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Let me ask a dumb question: If money exchange is the main problem that Bitcoin solves, then why isn't the problem of money exchange attacked directly instead, i

by rsp1984 12y ago

Let me ask a dumb question: If money exchange is the main problem that Bitcoin solves, then why isn't the problem of money exchange attacked directly instead, i.e. through some other less volatile classical stores of value like gold or stock? Why is money exchange a problem anyway and why couldn't a classical wire transfer solve the problem? The article doesn't say anything about these things and the underlying principles other than that it's "suprisingly difficult". Instead it goes right into proposing a solution based on Bitcoin and making big picture comparisons with network protocols that probably sound very smart to the right audience. Given the amount of agreement and hype that the article has received so far, I feel a bit like an outsider right now questioning what is proposed. I think I just don't get it. Is everybody just a lot smarter than me or does the community miss to address some basic questions here?

pmorici 12y ago
The answer for why Bitcoin instead of Gold or stocks or whatever comes down to trust and logistics. Take Gold for example you have to have to either ship the gold around which is expensive and slow or have a trusted third party store the gold and handle netting out the transactions between entities or accept delayed payment and trust that the counter party will deliver the underlying asset. Bitcoin does not require trust in anything except the math underlying the system.
- Vik1ng 12y ago
  You are completely ignoring that you still have to trust your own security and 3rd party apps and services.
  - XorNot 12y ago
    Also that BTC has no chargebanks, fraud detection etc. Once its gone from your account its gone.
    - Natanael_L 12y ago
      Multisignature services enable escrow and fraud detection, etc.
  - baddox 12y ago
    I don't think you'll ever be able to devise a system where you don't even have to trust yourself.
- sergiosgc 12y ago
  > Bitcoin does not require trust in anything except the math underlying the system. False. It requires trust in the liquidity of bitcoin. If you can't convert bitcoin to local currency, it has no value. Bitcoin's fragility is in its ability to act as a holder of value, as repeatedly show by speculative price swinging (sometimes without apparent cause). Gold, for all its faults, has a huge track record as a value store.
foobarqux 12y ago
Beside the fact that it already exists, I think the best argument would be that the BTC network didn't require coordination between financial institutions or a design committee.
Bakkot 12y ago
The answer to basically all of your questions is that to transfer money, you need to move money. This can be basically a promise of money, as with wire transfers, or physical, as you'd do by transporting bullion or cash. The problem with using a promise to move money is that you have to trust whoever's promising. That works alright if there's a central authority, like a bank, but less well if you don't want to trust the authority, don't have access to the authority, or are unable to comply with the rules of the authority. Also it's kind of a shitty experience, as is. (You wouldn't pay for all of your Amazon purchases with wire transfers, I'd imagine.) The problem with moving physical money is that it's difficult to do over long distances or en masse. In order to solve the problems with existing money transfer, then, bitcoin needs to be able to do without a central authority and without using a physical representation of money. Which it accomplishes by allowing you to store money - not just a representation or promise thereof - digitally.
- rsp1984 12y ago
  Thanks for your answer. However I still don't fully understand the problem I'm afraid. How is the trust required to move money cross borders different to the trust required to have an account with money at your bank? That acct is just a "promise" of money as well isn't it? Also, according to your response a domestic money transfer would suffer the same problems but these seem to work just fine (at least much better than international transfers). Why does a mechanism that works just fine in between bank and customers and generally domestically just break down when country borders are involved?
  - Bakkot 12y ago
    > Also, according to your response a domestic money transfer would suffer the same problems but these seem to work just fine (at least much better than international transfers). Certainly they work better, but "just fine" is a much stronger claim and one I'd disagree with. I don't find myself spending money by wire transfer hardly ever, eg, and when I do it is a much larger affair then using cash. See also andrewla's comment here [1]. > Why does a mechanism that works just fine in between bank and customers and generally domestically just break down when country borders are involved? Because banking systems and the regulations surrounding them are different in different countries, basically, and that adds lots of complications to an already extremely complex system. The bitcoin protocol is not different in different countries. [1] https://news.ycombinator.com/item?id=8066251 https://news.ycombinator.com/item?id=8066251
xiphias 12y ago
You're not alone: all the people who bought Bitcoin and holding it use Bitcoin mainly as the best store of value in human history. All fiat currencies are being printed like crazy (CHF was an exception, but it changed a few years ago)
- wpietri 12y ago
  Could you explain that? Compared with traditional currencies, Bitcoin's high volatility and unknown long-term risk profile make it look like a terrible store of value to me. (And, for similar reasons, very attractive to speculators.)
  - xiphias 12y ago
