One day, while I was learning about cipherspace, I discovered BitCoin. BitCoin is a completely decentralized, anonymous online monetary system that relies on a distributed database to facilitate transactions. The creator put a great deal of effort into ensuring that the system is secure and reliable. Unfortunately, there are no real assets backing he currency of BitCoin (and no coercive government backing it either). Thus ends BitCoin.
I can imagine, though, a system like BitCoin that allows people to write promissory notes and sign them with an RSA digital signature (to prevent couterfeiting). These promissory notes could be backed by gold, silver, fiat currencies, stocks and bonds, or pretty much anything. Then, these notes could be transfered from one person to another anonymously.
Couple this with an ebay-like service that allows people to swap these virtual currencies. Say, for example, that I have a gold note issued by a bank in South Africa. Since taking delivery of the gold could be a problem, I trade my notes for notes issued by a bank in U.S.A. Then, I can redeem those notes and have them FedEx me the gold (insured, of course).
This system would be Fed-proof, IRS-proof, FBI-proof and judgment-proof. This system would protect the users against monetary inflation, making it Fed-proof. Since nobody has a bossman ratting out their earnings, it is IRS-proof. It is FBI and NSA proof because all transactions are encrypted and anonymous. And, most importantly, it is judgment-proof because it is perfectly legal.
There are, at present, no laws that could be used to criminalize what I propose. Laws against money-laundering, for example, do not apply because there is no way to prove that the money came from an illegal source, such as drug dealing. Laws against tax-evasion do not apply either, because no taxes have ever been levied on imaginary currency. In addition, if you had your day in court, you could defend yourself on First Amendment grounds. Besides, international free trade agreements also have generous loopholes.
So what we are dealing with is anarcho-capitalism and wildcat banking on a global scale. If not for my non-existant programming skills, I'd be forking a new project off BitCoin right now.
Anybody here know C++?
"As long as there are sovereign nations possessing great power, war is inevitable."
@gabriel: Oh, man, you're begging for a flame-war.... ;-)
Of course, C++ and Perl are not even in the same solution-space... but I absolutely love Perl. Unfortunately, Perl has lost its roots with Perl6, which I think is going to be a fork, I don't think Perl5.x is ever going to be truly end-of-life'd, the code base is a large part of what makes Perl so powerful. Ruby and Python are Perl's closest relatives but they both lack the "down-and-dirty" quality of Perl5 that I fell in love with.
Clayton -
No worries, I'm just being inflammatory. I write C/C++ (C#, and some assembly) for a living, so I have a certain affection for them :). Now if there's any "God that Failed" book that should be written about a programming language, it's Ruby. Not a fan.
The Austrian view is that a commodity becomes money (the medium of exchange) because it was first already a highly marketable commodity.
In this case, it might very well be that "anonymity", "transaction-cost free", and "distributed" might be those marketable attributes of Bitcoin.
Because bits have no commodity value (they are not scarce so they cannot be valuable), no digital currency will ever be money in its own right just as paper money was never money in its own right sans government interference in the market. Digital currency at best will be a money substitute and its role in exchange should be analyzed in the same light as other money substitutes.
In one sense, this is like saying "Because atoms have no commodity value (they are not scarce so they cannot be valuable), no physical currency will ever be money in its own right...". But I know you would never say such a thing; neither would I.
Gold isn't valuable because atoms have commodity value; rather, that specific configuration of atoms in terms of protons, neutrons, and electrons, and molecule configuration as well as gold's chemical properties, is what makes gold valuable. In the same sense, Bitcoins are not just "bits", they are a specific pattern of bits in a pattern which is scarce by design. It is the pattern of bits which is that unit which has the qualities of money.
Now, it's not quite as good as gold: gold can survive an EMP burst, and it could even survive the destruction of all technology. There is also no known way to "break" gold, at least not until the day where we can painlessly sift gold atoms out of seawater. I certainly concede that point. I also concede the point that so long as there are legal tender rules, Bitcoin will only be a 2nd or 3rd class currency.
That might just be good enough for now. I share the same concerns that you do; what's important is to get the snowball rolling. You can't get from A to Z without first going through B, C, etc.... and there will most likely be improvements along the way that will address concerns like the ones you have expressed (Bitcoins don't function as a means of exchange since their current acceptance is so low; what prevents them from being manipulated, copied, etc...?).
