P2P Currency Systems

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For more information about the details of a P2P Currency take a look at P2P Currency Article.

This article focuses on current systems that facilitate or enable P2P Currency.

Contents

Examples of P2P Currency Systems

The following are examples of P2P Currency Systems. More information about how they qualify as P2P Currency systems can be found below:

  • From the original Bitcoin entry => "a new open source P2P e-cash system, originally developed by Satoshi Nakamoto

URL = https://bitcoin.org/

http://en.wikipedia.org/wiki/Bitcoin Bitcoin Wiki

Download Bitcoin v0.8.6 at https://bitcoin.org/en/download ; Design paper at http://www.bitcoin.org/bitcoin.pdf

See also on the Bitcoin Protocol, as distinguished from the currency.


Definition

1. Bitcoin is a leader in distributed P2P Currency. Each participant can be part of a network as wide as they can reach, or as small as they choose to make it. The only drawback of Bitcoin is the necessity to use the Bitcoin currency. This is offset for many by the fact that, because the currency is 'in force' and widely used, a number of exchanges have popped up, allowing users to trade coins for other currencies. Bitcoin may be useful for a P2P Network as an immediate replacement for cash with low infrastructure requirements for implementation.


2. From Wikipedia:

"Bitcoin is an open source peer-to-peer electronic cash system developed by Satoshi Nakamoto. The system is decentralized with no central server or trusted parties. Bitcoin relies on cryptographic principles to create unique, unreproducible, and divisible tokens of value. Users hold the cryptographic keys to their own money and transact directly with each other, with the help of the network to check for double-spending." (http://en.wikipedia.org/wiki/Bitcoin)


3. Springwise


"Bitcoin bills itself as “the first digital currency that is completely distributed.” In essence, that means that it’s managed collectively by a global network of users, so no bank or payment processor is required between buyers and sellers in any transaction. Users begin with Bitcoin by downloading its client program for Linux, Mac or Windows, thereby creating a digital wallet and associated Bitcoin address for themselves. Next, very small quantities of Bitcoins are available for free from the Bitcoin faucet, but to get larger ones, users can visit various currency exchanges and sites. They can also accept Bitcoins as payments for goods and services. Either way, once they have Bitcoins — abbreviated “BTC” — users can spend them at various participating online merchants for a wide variety of goods and services. It’s free for merchants to accept Bitcoins, and there are no chargebacks or fees. Currently, there is no charge for processing Bitcoin transactions, but eventually a small fee of about one bitcent will be charged every transaction to one of many competing Bitcoin “miners,” who create Bitcoins in a controlled way by running a dedicated program." (http://www.springwise.com/financial_services/bitcoin/)

Description

1. Satoshi writes:


"It’s completely decentralized, with no central server or trusted parties, because everything is based on crypto proof instead of trust.

The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micropayments impossible.

A generation ago, multi-user time-sharing computer systems had a similar problem. Before strong encryption, users had to rely on password protection to secure their files, placing trust in the system administrator to keep their information private. Privacy could always be overridden by the admin based on his judgment call weighing the principle of privacy against other concerns, or at the behest of his superiors. Then strong encryption became available to the masses, and trust was no longer required. Data could be secured in a way that was physically impossible for others to access, no matter for what reason, no matter how good the excuse, no matter what.

It’s time we had the same thing for money. With e-currency based on cryptographic proof, without the need to trust a third party middleman, money can be secure and transactions effortless.

One of the fundamental building blocks for such a system is digital signatures. A digital coin contains the public key of its owner. To transfer it, the owner signs the coin together with the public key of the next owner. Anyone can check the signatures to verify the chain of ownership. It works well to secure ownership, but leaves one big problem unsolved: double-spending. Any owner could try to re-spend an already spent coin by signing it again to another owner. The usual solution is for a trusted company with a central database to check for double-spending, but that just gets back to the trust model. In its central position, the company can override the users, and the fees needed to support the company make micropayments impractical.

Bitcoin’s solution is to use a peer-to-peer network to check for double-spending. In a nutshell, the network works like a distributed timestamp server, stamping the first transaction to spend a coin. It takes advantage of the nature of information being easy to spread but hard to stifle. For details on how it works, see the design paper here at http://www.bitcoin.org/bitcoin.pdf.

The result is a distributed system with no single point of failure. Users hold the crypto keys to their own money and transact directly with each other, with the help of the P2P network to check for double-spending."


2. Aran explains:

Bitcoin is an open source peer-to-peer (a.k.a "p2p") electronic cash system that's completely decentralised, with no central server, trusted authorities or middle men. The availability of bitcoins can't be manipulated by governments or financial institutions. Bitcoin already has a number of exchanges for converting to and from other currencies; BitcoinFX, New Liberty Standard, Bitcoin Exchange and Bitcoin Market.

Bitcoin may last for years and become a popular global currency, or it could be just a flash in the pan, but either way I think this is an important sign of the times to come. This is one of the first truly decentralised currencies and has paved the way for hundreds more to compete together in the new arena of Cipherspace over the coming years. This is one of the key factors in the transition of global society into the post-nation-state economy talked about in The Sovereign Individual.

In a p2p computer network there are no servers, the entire network is composed of users running instances of the application on their computers. Each running instance offers a small amount of processing and storage resource to the network so that it can deliver the services it was designed for such as redundant storage, anonymity or voice-over-IP applications.

In the case of a p2p currency system, some of the services the network is designed to offer are privacy, verification, authentication, currency creation and transfer of ownership. To ensure a reliable and tamper-proof system requires a lot of resource, and that amount is proportional to the amount of coins in the network. The network is able to pay the users for the resource they offer by making the coin-creation process part of the network protocol itself instead of being handled by a central trusted authority. This creates a natural and incorruptible link between the supply of currency in the network and the demand for it.

Even aside from the ability to exchange bitcoins for other currencies, it still makes a very useful tool for independent organisations and groups because it allows them to trade and settle accounts amongst themselves independently and privately. It effectively gives them a "bank" that has a trustworthy system of accounts that can't be tampered with and requires no corruptible central authority to operate. See the Bitcoin Whitepaper for more detail about how it works.

To try Bitcoin, download the Bitcoin software, then once it's running, click 'Generate Coins' which will pay you bitcoins in exchange for your computer working to validate bitcoin transactions. Check the exchange rate to calculate how many bitcoins need to be sent. The payer can purchase additional bitcoins if needed. The payer's previously generated bitcoins allow for a lower out of pocket payment. The payer then sends the bitcoins to the receiver using the Bitcoin software. The receiver can then sell their bitcoins for dollars. The receiver's previously generated bitcoins allow a higher dollar payout." (source?)


How does Bitcoin work

Graphics at http://spectrum.ieee.org/img/06Bitcoin-small-1338414276746.jpg and http://thumbnails.visually.netdna-cdn.com/bitcoin-infographic_5029189c9cbaf.jpg


1. FAQ

"Q. What is Bitcoin?

A. Bitcoin is a peer-to-peer currency. Peer-to-peer means that no central authority issues new money or tracks transactions. These tasks are managed collectively by the network.

Q. How does Bitcoin work?

A. Bitcoin utilises public-key cryptography. A coin contains the owner's public key. When a coin is transferred from user A to user B, A adds B’s public key to the coin, and the coin is signed using A's private key. B now owns the coin and can transfer it further. A is prevented from transferring the already spent coin to other users because a public list of all previous transactions is collectively maintained by the network. Before each transaction the coin’s validity will be checked." (https://en.bitcoin.it/wiki/Main_Page)


2. IEEE Spectrum's By Morgen E. Peck:

"The simplest way to understand Bitcoin is to think of it as a digital ledger book. Imagine a bunch of people at a table who all have real-time access to the same financial ledger on laptops in front of them. The ledger records how many bitcoins each person at the table has at a given time. By necessity, the balance of each account is public information, and if one person wants to transfer funds to the person sitting across from him, he has to announce that transaction to everyone at the table. The entire group then appends the transaction to the ledger, which they all need to agree on. In a system like this, money never has to exist in a physical form, and yet it can’t be spent twice. 


This is basically how Bitcoin works, except that the participants are spread across a global peer-to-peer network, and all transactions take place between addresses on the network rather than individuals. Address ownership is verified through public-key cryptography, without revealing who the owner is. 


The system turns traditional banking privacy on its head: All transactions are made in public, but they’re difficult to link up with a human identity. Maintaining the dissociation takes vigilance on the part of the Bitcoin user and careful decisions about which outside applications and exchange methods to use, but it can be done. “Anonymity is typically compromised by means outside of Bitcoin’s control, in other words,” says Jeff Garzik, who is on the team of programmers now responsible for developing the Bitcoin software. Bitcoin is often described as providing pseudoanonymity, by creating enough obfuscation to provide users with plausible deniability.


People who own bitcoins have a program—called the Bitcoin client—installed on their computers to manage their accounts. When they want to access their funds, they use the client to send a transaction request. The innovation of Bitcoin is to use the processing of these transaction requests as the mechanism for creating new currency.


As requests pile up in the system, individual computers, running “mining” programs, bundle them into chunks called transaction blocks. Before each block of transactions becomes part of the accepted Bitcoin ledger, or block chain, the mining software must transform the data using cryptographic hash equations. The Bitcoin client accepts the resulting hash values only if they meet strict criteria, so miners typically need to compute many hash values before stumbling upon one that meets the requirements. That process costs a lot of computing power—so much that it would be prohibitively difficult for anyone to come along and redo the work. Each new block that gets added and sealed strengthens all the previous blocks on the chain. 


The “miner” whose computer first finds an acceptable hash value is rewarded with newly minted bitcoins. The Bitcoin system adjusts the difficulty of the hashing requirements to control the minting rate. To its proponents, this is one of Bitcoin’s biggest attractions: Unlike the printing of “fiat” currency, which can be done on demand, the creation of Bitcoins will gradually taper until it reaches a limit of 21 million coins. 


