United Kingdom and a partner at Cobden Partners and Martin Hutchinson, a journalist, are out with a new paper, Bitcoin Will Bite the Dust.
From the conclusion:
Our best guess is that in the short term there will continue to be
drip-by-drip erosion of confidence as the realization grows that the
system is compromised. The current bitcoin oligopoly cannot
resolve this problem: like the Roman triumvirates, it is unstable and
the principal parties involved cannot agree on a lasting solution; they
also lack the ability to provide the necessary credible assurances anyway.
Humpty is well and truly broken and neither all the King’s
horses nor all the King’s men can put him back together again: it can
only be a matter of time before the whole unsteady edifice will
collapse.
Even in the unlikely event that it survives into the medium run, we
would still rate its longer-term chance of survival as zero. First, we
should remember that a recurring theme in the history of innovation
is that the pioneers rarely, if ever, survive. This is because early models
are always flawed and later entrants are able to learn from the
mistakes of their predecessors. There is no reason why Bitcoin should
be an exception to this historical rule. The second reason is that in the
very long run bitcoin would be uncompetitive against efficient
closed-wall systems such as PayPal or COEPTIS, the successor to
e-gold. Once the production of bitcoins becomes insignificant, then
the Bitcoin system will entirely depend on transaction fees to cover
its operational costs, and its fee levels would be higher than those of
more traditional payment systems because of the need to maintain
excess hashing and excess capacity to deter new entrants into the
transaction validation business. Put differently, Bitcoin can never
achieve the technical economic efficiency of competitors that can
operate with a very small number of servers, or even just one. In the
very long term, when there are no new bitcoins being produced to
subsidize the validation process, the Bitcoin system will no longer be
able to compete.20 Last but not least, there is still the problem that
Bitcoin is not backed by anything.
"Last but not least, there is still the problem that Bitcoin is not backed by anything."
ReplyDeleteThat statement proves that the authors don't fully understand the applications of this technology. It's like saying that tcp/ip isn't backed by anything. It's true that tcp/ip isn't worth anything if nobody needs to transfer files across a network, but here we are....
Bitcoin and other crypto-currencies have properties beyond being used as a monetary exchange. The cryptographic timestamping properties and proof-of-ownership goes far beyond use as monetary instrument directly. Digital signatures are a critical component of many technologies that are really in the infancy of adoption, such as cloud software, connected devices (IOT). Using blockchain technologies allows for the decentralized and STATEless proof of ownership in the digital as well as the physical world.
I believe the authors of this article (and you [to a large extent]) miss the point entirely. You're right to view this technology (and the overzealous advocates) with skepticism, but don't please don't miss the bigger picture.
"It's like saying that tcp/ip isn't backed by anything." Great analogy. You identified exactly the way in which Dowd misunderstands what money actually is. Money is a service for communicating value.
DeleteDowd or anyone interested in quickly apprehending this should study the history of a Pacific Island named Yap, dubbed the Island of Stone Money. Or take a few moments to contemplate that the inherent value of gold in the modern world, its industrial/scientific value, is actually only a few dollars an ounce. All the rest of gold's value is subjectively assigned monetary value. This value is created from thin air through voluntary, peer-to-peer, spontaneous consensus among those choosing to value gold for its money service. Gold, just like Bitcoin, is "backed by nothing" as Dowd would say.
I definitely think the Blockchain has some interesting potential, but even though the Blockchain came as a result of the Bitcoin, one has to wonder if it makes sense to treat it as separate technology that has been integrated into Bitcoin use versus considering them one and the same.
DeleteWay back when RW was suggesting Bitcoin as a fun "play", I spent a little time looking into it and stumbled across a video that was talking about Blockchain usage potential without much talk about Bitcoin itself and that's what I found interesting then(around a couple of years ago)- and still do-.
I'm not much interested in a currency that isn't tied to a physical commodity(and I personally don't consider spent electricity as such). Heck, if dollars weren't forced upon us by gov't I doubt many of us would use them. But there's no question that the Blockchain technology has some interesting potential.
