Bitcoin is not Randian gold

It's frustrated when people say that Bitcoin has bad macro-economic design or that the rules are set in stone. The design is experimental and the rules are consensus-based; so it is silly to make such binary right or wrong analyses.

Bitcoin is incredibly hard to describe. Its subsystems are complex and we often generalize for the sake of audience understanding. Subsystem details may contradict the precision of the generalization. Additionally, people with strong political beliefs often describe it with agenda-charged jargon, leading to a cloudy vernacular.

Here are some of those buzzphrases; (perhaps with more context we wouldn't hear that they denote poor macro-economic design.)

"Bitcoin is scarce and deflationary"
Some people will say that Bitcoin is deflationary. That due to occasional lost private keys its supply is finite and deflationary.

Contrarily, Bitcoin is inflationary until the year ~2140. New coins are released akin to the Keynesian monetary supply of the USA. It is similar to gold in that there is a fixed and predictable supply, but those rules are subject to change if there is consensus.

Currently Bitcoin is inflationary at a rate of 9% per annum.

"Bitcoin is anonymous"
Through most methods of bitcoin private-key creation, Bitcoin is indeed anonymous by definition of anonymity. The part that is often left out is that the anonymity decays in practice. Transactions are often broadcasted by a participant's IP, route to an identified user's wallet account where they are converted to USD, and drawn to a KYC'd person's bank account.

That is far from anonymous, or if anonymity was a spectrum: we could say that's like writing an anonymous book with a picture of the author on the cover.

"There will only ever be 21 million bitcoin in existence"
This is wrong in at least four ways, and yet I still say it often. 

  1. The real number is closer to 20,999,949.9997 because the 50 genesis block coins cannot be spent, and it is more like a limit - as in, approaches 21MM.
  2. Fractional banking can functionally permit an increase of money supply without an increase in the underlying "cash".
  3. The sentence could be lengthened to "There will only ever be 21 million bitcoin in existence... provided that the consensus dictates adherence to the initiating ruleset or robots don't enslave humanity and abolish Bitcoin."
  4. Whole Bitcoins units (as we typically refer to them) are divisible up to 8 decimal places, giving us something like 2.1 quadrillion actual units. 

All that being said, 21MM is close enough and serves for the purposes of understanding how the system works in most explanations.

There are a growing number of Bitcoin myths (https://en.bitcoin.it/wiki/Myths), which illustrates a larger problem. Hard stances on what Bitcoin is or isn't shows that there is a lack of understanding in the consensus mechanism. Consensus is one of its many under-appreciated facets.

Bitcoin is a fluid, adaptive, and self-correcting system. It has several stake-holders with varying interests. All of whom need to agree in order for Bitcoin to press onward. This makes it very difficult to go against what is in the general interest and also makes it very likely that Bitcoin will continue to adapt in the interest of its entire user base. Bitcoin, like many things, cannot work as a Zipf distribution where something like 1% of the users control it. It would collapse in short order if the ruleset did not serve general interests. Subsequently, it would reset with an improved ruleset which invalidates whatever Zipfian rules caused the collapse.

Hopefully all of the new alt-coins will serve as a research testbed for us to discover and eventually implement the ideal incentive macro economics of Bitcoin (among other things). 2140 is only 125 years away.

Heading into winter, save money on heat with Bitcoin

@Shoutout to cryptocoinsnews.com giving me my first byline and picked up piece :D - https://www.cryptocoinsnews.com/mine-bitcoin-save-money-heating/

Here in NY, heat is a big thing in the winter. It can get bitterly cold, and heating costs add up. Let's do some back of the envelope math to see if we can save money on heating those NY apartments. In a typically NY apartment we're talking 500-1500 sq/ft of living space. So for the purposes of this demonstration, let's use 1000 sq/ft as the magic number. Given that New York is a pretty cold climate, we're going to need about 4,000,000 BTUs per month of heat to keep that apartment warm. Here are the current rates for the common energy sources:

Electricty - $.20/kWh Oil - $3.60/gal Natural Gas -  $15/MCF

This gives us a very approximate cost per million BTU as follows:

Electricity - $60 Oil - $34.60 Natural Gas - $18.75

Which shows natural gas as the clear winner for heating our apartment at approximate cost of  $75/month during the coldest months. But what if electricity is our only option? (There have been several times where I have rented and the only available heating source was electricity. )

In that case it's a clear home run for the next contender: the bitcoin ASIC.

Bitfury ASIC

I won't go into too much detail, but essential it's a machine capable of producing bitcoins for the cost of electricity. The initial purchasing price of the device is also a factor.