As more and more miners compete to process transactions, mining requires more computing power. Brock Tice, who mines bitcoins in St. Paul, Minn., has a whole room stuffed full of enough mining computers to heat his office in the winter. But Tice first became interested in the network for a different reason. He thought it would be a better way to accept money from customers online." (http://spectrum.ieee.org/computing/software/bitcoin-the-cryptoanarchists-answer-to-cash/3)

2. Data-driven intelligence by Michael Nielsen:

"It may seem surprising that Bitcoin’s basis is cryptography. Isn’t Bitcoin a currency, not a way of sending secret messages? In fact, the problems Bitcoin needs to solve are largely about securing transactions — making sure people can’t steal from one another, or impersonate one another, and so on. In the world of atoms we achieve security with devices such as locks, safes, signatures, and bank vaults. In the world of bits we achieve this kind of security with cryptography. And that’s why Bitcoin is at heart a cryptographic protocol." (http://www.michaelnielsen.org/ddi/how-the-bitcoin-protocol-actually-works/)

Details

"The total number of bitcoins is programmed to approach 21 million over time. The money supply is programmed to grow as a geometric series every 210,000 blocks (roughly every 4 years); by 2013 half of the total supply will have been generated, and by 2017, 3/4 will have been generated. To ensure sufficient granularity of the money supply, bitcoins are divisible down to eight decimal places (a total of 2.1 × 10^15 or 2.1 quadrillion units)." (http://en.wikipedia.org/wiki/Bitcoin#Monetary_differences)

Note: the eight decimal places are only an artifact of the datatype used in current implementations. Should the need ever arise, this can be changed in the code. [1]

Context

Rainey Reitman (EFF):

"To understand digital currency, one must first note that money in the digital age has moved from a largely anonymous system to one increasingly laden with tracking, control and regulatory overhead. Our cold hard cash is now shepherded through a series of regulated financial institutions like banks, credit unions and lenders. Bitcoin, created in 2009 by Satoshi Nakamoto, is a peer-to-peer digital currency system that endeavors to re-establish both privacy and autonomy by avoiding the banking and government middlemen. The goal is to allow individuals and merchants to generate and exchange modern money directly. Once the Bitcoin software has been downloaded, a user can store Bitcoins and exchange them directly with other users or merchants — without the currency being verified by a third party such as a bank or government. It uses a unique system to prevent multiple-spending of each coin, which makes it an interesting development in the movement toward digital cash systems.

The model proposed by Bitcoin is in many ways a response to some of the privacy and autonomy concerns surrounding our current financial system. Current money systems now increasingly come with monitoring of financial transactions and blocking of financial anonymity. A peer-to-peer currency could theoretically offer an alternative to the bank practices that increasingly include sharing information on their customers who don't actively opt-out, and who may even then be able to share data with affiliates and joint marketers. Bitcoin is particularly interesting in the wake of recent events that demonstrated how financial institutions can make political decisions in whom they service, showcased by the decisions of PayPal, Visa, Mastercard and Bank of America to cut off services to Wikileaks. Bitcoin, if it were to live up to the dreams of its creators, might offer the kind of anonymity and freedom in the digital environment we associate with cash used in the offline world.

But Bitcoin's current implementation won't resolve all of the issues surrounding autonomy and privacy. Notably, the anonymity on Bitcoin is not entirely secure at this time, which makes its merits as a more private form of currency tenuous at best. There are also other weaknesses to the system, some significant, which should be understood before using Bitcoin. And as of this writing, Bitcoin can't be used to donate to Wikileaks. But even more important than these concerns is the fact that governments around the world may raise legal issues with any digital cash scheme — ranging from money laundering to tax evasion to a range of other regulatory concerns. Nonetheless, Bitcoin is an intriguing project and worth watching to see how it develops in the coming years." (https://www.eff.org/deeplinks/2011/01/bitcoin-step-toward-censorship-resistant)


Status

  • "According to the MIT Technology Review, bitcoin was four times more volatile in 2013 than the average stock, and the dollar-bitcoin exchange rate was 10 times more volatile than the dollar rate with major currencies like the euro or yen." [2]


Bitcoin inequality statistics

See the graphic at Who Owns All the Bitcoins – An Infographic of Wealth Distribution and also the Bitcoin Rich List

  • "It turns out that the distribution of bitcoins among users is even more skewed than the distribution of traditional wealth across the globe. This is understandable, since bitcoin favours early adopters who either mined or purchased their coins a few years ago. Furthermore, the amount of bitcoins in circulation is capped at 21 million, which also helps create an unequal distribution of wealth. Interestingly, the FBI has the second largest known stash of bitcoins, a whopping 174,000 BTC from the Silk Road seizure."

(http://www.cryptocoinsnews.com/news/owns-bitcoins-infographic-wealth-distribution/2014/03/21)

  • "North America has twice the number of Bitcoin-related, venture-backed businesses that Asia does. Overall, Canada and the United States account for 60 percent of such companies, according to a study released last week by Coindesk. Seventy percent of all Bitcoin venture capital goes to U.S.-based firms." [3]
  • "the drawback to consolidation is that those benefits will be concentrated in the hands of a relative few. That dynamic is already playing out among individual holders of Bitcoin, with a growing gulf between the Bitcoin-rich and the Bitcoin-poor. According to Risto Pietilä, a Finnnish entrepreneur, the overwhelming share of Bitcoin wealth is held in just a few dozen wallets. Half of all bitcoins belong to around 927 "individuals." If those figures are right, then half of the world's 12 million or so bitcoins is held by a tenth of a percent of all accounts. That's a stunning statement of inequality, since in the real world 46 percent of the world's wealth belongs to 1 percent of the global population. The Bitcoin world, then, is even less equal than the real world."[4]
  • "The “average Bitcoin user” is male (95.2%), 32.1 years old, libertarian / anarcho-capitalist (44.3%), non-religious (61.8%), with a full time job (44.7%), and is in a relationship (55.6%). [5]


Discussion, by Alice Martin, NEF:

"Often when Bitcoin is written about we’re given the impression it’s ‘us’ – the general public – who have the ability to participate in the new digital public. But this vision of egalitarianism is far from the truth. With 95% of transactions being made by men – and we can assume, as I will go on to explain, fairly well-off men – Bitcoin is not a currency of ‘the people'. It’s a currency for those already most well represented in politics, business, and generally any position of power. If you are a woman, if you are not white, if you do not have significant wealth – you are probably not a player in the Bitcoin world.

The fact that the average Bitcoin user is a white man in his mid-thirties is probably not a surprise to many. Brett Scott’s valuable contribution to this debate lays out possible reasons for the stark gender imbalance – and others have pointed to why it appeals to a relatively affluent, internet savvy group. But beyond discussions of who is able to play in the tech game, the Bitcoin story points to two more systemic issues about who has economic power, and how it’s set to reproduce itself:

  • Without capital you won’t get a look in. Each time bitcoins are mined, more processing power is needed to mine the next. Custom-built mining machines are expensive to purchase, and expensive to operate. Unsurprisingly then, bitcoin procurement is a lucrative business.
  • Make profit now, think later. In this story we see a good demonstration of how the wider financial system is programmed to encourage speculation and a never ending search for new markets. Two of the top five Bitcoin trends to have emerged so far this year are “big name retailers jumping on board” and “venture capital firms betting big”. With a booming sector of start-ups providing payments systems, mining pools and currency exchange platforms, London and New York, home to the two biggest financial sectors in the world, are emerging as incubators for this new industry. Fuelling this boom, global investment in the fintech industry has tripled since the 2008 banking crisis and currently stands at nearly $3 billion. With so much money going in – extracting profits out from these technologies is high on the agenda."

Business Aspects

Bitcoin's Business Uptake, 2013

Jessica Roy:

"Its recent buzz in the press has also helped bitcoin shed its black-hat shackles, as respectable businesses, including many popular websites like WordPress, OKCupid and Reddit, have begun accepting it as a form of payment. Offline, there is a surprising variety of items available for purchase with bitcoin: everything from houses to Domino’s pizzas. The hotel chain Howard Johnson will rent you a room in exchange for bitcoin. A Class Limousine, a black car service in New York, has started taking bitcoin payments. A few weeks ago, a Brooklyn man put his Mercedes up for sale on Craigslist and was willing to accept bitcoin. “It’s booming!” the salesman told The Observer. “It’s worth the same as money, so who cares?”

In early April, The New York Times reported that Cameron and Tyler Winklevoss, the famous Facebook-claiming twins, own 1 percent of all bitcoin, further compounding the currency’s hype. Around that same time, Andreessen Horowitz, one of Silicon Valley’s most storied venture capital firms, announced its intention to invest in its first bitcoin company, OpenCoin.

On a recent trip to Silicon Valley, Mr. Shrem said that investors were practically falling over themselves to get a piece of the bitcoin pie." (http://observer.com/2013/04/its-all-about-the-bitcoin-baby/)


What are Bitcoins spent on?: September 2013 calculation

The article from which this is excerpted gives detail on the price fixing schemes used to artificially inflate the bitcoin economy.

Rick Falkvinge:

"we look at the different economies making up bitcoin today. There are about 11.7 million bitcoin in circulation today. Out of these, a staggering 2 million bitcoin are gambled every year on the SatoshiDice site alone, and another, PrimeDice, 1.5 million.

To put these numbers in perspective, if translated to the global economy, it would mean that people bet the entire production of the USA at one single betting site, and the entire production of Europe on another. But as we have seen, these numbers do not contribute to the money supply pool in any meaningful way in a functioning economy. They are not funds in lockdown, or at least not for more than a few minutes. For all intents and purposes, the velocity of internet-based gambling money is infinite, or at least so much larger than other funds that it can be discarded.

That leaves us with drugs, read Silk Road, and for lack of a better word, normal products and services. A recent estimate says that Silk Road has two million USD in monthly turnover. This is real money that contributes to the money supply. A fair estimate could assume a two-month lockdown on such funds.

What about normal products and services? To get a ballpark understanding, I contacted Automattic (the parent company of WordPress) and asked politely if they could share how much revenue they have received in bitcoin, being one of the highest-visibility brands ever to accept bitcoin. The answer came quickly – “a couple of hundred dollars worth, so far”. If the highest-visibility brand accepting bitcoin has had less than two bitcoin in revenue in total, then for all intents and purposes, there is currently no measurable bitcoin economy outside of drugs and gambling.

This gives us enough data to calculate the value of the money pool, and derive the value of one bitcoin from there. If Silk Road has 22 million USD in annual sales, let’s be very generous to err on the safe side, and divide that by the United States’ money velocity, which is 1.67 on average instead of the 6 estimated above.

This generous estimation gives us a total bitcoin money supply value of 13 million USD.


The observant will note that this estimation of bitcoin’s total money supply value, while obviously a ballpark number, is less than two magnitudes smaller than the bitcoin money supply’s current valuation of 142 USD x 11.7M bitcoin = 1.66 billion USD.

Dividing this value with the bitcoin supply to get the current value of one bitcoin, this means that the current value of one bitcoin, as backed by exchange of products and services in its role as a transactional currency, is roughly one US dollar and twelve US cents. And that’s still a generous estimate.

It’s not hard to see why I use the words “vast overvaluation”, seeing how one bitcoin is currently trading at 142 USD. So how did we get here? Part speculation on future value, obviously, but there is something else going on too here. More interestingly, when looking very closely at the market for the past two months, there is ample and obvious evidence of price fixing." (http://falkvinge.net/2013/09/13/bitcoins-vast-overvaluation-seems-to-be-caused-by-usually-illegal-price-fixing/?)