I just don't think that it's a supportive argument for Bitcoin adoption in that regard. I treat them separately in terms of value. As always, if people want to use Bitcoin I have no problem with that and I hope they find some measure of success. I just think that as RW points out there's also some dangers in its use if you assume that it will always hold its purchase value or guarantee your anonymity and that you should operate accordingly.
You don't need Bitcoin to use the Blockchain concept, however you do need the Blockchain concept to use Bitcoin....
“…one has to wonder if it makes sense to treat [the blockchain] as separate technology that has been integrated into Bitcoin use versus considering them one and the same….You don't need Bitcoin to use the Blockchain concept...”
DeleteYour first statement is correct. Your second statement is incorrect. Don’t listen to people who try to separate bitcoin the monetary unit from its blockchain the ledger. They do not understand how Bitcoin works. They are just echoing the narrative of the institutional Bitcoin camp that doesn’t understand Bitcoin either in a case of the blind leading the blind. The monetary unit and its ledger are inseparable, interdependent aspects of the same thing. Two different faces of one coherent service.
As with all anarchic systems in life, Bitcoin the system works only because its internal and external incentives are exquisitely balanced across all essential functions so that valid performance of any one function both enables and requires valid performance of all the others. If you believe a blockchain could exist without any associated cryptocurrency, take some time to think through how you would attempt to make that work.
Remember, if you have any kind of centralized authority or trust at hand, using a blockchain is pointless. Just have that central entity set up a hierarchical distributed database to run a ledger and you are done and home in time for dinner. If you have no centralized authority or trust, well, to get anyone to participate at all, you must offer him some kind of value. Value necessarily inseparable from investment of physical world computing resources into performance of valid blockchain operations. Value that’s portable, durable, fungible, divisible, minable, and scarce in a digital realm populated by untrusted peers. I.e., a de facto cryptocurrency. :)
"Your first statement is correct. Your second statement is incorrect. Don’t listen to people who try to separate bitcoin the monetary unit from its blockchain the ledger."
Delete" If you believe a blockchain could exist without any associated cryptocurrency, take some time to think through how you would attempt to make that work."
Ok, that's a fair challenge. So first let me state that when I refer to the "Blockchain", I mean the concept, it doesn't have to specifically be "The Blockchain."
So now let me posit a scenario under one could exist without a cryptocurrency:
I have a software company and I want to utilize a title tracking(ownership) software via the cloud where subroutines are written into the software to check in with a "Blockchain" type system that matches a serial # of the software with its use and reports to me date, time, maybe even an IP address.
I, as the software creator, subscribe to said system by paying those running the ledger/Block style model(along with others too) and pay them in dollars, gold/silver, etc. et al
So I'm paying a third party ledger system to do my software title monitoring....without using a cryptocurrency.
How's that?
I appreciate your application of some thought to the matter. But you'll need a different scenario. The use of a blockchain-style ledger in your scenario is a pointless addition of complexity and irrelevant technologies to a situation effectively solved with a simple database.
DeleteSince you as a central authority are the single source of payment for a specific group of people you alone select to run software you alone tell them to run, and they must do exactly as you say in order to continue receiving payments from you, you can easily just have them run an off-the-shelf distributed database software package operating your title tracking database on their machines. Your scenario has multiple easily identified central points of control anyway, so using a peer-to-peer ledger system is pointless. Hire a corporate data center with redundant geographical locations and run a standard distributed database ledger that will give you vastly more flexibility and control over features and data than any blockchain-style ledger would. This is why all accounting firms, all banks, all corporations use ordinary databases to implement ledgers. The have exclusive full physical control over their entire physical computer networks and systems so integrity of their software and accuracy of their data is not at issue.
