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>Some people are pointing to Gox’s failure as a reason Bitcoin needs more governmental regulation, but I believe cryptography and peer-to-peer consensus protoco

by zeteo 13y ago

>Some people are pointing to Gox’s failure as a reason Bitcoin needs more governmental regulation, but I believe cryptography and peer-to-peer consensus protocols can eventually replace the need for certain types of regulation entirely. Frankly I don't see how that's possible. There are two sides to a transaction: the transfer of money in one direction and the transfer of goods or services in the other. Making one side very secure (or free from government intervention etc.) while neglecting the other is like building a bridge with one pillar made of tungsten and the other of adobe bricks. It'd only be as usable as its weaker side. The existing financial system is perhaps suboptimal in terms of transferring money, but it has pretty good tools of ensuring the expected goods and services flow back to the buyer: chargebacks, courts of law etc. The Bitcoin "economy" has nothing comparable except a vague spirit of community that fails more often than not (see e.g. the pathetic appeals of Silk Road 2 or Mt. Gox depositors). So when a fraudulent transaction occurs, the best hope of the victim lies, ironically, with the much maligned government institutions that they were trying to avoid in the first place. (Incidentally, this is also why it's perfectly reasonable for countries to outlaw Bitcoin transactions and have a good expectation of enforcing it.) There's no way cryptography and peer-to-peer consensus protocols will provide verification for goods and services. It's a hard problem, and Bitcoiners ignoring it will not make it go away anytime soon. Until it's solved, have fun driving 18-wheelers across continually crumbling bridge pillars.