Bitcoin Speculation as a 'Greater Fool' Pump and Dump scheme

Via Robert Wenzel (excerpted from Forbes)

"[A]ccording to Boston University Finance Professor Mark Williams the price [of Bitcoin] has really been driven by an influential few. Just 47 people own 29% of all outstanding Bitcoins; 930 own 50%. Another 10,000 folks bring the total owned by the largest coin holders to roughly 75%, leaving a sliver to be split among about 1 million small-change Bitcoiners.

Williams, a former trader and bank examiner for the Federal Reserve, argues that in 2013 the 47 powers coordinated to push prices up. They counted on what economists call Greater Fools. Investors make money when someone is willing to pay a higher price for a security than you did — Greater Fool Theory states that there is always someone willing to pay a higher price. But Williams sees the broader market wising up to Bitcoin’s limitations and taking back control in 2014[...]

“If you hype demand the small incremental amount that is available for sale set the price,” says Williams. “That’s not an efficient market, that’s an inflated market, a market that is misled with false information. I think the market mechanism right now is being interfered with.”

As these facts and questions enter the wider consciousness, as they have begun to, Williams feels smaller Bitcoin investors will pull out. “When these million people stop buying at these high prices, that’s when the house of cards will start falling pricewise.” (http://www.economicpolicyjournal.com/2014/01/bu-finance-professor-bitcoin-is-pump.html)


Warren Buffet: Bitcoin has no intrinsic value

Alice Truong:

" When it comes to the cryptocurrency, Buffett has these words of advice to investors: "Stay away from it." Calling Bitcoin "a mirage," he took fault not with recent lapses in security that have led to a number of high-profile heists, but with Bitcoin's intrinsic value. It's safe to assume he's not the person behind the anonymous $147 million Bitcoin transaction last fall.

The chairman and CEO of Berkshire Hathaway views Bitcoin as a means of transferring money--not as a currency. "A check is a way of transmitting money too. Are checks worth a lot of money just because they can transmit money?" he asked. "The idea it has some huge intrinsic value is such a joke." (http://www.fastcompany.com/3027737/fast-feed/warren-buffett-on-bitcoin-stay-away-from-it?)


Bitcoin's Business Potential

USCC Economic Issue Brief, Lauren Gloudeman:

"BAML FX and rates strategist David Woo argues that, as a medium of exchange, Bitcoin has the potential to become a competitive player in the e-commerce market, possibly accounting for 10 percent or more of all e-commerce payments for business-to-customer transactions[6]. Moreover, an increasing number of vendors large and small, including big name brands like Overstock.com and Virgin Galactic, accept the crypto-currency as payment; which is a reflection of the low entry costs to integrating Bitcoin as a payment system [7][8][9][10][11]. Since Overstock.com started accepting Bitcoins on January 9, 2014, Bitcoin users have spent more than $1 million on the website. Patrick Byrne, CEO of Overstock.com, expects the company’s Bitcoin sales to reach up to $15 million by the end of 2014.

Though Bitcoin sales only represent 1 percent of the company’s total sales this year, accepting Bitcoin has successfully attracted new customers, who represent nearly 60 percent of the 4,300 Bitcoin buyers.

Byrne expects that Amazon.com will also eventually start accepting Bitcoin as payment[12], as Bitcoin users will “become too big of a market” to ignore.

Bitcoin’s value as a medium of exchange is also highlighted by its potential to dominate money transfer services like Western Union, MoneyGram, and Euronet. In fact, Bitcoin’s market-driven value, which peaked at nearly $14 billion last year, surpassed the market capitalization of Western Union, at just over $9 billion in November.

As for Bitcoin’s role as a store of value, or as an asset that can be stored and traded at a later time, Woo is less optimistic. Like gold, Bitcoin pays no interest, has a limited supply, and is difficult to trace. Unlike gold, however, Bitcoin’s price is extremely volatile, hindering its viability as a predictable medium of exchange. One J.P. Morgan Securities strategist showed that Bitcoin’s average volatility of 120 percent over the last three years is extreme compared to the typical volatility of emerging markets foreign exchange of about 9 percent over the same period.

Moreover, Bitcoin does not have the reputation as a store of value that gold has maintained throughout history. Because of this disparity, Woo argues that Bitcoin’s worth as a store of value mimics silver more than any other commodity. Bitcoin’s potential is not limited to payments services, but can be applied “anywhere a transaction between two parties has traditionally required third party validation,” according to analysis by Deloitte Consulting LLP.

By utilizing an online public ledger called the “block chain” (see appendix 1) on which all confirmed transactions are recorded, a small fraction of Bitcoin denoting physical property or personal information can serve to transfer “digital signatures, digital contracts, digital keys (to physical locks, or to online lockers), digital ownership of physical assets such as cars and houses, digital stocks and bonds and digital money." USCC.Gov

History

Benjamin Wallace:

"Nakamoto himself mined the first 50 bitcoins—which came to be called the genesis block—on January 3, 2009. For a year or so, his creation remained the province of a tiny group of early adopters. But slowly, word of bitcoin spread beyond the insular world of cryptography. It has won accolades from some of digital currency’s greatest minds. Wei Dai, inventor of b-money, calls it “very significant”; Nick Szabo, who created bit gold, hails bitcoin as “a great contribution to the world”; and Hal Finney, the eminent cryptographer behind RPOW, says it’s “potentially world-changing.” The Electronic Frontier Foundation, an advocate for digital privacy, eventually started accepting donations in the alternative currency.

The small band of early bitcoiners all shared the communitarian spirit of an open source software project. Gavin Andresen, a coder in New England, bought 10,000 bitcoins for $50 and created a site called the Bitcoin Faucet, where he gave them away for the hell of it. Laszlo Hanyecz, a Florida programmer, conducted what bitcoiners think of as the first real-world bitcoin transaction, paying 10,000 bitcoins to get two pizzas delivered from Papa John’s. (He sent the bitcoins to a volunteer in England, who then called in a credit card order transatlantically.) A farmer in Massachusetts named David Forster began accepting bitcoins as payment for alpaca socks." (http://www.wired.com/magazine/2011/11/mf_bitcoin/all/1)


Prehistory: the dream of anonymous digital currencies

By Morgen E. Peck:

"The dream of an anonymous, independent digital currency—one where privacy is maintained for buyers and sellers—long predates Bitcoin. Despite obituaries in magazine articles from Forbes, Wired, and The Atlantic, the dream is far from dead.


The pursuit of an independent digital currency really got started in 1992, when Timothy May, a retired Intel physicist, invited a group of friends over to his house outside Santa Cruz, Calif., to discuss privacy and the nascent Internet. In the prior decade, cryptographic tools, like Whitfield Diffie’s public-key encryption and Phil Zimmermann’s Pretty Good Privacy, had proven useful for controlling who could access digital messages. Fearing a sudden shift in power and information control, governments around the world had begun threatening to restrict access to such cryptographic protocols.


May and his guests looked forward to everything those governments feared. “Just as the technology of printing altered and reduced the power of medieval guilds and the social power structure, so too will cryptologic methods fundamentally alter the nature of corporations and of government interference in economic transactions,” he said. By the end of the meeting, the group had given themselves a name—“cypherpunks”—and the superhero-like task of defending privacy across the digital world. In just a week, cofounder Eric Hughes wrote a program that could receive encrypted e-mails, scrub away all identifying marks, and send them back out to a list of subscribers. When you signed up, you got a message from Hughes: 


- Cypherpunks assume privacy is a good thing and wish there were more of it. Cypherpunks acknowledge that those who want privacy must create it for themselves and not expect governments, corporations, or other large, faceless organizations to grant them privacy out of beneficence.


Hughes and May were deeply aware that financial behavior communicates as much about you as words can—if not more. But outside of cash transactions or barter, there’s no such thing as a private transaction. We rely on banks, credit card companies, and other intermediaries to keep our financial system running. Will those corporations save and even share a dossier of your spending habits? Even using cash requires trust that the bill will maintain its worth. Will governments print too much currency or too little? Many cypherpunks would say that the only way to answer these questions is to build an entirely new system.


Gradually, their mistrust germinated into an anarchist philosophy. Most simply wanted to be able to buy things without someone looking over their shoulders. But others on the mailing list imagined liberating currency from governmental control and then using it to lash back at their perceived oppressors. 


Jim Bell, a onetime Intel engineer, took these fancies further than anyone, introducing the world to an odious thought experiment called an assassination market. Citizens needed an effective way to punish politicians who acted against the wishes of their constituents, he reasoned, and what better punishment than murder? With an anonymous digital coin, argued Bell, you could pool donations from disgruntled citizens into what amounts to bounties. If a politician made enough people angry, it would only be a matter of time before the price pushed him out of office or cost him his life. Bell’s essay, “Assassination Politics,” eventually attracted the attention of federal agents. His spiral through the U.S. court system started with an IRS raid in 1997 and ended this March with his release from prison. 


While cypherpunks like Bell were dreaming up potential uses for digital currencies, others were more focused on working out the technical problems. Wei Dai had just graduated from the University of Washington with a degree in computer science when he created b-money in 1998. “My motivation for b-money was to enable online economies that are purely voluntary,” says Dai, “ones that couldn’t be taxed or regulated through the threat of force.” But b-money was a purely personal project, more conceptual than practical.


Around the same time, Nick Szabo, a computer scientist who now blogs about law and the history of money, was one of the first to imagine a new digital currency from the ground up. Although many consider his scheme, which he calls “bit gold,” to be a precursor to Bitcoin, privacy was not foremost on his mind. His primary goal was to turn ones and zeros into something people valued. “I started thinking about the analogy between difficult-to-solve problems and the difficulty of mining gold,” he says. If a puzzle took time and energy to solve, then it could be considered to have value, reasoned Szabo. The solution could then be given to someone as a digital coin.

In Szabo’s bit gold scheme, a participant would dedicate computer power to solving cryptographic equations assigned by the system. “Anything that works well as a proof-of-work function, producing a specific binary string such that it can be proved that generating that string was computationally costly, will work,” says Szabo. In a bit gold network, solved equations would be sent to the community, and if accepted, the work would be credited to the person who had done it. Each solution would become part of the next challenge, creating a growing chain of new property. This aspect of the system provided a clever way for the network to verify and time-stamp new coins, because unless a majority of the parties agreed to accept new solutions, they couldn’t start on the next equation. 


When attempting to design transactions with a digital coin, you run into the “double-spending problem.” Once data have been created, reproducing them is a simple matter of copying and pasting. Most e-cash scenarios solve the problem by relinquishing some control to a central authority, which keeps track of each account’s balance. DigiCash, an early form of digital money based on the pioneering cryptography of David Chaum, handed this oversight to banks. This was an unacceptable solution for Szabo. “I was trying to mimic as closely as possible in cyberspace the security and trust characteristics of gold, and chief among those is that it doesn’t depend on a trusted central authority,” he says. 