The Austrian view is that a commodity becomes money (the medium of exchange) because it was first already a highly marketable commodity. In this case, it might very well be that "anonymity", "transaction-cost free", and "distributed" might be those marketable attributes of Bitcoin. Because bits have no commodity value (they are not scarce so they cannot be valuable), no digital currency will ever be money in its own right just as paper money was never money in its own right sans government interference in the market. Digital currency at best will be a money substitute and its role in exchange should be analyzed in the same light as other money substitutes. In one sense, this is like saying "Because atoms have no commodity value (they are not scarce so they cannot be valuable), no physical currency will ever be money in its own right...". But I know you would never say such a thing; neither would I. Gold isn't valuable because atoms have commodity value; rather, that specific configuration of atoms in terms of protons, neutrons, and electrons, and molecule configuration as well as gold's chemical properties, is what makes gold valuable. In the same sense, Bitcoins are not just "bits", they are a specific pattern of bits in a pattern which is scarce by design. It is the pattern of bits which is that unit which has the qualities of money. Now, it's not quite as good as gold: gold can survive an EMP burst, and it could even survive the destruction of all technology. There is also no known way to "break" gold, at least not until the day where we can painlessly sift gold atoms out of seawater. I certainly concede that point. I also concede the point that so long as there are legal tender rules, Bitcoin will only be a 2nd or 3rd class currency. That might just be good enough for now. I share the same concerns that you do; what's important is to get the snowball rolling. You can't get from A to Z without first going through B, C, etc.... and there will most likely be improvements along the way that will address concerns like the ones you have expressed (Bitcoins don't function as a means of exchange since their current acceptance is so low; what prevents them from being manipulated, copied, etc...?). The difference is that gold atoms are naturally scarce whereas BitCoin bits are scarce only as a matter of convention. I can create "scarce" bits simply by flipping a coin repeatedly and claiming the particular pattern that emerges as "bit gold." The bits of bitgold/BitCoin/hashcash are valuable as proof-of-work but nothing else. While proof-of-work has some value - as proven by the durability of hashcash - I think it is a long ways from being among the most highly marketable goods. I'm being so critical only because I have worked extensively on this problem myself and have developed some of my own solutions (most have been discarded, others are currently on the drawing boards) and have wrestled with the economic and technological side of the issue at length. It is my view that the best path forward is to establish some sort of paper-currency-reserve-backed digital currency system and extend from there into gold or other commodities. My first attempt used a centralized reserve but then I ran into the problem that there is nowhere on Earth that is safe from the long arm of the Federal Reserve. So, you either follow the e-cache route and use an un-audited gold reserve or you find some way to distribute the reserve. The idea currently on the drawing boards is some kind of distributed, (physical) dollar-backed, peer-to-peer reserve system. Some of BitCoin's solutions are highly attractive, especially the proof-of-work-based secure timestamp system, highly preferable to other secure timestamp schemes. Clayton - http://voluntaryistreader.wordpress.com | Post Points: 20
The difference is that gold atoms are naturally scarce whereas BitCoin bits are scarce only as a matter of convention. I can create "scarce" bits simply by flipping a coin repeatedly and claiming the particular pattern that emerges as "bit gold." The bits of bitgold/BitCoin/hashcash are valuable as proof-of-work but nothing else. While proof-of-work has some value - as proven by the durability of hashcash - I think it is a long ways from being among the most highly marketable goods.
I'm being so critical only because I have worked extensively on this problem myself and have developed some of my own solutions (most have been discarded, others are currently on the drawing boards) and have wrestled with the economic and technological side of the issue at length. It is my view that the best path forward is to establish some sort of paper-currency-reserve-backed digital currency system and extend from there into gold or other commodities. My first attempt used a centralized reserve but then I ran into the problem that there is nowhere on Earth that is safe from the long arm of the Federal Reserve. So, you either follow the e-cache route and use an un-audited gold reserve or you find some way to distribute the reserve. The idea currently on the drawing boards is some kind of distributed, (physical) dollar-backed, peer-to-peer reserve system. Some of BitCoin's solutions are highly attractive, especially the proof-of-work-based secure timestamp system, highly preferable to other secure timestamp schemes.