belorn 13y ago
> Existing financial system is perhaps suboptimal in terms of transferring money, but it has pretty good tools of ensuring the expected goods and services flow back In what way is physical money different from bitcoint in this aspect? Is there an implied statement here than for all the ages where we did not have electronic banking, money was inherently insecure and built on crumbling bride pillars? Treat bitcoin like physical money, and most issues goes away. I don't post thousands of money to a strange in a different country to hold them for me, nor do I give physical money to a store before I have the product in my hand.
MarkPNeyer 13y ago
> There's no way cryptography and peer-to-peer consensus protocols will provide verification for goods and services. Why wouldn't reputation help with this problem? users will have to start small to develop their reputation, but doing so will allow users more trust. There are ways of doing things that don't involve guns - and that's ultimately what government relies on.
- Lambdanaut 13y ago
  It's the same concept as a credit score, really.
- pjc50 13y ago
  Trust is always gameable; Madoff got billions by getting people to trust him. (I thought libertarians were in favour of gun-based dispute resolution systems?)
  - MarkPNeyer 13y ago
    Every social system is gameable. Trust based upon reputation is far far simpler than government. One thing bitcoin gives the world is the blockchain; there has never been a historical record that is free to access and to add records to, but impossible to modify. That's HUGE. As for libertarians, you clearly don't understand at all. They want to avoid systems of conflict resolution that depend on violence; that's their whole point. Their obsession with trade, contracts and money arise from their view that those are voluntary ways of interacting.
    - sz4kerto 13y ago
      It's not free to add to. It's computationally extremely expensive, that's why miners are compensated.
      - MarkPNeyer 13y ago
        proofofexistence.com is free to use; that's what i meant.
pjc50 13y ago
This is exactly it: dispute resolution is hard, and involves untangling real world facts from distant parties some of whom are motivated fraudsters. Credit cards push the work of verifying that the person making a purchase with an account is the person entitled to do so, onto the merchants. Paypal has followed this; its terrible dispute resolution is a big source of complaints. Bitcoin has no dispute resolution at all. Once a transaction is confirmed, that's it; you have to use some mechanism outside the system to get your money back. People talk about escrow but it's hardly a magic solution. A corollary of this is that all software handling bitcoin has to be extremely reliable. Not just the client, but anything built on it, such as the entirety of the exchange. Like a pressurised container full of money; if there is any crack or way a hole can be made, it bursts and the money is gone. Even if all the software you've built is fine, any operating system level 0day (cought Apple) will sink you.
- Lazare 13y ago
  > Like a pressurised container full of money; if there is any crack or way a hole can be made, it bursts and the money is gone. That is, far and away, the best description of the problem I've heard. Did you come up with it?
  - pjc50 13y ago
    Yes, as I was writing that post. I'd been considering rocketry analogies, where one software error (Ariane) or bad seal (Challenger) will blow the whole thing up, but I wanted to convey leakiness. Mtgox found a slow puncture and went down like a deflated bouncy castle.
    - gustoffen 13y ago
      It is also like a bubble. A tiny pin prick, and pop! Which is also doubly apt because some consider the market price of bitcoin a bubble.
- lukifer 13y ago
  In a perfect world, all those problems are solvable with smart contracts, m-of-n transactions, better open-source software and accounting practices, etc. Of course, we don't live in the perfect world, and all non-trivial software has bugs. Time will tell if "perfect enough" plumbing is achievable, and whether the Bitcoin experiment is sustainable. I think's a worthwhile gamble, on a micro and macro scale, but no one should get involved with Bitcoin without understanding the risks.
bduerst 13y ago
This can be solved, but it will result in an increased transactional cost. Right now, proponents of bitcoin like to tout the low transactional costs, compared to traditional payment systems, as a predictor of bitcoins's "impending" success. Disputes, Chargebacks, etc. are handled now by financial institutions, at a cost to overhead. These financial institutions also have insurance to distribute their risk. If your account is hacked, you file some affadavits and you get your money back. IF bitcoin were mass adopted, you can be sure that financial organizations that deal in bitcoin will tack on transactional costs relative to the risk of loss - almost like an insurance. In the case of Bitcoin - this is VERY high, unless of course the transactions are done with other financially certified organizations. Aaaaaaaand we are back at a traditional banking system with transactional costs, but for bitcoins.
- contingencies 13y ago
  To clarify, cryptocurrencies such as Bitcoin offer not only low transaction costs but also global reach, far faster settlement at distance, and a public ledger. Some systems offer still more features.
  - bduerst 13y ago
    Right, but there is zero risk distribution which contributes to the transaction cost differential with other services. If bitcoin were to become mainstream, the transactional cost would raise because of the overhead with risk deferment. Cryptocurrencies will definitely become mainstream because of the international and speed factors, but I don't think it will be bitcoin.
    - contingencies 13y ago
      When you say risk deferment, which type of risk are you discussing specifically? I see cryptocurrency use as being largely automated and transparent to the consumer in future. I think Bitcoin may have a place, but other more popular systems will provide solutions to many of its more gaping issues (rapid local settlement suitable for point of sale, complexity of implementation, lack of chargeback/cancellation channels, initial counterparty trust bootstrap, reputation management, etc.) I started having a think about how these might come together over here ... comments/thoughts/collaboration welcome. http://ifex-project.org/ http://ifex-project.org/
brainst0rm 13y ago
> it has pretty good tools of ensuring the expected goods and services flow back to the buyer: chargebacks, courts of law etc. The existing financial (and legal) system is terrible at enforcing contracts, settling dispute, and establishing credit. > There's no way cryptography and peer-to-peer consensus protocols will provide verification for goods and services. Crypto-currency is one of the key pieces needed to build a better system. I strongly believe crypto-contracts are also needed. They give us the instruments to tackle the problems you mentioned. The ethereum white paper (https://github.com/ethereum/wiki/wiki/%5BEnglish%5D-White-Paper#wiki-contracts https://github.com/ethereum/wiki/wiki/%5BEnglish%5D-White-Pa...) does a good job at explaining how contract enforcement can be coded into the blockchain.
- pjc50 13y ago
  What? The conventional system is made of contracts, dispute, and credit. We've been doing it for centuries. It's not fraudproof but in western countries is usually very reliable ("high trust society"). Admittedly it's hard to export, or push into areas where the culture is low-trust.
  - GFK_of_xmaspast 13y ago
    A generous interpretation of the GP's contract is the current system is weighted in favor of the larger players.
DenisM 13y ago
>There's no way cryptography and peer-to-peer consensus protocols will provide verification for goods and services Yes, there is: bit-contract. I forgot where I read about it, but basic idea is very simple: before transaction takes place, both sides make a separate deposit exceeding in size the value of the transaction. After transaction completes, either both sides vote to release the deposits and get their deposit coins back, or one of the parties is so aggrieved, they decide to punish the other party by voting to destroy both deposits. The loser loses twice, but they don't let the perp to get away with it either. This creates incentive for both sides to strive for mutual satisfaction. Scammers and crazy cranks will run out of money pretty soon. This works really well for small contracts, such as selling an old iPod on Ebay. For large transactions you could rely on reputation instead - if the value of reputation is $X, you can trade for $X/2 with that person, as it would be silly for them to cash out so cheaply.
- romanows 13y ago
  The bit-contract idea is neat, although it seems like it could be misused. A group of dishonest buyers could gang up on an honest seller and inflict a worst-case N x (penalty + item_cost) damage at a cost to each buyer of (penalty - item_cost). The seller damage is only N x (penalty - item_cost) if the seller waits until they have payment before shipping, though, so I suppose you'd need a very high N to impact a high-volume seller that can verify quickly. Seems reasonable for low-profile or low-volume sellers, though.
- shitlord 13y ago
  > one of the parties is so aggrieved, they decide to punish the other party by voting to destroy both deposits. The loser loses twice, but they don't let the perp to get away with it either. Honestly, that is wildly impractical and would never account for the requirements of the real world. Want to buy a house for $300000? Well you better put up at least another $300000. Oh, and if the other guy scams you, you're out at least $600000. Like you said, that scheme might work for microtransactions. For actual business, almost nobody has that kind of money lying around. > For large transactions you could rely on reputation instead Isn't that fundamentally what you are trying to avoid?
grahamburger 13y ago
I thought this was essentially a solved problem with Bitcoin. The protocol allows for transfers that must be verified by 3 (or more) parties. So all we need is a few trusted third parties to arbitrate transactions.