Bit gold proved that it was possible to turn solutions to difficult computations into property in a decentralized fashion. But property is not quite cash, and the proposal left many problems unsolved. How do you assign proper value to different strings of data if they are not equally difficult to make? How do you encourage people to recognize this value and adopt the currency? And what system controls the transfer of currency between people?


After b-money and bit gold failed to garner widespread support, the e-money scene got pretty quiet. And then, in 2008, along came a mysterious figure who wrote under the name “Satoshi Nakamoto,” with a proposal for something called Bitcoin." (http://spectrum.ieee.org/computing/software/bitcoin-the-cryptoanarchists-answer-to-cash)

Technological Issues

Review of incidents related to Bitcoin, by Benjamin Wallace:

"Even the purest technology has to live in an impure world. Both the code and the idea of bitcoin may have been impregnable, but bitcoins themselves—unique strings of numbers that constitute units of the currency—are discrete pieces of information that have to be stored somewhere. By default, bitcoin kept users’ currency in a digital “wallet” on their desktop, and when bitcoins were worth very little, easy to mine, and possessed only by techies, that was sufficient. But once they started to become valuable, a PC felt inadequate. Some users protected their bitcoins by creating multiple backups, encrypting and storing them on thumb drives, on forensically scrubbed virgin computers without Internet connections, in the cloud, and on printouts stored in safe-deposit boxes. But even some sophisticated early adopters had trouble keeping their bitcoins safe. Stefan Thomas had three copies of his wallet yet inadvertently managed to erase two of them and lose his password for the third. In a stroke, he lost about 7,000 bitcoins, at the time worth about $140,000. “I spent a week trying to recover it,” he says. “It was pretty painful.” Most people who have cash to protect put it in a bank, an institution about which the more zealous bitcoiners were deeply leery. Instead, for this new currency, a primitive and unregulated financial-services industry began to develop. Fly-by-night online “wallet services” promised to safeguard clients’ digital assets. Exchanges allowed anyone to trade bitcoins for dollars or other currencies. Bitcoin itself might have been decentralized, but users were now blindly entrusting increasing amounts of currency to third parties that even the most radical libertarian would be hard-pressed to claim were more secure than federally insured institutions. Most were Internet storefronts, run by who knows who from who knows where.

Sure enough, as the price headed upward, disturbing events began to bedevil the bitcoiners. In mid-June, someone calling himself Allinvain reported that 25,000 bitcoins worth more than $500,000 had been stolen from his computer. (To this day, nobody knows whether this claim is true.) About a week later, a hacker pulled off an ingenious attack on a Tokyo-based exchange site called Mt. Gox, which handled 90 percent of all bitcoin exchange transactions. Mt. Gox restricted account withdrawals to $1,000 worth of bitcoins per day (at the time of the attack, roughly 35 bitcoins). After he broke into Mt. Gox’s system, the hacker simulated a massive sell-off, driving the exchange rate to zero and letting him withdraw potentially tens of thousands of other people’s bitcoins.

As it happened, market forces conspired to thwart the scheme. The price plummeted, but as speculators flocked to take advantage of the fire sale, they quickly drove it back up, limiting the thief’s haul to only around 2,000 bitcoins. The exchange ceased operations for a week and rolled back the postcrash transactions, but the damage had been done; the bitcoin never got back above $17. Within a month, Mt. Gox had lost 10 percent of its market share to a Chile-based upstart named TradeHill. Most significantly, the incident had shaken the confidence of the community and inspired loads of bad press.

In the public’s imagination, overnight the bitcoin went from being the currency of tomorrow to a dystopian joke. The Electronic Frontier Foundation quietly stopped accepting bitcoin donations. Two Irish scholars specializing in network analysis demonstrated that bitcoin wasn’t nearly as anonymous as many had assumed: They were able to identify the handles of a number of people who had donated bitcoins to Wikileaks. (The organization announced in June 2011 that it was accepting such donations.) Nontechnical newcomers to the currency, expecting it to be easy to use, were disappointed to find that an extraordinary amount of effort was required to obtain, hold, and spend bitcoins. For a time, one of the easier ways to buy them was to first use Paypal to buy Linden dollars, the virtual currency in Second Life, then trade them within that make-believe universe for bitcoins. As the tone of media coverage shifted from gee-whiz to skeptical, attention that had once been thrilling became a source of resentment.


More disasters followed. Poland-based Bitomat, the third-largest exchange, revealed that it had—oops—accidentally overwritten its entire wallet. Security researchers detected a proliferation of viruses aimed at bitcoin users: Some were designed to steal wallets full of existing bitcoins; others commandeered processing power to mine fresh coins. By summer, the oldest wallet service, MyBitcoin, stopped responding to emails. It had always been fishy—registered in the West Indies and run by someone named Tom Williams, who never posted in the forums. But after a month of unbroken silence, Wagner, the New York City bitcoin evangelist, finally stated what many had already been thinking: Whoever was running MyBitcoin had apparently gone AWOL with everyone’s money. Wagner himself revealed that he had been keeping all 25,000 or so of his bitcoins on MyBitcoin and had recommended to friends and relatives that they use it, too. He also aided a vigilante effort that publicly named several suspects. MyBitcoin’s supposed owner resurfaced, claiming his site had been hacked. Then Wagner became the target of a countercampaign that publicized a successful lawsuit against him for mortgage fraud, costing him much of his reputation within the community. “People have the mistaken impression that virtual currency means you can trust a random person over the Internet,” says Jeff Garzik, a member of bitcoin’s core developer group." (http://www.wired.com/magazine/2011/11/mf_bitcoin/all/1)

Vitalik Buterin on the 11/12 March 2013 blockchain fork: "The other aspect of Bitcoin’s decentralization that this incident calls into question is that of mining pools. The reason why the controlled switch to the 0.7 fork was even possible was that over 70% of the Bitcoin network’s hash power was controlled by a small number of mining pools and ASIC miners, and so the miners could all be individually contacted and convinced to immediately downgrade. Another article on the fork reads [Russian]: “the real problem is not even in the code supporting the Bitcoin network; bugs are everywhere. Rather, it’s the matter of who controls it. This event clearly showed that even such a well thought-out system is controlled by the will of a very small number of people – particularly, the operators of mining pools. Over 70% of new blocks right now are being found on pools, and not on individual solo miners. The underlying idea of the system was that the benevolent majority can stop a small number of attackers, but in the present time it is simply not working. The winner in a possible takeover will be the one with greater computing power, and no one else.” Bitcoin is clearly not at all the direct democracy that many of its early adherents imagined, and, some worry, if a centralized core of the Bitcoin community is powerful enough to successfully undertake these emergency measures to set right the Bitcoin blockchain, what else is it powerful enough to do? Force double spends to reverse million-dollar thefts? Block or even redirect transactions known to originate from Silk Road? Perhaps even modify Bitcoin’s sacred 21 million currency supply limit?

However, a strong argument can be made that such fears are very unlikely to materialize. The reason why has nothing to do with the specific identities of the Bitcoin mining pool operators or the cohesiveness of the Bitcoin mining community; rather, it’s the fact that Bitcoin mining is still in fact quite decentralized; it simply is decentralized in a different way. Taking a political analogy, the closest equivalent would be a liquid democracy: a hybrid of direct and representative democracy where people can either vote for individual bills by themselves or assign politicians – with the proviso that if they do not like what a given politician is doing they can switch to assigning their voting power to someone else at any time. Back in the world of Bitcoin, although much of the Bitcoin network’s hash power is concentrated with mining pool operators in practice, every individual miner can switch from one pool to another almost instantly, so if a coalition of mining pool operators decides to start violating the Bitcoin protocol miners can simply switch to any pool that remains honest, instantly depriving the miscreants of their power. Although no mining pool has attempted to actively subvert the Bitcoin protocol so far, this kind of “voting” has been done before; in 2011, there were several incidents where the mining pool Deepbit pushed above 50% of the total network hash power, and in each case there was a mass exodus of miners toward other pools to balance things out. Although the nominal power may rest with the mining pool operators, the feedback of the community is always only one step away." (http://bitcoinmagazine.com/3668/bitcoin-network-shaken-by-blockchain-fork/)

Yanis Varoufakis: Bitcoin’s two fundamental flaws

As with all things digital, there are a number of concerns to do with security; with the fear of hackers and e’spivs. Imagine a world that has shifted entirely to bitcoin. Would we not live in fear that some ingenious hacker will get the better of Nakamoto’s algorithm and manipulate it to his benefit? Would it be wise for humanity simply to assume that the bitcoin algorithm is un-hackable (especially so in the absence of some authority that can intervene and save the day if something horrible happens to the algorithm)? Besides, even if the algorithm is safe, there is always the danger of waking up to the realisation that one’s bitcoin stash was e’looted during the night. And if one entrusts one’s stash to some company with better firewalls and computer security, what happens (in the absence of a bitcoin Central Bank) if that company goes broke or simply disappears into the Internet’s darker crevices (with its customers’ bitcoins)?

These concerns would probably suffice to put a dent in bitcoin’s prospects. But they are not the main drawbacks of the currency. No, there are two insurmountable flaws that make bitcoin a highly problematic currency: First, the bitcoin social economy is bound to be typified by chronic deflation. Secondly, we have already seen the rise of a bitcoin aristocracy (a term ‘coined’ by Greek blogger @techiechan) which, besides the issues of distributive justice which it raises, evokes serious fears about the capacity of very few entities or persons to manipulate the currency in a manner that enriches them at the expense of financial instability. Let us look at these two problems in some detail.

First, deflation is unavoidable in the bitcoin community because the maximum supply of bitcoins is fixed to 21 million bitcoins and approximately half of them have already been ‘minted’ at a time when very, very few goods and services transactions are denominated in bitcoins. To put simply, if bitcoin succeeds in penetrating the marketplace, an increasing quantity of new goods and services will be traded in bitcoin. By definition, the rate of increase in that quantity will outpace the rate of increase in the supply of bitcoins (a rate which, as explain, is severely constricted by the Nakamoto algorithm). In short, a restricted supply of bitcoins will be chasing after an increasing number of goods and services. Thus, the available quantity of bitcoins per each unit of goods and services will be falling causing deflation. And why is this a problem? For two reasons: First, because an expected fall in bitcoin prices motivates people with bitcoins to delay, as much as they can, their bitcoin expenditure (why buy something today if it will be cheaper tomorrow?). Secondly, because to the extent that bitcoins are used to buy factors of production that are used to produce goods and services, and assuming that there is some time lag between the purchase of these factors and the delivery of the final product to the bitcoin market, a steady fall in average prices will translate into a constantly shrinking price-cost margin for firms dealing in bitcoins.

