The blockchain is often cited, mistakenly, as a panacea for many ills facing society. This confusion is understandable, stemming as it does from the extraordinary growth experienced in the crypto-asset industry, which seems to morph and change direction as fast as people can study its effects.Read More
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.
- 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.
- Fractional banking can functionally permit an increase of money supply without an increase in the underlying "cash".
- 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."
- 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.
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.
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.
If you’re unfamiliar with CoinValidation, that about sums it up... It was never clear to begin with. There are several reasons for why it’s not straight forward, and below I’ll attempt to sort it all out. First let me say the following:
CoinValidation.com was an attempt to innovate in what we thought may be the most controversial side of Bitcoin; the identity layer. It is not a specific technology, the idea of whitelisting/blacklisting/xlisting whatever is totally off-base and was a rumor. Here is what CV really is:
It’s a thinktank.
It was an attempt by a small group of people to solve one of Bitcoin’s largest problems: no one was creating new technology in the identity layer of Bitcoin. We did not specifically want to endorse or profit from some piece of tech like blockchain analysis or whitelisting, etc. We simply wanted to explore what was possible. We found some interesting things, like tech that could reduce the risk of privacy loss in the standard KYC model. But that all went unheard because people thought we were trying to hurt user privacy or to affect fungibility.
People thought that we were building a for-profit startup focused on selling tech and user data wholesale... In fact, we were trying to do the exact opposite of that. It could best be described as a thinktank for the KYC and regulatory side of Bitcoin - which we had become familiar with during our time at Bitinstant.
Some of the ideas we explored and want to continue to explore:
- How can Bitcoin companies comply with US regulations from a legal/tech standpoint?
- What can Bitcoin companies do differently vs. typical financial companies, but still be compliant?
- What is possible with blockchain analysis?
- How can Bitcoin companies communicate patterns of fraud to each other?
- How can ownership of assets be proven?
- Can something like the MIT PGP database exist for Bitcoin addresses?
- Is it unethical to build technology that enables Bitcoin businesses to tie into legacy systems?
- How sensitive is the Bitcoin community to a group of people experimenting with what’s possible?
Here are some of the realizations we’ve had in exploring the above questions:
- We facilitated the first underwriting of a mortgage to a bank as a proof of concept.
- Bitcoin companies can comply with the regulations, and yes it is very limiting.
- There are sophisticated ways that Bitcoin companies can communicate fraud patterns to each other.
- That kind of communication could prevent another Mt. Gox type of failure, which is inevitably going to happen because it is not being addressed.
- Blockchain analysis can be really scary.
- Bitcoin is not anonymous in most contexts.
- We designed a new way of hashing KYC data so that five points of attack can be reduced to two.
- We found ways for companies to satisfy BSA requirements without having to store or transmit user information.
We stopped working on exploring these concepts because
A) No profit model translates to no funding. B) The community tried to burn us at the stake, hence no funding. C) I realized that I am not the best at public relations, and it's hard to convey what I want to convey.
I continue to work on innovations on the regulatory front, but for obvious reasons - not at the level I probably should.
Still, here is what I believe is possible for companies:
- Satisfy regulatory requirements here in the US if they want to.
- Do it in a way that risks user privacy much less than what is currently in place in the Bitcoin ecosystem.
- Have a system with less fraud, better consumer protection and AML, and less privacy loss than what exists in traditional financial AND current Bitcoinland.
Now the fact that it is possible - doesn’t mean I’m endorsing it. Working with regulations here in the US is not some lofty philosophical decision for me. Businesses are going to work within that framework regardless of my thoughts on it because that is what the market will dictate. I’m simply trying to help navigate that landscape responsibly... Even though my personal philosophies are often in line with those of libertarianism.
People are going to buy their Bitcoins in the most efficient and effective way possible to them. The path the masses take to acquire and use Bitcoins will be the one which has the best user experience, closely parallels what they are used to, and costs the least. The masses don’t care about Ayn Rand or crypto anarchy.
We can push the boundaries of what is possible if we can stop fighting and solve real problems. Problems like this:
- Why are users giving their KYC information to shady companies?
- Why is the community trusting $700 million to one dude with an exchange written in PHP in Japan?
- What is being done to prevent that from happening again?
- Why is multi-sig not in full effect on every wallet valued greater than $1000?