Blockchain is highly specialized ledger technology specifically addressed at solving the unique problems of ensuring data integrity under uncontrolled conditions of peer-to-peer distributed networks. These networks include untrusted parties with every possible incentive, freedom, and means to attempt to shut down the network, like governments, or distort the ledger to their own advantage, like thieves. Any scenario that doesn't also have such requirements, any scenario that contains some centralized chokepoint anyway, is a pointless scenario to attempt to apply blockchain technology to as an ordinary centrally controlled database presents a far more simple, powerful, and cheap ledger solution.
Blockchain technology arose out of the recognition by cyptoanarchists that any requirement of trust or good behavior is a non-starter in an anarchic environment that necessarily includes badly behaving participants and that any dependency on a central point is a central point of failure for governments to attack to destroy the whole network. For example, eGold presented multiple central points of control over a digital currency system that the government woke up one day and elected to shut down at the stroke of a pen, sending some agents to a specific geographical location to seize specific computers running the network and arrest specific well-known operators of the network getting paid from a single bank account that could be frozen.
Bitcoin’s blockchain technology arose specifically in response to the need to make impossible precisely this kind of shut down. It does that by ensuring there is no centralized resource of any kind nor requirement of good behavior of any particular participants that Bitcoin is dependent upon to continue to function. Not one aspect of Bitcoin is centralized in any possible way. You’ll need to come up with a scenario with these same fundamental requirements, where a blockchain-style peer-to-peer ledger is mandatory instead of optional, and then explain how you would make a blockchain work in that setting without a cryptocurrency.
" The use of a blockchain-style ledger in your scenario is a pointless addition of complexity and irrelevant technologies to a situation effectively solved with a simple database."
DeleteI'm not really sure I agree with you. A dedicated "ledger" system can be applied to multiple software across many different corporations as a method of title tracking. It's a great way for smaller firms to get some tracking without having to have a support staff & technology on the order of Microsoft et al.
Not only that, I'm just using software as an example. What if real estate title was tracked in such a way? The possibilities are limitless.
"Since you as a central authority are the single source of payment for a specific group of people you alone select to run software you alone tell them to run"
I'm not the "single source" by necessity-you inferred that, instead I might be one of several competing ledger systems in the Blockchain manner. The free market can determine who they work with.
"and they must do exactly as you say in order to continue receiving payments from you"
Why would they be receiving payments from my company? I would be their vendor, it would be the other way around. They would have the final say as a customer, not me.
They would be paying for a public ledger/tracking service, so that they could track the use/ownership of their software and their clients could legally change ownership under the terms, of a EULA for example, that their customers would agree to if they decide to buy the software.
Again, that's just one use....I also like the idea of a decentralized, competitive title tracking for real estate too if you could ever get gov't out of the way.(or a host of other title important property)
I think that's the brilliance of the Blockchain concept.
"where a blockchain-style peer-to-peer ledger is mandatory instead of optional,"
I'm not into mandatory stuff, strictly voluntary.
" then explain how you would make a blockchain work in that setting without a cryptocurrency."
I just did that.
My company, Subledger, provides a terrific ledger-in-the-cloud API service that is far less expensive per transaction than the Bitcoin blockchain.
DeleteWhile I'm happy that you think we're a potential substitute for the Bitcoin blockchain, you're wrong. We have our place (intra-entity transactions) and Bitcoin has its place (inter-entity transactions).
If you cannot understand the differences between the world-wide, decentralized, trust-free Bitcoin blockchain transaction system, I'd recommend thinking it through.
"While I'm happy that you think we're a potential substitute for the Bitcoin blockchain, you're wrong."
DeleteWhere did I say that?
I'd recommend thinking through what I posted.
In fact, I even repeated above, "I mean the concept, it doesn't have to specifically be "The Blockchain." after I already stated once in my original response "You don't need Bitcoin to use the Blockchain concept".
I said "concept" over and over again. I never once implied that your ledger should or can replace Blockchain, only that I liked the concept of Blockchain itself.
I'm not even familiar with your software, I've only just heard of it now.
When going to your site though I only see reference to accounting. Are you marketing or using your software in a fashion to establish title to anything?