by zeteo 13y ago

belorn 13y ago

> Existing financial system is perhaps suboptimal in terms of transferring money, but it has pretty good tools of ensuring the expected goods and services flow back In what way is physical money different from bitcoint in this aspect? Is there an implied statement here than for all the ages where we did not have electronic banking, money was inherently insecure and built on crumbling bride pillars? Treat bitcoin like physical money, and most issues goes away. I don't post thousands of money to a strange in a different country to hold them for me, nor do I give physical money to a store before I have the product in my hand.

MarkPNeyer 13y ago

> There's no way cryptography and peer-to-peer consensus protocols will provide verification for goods and services. Why wouldn't reputation help with this problem? users will have to start small to develop their reputation, but doing so will allow users more trust. There are ways of doing things that don't involve guns - and that's ultimately what government relies on.

Lambdanaut 13y ago
It's the same concept as a credit score, really.
pjc50 13y ago
Trust is always gameable; Madoff got billions by getting people to trust him. (I thought libertarians were in favour of gun-based dispute resolution systems?)
- MarkPNeyer 13y ago
  Every social system is gameable. Trust based upon reputation is far far simpler than government. One thing bitcoin gives the world is the blockchain; there has never been a historical record that is free to access and to add records to, but impossible to modify. That's HUGE. As for libertarians, you clearly don't understand at all. They want to avoid systems of conflict resolution that depend on violence; that's their whole point. Their obsession with trade, contracts and money arise from their view that those are voluntary ways of interacting.
  - sz4kerto 13y ago
    It's not free to add to. It's computationally extremely expensive, that's why miners are compensated.
    - MarkPNeyer 13y ago
      proofofexistence.com is free to use; that's what i meant.

pjc50 13y ago

This is exactly it: dispute resolution is hard, and involves untangling real world facts from distant parties some of whom are motivated fraudsters. Credit cards push the work of verifying that the person making a purchase with an account is the person entitled to do so, onto the merchants. Paypal has followed this; its terrible dispute resolution is a big source of complaints. Bitcoin has no dispute resolution at all. Once a transaction is confirmed, that's it; you have to use some mechanism outside the system to get your money back. People talk about escrow but it's hardly a magic solution. A corollary of this is that all software handling bitcoin has to be extremely reliable. Not just the client, but anything built on it, such as the entirety of the exchange. Like a pressurised container full of money; if there is any crack or way a hole can be made, it bursts and the money is gone. Even if all the software you've built is fine, any operating system level 0day (cought Apple) will sink you.

Lazare 13y ago
> Like a pressurised container full of money; if there is any crack or way a hole can be made, it bursts and the money is gone. That is, far and away, the best description of the problem I've heard. Did you come up with it?
- pjc50 13y ago
  Yes, as I was writing that post. I'd been considering rocketry analogies, where one software error (Ariane) or bad seal (Challenger) will blow the whole thing up, but I wanted to convey leakiness. Mtgox found a slow puncture and went down like a deflated bouncy castle.
  - gustoffen 13y ago
    It is also like a bubble. A tiny pin prick, and pop! Which is also doubly apt because some consider the market price of bitcoin a bubble.
lukifer 13y ago
In a perfect world, all those problems are solvable with smart contracts, m-of-n transactions, better open-source software and accounting practices, etc. Of course, we don't live in the perfect world, and all non-trivial software has bugs. Time will tell if "perfect enough" plumbing is achievable, and whether the Bitcoin experiment is sustainable. I think's a worthwhile gamble, on a micro and macro scale, but no one should get involved with Bitcoin without understanding the risks.

