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I agree with much of this essay, but it only hints at a key point: the most brilliant elements of Bitcoin's design are not in the realm of technical achievement

by cs702 13y ago

I agree with much of this essay, but it only hints at a key point: the most brilliant elements of Bitcoin's design are not in the realm of technical achievement, but in the realm of social engineering. Bitcoin is not just a "technology" but a social platform with built-in incentives for attracting miners and transaction processors, and therefore end-users; growing demand from end-users attracts even more miners and transaction processors -- a self-reinforcing feedback loop. All other prior crypto-currency efforts failed because, not because they were technically "inferior" (in the narrow sense of that word), but because they lacked the incentives necessary to attract a sufficient number of adopters.

gojomo 13y ago
I agree Bitcoin's approachability and incentive structure were crucial. The interesting question now: is Bitcoin sui generis (like say TCP/IP, and further cemented in place by network effects) or the harbinger of many similar systems (like say Napster/Gnutella)? A lot of people were deterred from trying things in this sphere because of a (flawed) conventional wisdom that there was no room for success — that various academic attacks would be fatal, and social/institutional barriers too strong. But now that Bitcoin shows that an ugly "Minimum Viable Cryptocurrency" with the right balances/incentives can take off, we're already seeing lots of new interest and experiments. I strongly expect some of these will discover new workable tradeoffs, in some cases even better than Bitcoin's brilliant+lucky mix, that will then either coexist with Bitcoin in overlapping domains, or feed into the evolution of 'Bitcoin Prime'. Lots more fun ahead.
- maxerickson 13y ago
  If the legal issues are not a big deal, one big competitor will be a low fee, price stable, zero coin like system underwritten by a commercial entity. Commercial backing will be more interesting to many consumers than the network of miners.
  - gojomo 13y ago
    Definitely, or a consortium of backers. I could also see USGov offering a FedCoin (guaranteed redemption for USD) or TBillCoin (instantly tradable, divisible, interest-bearing USGov debt as currency). They might even be able to cook up something that's more anonymous than Bitcoin (ZeroCoin-like) most of the time, but deanonymizable sfter some 'CoinCourt' due process legal proceedings. (Think ClipperChip/key-escrow, but for cryptocurrency.)
    - chii 13y ago
      > USGov offering a FedCoin i highly doubt this will ever occur - the Fed Reserve (or more correctly, the current cohort of "elite" bankers who control the Fed Resesrve) will either fight bitcoin if it threatens the dominance of the US dollar as the world currency, or the public will drag it kicking and screaming to adopt it (without much success i'd presume). Control of currency is of utmost importance to those who are in power - and i mean really in power, not those who are voted into power like the POTUS.
      - betterunix 13y ago
        First of all, the US dollar is not "the world currency." You need not go further than Vancouver to find places where USD is not widely used as currency. While USD is a very strong currency, it is by no means the only currency in widespread use. It is equally false to try to separate money from law. Currencies have their value because of the law -- because of tax laws, and debt laws, and tort laws, and all the other laws that result in people being legally obliged to make certain payments. Control of currency is important to governments in the same way that control of speed is important to someone driving a car. The control is inherent and the issue is really about not completely screwing things up.
        bdcs 13y ago
        The US dollar IS the world currency if you round up from about 65%: http://en.wikipedia.org/wiki/File:Reserve_currencies.svg http://en.wikipedia.org/wiki/File:Reserve_currencies.svg Financial institutions buy dollars and sell the others when there is the slightest panic. Chinese buy Argentinean wine with US dollars. The USD holds a unique title, an exorbitant privilege. Furthermore, money operates outside of the law very often -- even dollars -- just look at criminal activities, both low-brow and complicated, e.g. off-shore accounts.
- narrator 13y ago