    Volatility should never be important when selecting a store of value. Gold and silver has much volatility compared to USD and hamburger price, still if you sold a cow 5000 years ago in Egypt for silver, you could buy at least 0.1 cows from the same amount of silver today. Silver doesn't lose more than 0.01% of its value/year (still the volatility is much higher than that). It's actually more important to understand why USD and CHF are so bad store of value. The best explanation is by Mike Maloney: https://www.youtube.com/watch?v=iFDe5kUUyT0 https://www.youtube.com/watch?v=iFDe5kUUyT0
    - wpietri 12y ago
      Volatility matters a lot for a value store, because the point of storing value is being able to convert back to something you actually value later on. If you put it in something highly volatile relative to whatever you actually care about, you may end up losing a lot of the stored value.
    - xiphias 12y ago
      I can't reply to your comment for some reason, so I reply here. I bought Bitcoins more than 1 year ago. If you look at Bitcoin in terms of years, and as a long-term store of value, Bitcoin is not volatile: the value is increasing until total adaptation. And I don't know anybody else who bought and held his bitcoins who's complaining :) (I'm not counting people who had Bitcoins held at MtGox, as they didn't have Bitcoins, just IOUs for Bitcoins)
napoleond 12y ago
I am returning to this thread a bit late, but let me try to answer your questions: > If money exchange is the main problem that Bitcoin solves, then why isn't the problem of money exchange attacked directly instead, i.e. through some other less volatile classical stores of value like gold or stock? "Money exchange" is a poor way of phrasing the problem that Bitcoin solves. Satoshi called it "Peer-to-Peer Electronic Cash", which is a better way to think of it: currently, without Bitcoin, the only way to transfer money to a peer without relying on a third party of any sort is to hand deliver a wad of cash. Bitcoin enables that transaction to happen electronically, for free. I don't see how it would be possible to enable those features (no need for third party, free international transfer) while using classical stores of value, and as far as I know neither does/has anyone else. > Why is money exchange a problem anyway and why couldn't a classical wire transfer solve the problem? This is basically asking "why is the trust thing so important?" That's a pretty heavy question, but one simple answer that comes to mind is that trust is expensive, and economically inefficient. The capital involved in mimicking the behaviour of a company like Western Union is a small fraction of what they're worth by virtue of being Western Union (ie. having people trust them) and the fact that they meet regulatory requirements everywhere they operate. That brand is only valuable and those regulations are only necessary because transferring money used to be impossible without them. Now, what Stripe is suggesting (and I happen to agree) is that there may always be trusted third parties and possibly some level of regulations involved to protect the consumer, but the level of trust and the amount of safeguards will ultimately be tempered by the enormously reduced barriers to entry (and hence vastly increased competition), potentially to the point where consumers will have almost the same variety of choice with their payment providers (ie. replacing credit card) as they currently enjoy with email. There are still a lot of technical hurdles to work out before that can become a reality, but that's the dream I'm excited about and the real value I see in Bitcoin.
pjc50 12y ago
Classical wire transfers have two things that people object to: high fees and anti-money-laundering legal requirements. The problem with making it "easy" to move money is that fraud becomes easy as well. There was an article on HN the other day about someone who wired $4k to a fraudulent AirBNB host. The credit card system skews towards assuming that the merchants are fraudulent and the customers mostly honest. Bitcoin goes in the other direction: it's entirely caveat emptor, there's no fraud protection or recovery at all. If your key is used to send bitcoins, by you or someone else, they're gone to that address. This allows for the low transaction fees but creates a trail of people who've lost money, whether on mntgox or localbitcoins or random internet purchases. (I've been playing with the description "uber for banknotes" for a while; the disruptive evading of existing regulated systems is important to both Uber and Bitcoin)
- sergiosgc 12y ago
  Bitcoin allows for escrow transactions, where a third party can act as a referee in case there's a dispute in the transaction. It has the important property, absent from current escrow setups, that the escrow party never holds the money: they have the power to accept or reverse a transaction, but nothing else. It limits the trust commitment towards the escrow service.
  - pjc50 12y ago
    People keep saying this, but how much is it actually used? How much do you have to pay the escrow service? How good are they at dispute resolution? Also, the money has to be kept in escrow until the possibility of a dispute is over, which adds a substantial delay.
    - sergiosgc 12y ago
      I imagine escrow being done by the likes of Airbnb, in the case of the service. It won't be error free, but should stop the absolute frauds. In those cases, the escrow service is already paid for: it's the market that facilitated the transaction. As for the money being kept in escrow, that is the definition of escrow. The alternative is the scenario of credit card payment processors, which keep the money for a period, and retain a fixed percentage of sales turnover, as a guarantee for refunds. From the merchant perspective, the average payment delay should be shorter using bitcoin than it is with credit cards.

