic growth will be priced in to Bitcoin. Yeah, that's kind of the point. When economic growth is "priced in to" a currency that is tied to a fixed commodity, it results in value fluctuations of the currency.

randallsquared 14y ago

The interesting thing about using energy as a currency is that its inflation naturally tracks the real world: if everyone has double the currency (and it's backed by real energy), then people are richer in purely material terms as well, in much the way that we're richer on average than people were in 1950. A major issue is that we don't have anything that's usefully dense in energy content to use as money (except nuclear fuels, I suppose, but I have a hard time seeing them in circulation with the current fear of nuclear power...).

bradleyland 14y ago
The amount currency "required" by an economy correlates to the size of the economy. The available energy commodities are not guaranteed to track the size of an economy. That's why we see fluctuations in the cost of energy. > A major issue is that we don't have anything that's usefully dense in energy content to use as money. I don't really understand this comment. If you're going to design a commodity backed currency, the energy density of the commodity is irrelevant. You don't have to swap uranium bars at the store in order to use an energy commodity as currency. You issue contracts representing your ownership of a specific amount of the commodity in a warehouse somewhere. Sound familiar? Commodity backed currency is not new. Swapping out the commodity just ties you to another system of supply & demand.
- randallsquared 14y ago
  Having a piece of paper that says you owe me 6 trillion kJ is fine until it turns out you can't pay up. Ultimately, someone has to have the actual backing commodity. This is no problem with USD, since it's all just numbers anyway. It's less of a problem for gold than for energy, since 1 400oz bar is worth over half a million USD. Half a million USD in barrels of oil is more than 5000 barrels. Ideally you'd want something that was easy to store to base your economy on. :)
notahacker 14y ago
Energy inflation doesn't naturally track the real world at all. You're not richer in real terms for travelling on a thirsty old MD-80 than a new A320neo using little more than half the fuel, and the US is not better off in real terms than 1980, when per capita energy use was higher than it is now. A Google search or Kindle download is not materially less beneficial than a drive to the library/bookstore. In fact, for a developed country like the US the anticipated trend in energy use is in the opposite direction to the anticipated trend in real GDP. http://www.eia.gov/forecasts/aeo/MT_energydemand.cfm http://www.eia.gov/forecasts/aeo/MT_energydemand.cfm An energy-based theory of value is more wrong than the labour theory was in the time of Smith and Marx, and similarly it's increasingly wrong. This forum is full of people who create economic value with computer technology that decreases the demands on physical infrastructure.

venomsnake 14y ago

Energy based system of currency create a system that is very good at tracking GDP by design. Also it is self adjustable and it creates natural currency sink. The fed has only half the toolsets nowadays - it can create and pump liquidity, but cannot extract excess amount and cannot direct where the liquidity will go.

jules 14y ago

Up to a point, yes. But the whole point of money is that it serves as an intermediary for value, so that you don't need to do barter. If a currency is extremely volatile this function is diminished because when you immediately have to get rid of your money to hold some kind of stable value you get closer and closer to a barter system. In the limit where nobody wants to hold money and immediately wants to get rid of it you get a barter system. For example if bitcoin is so volatile that every time people earn one they immediately want to buy X with it to make sure they hold their value, you might as well skip the bitcoin step and directly use X as a currency, especially since a bitcoin transaction isn't free. X could be stocks, bonds, gold, dollars, etc.

bradleyland 14y ago
I agree 100%. One of the goals of a flexible money supply is to reduce the volatility of currency. As your economy grows, so should your money supply. This requires flexibility in money supply and tight analysis of the economy and money supply. There is a separate argument surrounding currency debt. That is, current policy doesn't strictly regulate the money supply in a way that tracks economic growth. They use debt as a means to "create" growth. I won't pretend that this is some sort of foregone conclusion, but the whole debacle involving Reinhart and Rogoff and their Excel error dealt a serious blow to those who object to the theory that debt drives growth. Again, I'm not saying the case is closed, but right now, the debt-driven-growth folks are winning the debate. When you fix your currency to a commodity or other non-controllable factor, you give up control of your money supply, which causes volatility of its own.
rwj 14y ago
Real world assets are not immune to fluctuations in value either. The idea that gold or some other physical asset has a fixed intrinsic value is an unfounded opinion. As an example, in the 17th century, the Netherlands experienced a large bubble in the value of... tulips.

dualogy 14y ago

> Whether you back your money with energy, cryptography, flowers, or seashells, you can never control all the other factors, and thus your currency will fluctate. Indeed! And before long, people will want to lend and borrow BTC once usage expands beyond the current early-adopter "hard money" crowd. That's just human nature and is OK on a small scale. But then BTC IOUs may start to circulate. Then some new-fangled "BTC Goldman-Madoff" figures out ingenious ways to "make your BTC work for you, let us do the IOU magic of fractional reserves for you. Just don't all attempt to cash in your chips at the same time, which you won't given the incredible growth in IOU 'returns' (not hard BTC but hey, by now one is as good as the other in the minds of most) we can deliver for a few decades". Bam, here we go again?