  Bitcoin works because it's actually a sneaky way of teaching the world Hayekian monetary theory without all those extremely long translated German sentences with multiple subordinate clauses. Ever read "The Denationalization of Money"(http://mises.org/document/3970 http://mises.org/document/3970)?
  - bachback 13y ago
    I would suggest rather John Law's 1705 essay "Money and trade considered: with a proposal for supplying the nation with money". Interestingly enough Graeber's history of debt overlooks this crucial step, namely the establishment of fiat currency of which there are different forms.
- contingencies 13y ago
  Agreed, social engineering was key. Just this morning I was explaining (in Mandarin, in a Thai taxi, mind you!) that the best and worst feature of Bitcoin was mining as a solution for the initial distribution problem. Is this exactly what, in hindsight, crypto-currencies probably needed to get started? IMHO, Yes. Is this a good feature going forward? IMHO, No. Does it matter anymore? IMHO, No ... as there will be loads of alternatives and Bitcoin and related ecosystems have cracked open a wedge of reality that can never again be shut. In short: MVP crypto-currency of its era? Maybe. Very good fit for the era? History says yes. Very good fit for the future? IMHO, probably not... but also, not going away soon. Whatever one's views on Bitcoin, it's hard to challenge its credentials as a damn good hack that changed the world. I'll be proud to tell my grandchildren that back when it all started I (ab)used my admin powers to undelete Bitcoin's Wikipedia page, despite the shit-storm that caused! ;) Hahah.
anologwintermut 13y ago
Although you are right about all previous crypto-currencies falling, it's difficult to ascribe their failures to lack of incentives for most of them. The major theoretical and commercial work on e-cash was done by David Chaum. His stuff was centralized, efficient, and anonymous. He had several major parties trying to license his technology, including Microsoft ( who wanted to put it in Windows) and several banks. These deals fell through because of issues with Chaum allegedly. Without buy in from a trusted name, people were then unwilling to use Digicash. The point is given that bitcoin has gotten so much attention, some known name may attempt Chaum style e-cash and get it to work. Incentives are only an issue for distributed e-cash systems and as people's willingness to use Visa shows, they can trust centralized ones.
- betterunix 13y ago
  Chaum's systems also failed because of a lack of demand. In the early-to-mid-90s it seemed sensible that nobody would spend money online without at least some of the security guarantees of digital cash. In retrospect, however, there are these issues: 1. Banks have centuries of experience in combating fraud. It is not clear that digital cash actually improves the situation for banks, given the higher infrastructure costs. If you cannot show banks that they will lose less to fraud with digital cash than the new infrastructure would cost, the banks will not care -- it is easier to analyze spending patterns and identify likely fraud. 2. Most users have a very poor understanding of the security implications of spending money online. On some of that, the fraud that users have to deal with is only partially defended against by digital cash; scams involving people taking money and not delivering the goods are even older than the banking system and are not addressed by digital cash. While the theft of credit card data causes headaches for users, banks are sufficiently good at stopping it that few people are clamoring for a better system. 3. It is unclear that merchants would have benefited from digital cash. While certain kinds of fraud affecting merchants might have been mitigated (e.g. no charge backs), the real issue is whether or not merchants would make more money with such systems. That is unclear, as the banks can and mostly certainly would still charge fees for the service and would likely charge at least as much as they charge for credit cards. Offline systems would mitigate the issue of service fees, but would also increase the risk of fraud and would leave merchants with the short end of the stick. If anything, Bitcoin reinforces the point that security is not the deciding factor here. Bitcoin does not even have a clear security definition, yet for reasons that we could argue about for hours on end it has become more popular than systems with provable security.