I had never heard of it. I looked at the site and your characterization is simply wrong. The "forum gold" enables the exchange of other already valued items, that is, game pieces from popular games like Diablo or WoW. The fg currency is no counter-example to Mises's regression theorem. If anything, it only goes to reaffirm it.
just like any fiat currency.. however it was started from zero like bitcoin
Fiat currency only exists by virtue of the force of the State manipulating the market to imbue its fiat tokens with value. It seems to me that the creator of BitCoin labors under the misconception that dollars are valuable simply because there is a finite number of them in existence. This is, of course, not true. Dollars are valuable because people accept them in payment for goods and services. And people only accept them in payment for goods and services because dollars were once a mere money substitute for gold. Only State force can convert a money substitute into money proper. I can imagine a tyrannical government forcing us all to use a BitCoin-esque fiat digital currency. But it is not possible for BitCoin or any similar currency to become valuable simply because it is scarce.
By virtue of the force of my massive gold supply, I manipulate the market to imbue bitcoins with the value of 0.000125 grams of gold per bitcoin. Before I die, I will found a foundation with enough gold reserves to maintain this value until the end of time.
As an aside, there is a number the "mining" of whose bits may be really valuable. This number is Chaitin's constant also known as the "halting probability" - the probability that a random program will halt when executed on a given Universal Turing Machine (idealized computer). The bits of Omega can be used to decide whether a particular program halts in computable time. This is important because any question in mathematics can be formulated in terms of the halting of a Turing machine... an algorithm that exhaustively searches all mathematical proofs of P = NP could be programmed to halt if P = NP otherwise not to halt. Determining whether this program halts or not would be equivalent to proving P = NP or P != NP.
In this sense, Omega contains all of mathematics. Mining the bits of Omega is uncomputably hard - harder than exponential time... harder, in fact, than O(any definable mathematical function). Yet, Omega has a definite value. Computing its bits would be a genuine contribution to human knowledge since each new bit of Omega that is computed would be a novel contribution to human knowledge. The mathematical consequences of each new bit could be worked out by mathematicians and promulgated into the literature.
The Clay Institute offers a $1m prize for several open questions in mathematics. A similar kind of bounty could be placed on the mining of bits of Omega. The first person to mine a new bit of Omega could be awarded some large sum of money and this would incentivize the competitive application of computing power.
I'm not sure how any of this could be applicable to digital currency, however. ;-)
I believe in Bitcoin's case, it's not that his statement was right or wrong, it's that Bitcoin is not a fiat currency in the usual sense. It is designed to function much like a digital form of gold. He makes a good point that real gold had non-monetary uses which lent it value before it became to be used as money, but I believe that Bitcoin also has valuable attributes such as being distributed, transaction free, and somewhat anonymous. This may (or may not) help to drive initial adoption of the currency.
Agreed, we will have to see what the market thinks about the distributed nature and other qualities of Bitcoin, but the implementation still has a ways to go. It's ok; it's all about getting the snowball rolling :)
I'm glad that there's guys like you out there putting a lot of thought into this, because I see digital currencies as one of the ways to secede from the overbearing arm of government. I also find this interesting, because I believe that some form of digital currency is the way to go in the future. If/when nanotech does a sharp takeoff, it's going to drive material costs through the floor and greatly alter the price structure; even gold won't be safe if it becomes dirt cheap to mine; perhaps even to transmute. A new paradigm for money will be needed; I could imagine that energy and CPU time (and by extension, computronium) will continue to be scarce and valuable.
Today, however, it is the long arm of the government that we have to worry about most. I believe that any centralized system will necessarily fail because the governments have the centralized power game down pat. Having a center also means having a single point of weakness. To survive in today's political environment, any solution will necessarily have to be distributed, and I believe that is Bitcoin's largest advantage.