by rsp1984 12y ago

pmorici 12y ago

The answer for why Bitcoin instead of Gold or stocks or whatever comes down to trust and logistics. Take Gold for example you have to have to either ship the gold around which is expensive and slow or have a trusted third party store the gold and handle netting out the transactions between entities or accept delayed payment and trust that the counter party will deliver the underlying asset. Bitcoin does not require trust in anything except the math underlying the system.

Vik1ng 12y ago
You are completely ignoring that you still have to trust your own security and 3rd party apps and services.
- XorNot 12y ago
  Also that BTC has no chargebanks, fraud detection etc. Once its gone from your account its gone.
  - Natanael_L 12y ago
    Multisignature services enable escrow and fraud detection, etc.
- baddox 12y ago
  I don't think you'll ever be able to devise a system where you don't even have to trust yourself.
sergiosgc 12y ago
> Bitcoin does not require trust in anything except the math underlying the system. False. It requires trust in the liquidity of bitcoin. If you can't convert bitcoin to local currency, it has no value. Bitcoin's fragility is in its ability to act as a holder of value, as repeatedly show by speculative price swinging (sometimes without apparent cause). Gold, for all its faults, has a huge track record as a value store.

foobarqux 12y ago

Beside the fact that it already exists, I think the best argument would be that the BTC network didn't require coordination between financial institutions or a design committee.

Bakkot 12y ago

The answer to basically all of your questions is that to transfer money, you need to move money. This can be basically a promise of money, as with wire transfers, or physical, as you'd do by transporting bullion or cash. The problem with using a promise to move money is that you have to trust whoever's promising. That works alright if there's a central authority, like a bank, but less well if you don't want to trust the authority, don't have access to the authority, or are unable to comply with the rules of the authority. Also it's kind of a shitty experience, as is. (You wouldn't pay for all of your Amazon purchases with wire transfers, I'd imagine.) The problem with moving physical money is that it's difficult to do over long distances or en masse. In order to solve the problems with existing money transfer, then, bitcoin needs to be able to do without a central authority and without using a physical representation of money. Which it accomplishes by allowing you to store money - not just a representation or promise thereof - digitally.

rsp1984 12y ago
Thanks for your answer. However I still don't fully understand the problem I'm afraid. How is the trust required to move money cross borders different to the trust required to have an account with money at your bank? That acct is just a "promise" of money as well isn't it? Also, according to your response a domestic money transfer would suffer the same problems but these seem to work just fine (at least much better than international transfers). Why does a mechanism that works just fine in between bank and customers and generally domestically just break down when country borders are involved?
- Bakkot 12y ago
  > Also, according to your response a domestic money transfer would suffer the same problems but these seem to work just fine (at least much better than international transfers). Certainly they work better, but "just fine" is a much stronger claim and one I'd disagree with. I don't find myself spending money by wire transfer hardly ever, eg, and when I do it is a much larger affair then using cash. See also andrewla's comment here [1]. > Why does a mechanism that works just fine in between bank and customers and generally domestically just break down when country borders are involved? Because banking systems and the regulations surrounding them are different in different countries, basically, and that adds lots of complications to an already extremely complex system. The bitcoin protocol is not different in different countries. [1] https://news.ycombinator.com/item?id=8066251 https://news.ycombinator.com/item?id=8066251

xiphias 12y ago

You're not alone: all the people who bought Bitcoin and holding it use Bitcoin mainly as the best store of value in human history. All fiat currencies are being printed like crazy (CHF was an exception, but it changed a few years ago)