From my own personal experience, it takes a gen I 100gh/s Avalon miner (600-1000w PSU) to heat that 1000 sq/ft apartment. It uses 14.4kWh of electricity per day - giving us a monthly cost of ~$86.4. This is without using optimization like thermostats to keep a consistent temperature. My method was to adjust the openness of my window.

Surely $86.4 can't compare to the $60 cost of electricity alone? Surely. But that's not all. The ASIC producing 100gh/s would have bestowed upon us some BTC during that month period. At the current price ($380) we're talking $15/month. It starts to get interesting.

On top of which, that gen 1 100gh/s ASIC is somewhat outdated. We can find used Avalons  on ebay that output 200gh/s for the same amount of electricity or less.  On top of this, there are or shortly will be chips on the market capable of 1W/Gh - which would offset the cost of heating entirely and then some (beating oil and natural gas.)

I believe we're now in the territory of ASIC heat being more efficient than traditional electric heating elements from a cost/btu standpoint. Play this out for a few years and we see the cloud moving to our baseboard heaters.

If you pay for your heat in NY - it probably pays to buy some ASICs. The value of bitcoin will go up or down, the hashrate similarly, but so does oil / gas. Right now it makes sense to heat with ASICs.

Bitcoin: after the beginning...

In my last post on this subject, I wrote about Bitcoin being the beginning of an extreme shift in culture. I anticipate that the shift could take 10-20 years to be realized, but there’s a lot of work that can be done to shorten it to 3 years.

The shift I imagine can primarily be described as decentralized voting, trustless identity/finance pairing, transparent government/public corporations/non-profits, DAOs, granularly controlled privacy for those who want it, and an overall reduction in crime, bureaucracy, and oppression. Additionally, the standard of living, especially in the developing work, will be dramatically much higher.

People in sub-saharan Africa and Latam (where reduction in poverty is vital) will have access to financial services, communication, organization and self-governance. There will be methods for the developed world to efficiently and effectively donate to causes where it is badly needed. Causes like mesh networks to facilitate communication, and food / clean water so that time can be spent on social infrastructure. Funding can go directly to those causes without being pilfered, and results can be more easily monitored for efficacy.

Percentage_of_poverty_in_the_world,_Mexico_colour_coded_corrected
Percentage_of_poverty_in_the_world,_Mexico_colour_coded_corrected

The first feature I was excited about with Bitcoin was its use as currency, value transfer, and value storage. For those who bank branchlessly - this technology alone is life changing. But decentralized ledger systems give us much more than that.

Decentralized voting is huge. Decentralized storage of information, identity, communication, law, business, and much more are all possible and real in the near future.

What most excites me is the ability to quantize the analog world we live in. By decentralizing these metrics in a publicly stored system, we can do some very cool data analysis. We can see if the aid given to Burundi can be categorized by source and destination. We can then see what works and what doesn’t.

Recently a representative from a global charity (one of the largest, with over $4.2bn in contributions in 2013) came to our office. He told us that one of the major issues in giving financial aid is that when it doesn’t go to the matron of the household - funds get spent by the males on alcohol and drugs. It is difficult to keep the men from stealing the funding, so the charities don't give financial aid to those households. If the money can be given directly to the women of the household, there is an overwhelming probability that she will make her family escape from the relative poverty.

There are many clear applications for where Bitcoin - and the more important underlying technology - can greatly benefit the world. Most of the applications we have considered closely parallel systems with which we are already familiar. The financial aid problem could potentially be solved with Bitcoin wallets for the women in need of financial aid. That’s not to presume that it’s a silver bullet, but it would create a very big difference in solving the problem. This example closely parallels some of the financial aid systems we currently use, but the distribution chain length and cost would be dramatically reduced. It is a more efficient version of what we already have. In many cases, efficiency to the point of being effective where it otherwise wouldn’t work. Reducing the distribution chain by 20 points of contact - to get to a family in need - is what it takes to be worthwhile.

As far as the example with Burundi of A/B testing methods of aid, there is not much like that available to us. Most people have almost no experience crowd-auditing what works because there simply is not enough high-quality data. This may be bordering on the spooky for most people, but that’s because we’ve been conditioned. Our conditioning has told us that centralized organizations control the information, our privacy is under attack and not theirs. We now have the tool to flip that scenario. We can responsibly shine more light on the structural inefficiencies of the world, the corruption, violence, poverty, and attempts at sweeping this stuff under the rug. At the same time we can reduce the need for reductions in personal privacies.