Secondly, two major faultlines are developing, quite inevitably, within the bitcoin economy. The first faultline has already been mentioned. It is the one that divides the ‘bitcoin aristocracy’ from the ‘bitcoin poor’, i.e. from the latecomers who must buy into bitcoin at increasing dollar and euro prices. The second faultline separates the speculators from the users; i.e. those who see bitcoin as a means of exchange from those who see in it as a stock of value. The combination of these two faultlines, whose width and depth is increasing, is to inject a massive instability potential into the bitcoin universe. While it is true for all currencies that there is always some speculative demand for them, as opposed to transactions demand, in the case of bitcoin speculative demand outstrips transactions demand by a mile. And as long as this is so, volatility will remain huge and will deter those who might have wanted to enter the bitcoin economy as users (as opposed to speculators). Thus, just like bad money drives out good money (Gresham’s famous ‘law’), speculative demand for bitcoins drives our transactions demand for it.

Can these two flaws be corrected? Would it be possible to calibrate the long-term supply of bitcoins in such a way as to ameliorate for the deflationary effects described above while tilting the balance from speculative to transactions demand for bitcoins? To do so we would need a Bitcoin Central Bank, which will of course defeat the very purpose of having a fully decentralised digital currency like bitcoin." (http://yanisvaroufakis.eu/2013/04/22/bitcoin-and-the-dangerous-fantasy-of-apolitical-money/)


Bitcoin is not Anonymous

Jeff Garzik notes:

If you visit the bitcoin wiki page on anonymity [13]], the first sentence is

- While the Bitcoin technology can support[link] strong anonymity, the current implementation is usually not very anonymous.

With bitcoin, every transaction is written to a globally public log, and the lineage of each coin is fully traceable from transaction to transaction. Thus, /transaction flow/ is easily visible to well-known network analysis techniques, already employed in the field by FBI/NSA/CIA/etc. to detect suspicious money flows and "chatter." With Gavin, bitcoin lead developer, speaking at a CIA conference this month, it is not a stretch to surmise that the CIA likely already classifies bitcoin as open source intelligence (no pun intended).

Further, if Silk Road truly permits deposits on their site, that makes it even easier for law enforcement to locate the "hub" of transactions.

Attempting major illicit transactions with bitcoin, given existing statistical analysis techniques deployed in the field by law enforcement, is pretty damned dumb." (private email, cited [14])

Other P2P Currencies vs. Bitcoin

The second wave: Bitcoin forks

Carl Miller:

"A programmer can piggyback on the bitcoin code, customise it, and within a day give you your own currency. There are around 70 cryptocurrencies currently being traded in reasonable quantities. At the moment, most have tinkered around with bitcoin to offer some kind of additional edge. Litecoins offer faster transactions. Worldcoins, designed with a small total cap, promise to appreciate over time. Anoncoin claims to be more anonymous (obviously) and Stablecoin to have "military-grade" encryption.

Yet a second kind of cryptocurrency is appearing for another reason. Devcoins are used by open-source developers. Peercoin are used by those who desire, in their eyes, a more equitable way of sharing out the currency in the first place (bitcoin is notoriously unequal, a few big miners and early adopters hold the majority of bitcoin wealth). Coinye Wests will be for gigs and music. Sexcoins are self-explanatory. These new cryptocurrencies are being used as a way of affiliating with a group, community, interest or set of principles. Using dogecoins, which sport no particular advantage over bitcoins at all, is most directly a cultural rather than a financial decision.

We are moving into an era where the currency we use be a conscious, active, even activist decision, a value statement based on who we are and what we need. Imagine: eco-cafes will trade in currencies where a tiny percentage of each transaction goes to a good cause. You will pay your child pocket money in a currency they can only use on certain, child-proofed things. We might pay our officials allowances in a completely non-anonymous currency so we can track everything they spend. Niche groups and communities, from survivalists in Utah and comic book fans in New York to terrorist cells, will, with just a little bit of technological know-how, be able to create and finesse a currency that works specifically for them.

I confidently predict that the number of cryptocurrencies that are regularly traded and used will radically grow. Their exchange with each other is also likely to grow more intensive and seamless. We might end up habitually using dozens of currencies without noticing, as super-fast transactions allow us to move our money into the currency we need at that time. You might quickly exchange the sexcoins you have left over from last night into bitcoins to pay your freelance designer, devcoins to make a contribution to her open-source project, and a childcoin so your kid can browse amazon whilst they wait.

Cryptocurrencies are now part of our cultural and technological development. Their attributes and capabilities will constantly change. At a barest minimum, the security conscious will lump on more and more ways of keeping them secure against theft. The privacy conscious likewise will do so against detection." (http://www.wired.co.uk/news/archive/2014-01/13/dogecoin-and-the-era-of-personal-currency)

Is Freicoin in competition with Bitcoin?

"Yes and no, but mostly no.

We are in favor of a free monetary market. We believe that there should be a free monetary market and monetary diversity. In this respect, yes, Freicoin and Bitcoin will compete with each other for users as currencies. But that doesn’t mean that you can’t use both for different reasons or that one of them has to necessarily disappear. In any case, that’s for you and the the marketplace of ideas to decide, not us, the bitcoin community or any coercive agency. Silvio Gesell wrote that money was a natural monopoly and thus the state should operate it, but we disagree with him on that point. Thousands of complementary currencies in circulation today are a living proof that this is not the case.

The Austrian school of economics underlies Bitcoin’s design. Most Austrian economists don’t support a monetary monopoly, even if such a money system were based on gold, which Bitcoin is designed to resemble. E.C. Riegel was a strong opponent of a state monopoly on money. Bernard Lietaer argues that both competition and diversity are important for the efficiency and resilience of a market economy. There are many other inspirations to defend a free monetary market inclusive of both Bitcoin and Freicoin.

Bitcoin and Freicoin support each other as collaborative free software. Free software is software that respects your freedom as a user and with a collaborative development model. Freicoin is a fork of Bitcoin because we don’t want to compete with it technically. The technical improvements we develop will be submitted “upstream” to the Bitcoin developers, and we will of course draw upon features and bug fixes applied to Bitcoin. Our software development relationship with the bitcoin community is based on collaboration, not competition.

We don’t compete with bitcoin for miners either. Merged mining allows network operators to secure both currencies simultaneously. The merged mining technology first developed for Namecoin allows miners to use their proof of work in several block chain networks simultaneously. We’re currently evaluating the tradeoff between security and the convenience of having merged mining included early-on, since some new chains have been attacked by bitcoin pools (even without the users of that pool knowing it) and merged mining makes new currencies vulnerable to such attacks. Even if Freicoin isn’t merged-mine capable at launch, it will be in the near future. The result is more security for both Freicoin and Bitcoin." (http://freico.in/about/)


Can Ripple be integrated with Bitcoin

Interview of Ryan Fugger, conducted by Samuel Benson:

"Ben: Can Ripple and Bitcoin integrate?

Ryan: Sure, they can integrate in lots of ways.

There’s a discussion on the Bitcoin forums about Ripple being a good way to implement instant Bitcoin transactions.

https://bitcointalk.org/index.php?topic=3557.0

Ben: What plans do you have for Ripple over the next few years?

Ryan: I don’t know… I’d like to have a working distributed server implementation. Beyond that, I hope the idea catches on further and more people starting building systems like this.

Ben: Any thoughts on Decentralized currencies and networks growing in India?

Ryan: Ripple would be a great way to build a Hawala network:

https://en.wikipedia.org/wiki/Hawala

You can look at Ripple as Hawala with automated routing.

There is no API to Ripplepay yet and Ripple still has a few problems to solve. It has the strong potential to be a monetary system to work alongside Bitcoin. Similarities can be found in the PayPal exchange website Bitcoinary.com." (http://bensonsamuel.wordpress.com/bitcoin-3/a-decentralized-monetary-system-for-a-decentralized-currency/)

What is the difference between Coinbase and every other Bitcoin wallet service?

From an interview of Brian Armstrong, conducted by Samuel Benson:

There are several good online wallets for Bitcoin, and open source Bitcoin clients for the desktop.

Why should someone use Coinbase instead?

Here are a few ways Coinbase tries to be different:

They try to make Bitcoin easy to use for non-technical users. This means they avoid asking the user to deal with private keys, encryption, or any topics they might be unfamiliar to them. They try to make buying and selling Bitcoin with your local currency as simple as possible. They handle security and backups for you so don’t have to worry about losing your device, or forgetting to back it up. (Note that all of these may not be built yet, but this is their goal for the product.) They understand there are a variety of users in the Bitcoin ecosystem from beginner to advanced, and they certainly do not claim to be the best solution for everyone.

What is the difference between Coinbase and PayPal?

Coinbase uses a different currency underneath (Bitcoin) which is a distributed, open-source protocol for transmitting money. Bitcoin is still relatively new, but they believe it is a good platform to build on top of due to the following properties:

Low (or zero) transaction fees Payments arrive instantly (at about the speed of an email) and are confirmed within the hour Works internationally They try to make Coinbase easy to use and help avoid transaction fees when making payments." (http://bensonsamuel.wordpress.com/bitcoin-3/bitcoin-gets-funded-by-ycombinator-interview-with-the-ceo-of-coinbase/)

From the Coinbase FAQ:

"Coinbase is a simple and secure online bitcoin wallet for sending, receiving, and storing bitcoin. Coinbase also allows you to buy and sell bitcoin using a bank account, or use our tools to accept bitcoin as a merchant.

Coinbase is different from other bitcoin services and wallets in several ways:


   We focus on making bitcoin easy to use for non-technical users.  This means we avoid asking users to deal with private keys, encryption, or any topics they might be unfamiliar with.
   We make buying and selling bitcoin using a bank account easy.
   We handle security and backups so you don't have to worry about losing your device or forgetting to back it up.
   We are a "one stop shop" - we offer a wallet, an exchange, and merchant tools with one simple interface.
   Coinbase is a platform on which many bitcoin applications are being built using our API."

(http://support.coinbase.com/customer/portal/articles/585625-what-is-coinbase-and-how-much-does-it-cost-to-use-)

Ethereum: Cryptocurrency 2.0

Ethereum: A Next-Generation Generalized Smart Contract and Decentralized Application Platform:

"In the last few months, there has been a great amount of interest into the area of using Bitcoin-like blockchains, the mechanism that allows for the entire world to agree on the state of a public ownership database, for more than just money. Commonly cited applications include "colored coins", the idea of using on-blockchain digital assets to represent custom currencies and financial instruments, "smart property", physical objects such as cars which track a colored coin on a blockchain to determine their present legitimate owner, as well as more advanced applications such as decentralized exchange, financial derivatives, peer-to-peer gambling and on-blockchain identity and reputation systems. Perhaps the most ambitious of all is the concept of "autonomous agents" or "decentralized autonomous corporations" - autonomous entities that operate on the blockchain without any central control whatsoever, eschewing all dependence on legal contracts and organizational bylaws in favor of having resources and funds autonomously managed by a self-enforcing smart contract on a cryptographic blockchain.