bduerst 13y ago

This can be solved, but it will result in an increased transactional cost. Right now, proponents of bitcoin like to tout the low transactional costs, compared to traditional payment systems, as a predictor of bitcoins's "impending" success. Disputes, Chargebacks, etc. are handled now by financial institutions, at a cost to overhead. These financial institutions also have insurance to distribute their risk. If your account is hacked, you file some affadavits and you get your money back. IF bitcoin were mass adopted, you can be sure that financial organizations that deal in bitcoin will tack on transactional costs relative to the risk of loss - almost like an insurance. In the case of Bitcoin - this is VERY high, unless of course the transactions are done with other financially certified organizations. Aaaaaaaand we are back at a traditional banking system with transactional costs, but for bitcoins.

contingencies 13y ago
To clarify, cryptocurrencies such as Bitcoin offer not only low transaction costs but also global reach, far faster settlement at distance, and a public ledger. Some systems offer still more features.
- bduerst 13y ago
  Right, but there is zero risk distribution which contributes to the transaction cost differential with other services. If bitcoin were to become mainstream, the transactional cost would raise because of the overhead with risk deferment. Cryptocurrencies will definitely become mainstream because of the international and speed factors, but I don't think it will be bitcoin.
  - contingencies 13y ago
    When you say risk deferment, which type of risk are you discussing specifically? I see cryptocurrency use as being largely automated and transparent to the consumer in future. I think Bitcoin may have a place, but other more popular systems will provide solutions to many of its more gaping issues (rapid local settlement suitable for point of sale, complexity of implementation, lack of chargeback/cancellation channels, initial counterparty trust bootstrap, reputation management, etc.) I started having a think about how these might come together over here ... comments/thoughts/collaboration welcome. http://ifex-project.org/ http://ifex-project.org/

brainst0rm 13y ago

> it has pretty good tools of ensuring the expected goods and services flow back to the buyer: chargebacks, courts of law etc. The existing financial (and legal) system is terrible at enforcing contracts, settling dispute, and establishing credit. > There's no way cryptography and peer-to-peer consensus protocols will provide verification for goods and services. Crypto-currency is one of the key pieces needed to build a better system. I strongly believe crypto-contracts are also needed. They give us the instruments to tackle the problems you mentioned. The ethereum white paper (https://github.com/ethereum/wiki/wiki/%5BEnglish%5D-White-Paper#wiki-contracts https://github.com/ethereum/wiki/wiki/%5BEnglish%5D-White-Pa...) does a good job at explaining how contract enforcement can be coded into the blockchain.

pjc50 13y ago
What? The conventional system is made of contracts, dispute, and credit. We've been doing it for centuries. It's not fraudproof but in western countries is usually very reliable ("high trust society"). Admittedly it's hard to export, or push into areas where the culture is low-trust.
- GFK_of_xmaspast 13y ago
  A generous interpretation of the GP's contract is the current system is weighted in favor of the larger players.

DenisM 13y ago

>There's no way cryptography and peer-to-peer consensus protocols will provide verification for goods and services Yes, there is: bit-contract. I forgot where I read about it, but basic idea is very simple: before transaction takes place, both sides make a separate deposit exceeding in size the value of the transaction. After transaction completes, either both sides vote to release the deposits and get their deposit coins back, or one of the parties is so aggrieved, they decide to punish the other party by voting to destroy both deposits. The loser loses twice, but they don't let the perp to get away with it either. This creates incentive for both sides to strive for mutual satisfaction. Scammers and crazy cranks will run out of money pretty soon. This works really well for small contracts, such as selling an old iPod on Ebay. For large transactions you could rely on reputation instead - if the value of reputation is $X, you can trade for $X/2 with that person, as it would be silly for them to cash out so cheaply.

romanows 13y ago
The bit-contract idea is neat, although it seems like it could be misused. A group of dishonest buyers could gang up on an honest seller and inflict a worst-case N x (penalty + item_cost) damage at a cost to each buyer of (penalty - item_cost). The seller damage is only N x (penalty - item_cost) if the seller waits until they have payment before shipping, though, so I suppose you'd need a very high N to impact a high-volume seller that can verify quickly. Seems reasonable for low-profile or low-volume sellers, though.
shitlord 13y ago
> one of the parties is so aggrieved, they decide to punish the other party by voting to destroy both deposits. The loser loses twice, but they don't let the perp to get away with it either. Honestly, that is wildly impractical and would never account for the requirements of the real world. Want to buy a house for $300000? Well you better put up at least another $300000. Oh, and if the other guy scams you, you're out at least $600000. Like you said, that scheme might work for microtransactions. For actual business, almost nobody has that kind of money lying around. > For large transactions you could rely on reputation instead Isn't that fundamentally what you are trying to avoid?

grahamburger 13y ago

I thought this was essentially a solved problem with Bitcoin. The protocol allows for transfers that must be verified by 3 (or more) parties. So all we need is a few trusted third parties to arbitrate transactions.