- Why is the community already satisfying most of the regulatory requirements, kicking and screaming that they exist, and then doing almost nothing to realistically change it?
Real change takes real work, and it’s not going to get done if the people innovating are ostracized for thinking outside the box. Creating real change is a massive undertaking. The challenge of navigating the Bitcoin legal landscape is going to take a lot of hard work and cooperation. Please feel free to comment with your questions about regulation here in the US - we have a lot of experience in this space and want to share what we’ve learned.
Of course CV failed at reaching minds with what we thought was very important information. But failing is how we learn sometimes, and I'm grateful that there are those in the community who see that what we work on is valuable. Thank you.
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:
- It is easier for business operators to build smaller-scope products.
- When one of those competing products fails, the entire system doesn’t halt - it is swiftly replaced.
- 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
This is an exciting moment in human history. The Internet has provided humankind the ability to communicate over great distances and access to information and collaboration that’s unprecedented. The result is a great push in the advancement of our species. As a part of this technological wave of improvement, I have taken a moment to reflect on what that means now and for our future and how we can each contribute to the advancement of our civilization. The Internet is really, really cool. Anyone in the world can communicate with anyone else in the world in a split second, as long as they’re connected to the Internet. This is a huge deal.
I rank the Internet as the third greatest technological achievement in human history (behind only fire and electricity). It provides us a global communication system that accelerates advancements in every other field of human study: Medicine, mathematics, physics, law...you name it. With the Internet, we can perhaps achieve more in the coming 50 years than mankind has accomplished in the past one thousand.
With the Internet, Socrates’ famous words have never rung truer: “I am not an Athenian or a Greek, but a citizen of the world.” We are no longer a tribal species; we are a global species. Today, we can easily send information, currency, physical goods, and communications around the world in trivial amounts of time. If we follow the natural path that these advancements present, we can truly achieve a global culture, global governance, and hopefully global peace.
It is easy to see that education has the power to change some of the bad stuff in the world. Technologies and infrastructure like those offered by Wikipedia, Google, Twitter, Facebook, Amazon, Reddit, PayPal, and Bitcoin are enabling communication and the sharing of knowledge and information which is progressing us towards a global civilization. Anyone with access to the Internet can connect to sites like Carnegie Mellon, Stanford University, or the Khan Academy to take high-quality courses for free. They can then share what they’ve learned with people around the world on sites like Reddit, Tumblr, Stack Exchange, and Wordpress. This type of access to information and interaction is unprecedented. People from all walks of life and cultures are collaborating - thinking, learning and problem-solving together. I love it. This system, with all its benefits, is empowering individuals, but it also feeds “Big Brother.”
The concept of a global government is frightening. George Orwell opened many people’s eyes to the idea that one-way transparency is a bad thing. We are seeing real manifestations of his fictional “1984” in the news lately. Governments are definitely spying on their citizens. In the US, every word written and spoken has a good shot at being recorded and stored somewhere in Utah. Even still, I'm willing to wager that technology and freedom of information will overcome the rise of tyranny.
There are many who say “if I’m not doing anything wrong, what do I care if they watch me.” The problem is that you may think you’re not doing anything wrong, but the government may think otherwise. Many countries censor the politically outspoken, even torturing and killing those who do not support the party in power. The constitution and the bill of rights in the US argue for the freedom of speech, due process, checks and balances, and the right to not self-incriminate - but it is becoming clear that the US no-longer plays by its own rules.
The potential for corruption and using new technologies to go after law-abiding citizens is eye-opening. Fortunately, the transparency cuts both ways - leaking information and whistleblowing are easier than ever.
We are on the precipice of a global renaissance, and very few of us even realize it. The idea of contributing a single line of code, or a single blog post that brings us closer to capturing a type I civilization motivates me to write that code. It is why I am so passionate about technology.
As we’re in the midst of these exciting times, ask yourself this: how would you react if electricity was just invented? Would you behave like the majority of people who scoffed at it as a parlor trick?
There’s a good story about a man who thought that electricity could change the world. His own father thought that he was a fool. Now, JP Morgan stands as one of the most respected and visionary business men of all time. If only we could all reflect on this moment in history, it might teach us to respect each innovation for having the potential to change the world.
When a decentralized communication system (the internet), a decentralized currency (Bitcoin), and a decentralized voting system (TBD) come knocking at the door - will you jump on board?