However, most of these applications are difficult to implement today, simply because the scripting systems of Bitcoin, and even proto-cryptocurrency-2.0 alternatives such as the Bitcoin-based colored coins protocol and so-called "metacoins", are far too limited to allow the kind of arbitrarily complex computation that DACs require. What this project intends to do is take the innovations that such protocols bring, and generalize them - create a fully-fledged, Turing-complete (but heavily fee-regulated) cryptographic ledger that allows participants to encode arbitrarily complex contracts, autonomous agents and relationships that will be mediated entirely by the blockchain. Rather than being limited to a specific set of transaction types, users will be able to use Ethereum as a sort of "Minecraft of crypto-finance" - that is to say, one will be able to implement any feature that one desires simply by coding it in the protocol's internal scripting language. Custom currencies, financial derivatives, identity systems and decentralized organizations will all be easy to do, and it will also be possible to construct transaction types that even the Ethereum developers did not imagine. Altogether, we believe that this design is a solid step toward the realization of "cryptocurrency 2.0"; we hope that Ethereum will be to cryptocurrency what Web 2.0 was to the World Wide Web circa 1995." (http://vbuterin.com/ethereum.html)

Interview

Excerpted from a more detailed interview:

"Klint Finley: Could you give us a brief overview of what Bitcoin is for the unfamiliar?

Gavin Andresen: Sure. Bitcoin is the first peer-to-peer currency - it is money created by people instead of by a central bank or government.


And how does it work?

Everybody trying to create bitcoins and everybody trading bitcoins is connected by a peer-to-peer network. And the code everybody is running makes sure nobody else is cheating - nobody else is creating more bitcoins than are allowed, nobody is trying to spend their bitcoins more than once, and that bitcoins are only being spent by their rightful owners.

The really novel idea is a mechanism for preventing bitcoins from being spent more than once WITHOUT relying on a central authority.

The other mostly new idea is limiting the supply of bitcoins without relying on a central authority.


How do you accomplish these things without a central authority? And how do Bitcoin clients and servers find each other?


Let me tackle the easy one first - how do Bitcoin clients find each other:

All p2p networks have "the bootstrapping problem" - without central servers, nodes (machines) on the network need to be able to find each other. Bitcoin solves it using three mechanisms:

1. By default, Bitcoin clients join an IRC chat channel and watch for the IP addresses and ports of other clients joining that channel. The name of that channel (and the name of the IRC chat server) is hardcoded into the Bitcoin software.

2. There is a list of "well known" Bitcoin nodes compiled into the software in case the IRC chat server is unreachable for some reason.

3. You can manually add (via configuration file or command-line option) IP addresses of other machines running Bitcoin to connect.


Once you're connected to the Bitcoin p2p network, other machines send you messages containing IP addresses (and ports) of other machines they know about, so after bootstrapping you find other Bitcoin nodes via the Bitcoin network itself.

There is a lot of discussion about alternative bootstrapping mechanisms, so I wouldn't be surprised if alternative Bitcoin implementations that use something else pop up in the next year or so.


I'm guessing you can also change the IRC server and channel manually as well?

No, actually, you can't - you'd have to recompile Bitcoin to do that." (http://www.readwriteweb.com/hack/2010/12/interview-bitcoin.php)



Commons Aspects of Bitcoin

Triple Accounting and the Verification by the whole network of peers

Jaromil:

"The most remarkable innovation brought by Bitcoin deals with the system of accounting that we use today.

Double-entry bookkeeping is what we use today to make sure that earnings and expenditures match, basically authenticating the flow of money and making sure “nothing is duplicated”.

From an historical perspective, the double-entry bookkeeping system is very ancient and barely actualised through the ages: it was described by an Italian mathematician and Franciscan friar named Luca Pacioli in his book “Summa de arithmetica, geometria, proportioni et proportionalità” published in 1494 in Venice.

The second half of his book, dedicated to geometry, is a section titled “Trattato de computi e delle scritture” in which he describes the necessity of mathematics in accountancy. Those principles were certainly not invented by Pacioli, but mostly actualised, formalised and translated in his tractatus, as demonstrated by the existence of a previous book “Della mercatura e del mercante perfetto” by Benedikt Kotruljević published in Latin some decades before, or as hinted by the presence of another figure behind his portrait in the famous painting attributed to Jacopo de’ Barbari who is believed to be Albrecht Dürer, an artist and traveler who shared Pacioli’s passion for geometry and magic.

Such a system is still, as of today and despite its flaws, the one in use on large scale around the world by most accountancy systems. Being a system that ensures the univoque matching of what is written with what is real, it can be seen as gateway to the digital dimension and can undoubtedly benefit from the technical innovation through digital tools. Hence my argument that Bitcoin is basically this innovation or, more precisely, the implementation of an innovation as the triple-signed receipt method.


Quoting Ian Grigg:

- The digitally signed receipt, with the entire authorisation for a transaction, represents a dramatic challenge to double entry bookkeeping at least at the conceptual level. The cryptographic invention of the digital signature gives powerful evidentiary force to the receipt, and in practice reduces the accounting problem to one of the receipt’s presence or its absence. This problem is solved by sharing the Dyne.org Digital Press – 7 – 6 April 2013Bitcoin, the end of the Taboo on Money D.J. Roio records - each of the agents has a good copy. In some strict sense of relational database theory, double entry book keeping is now redundant.

The accounting system of triple-signed receipts in Bitcoin respects the original role of money as contract (and digitized speech, I’d argue).


Quoting Marco Sachy’s research on complementary and alternative currency:

- The ontology of money is as relational, abstract and cogent as agreements are in general and the possibilities to formulate these agreements are unimaginable, bearing in mind that the orthodox process of currency design and creation is - drawing from Adorno and Horkheimer’s Dialectic of the Enlightenment - an arbitrary and historically determined one.


It is the very substance of those cogent agreements that money represents and can be verified by matching declarations on two books or, as Bitcoin does, calling the whole network of participating peers to witness every contract and entangling it into a cryptographic blockchain. Simply put, this is bookkeeping in the age of Bitcoin." (http://jaromil.dyne.org/writings-files/Bitcoin_end_of_taboo_on_money.pdf)


Aspects of Bitcoin

Its basic design flaw: gold-like design

Anthony Migchels:

"Notwithstanding these revolutionary breakthroughs, Bitcoin does suffer from a basic flaw. It’s designed to behave like Gold. Nakamoto clearly believes Austrian Economics to the last word, including the idea that hyperinflation is the main threat to the system.

As a result Bitcoin suffers from the same problems as Gold: it is deflationary and expensive. There is never enough of it. True, Bitcoins can be divided in ever smaller denominations, so ‘physically’ there will never be a shortage, but it means Bitcoin is designed to appreciate for ever and this is the definition of deflation.

Worse still, Bitcoin does not address the interest issue. There is no possibility for cheap credit and if the unit matures, a banking system will be necessary to provide credit based on deposits.

Not only will this exacerbate the scarcity of money, it will also lead to very high cost for capital.

Yet another problem is that with a full reserve banking system as required by bitcoin (and Gold too, by the way) would allow the Money Power to mop up the money supply through compound interest within one or two decades, as you can find out here..

The basic conceptual flaw is, that Austrian Economics believes a currency should be a good store of value first and foremost. This is the fatal mistake: money is a means of exchange, and it is the agreement to use it as such that gives it value, not the other way around. This is even true of Gold today: the reason Gold is now expensive, is because many investors are speculating it will be currency again.

Because of this design flaw, Bitcoin is being hoarded by its users. They prefer to have it sit in their ‘account’, instead of spending it, hoping it will appreciate. As a result turnover is lower than it could be. The unit is already an object of speculation, hindering its primary function: to finance normal trade." (http://realcurrencies.wordpress.com/2012/05/18/bitcoin-impressive-but-flawed/)

Rich get Richer effect empirically observed

"In 2011, however, BitCoin began to get significant media coverage which attracted many more users. The currency also became more attractive after an exchange was set up that allowed bitcoins to be traded for dollars. During this second phase, bitcoins started to function as a real currency.

The team’s key finding from this second phase is related to wealth accumulation. Kondor and co say that the network grew by preferential attachment. In other words, a node with a large number of links is likely to attract more links than a node with only a few links.

This is a well-known effect in network science. Economists call it the Matthew effect after the biblical observation that the rich get richer.

Examples of the Matthew effect occur in many networks. Popular websites are likely to grow more rapidly than less popular ones, for example. And a similar process is thought to occur in real economies where the rich really do seem to get richer.

The Matthew effect is thought to be the origin of the 80:20 distribution of wealth– that 20 per cent of the population own 80 per cent of the wealth.

Kondor and co say a similar phenomenon is clearly observable in the BitCoin network. Not only are popular nodes likely to attract more links, their wealth is also likely to grow more quickly than less popular nodes. “The ability to attract new connections and to gain wealth is fundamentally related,” they say. “The “rich get richer” phenomenon is indeed present in the system.”

An interesting aspect of this currency is that the transactions are largely anonymous. As a result, the buying and selling of illegal goods and services is probably overrepresented in the network. If so, the Matthew effect must be at work even in this shadowy world.

This kind of approach has significant potential for future studies. Kondor and co say the transparency of the network means that this system could be hugely valuable for econophysicists wishing to evaluate and refine their models. In no other system of currency is it possible to study what goes on in such detail.

Could bitcoins eventually replace ordinary cash? Kondor and co avoid making any predictions, but the evidence they have unearthed is that the BitCoin network already functions in a way that is uncannily similar to real world currencies. So in that respect, there is nothing to stop it being more widely adopted." (http://www.technologyreview.com/view/518541/rich-get-richer-effect-observed-in-bitcoin-digital-currency-network/)

Ref: arxiv.org/abs/1308.3892 : Do The Rich Get Richer? An Empirical Analysis Of The Bitcoin Transaction Network

See also:

  • Gini Coefficient = 0.87709 ; Bitcoin Wealth Distribution extremely unequal (Bitcoinica data) http://ow.ly/trKoy, the 1% own 50%
  • the top 100 have gone from holding 1,776,434 coins to holding 2,254,634 Bitcoins, a whopping 27% increase! [16]

Bitcoin's Political Sociology

Alex Waters:

"“You have bitcoin purists, who are just about bitcoin because it’s a technology that will help the world,” he said, explaining how some evangelists believe bitcoin will allow citizens of third-world countries to protect their money, free from the interests of financial institutions. (As the popular site We Use Coins puts it, “There’s no wallstreet [sic] banker getting rich by standing between you and the people you want to send and receive money from.”)