As an aside, there is a number the "mining" of whose bits may be really valuable. This number is Chaitin's constant also known as the "halting probability" ... In this sense, Omega contains all of mathematics. Mining the bits of Omega is uncomputably hard - harder than exponential time... harder, in fact, than O(any definable mathematical function). Yet, Omega has a definite value... The Clay Institute offers a $1m prize for several open questions in mathematics. A similar kind of bounty could be placed on the mining of bits of Omega. The first person to mine a new bit of Omega could be awarded some large sum of money and this would incentivize the competitive application of computing power. I'm not sure how any of this could be applicable to digital currency, however. ;-) Clayton -
In this sense, Omega contains all of mathematics. Mining the bits of Omega is uncomputably hard - harder than exponential time... harder, in fact, than O(any definable mathematical function). Yet, Omega has a definite value...
I'm not sure how it would be applicable, either, but that's pretty interesting! I read through the PDF, and for some reason it got me thinking about the whole subjective/objective morality debate again, but I won't get into that in this thread ;)
@Clayton
If you are willing, I would like to run through a hypothetical with you regarding the Bitcoin concept. Let's assume that all of the technical goals of the Bitcoin pan out. This means that they are mathematically proven to be unhackable, they do have an upper limit to the amount in circulation (21M), and the distributed system works and scales infinitely. Let's also assume that any alternative forms of currency are largely transacted digitally, meaning that the threat of a world wide EMP would devastate/destroy any system.
Let us now assume that a totalitarian world government forces Bitcoin's use upon everyone in the world as the only allowable form of currency. Eventually this government is overthrown but not before the BitCoin is the universal form of currency. Anarcho capitalism (or your pick of anarchy) takes over as the rule of the world with nothing forcing people to continue to use BitCoins as currency. Do you hypothesize that the use of Bitcoins as a means of currency (i.e.: something you use to pay for goods / services) would fall in favor of some other (perhaps physical) commodity or commodity backed currency?
While I can not fathom how (other than coercion) a currency such as Bitcoin could come into popular favor, I also do not see why it would fall out of favor *after* it has value. I do agree with you that in order for a currency to become generally used it needs to be backed by a useful commodity. However, I also believe that all that is needed for a currency to *stay* a currency is scarcity and security.
The USD went through a process such as this where it was once backed by a commodity, giving it it's initial power but now it is no longer backed. As long as it has scarcity people will continue to use it as a form of currency. The thing that is now killing the USD is the world's realization that it is not in fact scarce as the federal reserve can print it at will.
The way I see it, people desire a currency as it is much preferable over the alternative (bartering). People also desire the currency to be as widely used as possible. This means that unless a new form of currency has an advantage over the old one, people will not switch. In the case of our hypothetical scenario the Bitcoin has no (as far as I can see) disadvantages over any other form of currency. As long as it's accepted, people will continue to use it and as long as people continue to use it, it will be accepted. While this is circular, it is also self sustaining.
Current world currencies differ from this because there are disadvantages to them. Primarily, there are risks of devaluation as more currency is injected into the market over time due to printing (in the case of the USD) or more gold is mined thereby increasing the reserves (in the case of a backed currency). I hypothesize that people prefer to know that the purchasing power of their currency can not change over time (as is the case with a fixed money supply) and therefor would have no reason to change to any other form of currency.
In a similar hypothetical, let's say that there is a backed currency and the Bitcoin, both are used in equal proportions of the world meaning that neither currency has achieved popularity over the other. For every Walmart that accepts Bitcoin there is an equivalent Walmart that accepts this backed dollar. Given this scenario, which would win out as the supreme currency? If you assume that people desire a single currency to use then one of them will eventually become the popular choice but would it be the backed currency or the virtual one?
The virtual currency has no inherent value while the backed currency does not offer the security the virtual one does since physical goods can be stolen, seized, created, etc. This begs the question of which do people value more, security in a distributed uncontrolled but mathematically proven system or the knowledge that their currency can be turned into some physical commodity, as long as the issuing institution remains around?
@Micah71381
We can look at the Somali shilling to affirm that you are correct that a fiat money can continue in use even after its backing has completely collapsed. Economist Ben Powell describes in a lecture available online that the Somali shilling continued in use even after the collapse of the Somali government. Interestingly, what happened is that Somalis stopped accepting any shilling notes larger than the largest denomination at the time of the collapse. So, the shilling could not be inflated beyond a certain point and it dropped to approximately its commodity value (paper+ink+printing+transportation costs) and is used in small transactions.