by cs702 13y ago

gojomo 13y ago

I agree Bitcoin's approachability and incentive structure were crucial. The interesting question now: is Bitcoin sui generis (like say TCP/IP, and further cemented in place by network effects) or the harbinger of many similar systems (like say Napster/Gnutella)? A lot of people were deterred from trying things in this sphere because of a (flawed) conventional wisdom that there was no room for success — that various academic attacks would be fatal, and social/institutional barriers too strong. But now that Bitcoin shows that an ugly "Minimum Viable Cryptocurrency" with the right balances/incentives can take off, we're already seeing lots of new interest and experiments. I strongly expect some of these will discover new workable tradeoffs, in some cases even better than Bitcoin's brilliant+lucky mix, that will then either coexist with Bitcoin in overlapping domains, or feed into the evolution of 'Bitcoin Prime'. Lots more fun ahead.

maxerickson 13y ago
If the legal issues are not a big deal, one big competitor will be a low fee, price stable, zero coin like system underwritten by a commercial entity. Commercial backing will be more interesting to many consumers than the network of miners.
- gojomo 13y ago
  Definitely, or a consortium of backers. I could also see USGov offering a FedCoin (guaranteed redemption for USD) or TBillCoin (instantly tradable, divisible, interest-bearing USGov debt as currency). They might even be able to cook up something that's more anonymous than Bitcoin (ZeroCoin-like) most of the time, but deanonymizable sfter some 'CoinCourt' due process legal proceedings. (Think ClipperChip/key-escrow, but for cryptocurrency.)
  - chii 13y ago
    > USGov offering a FedCoin i highly doubt this will ever occur - the Fed Reserve (or more correctly, the current cohort of "elite" bankers who control the Fed Resesrve) will either fight bitcoin if it threatens the dominance of the US dollar as the world currency, or the public will drag it kicking and screaming to adopt it (without much success i'd presume). Control of currency is of utmost importance to those who are in power - and i mean really in power, not those who are voted into power like the POTUS.
    - betterunix 13y ago
      First of all, the US dollar is not "the world currency." You need not go further than Vancouver to find places where USD is not widely used as currency. While USD is a very strong currency, it is by no means the only currency in widespread use. It is equally false to try to separate money from law. Currencies have their value because of the law -- because of tax laws, and debt laws, and tort laws, and all the other laws that result in people being legally obliged to make certain payments. Control of currency is important to governments in the same way that control of speed is important to someone driving a car. The control is inherent and the issue is really about not completely screwing things up.
      - bdcs 13y ago
        The US dollar IS the world currency if you round up from about 65%: http://en.wikipedia.org/wiki/File:Reserve_currencies.svg http://en.wikipedia.org/wiki/File:Reserve_currencies.svg Financial institutions buy dollars and sell the others when there is the slightest panic. Chinese buy Argentinean wine with US dollars. The USD holds a unique title, an exorbitant privilege. Furthermore, money operates outside of the law very often -- even dollars -- just look at criminal activities, both low-brow and complicated, e.g. off-shore accounts.
narrator 13y ago
Bitcoin works because it's actually a sneaky way of teaching the world Hayekian monetary theory without all those extremely long translated German sentences with multiple subordinate clauses. Ever read "The Denationalization of Money"(http://mises.org/document/3970 http://mises.org/document/3970)?
- bachback 13y ago
  I would suggest rather John Law's 1705 essay "Money and trade considered: with a proposal for supplying the nation with money". Interestingly enough Graeber's history of debt overlooks this crucial step, namely the establishment of fiat currency of which there are different forms.
contingencies 13y ago
Agreed, social engineering was key. Just this morning I was explaining (in Mandarin, in a Thai taxi, mind you!) that the best and worst feature of Bitcoin was mining as a solution for the initial distribution problem. Is this exactly what, in hindsight, crypto-currencies probably needed to get started? IMHO, Yes. Is this a good feature going forward? IMHO, No. Does it matter anymore? IMHO, No ... as there will be loads of alternatives and Bitcoin and related ecosystems have cracked open a wedge of reality that can never again be shut. In short: MVP crypto-currency of its era? Maybe. Very good fit for the era? History says yes. Very good fit for the future? IMHO, probably not... but also, not going away soon. Whatever one's views on Bitcoin, it's hard to challenge its credentials as a damn good hack that changed the world. I'll be proud to tell my grandchildren that back when it all started I (ab)used my admin powers to undelete Bitcoin's Wikipedia page, despite the shit-storm that caused! ;) Hahah.

anologwintermut 13y ago

Although you are right about all previous crypto-currencies falling, it's difficult to ascribe their failures to lack of incentives for most of them. The major theoretical and commercial work on e-cash was done by David Chaum. His stuff was centralized, efficient, and anonymous. He had several major parties trying to license his technology, including Microsoft ( who wanted to put it in Windows) and several banks. These deals fell through because of issues with Chaum allegedly. Without buy in from a trusted name, people were then unwilling to use Digicash. The point is given that bitcoin has gotten so much attention, some known name may attempt Chaum style e-cash and get it to work. Incentives are only an issue for distributed e-cash systems and as people's willingness to use Visa shows, they can trust centralized ones.

betterunix 13y ago
Chaum's systems also failed because of a lack of demand. In the early-to-mid-90s it seemed sensible that nobody would spend money online without at least some of the security guarantees of digital cash. In retrospect, however, there are these issues: 1. Banks have centuries of experience in combating fraud. It is not clear that digital cash actually improves the situation for banks, given the higher infrastructure costs. If you cannot show banks that they will lose less to fraud with digital cash than the new infrastructure would cost, the banks will not care -- it is easier to analyze spending patterns and identify likely fraud. 2. Most users have a very poor understanding of the security implications of spending money online. On some of that, the fraud that users have to deal with is only partially defended against by digital cash; scams involving people taking money and not delivering the goods are even older than the banking system and are not addressed by digital cash. While the theft of credit card data causes headaches for users, banks are sufficiently good at stopping it that few people are clamoring for a better system. 3. It is unclear that merchants would have benefited from digital cash. While certain kinds of fraud affecting merchants might have been mitigated (e.g. no charge backs), the real issue is whether or not merchants would make more money with such systems. That is unclear, as the banks can and mostly certainly would still charge fees for the service and would likely charge at least as much as they charge for credit cards. Offline systems would mitigate the issue of service fees, but would also increase the risk of fraud and would leave merchants with the short end of the stick. If anything, Bitcoin reinforces the point that security is not the deciding factor here. Bitcoin does not even have a clear security definition, yet for reasons that we could argue about for hours on end it has become more popular than systems with provable security.