The second group, Mr. Waters continued, comprises those who are politically motivated. “A lot of libertarians,” he said.

As for the third group: “You have people with profit incentive. They want to be involved in bitcoin to make a lot of money.” (http://observer.com/2013/04/its-all-about-the-bitcoin-baby/)


Bitcoin's Energy Use

1. Brad Plumer:

"Blockchain.info, a site that tracks data on Bitcoin mining, estimates that in just the last 24 hours, miners used about $147,000 of electricity just to run their hardware, assuming an average price of 15 cents per kilowatt hour … That’s enough to power roughly 31,000 U.S. homes, or about half a Large Hadron Collider.

It’s a stunning stat, but does this really count as a “disaster”? That’s less clear. After all, we need to consider the counterfactural: Is it possible that these computers would be used for other activities and calculations anyway, if they weren’t mining Bitcoins?

In any case, Gimein’s piece does touch on a red-hot topic in energy circles — how much electricity does all of our computing and Internet infrastructure actually consume? A 2011 study by Stephen Ruth of George Mason University estimated that the entire global information and communications technology industry accounts for “only about 3–5 percent” of the world’s electricity use. So it has a much smaller environmental footprint than, say, cars, trucks, and planes (which account for 25 percent of all energy demand.)

On the other hand, the Internet’s energy needs are expected to swell significantly in the coming years — even though computing keeps getting more energy-efficient. An interesting new study in Science by Diego Reforgiato Recupero finds that Internet traffic volume tends to double every three years. But network energy-efficiency isn’t keeping pace. As a result, the world’s IT infrastructure will consume 19 percent more energy in 2013 than in 2012.

Interestingly, as Alexis Madrigal explains here, most of the energy used by our computing infrastructure comes from wireless and cellular networks — by contrast, data centers themselves only use about 10 percent of the electricity involved. What’s more, those wireless networks don’t seem to be improving their energy efficiency all that quickly. That’s why overall energy use could keep growing, particularly as cloud computing becomes more widespread.

Bottom line: On the vast scale of environmental disasters, Bitcoin barely registers. And, in the grand scheme of things, the Internet is still relatively green (that’s particularly true if it cuts into other activities, like driving). But it’s also true that our computing infrastructure is becoming an increasingly significant part of the world’s energy demand." (http://www.washingtonpost.com/blogs/wonkblog/wp/2013/04/12/what-bitcoin-teaches-us-about-the-internets-energy-use/)


2. Eric Limer:

"According to Bitcoin Watch, the whole Bitcoin network hit a record-breaking high of 1 exaFLOPS this weekend. When you're talking about FLOPS, you're really talking about the number of Floating-point Operations a computer can do Per Second, or more simply, how fast it can tear through math problems. It's a pretty common standard for measuring computer power. An exaFLOPS is 1018, or 1,000,000,000,000,000,000 math problems per second. The most powerful supercomputer in the world, Sequoia, can manage a mere 16 petaFLOPS, or just 1.6 percent of the power geeks around the world have brought to bear on mining Bitcoin. The world's top 10 supercomputers can muster 5 percent of that total, and even the top 500 can only muster a mere 12.8 percent.

And that 1 exaFLOPS number is probably a little low. Because Bitcoin miners actually do a simpler kind of math (integer operations), you have to do a little (messy) conversion to get to FLOPS. And because the new ASIC miners—machines that are built from scratch to do nothing but mine Bitcoins—can't even do other kinds of operations, they're left out of the total entirely. So what we've got here is a representation of the total power spent on Bitcoin mining that could theoretically be spent on something else, like real problems that exist naturally.

Because of the way Bitcoin self-regulates, the math problems Bitcoin mining rigs have to do to get more 'coin get harder and harder as time goes on. Not to any particular end, but just to make sure the world doesn't get flooded with Bitcoins. So all these computers aren't really accomplishing anything other than solving super difficult and necessarily arbitrary puzzles for cyber money. It's kind of like rounding up the world's greatest minds and making them do Sudokus for nickels.

Projects like Folding@Home and SETI@Home use similarly networked power for the less-pointless practices of parsing information that could lead to more effective medicines or finding extra-terrestrial life, respectively, and either are hard-pressed to scrounge up even half of a percent of the power the Bitcoin network is rocking. And with specialized Bitcoin-mining hardware on the rise, there's going to be an army of totally powerhouse PCs out there that are good for literally nothing but digging up cybercoins.

It's incredible to think about the amount of power being directed at this one, singular purpose; power that's essentially being "donated" by thousands of people across the globe just because they have skin in the game. It's by far the most computational effort that has ever been devoted to a single purpose. And sure, Bitcoins are fine and all, but can you imagine what we could do if this energy was put behind other tough problems? We'll you're going to have to imagine, because so long as mining Bitcoins can earn you money and folding proteins can't, it's pretty clear which one is gonna get done." (http://gizmodo.com/the-worlds-most-powerful-computer-network-is-being-was-504503726?)


3. BY MICHAEL CARNEY:

"At today’s value of roughly $1,000 per bitcoin, the electricity consumed by the bitcoin mining ecosystem has an estimated carbon footprint – or total greenhouse gas emissions – of 8.25 megatonnes (8,250,000 tonnes) of CO2 per year, according to research by Bitcarbon.org. That’s 0.03 percent of the world’s total greenhouse gas output, or equivalent to that of the nation of Cyprus. If bitcoin’s value reaches $100,000, that impact will reach 3 percent of the world’s total, or that of Germany. At $1 million – which seems farcical but which may not be out of the realm of possibility given the artificially limited bitcoin supply – this impact rises to 8.25 gigatonnes, or 30 percent of today’s global output, and equivalent to that of China and Japan combined.

Bitcoins aren’t mined from the earth’s crust like most physical commodities – although at least that leaves tangible evidence of its environmental impact. Rather, they are “mined” by computers solving a set of complicated computational problems. These problems are designed to get more difficult over time, until the year 2140 when the 21 millionth (and final) bitcoin is mined. Early in bitcoin’s existence, it was feasible to run a successful mining operation with a standard PC. Now the task requires custom mining rigs that can run orders of magnitude more processes per second.

The top of the line model, which is currently made by a Swedish company called KnCMiner, costs around $13,000 and can mine at a rate 550 gigahashes per second: They’ve sold $28 million worth, and soon these too will be obsolete. The total computational power of the global bitcoin mining network today is more than seven million gigahashes, and climbing. That’s 256 times greater than the world’s top 500 supercomputers, combined.

These computers are consuming so much electricity that it’s already unprofitable to mine in some regions of the world. According to Blockchain.info the total electricity cost of all mining acticity conducted over the last 24 hours was $19,652,986.38, as the system consumed 131,019.91 megawatt hours. In April, Bloomberg Sustainability called bitcoin mining it a “real-world environmental disaster.” At the time, the system was consuming just 7,000 megawatt hours per day – things have increased 142-fold in the last eight months." (http://pando.com/2013/12/16/bitcoin-has-a-dark-side-its-carbon-footprint/)

Bitcoin as cryptograpic breaktrhough

by Benjamin Wallace:

"In November 1, 2008, a man named Satoshi Nakamoto posted a research paper to an obscure cryptography listserv describing his design for a new digital currency that he called bitcoin. None of the list’s veterans had heard of him, and what little information could be gleaned was murky and contradictory. In an online profile, he said he lived in Japan. His email address was from a free German service. Google searches for his name turned up no relevant information; it was clearly a pseudonym. But while Nakamoto himself may have been a puzzle, his creation cracked a problem that had stumped cryptographers for decades. The idea of digital money—convenient and untraceable, liberated from the oversight of governments and banks—had been a hot topic since the birth of the Internet. Cypherpunks, the 1990s movement of libertarian cryptographers, dedicated themselves to the project. Yet every effort to create virtual cash had foundered. Ecash, an anonymous system launched in the early 1990s by cryptographer David Chaum, failed in part because it depended on the existing infrastructures of government and credit card companies. Other proposals followed—bit gold, RPOW, b-money—but none got off the ground.

One of the core challenges of designing a digital currency involves something called the double-spending problem. If a digital dollar is just information, free from the corporeal strictures of paper and metal, what’s to prevent people from copying and pasting it as easily as a chunk of text, “spending” it as many times as they want? The conventional answer involved using a central clearinghouse to keep a real-time ledger of all transactions—ensuring that, if someone spends his last digital dollar, he can’t then spend it again. The ledger prevents fraud, but it also requires a trusted third party to administer it.


Bitcoin did away with the third party by publicly distributing the ledger, what Nakamoto called the “block chain.” Users willing to devote CPU power to running a special piece of software would be called miners and would form a network to maintain the block chain collectively. In the process, they would also generate new currency. Transactions would be broadcast to the network, and computers running the software would compete to solve irreversible cryptographic puzzles that contain data from several transactions. The first miner to solve each puzzle would be awarded 50 new bitcoins, and the associated block of transactions would be added to the chain. The difficulty of each puzzle would increase as the number of miners increased, which would keep production to one block of transactions roughly every 10 minutes. In addition, the size of each block bounty would halve every 210,000 blocks—first from 50 bitcoins to 25, then from 25 to 12.5, and so on. Around the year 2140, the currency would reach its preordained limit of 21 million bitcoins." (http://www.wired.com/magazine/2011/11/mf_bitcoin/all/1)


Bitcoin Business and Economics

Bitcoin Research

Publications including research and analysis of Bitcoin or related areas, https://en.bitcoin.it/wiki/Research

list of researchers, via [17]

  • Jerry Brito (@JerryBrito), senior research fellow at the Mercatus Center at George Mason University. [18]
  • Russell Roberts (@EconTalker) of the Library of Economics and Liberty. He hosted an EconTalk episode on Bitcoin: [19]
  • economist Jon Matonis (@JonMatonis) who recently presented on using Bitcoins as a currency to monetize game play: [20]

Critics:

  • Timothy B. Lee (@BinaryBits) sees problems with Bitcoin (bubbles, vulnerable to cartel, etc.): [21]

The problems of Bitcoin

"What Bitcoin doesn't provide or doesn't provide in an effective manner:

   * Cost of creating money
   * Method of reaching a consensus, based on computing power
   * No "real value" to back it
   * Settlement risk not covered
   * Scalability issues
   * All the lacking features of a "soft" currency."

(http://events.ccc.de/congress/2011/Fahrplan/events/4668.en.html)


Bitcoin as a legitmate investment vehicle

Kurt Eichenwald:


1.


"Put simply, despite all the hullaballoo, Bitcoins are not a currency, at least in any traditional sense of the word. Rather, they have transformed more into an investment, like a stock. I could certainly purchase items with shares of Google Inc.—I would just have to find a seller willing to accept them—but no one would rationally say that makes stock into a currency rather than an investment.