Nick, I apologize for the lengthy reply but the reason your model won’t work requires a deeper dive to reveal. First of all, you want to operate fully legal. Check. And you want to operate peer-to-peer trustless with no central authority. Check. But you want to separate asset title transfer processing from physical transaction fee payment with no mechanism nor trusted party to unite them. There’s your problem.
DeleteThe essence of why your trustless hybrid virtual/physical model is not viable is embedded in my previous statement that, in a trustless setting, value provided to transaction processors must be “necessarily inseparable from investment of physical world computing resources into performance of valid blockchain operations.” Only this technology mitigates the need for centralized trusted 3rd parties.
Database theory provides the structural basis for why your hybrid ledger system won’t work. Starting with ACID: https://en.wikipedia.org/wiki/ACID
Ledgers are just databases of transactions. As such, they must follow all ACID rules of databases. The Bitcoin blockchain is itself nothing more than a distributed database. It scrupulously adheres to ACID. All must blockchain implementations of any form in order to be valid.
One of the business requirements of a peer-to-peer, distributed database is that transaction processors necessarily get paid for their work and transactors who pay necessarily get their transactions processed. Both operations must verifiably occur and must occur together in all or nothing fashion. Otherwise the database could not function and would cease to exist.
These mandatory business requirements translate into constraints on the system that must be respected when processing transactions. They fall under Atomicity and Consistency, the “A” and the “C” in ACID. They constitute processing and data integrity requirements that a blockchain implementation of any form must enforce. Under Bitcoin, that is accomplished in code. The code ensures atomistic system transaction processing guaranteeing simultaneous reward payment for block creation along with bitcoin transfer entries because the same entity processes both operations simultaneously before having that fact validated and secured by the full trust of the entire network.
By contrast, your virtual transaction entry / physical transaction fee payment system fails to ensure Atomicity and Consistency because it takes operations that _must_ verifiably occur and occur simultaneously and divides them apart across distinct, unrelated, mutually distrusting entities at different geographies and different points in time.....
In English, all this means I can’t mail my check to an untrusted transaction processor until I see he actually completed my transaction but he can’t complete my transaction until he sees my untrusted check clear his bank account. We each possess ½ of what it takes to complete a valid system transaction, but we can’t execute that transaction because we can’t trust each other. Worse, while a title transfer is verifiable by the rest of the network, the completion of the physical payment for the system transaction is not verifiable, leaving the larger network unable to ascertain if a valid system transaction has actually occurred in the case a transaction processor claims to have not been paid. Of course is there exists a 3rd party trusted by the two parties, he can serve as an “escrow agent” resolving the deadlock between the two parties. And if this 3rd party is also trusted by the majority of the network, he can provide credible validation that the payment was actually delivered.
DeleteBut wait, if there exists a 3rd party trustworthy enough to guarantee the Atomicity and Consistency of system transactions in this way, that trusted party could just process transactions himself in the first place, more expeditiously, at lower cost, employing a more efficient centralized database. And such a centralized trust-based model is far superior economically. It would soon drive out of business any competing system inefficiently attempting to use a blockchain model for transaction processing burdened by bolting on external transaction guarantees from 3rd party trusted entities.
Now if there is no trusted 3rd party trustworthy enough to trust with the integrity of system transactions then you’ll get cases of deadlocks, cases were title transactions are made without corresponding payments, cases where payments are made without corresponding title transactions, and cases where transaction fee payments are called into dispute, and the whole hybrid virtual/physical system will implode.
These dynamics are why high-fee eBay persists as a centralized universally trusted central market-maker intermediating distance transactions between untrusted parties through user credit card validation, insurance provision, reputation tracking, and dispute resolution to effect atomicity of transactions while low-fee Craigslist, which merely brings buyers and sellers directly together, remains forever limited to local situations where untrusted parties can meet face-to-face for simultaneous exchange to address the lack of trust. Your hybrid model’s requirements are that it provide the trust gap bridging and validation of eBay while also providing the trustlessness and decentralization of Craigslist without including any mechanism to do so, as a blockchain-integrated cryptocurrency does.