I’m hoping we can work together on this, I guarantee that if you’re reading this -- you can help.

How Many Eyes Are on the Books?

Echoing the sentiment of Ryan Straus (Ridell Williams); the overarching issue at the forefront of Bitcoinland is that Bitcoiners place a lot of trust in individuals and organizations. That’s not to say placing trust in people and institutions is always a bad thing, but that trust needs to come with safeguards. The recent events at Mt. Gox are an articulate illustration of those challenges. For years, Mt. Gox was a mainstay of Bitcoin. Gox allowed many people to get involved in digital currency with ease and relative security. We can thank Gox for much of the early adoption and infrastructure of the community. Ultimately the trust was betrayed. We saw technical glitches, a lack of communication, and wild levels of volatility.

Most of this could have been prevented with solid tech, transparency, and outreach. Still, I subscribe to the idea that Mt. Gox has given us a great gift. We can learn from their shortcomings and reference their successes for the next level of Bitcoin infrastructure.

Having developed software for a while, my greatest lessons draws from moments of failure. There have been amazing tools developed purely from breakdowns in software. These tools help us prevent, detect, resolve, and communicate about technical issues which naturally and inevitably evolve. I believe 2014 is a year where we can build some of those tools for Bitcoin.

The tools the community most needs to focus on are:

Triple-entry accounting: While this term is somewhat vague, I envision it as a method for reconciling a company’s books. In essence, you could assign a Bitcoin address as the holder of funds for the traditional double-entry accounting verticals. Operating expenses, accounts receivable, salary, investments, etc. could have dedicated Bitcoin addresses for the inflow and outflow of funds. This would make it much easier to visualize funds flow both internally and from the perspective of an outside auditor.

Ledger transparency: This piggybacks off of the idea of triple-entry accounting. I half-jokingly tweeted that managers of the future will be able to crowdsource peer-review of their records. For many organizations, like non-profits and publicly traded companies, stakeholders want transparency but the presentation methods are fairly analog. The idea is to digitize all of an organization’s fund flows, and make it available on something like the blockchain - so that people who know the correspondent Bitcoin addresses could verify that financial statements are accurate.

The implications of this are far-reaching, and an understanding of how it would play out practically are to be determined. Many people would prefer to invest or donate to an organization where the financial representations were accurate. The existence of ledger transparency is inevitable simply due to the competitive advantage. The upside for the organization is increased efficiency and reduced cost for auditing, as well as a lower risk of financial inaccuracy. People want to know “How many eyes are on the books?” The answer could soon be “Everyone’s.”

Full-Reserve Bitcoin Banking: We have the technology to prevent fractional reserve of our assets. This is the cutting edge of Bitcoin security. It’s shiny, it works, and not enough people / organizations are using it. Existence and placement of assets can be cryptographically proven and movement can be restricted with extremely granular configurations (multi-sig.)

Insurance: When all else fails, there is insurance. A Bitcoin depository institution could have an extremely secure system of storage. Risk could then be calculated and deposits insured.

Modularization: In the financial industry, there is a great deal of modularization. It is imprudent to have a single entity act as a depository institution, clearinghouse, order-matching exchange, and auditor all at once. These tasks can be separated for increased efficiency, reduced risk, and greater scope-precision. This is important for three reasons:

  1. It is easier for business operators to build smaller-scope products.
  2. When one of those competing products fails, the entire system doesn’t halt - it is swiftly replaced.
  3. Maintenance of a module does not require system-wide downtime.

Granted, the financial community has had several hundred years to evolve to the point of efficient compartmentalization. Fortunately for Bitcoin, most of the work has been done and we simply have to parallel many of the models that exist. We can even step it up a notch with transparency and decentralization of trust.

It is important that we remember the spectrum of what we like in principle and what is possible today, this week, this year, etc. It is going to take some time to revolutionize finance with the power of cryptography. We are still waiting for sweeping changes to happen overnight. It’s been 5 years, and we’ve resigned to working on what is practically achievable in experience-based timeframes. The items discussed above are our goals for 2014. Our focus is on the option of transparency, importance of choice, and the obsoletion of coercive trust.

(1) “If I own several pounds of gold, I may not want to keep all of it in my home.” (2) CoinApex.com has taken initiative to implement TE accounting for one of their companies as a proof of concept. Research is ongoing and results will be shared by year-end.

Syndicated from http://hub.playerauctions.com/alex_waters-bitcoin-eyes-on-the-books - on March 7th, 2014