But bear in mind that in the competition between currencies, the opposite of Gresham's Law would hold... good money would drive bad money out of the market just like good cars drive bad cars out of the market. People would prefer to transact in currencies that actually meet their needs. All things equal, I cannot imagine someone choosing to use an unbacked over a backed currency. Even if there were a government-sponsored fiat BitCoin, when that government collapsed, people could issue their own gold-backed BitCoins or whatever, and wipe out the old, government fiat BitCoin system (I know I'm playing fast and loose with the technical details but I'm making a point about the economics of the situation, not the technology). This would be analogous to privately issuing gold-backed dollars in the wake of a collapse of the US government. The unbacked dollars would eventually become museum wallpaper or cigarette-wrappers.
People would prefer to transact in currencies that actually meet their needs. All things equal, I cannot imagine someone choosing to use an unbacked over a backed currency.
My curiosity lies in why you think people would choose to switch from a commonly accepted but unbacked currency with a finite supply (no one can print new money) to a backed currency that isn't accepted anywhere and can be printed/mined freely. Even if you could gather an initial small following for the backed currency, I don't see how it could break into popular usage in favor of an unbacked but finite one. With current currency, the big reason I see as to why people would drop an unbacked currency with the collapse of the issuing institution is mainly because there is no longer any control on it's printing.
The unique feature of the Bitcoin that I see is the inability for anyone (even the creators) to print new money which sets it apart from a traditional currency. This means that while it may not be backed, just as the USD is not backed, no one can create any more meaning that as long as everyone accepts it as a form of currency it serves it's purpose better than any other kind of currency out there (it maintains or gains spending power indefinitely).
In your example of the collapse of the US government, are we assuming that it is impossible for anyone to print new currency after such a collapse? Are we also assuming that the general populous understands that printing of new currency is impossible? With all current currencies the only thing that stops printing in the wake of the collapse of the issuing institution (bank or government) are laws which generally are assumed to have also broken down in such a collapse.
The other problem I have with making a correlation between modern currencies and the Bitcoin is that should any single government collapse there are dozens of alternative currencies to switch to that essentially have all the same advantages/disadvantages that the previous one did. In the case of going from an all Bitcoin society to a backed currency society though, there is a disadvantage that must be taken into consideration, the fact that the money loses value over time due to printing/mining.
@Micah:
Well, in our fiat-money age, it is easy to think that the problem with modern money is that its supply can be increased. But this is not actually the problem. The problem is that the price of money - which would be set in a natural order economy by the balance between the demand for cash balances and the supply of money - is controlled. In a natural order economy, it is conceivable that a situation could arise where an increase in the quantity of money would, in fact, be beneficial to the economy. If we imagine gold to be the monetary commodity, then this situation would be addressed by an increase in gold mining until the marginal costs of mining are about equal to the marginal revenue earned, just as an in any other industry (also, by conversion of non-monetary gold into monetary gold but that's a pedantic issue).
So, BitCoin's fixed supply could, in the future, actually be a defect, not a feature. But again, I don't think the technical issues are the primary obstacle to BitCoin or any other digital currency. The problem with the "bit gold" idea as originally propounded by Nick Szabo is that proof-of-work is not among the most marketable goods so it's not even in the running to become money, even though it shares some of the other desirable attributes of money.
I do agree that the problem with modern money isn't with the ability to mine/produce more of it, it's that the value 'assigned' to money does not match the cost to produce it.
I would personally rather have a form of currency that I knew would remain of constant value, with no ability to mine/produce more thereby increasing it's supply. Can you go into more detail as to what advantages you can see to the production of additional currency?
Is it perhaps an issue of the currency not being divisible enough? I can see a hypothetical situation where the population grows so large that 2.1 x 10^15 indivisible units of currency are not enough to accurately price goods / services. Perhaps a significant portion of the currency leaves the economy (e.g.: by people dying without transfer of wealth, or hoarding) over time and eventually it's no longer 2.1x10^15 but instead a much smaller number.
The examples of problems with a non-expanding currency listed above, can be resolved through technical means such as a divisibility system that scales infinitely. Such a system may allow for modifications to the divisibility as technology advances (i.e.: 32-bit to 64-bit to 128-bit) thus allowing currency to leave the system while still maintaining value yet scaling infinitely as to it's divisibility.