"Nick, I apologize for the lengthy reply but the reason your model won’t work requires a deeper dive to reveal."
DeleteNo need to apologize, I appreciate the dialogue and your time in explaining your viewpoint to me.
"And you want to operate peer-to-peer trustless with no central authority. Check."
Actually, I'm not necessarily saying that. I'm saying it should always be voluntary, and the "central authority" might be considered the people running/maintaining a ledger....but that there would most likely be competition for that service.
"These dynamics are why high-fee eBay persists as a centralized universally trusted central market-maker intermediating distance transactions between untrusted parties through user credit card validation, insurance provision, reputation tracking, and dispute resolution to effect atomicity of transactions while low-fee Craigslist, which merely brings buyers and sellers directly together, remains forever limited to local situations where untrusted parties can meet face-to-face for simultaneous exchange to address the lack of trust. Your hybrid model’s requirements are that it provide the trust gap bridging and validation of eBay while also providing the trustlessness and decentralization of Craigslist without including any mechanism to do so, as a blockchain-integrated cryptocurrency does."
I'm really glad you brought up E-bay, I was going to use it earlier as another example so I think you and I are actually moving in the same direction intellectually.
I would point out to you that you have in essence answered your own objection. We see in the market today many viable methods by which a transaction can take place to mitigate "trust" issues. Paypal of course is a vital component to E-bay, as you point out credit cards, etc. et al. They all perform this function.
I won't argue with you that the transactions costs may be higher, I think that's a valid point- but I do think that Tom's comment above about his company, "provides a terrific ledger-in-the-cloud API service that is far less expensive per transaction than the Bitcoin blockchain" to be FASCINATING/AWESOME! (I really do hope Tom succeeds, I'm just always on the "annoyed" side when people assume that those who haven't adopted Bitcoin are ignorant- which seems to happen a lot in discussions between adopters and non adopters)
Anyway, I think in conclusion that we already see market based databases with mitigaters for trust issues(ebay!)- I can't help but wonder why it can't happen for an independent ledger service(like Tom's company), tailored to specific markets/needs.
I must admit though, your knowledge of database theory is impressive. I may have to call you and Tom down the road because I started last year on a major database project in a Craigslist type vane(but the market based data would be something WAY outside of the market Craigslist serves , & potentially larger) and worked briefly with a web designer last year for some basics but had to abandon it to focus on my core business(I have mouths to feed) for now. (I'm just too busy, too many irons in the fire, etc. et al.)
If you would mind dropping me an email if you feel comfortable sharing your personal information with me so I have it for down the road that would be great. (toolexnickatgmail)
:)
Dowd is a practiced thinker on the subject matter so I’m surprised at the lack of sophistication of these criticisms. These are the superficial sorts of objections Bitcoin dilettantes come up with who don’t bother to study the subject in depth or uncover the widely-known refutations.
ReplyDeleteEach of Dowd’s conceptual objections like “not backed by anything” has been carefully addressed by other monetary and economic thinkers. Each of Dowd’s technical objections like “insufficient block rewards” is easily fixed with technology evolution either in Bitcoin itself or within the burgeoning free market in alternative competing cryptocurrencies.
Perhaps a clue to what’s going on is Dowd is a Cato Institute affiliated, Milton Friedman kind of guy. These are the same establishment libertarians who label Austrian pure free market ideas as extreme and impractical and see nothing wrong with admitting “a little” government control into their economics if expedient. Perhaps Dowd assumes this same mindset when labeling this pure free market currency as extreme and impractical and supporting centralized, institution-backed currencies that necessarily admit “a little” government control.
Sweat on the palms of their hands will be all Bitcoin fanboys are left with if a cyber security emergency is called, or the internet is taken down by the federal government in a time of their choosing. At a bare minimum all anonymity will vanish the longer Blythe Masters is involved with Bitcoin, after having manipulated the precious metals market for years on end. In the end all we really possess is that which we can protect with our own two hands.
ReplyDelete