wpietri 12y ago
Could you explain that? Compared with traditional currencies, Bitcoin's high volatility and unknown long-term risk profile make it look like a terrible store of value to me. (And, for similar reasons, very attractive to speculators.)
- xiphias 12y ago
  Volatility should never be important when selecting a store of value. Gold and silver has much volatility compared to USD and hamburger price, still if you sold a cow 5000 years ago in Egypt for silver, you could buy at least 0.1 cows from the same amount of silver today. Silver doesn't lose more than 0.01% of its value/year (still the volatility is much higher than that). It's actually more important to understand why USD and CHF are so bad store of value. The best explanation is by Mike Maloney: https://www.youtube.com/watch?v=iFDe5kUUyT0 https://www.youtube.com/watch?v=iFDe5kUUyT0
  - wpietri 12y ago
    Volatility matters a lot for a value store, because the point of storing value is being able to convert back to something you actually value later on. If you put it in something highly volatile relative to whatever you actually care about, you may end up losing a lot of the stored value.
  - xiphias 12y ago
    I can't reply to your comment for some reason, so I reply here. I bought Bitcoins more than 1 year ago. If you look at Bitcoin in terms of years, and as a long-term store of value, Bitcoin is not volatile: the value is increasing until total adaptation. And I don't know anybody else who bought and held his bitcoins who's complaining :) (I'm not counting people who had Bitcoins held at MtGox, as they didn't have Bitcoins, just IOUs for Bitcoins)

napoleond 12y ago

I am returning to this thread a bit late, but let me try to answer your questions: > If money exchange is the main problem that Bitcoin solves, then why isn't the problem of money exchange attacked directly instead, i.e. through some other less volatile classical stores of value like gold or stock? "Money exchange" is a poor way of phrasing the problem that Bitcoin solves. Satoshi called it "Peer-to-Peer Electronic Cash", which is a better way to think of it: currently, without Bitcoin, the only way to transfer money to a peer without relying on a third party of any sort is to hand deliver a wad of cash. Bitcoin enables that transaction to happen electronically, for free. I don't see how it would be possible to enable those features (no need for third party, free international transfer) while using classical stores of value, and as far as I know neither does/has anyone else. > Why is money exchange a problem anyway and why couldn't a classical wire transfer solve the problem? This is basically asking "why is the trust thing so important?" That's a pretty heavy question, but one simple answer that comes to mind is that trust is expensive, and economically inefficient. The capital involved in mimicking the behaviour of a company like Western Union is a small fraction of what they're worth by virtue of being Western Union (ie. having people trust them) and the fact that they meet regulatory requirements everywhere they operate. That brand is only valuable and those regulations are only necessary because transferring money used to be impossible without them. Now, what Stripe is suggesting (and I happen to agree) is that there may always be trusted third parties and possibly some level of regulations involved to protect the consumer, but the level of trust and the amount of safeguards will ultimately be tempered by the enormously reduced barriers to entry (and hence vastly increased competition), potentially to the point where consumers will have almost the same variety of choice with their payment providers (ie. replacing credit card) as they currently enjoy with email. There are still a lot of technical hurdles to work out before that can become a reality, but that's the dream I'm excited about and the real value I see in Bitcoin.

pjc50 12y ago

Classical wire transfers have two things that people object to: high fees and anti-money-laundering legal requirements. The problem with making it "easy" to move money is that fraud becomes easy as well. There was an article on HN the other day about someone who wired $4k to a fraudulent AirBNB host. The credit card system skews towards assuming that the merchants are fraudulent and the customers mostly honest. Bitcoin goes in the other direction: it's entirely caveat emptor, there's no fraud protection or recovery at all. If your key is used to send bitcoins, by you or someone else, they're gone to that address. This allows for the low transaction fees but creates a trail of people who've lost money, whether on mntgox or localbitcoins or random internet purchases. (I've been playing with the description "uber for banknotes" for a while; the disruptive evading of existing regulated systems is important to both Uber and Bitcoin)

sergiosgc 12y ago
Bitcoin allows for escrow transactions, where a third party can act as a referee in case there's a dispute in the transaction. It has the important property, absent from current escrow setups, that the escrow party never holds the money: they have the power to accept or reverse a transaction, but nothing else. It limits the trust commitment towards the escrow service.
- pjc50 12y ago
  People keep saying this, but how much is it actually used? How much do you have to pay the escrow service? How good are they at dispute resolution? Also, the money has to be kept in escrow until the possibility of a dispute is over, which adds a substantial delay.
  - sergiosgc 12y ago
    I imagine escrow being done by the likes of Airbnb, in the case of the service. It won't be error free, but should stop the absolute frauds. In those cases, the escrow service is already paid for: it's the market that facilitated the transaction. As for the money being kept in escrow, that is the definition of escrow. The alternative is the scenario of credit card payment processors, which keep the money for a period, and retain a fixed percentage of sales turnover, as a guarantee for refunds. From the merchant perspective, the average payment delay should be shorter using bitcoin than it is with credit cards.