The essence of a currency is a rational expectation of relatively stable valuation. Yes, values can collapse or soar, but those circumstances relate to unusual events and, for the most part, are widely predictable ahead of time. Outside of those circumstances, the values of valid currencies tend to fluctuate within a reasonable range. There are several reasons for this, including the existence of central banks, which can act to preserve the integrity of their national currency. But more important is the rich and liquid markets for nationally backed currencies, with traders buying and selling based on floating exchange rates. When one currency—say the yen—rises in value against the dollar, a trader might sell it for a profit, then purchase the now cheaper dollar. Or, if, say, the dollar were to start collapsing, the Fed could intervene in the market and purchase quantities of the currency to stabilize it. But it is almost incomprehensible to imagine that 100 yen would be worth $1 on Monday and then be worth $5 on Tuesday. That is the kind of daily value change seen in stocks.

Or in Bitcoins. Last year, the value of Bitcoins more than doubled, from $5 to $13. In other words, assuming Subway accepted Bitcoins (Lord help us), you could have purchased one of the restaurant’s $5 foot-long sandwiches with the value of one Bitcoin unit. By the end of the year, you could have purchased a little bit more than two-and-a-half sandwiches, even though the actual price was the same.

This year, the insanity of Bitcoins is obvious for all to see. Within a few months, the value of Bitcoins soared to a high of $147, an eleven-fold increase. Now that poor Subway restaurant will be turning almost 30 sandwiches for the same number of Bitcoins, with the dollar value of the meal not having budged. In other words, the Bitcoin economy is experiencing massive deflation in the value of assets.

What caused this unprecedented jump, which translates into an annualized return of about 4,000 percent? The general consensus is that the financial crisis in Cyprus, which led to proposals to raid domestic bank accounts, set off a panic among Spaniards, who feared that the tumult would cross the Mediterranean and put their savings at risk. So large numbers of them converted their euros into digital Bitcoins.

But the reason for the price jump is almost irrelevant. What matters here is that the experience shows that the Bitcoin is not functioning like a useful currency. Think about it—would you cash in a share of stock at $13 if the price was zooming up? Or would you wait to see how high the value might go? Principles of smart investing dictate that you should sell when you’ve made reasonable profits, before an inevitable turnaround. Few ever follow those rules, including Bitcoin buyers.

Hoarding has become a common feature of the Bitcoin market, as purchasers hold on to the investment in hopes that the prices will keep rising. One comprehensive study released last October found that more than three-quarters of all Bitcoins—78 percent—had been stuffed into virtual mattresses and taken out of circulation. In other words, in a system where supply and demand dictate prices, the available supply in the market is far less than might be imagined.

In essence, the market is a fantasy. Once the hoarders stop buying, what buyers will step up to the plate to take their place? My bet? No one. There will be, at some point, a time when some hoarder decides to unload. Prices will drop. Other hoarders will get scared and start to sell. Prices will drop further. Before long, there will be a mass rush to the exits. And at that point, the illiquidity of the Bitcoin market will be apparent.

A similar thing even happened to the richest, most liquid investment game of all: the United States stock market. In 1987, the market was creaking a little, and prices started to move downward. At that point, there was a popular idea called program trading, which, at its most basic, would result in sales of stocks if prices fell below a particular level. Of course, when the stock fell, the programs started selling—and all the elephants tried to run through the same door at the same time. Stocks lost 22.6 percent of their value in a single day, simply because there were not enough buyers to offset the flood of selling. That’s exactly what will happen when the hoarders of Bitcoins start to cash in.

Perhaps the best document to understand the Bitcoin market is a report published in October by the European Central Bank. In it, the institution spends a good deal of time critiquing what it calls “the bitcoin scheme.” (Warning No. 3: When a major financial player refers to an investment as being part of a “scheme,” steer clear.)

One of the big problems, the bank writes, is that the Bitcoin investors are on a very uneven playing field, largely because of the complexity that seems so cool. Yes, many markets have investors struggling with different levels of information, but those are usually in liquid markets where such variations will not usually leave one side broke. The bank says of Bitcoins:

The system demonstrates a clear case of information asymmetry. It is complex and therefore not easy for all potential users to understand. At the same time, however, users can easily download the application and start using it even if they do not actually know how the system works and which risk they are actually taking. This fact, where there is clear legal uncertainty and lack of close oversight, leads to a high-risk situation. Not enough to convince you? Then perhaps Gavin Andresen, a lead developer on the Bitcoin project, might:

Bitcoin is an experiment. Treat it like you would a promising Internet start up company: Maybe it will change the world, but recognize that investing your money or time in new ideas is always risky. I think Andresen understates the case: Bitcoin is far more dangerous than an Internet start-up company. With a start-up, you can at least see the business plan and assess its probabilities for financial success. Bitcoin is a completely anonymous marketplace. Even assessing how much of the market is held by hoarders requires experts to make analyses.

There are some critics who contend that Bitcoin is a Ponzi scheme, where the initial buyers are simply earning returns with the investments of future buyers. That oversimplified the circumstances—Bitcoin doesn’t actually fit the model of such a scheme.

It does, however, fit the model of one of the most famous investment bubbles in history, the tulip-and-bulb craze. It took place from 1634 to 1637, a few decades after tulips were brought from Turkey to the Dutch. A virus changed the colors of the tulips, making them very popular. Prices began to rise as people bought more and more tulips. Hoarders (the tulip-bulb centers) began loading up on them, driving up the prices as demand increased and supply dropped. Then tulip investors who had huge paper profits decided to lock them in by selling. And the price dropped. Which led to more sales, larger price drops, and on and on. By the time the downward spiral ended, tulips were back to being flowers—not investments—and the bulb investors were wiped out.

In essence, the tulip-bulb bubble was based only on the fact that buyers and sellers decided—peer to peer—that these flowers had ridiculous values. It was nothing more than an agreement in thought. Bitcoin fans admit that the currency has value only because the users in the Bitcoin market think it does but say that that is no different than in the markets for dollars, yen, and other national currencies. And that is absurd. There is no country, no national bank, nothing standing behind the Bitcoin valuations other than other Bitcoin investors. If the dollar falls, the Fed will jump in. And if the Bitcoin falls? Well, personal bankruptcies will probably go up.

So, anyone out there buying Bitcoins at ridiculously inflated prices, please recognize the risk you are taking. You will likely lose everything." (http://www.vanityfair.com/online/daily/2013/04/logic-problems-bitcoin-bubble)


2.

"Bitcoins are not an investment. They are an investment fad that someday could be a real digital currency, but if they continue to behave as they have, they will instead be nothing. This is not hard to understand. The fact is that real investments—outside of manias—do not quadruple or sextuple, much less gain 20 times their value so quickly.

Add to that the reality that Bitcoins have no true method of underlying valuation. You want to buy a stock? Pull up its filings with the S.E.C. and assess its financial structure and business strategy. A municipal bond? Same thing. A national currency? Assess the present economic conditions of the issuing country and check relative interest rates, etc., to determine which currency is the most valuable at that time.

Assess Bitcoins? All you can do is examine the trading patterns, which do not provide a real analysis of any underlying economic value. The economics of investments are not solely based on supply and demand, and that is all that goes into Bitcoin prices. It doesn’t matter if the demand comes from a currency panic in Spain—which is one of the rationales being offered for the jump—or rank speculation. There is nothing backing up the values—not a government, not an underlying financial value, nothing.

Then throw one more bit of news on the pile. Mt. Gox, the major Bitcoin trading platform, today announced it was halting trading because of what it called a panic. Halting trading? I don’t recall Mt. Gox halting trading when the stock was zooming up at irrational speed. I don’t recall it declaring that ridiculous growth as a mania, although it’s fine calling the collapse a panic. If trading in a financial instrument can be shut down without notice on a decline—but is kept open when it is going up—that instrument is being subjected to a rules-based manipulation. And given the amount of hoarding involved in Bitcoins—78 percent of the market is being hoarded, according to an academic study published last month—the probability of a pure manipulation of the price by big holders after everyone “cools off” is too high for comfort. (By the way—news for the big holders: if anyone does try to manipulate Bitcoin prices when trading begins, they will probably go to jail. It might not classify as securities fraud—after all, Bitcoins are not a security—but it certainly would be wire fraud.)

Here’s the bottom line. Bitcoins are not a real investment; they are bets inside a casino. If the price goes back up, don’t be fooled. In the parlance of popping investment bubbles, it’s something called a “dead-cat bounce.” People who are desperate to keep the game going rush back in, hoping to bring the price back up, but it never lasts.

As I said, maybe someday Bitcoins will be a real currency. But if you think they are a great investment worth a huge chunk of your savings, check Google maps for your nearest bankruptcy court. You’ll be there soon." (http://www.vanityfair.com/online/eichenwald/2013/04/excuses-bitcoin-bubble-burst)

See also: Quantitative Analysis of the Full Bitcoin Transaction Graph

Discussion

See: Bitcoin - Discussion

Amongst the issues raised in our separate discussion entry are:

  1. A summary of BitCoin criticisms
  2. Scarcity Aspects of Bitcoin
  3. Mining Privileges associated with Bitcoin
  4. The Difference between Bitcoin and Open Coin
  5. Is Bitcoin a deflationary currency?
  6. Bitcoin wastes energy
  7. Is Bitcoin Legal?


The fallacy of a non-political currency

Yanis Varoufakis: On “The fantasy of ‘de-politicised’, ‘honest’ money

“The Crash of 2008 has infused our societies with enormous scepticism on the role of the authorities, both government and Central Banks. It is quite natural that many dream of a currency that politicians, bankers and central bankers cannot manipulate; a currency of the people by the people for the people. Bitcoin has emerged as the great white hope of something of the sort. Alas, the hope it brings to many people’s hearts and minds is false. And the reason is simple: While it is true that local communities have, in the past, generated successful communitarian currencies (that enabled them to improve welfare in their midst, especially at a time of acute economic crises), there can be no de-politicised currency capable of ‘powering’ an advanced, industrial society.

Since the second industrial revolution made possible the emergence of large, networked oligopolistic companies (the Edisons and Fords of the 1900s, and the Googles or Apples of today), capitalism became dependent on large credit spurts for the purposes of financing these capital corporations’ needs. Such credit spurts required large boosts in the money supply, both in order to finance the creation of new capital goods and also to support the new consumption patterns that were necessary to maintain the economy’s new productive capacity. Even when capitalist economies operated under the Gold Standard, banks found ways of creating money by lending increasing quantities against the existing, stable, stock of gold.

The 1920s thus demonstrates the impossibility of an apolitical money supply. Even though the monetary authorities were insisting on a stable correspondence between the quantity of paper money and gold, the financial sector was boosting the money supply inexorably. Should the authorities stop them from so doing? If they had, the Edisons and the Fords would have never flourished, and capitalism would have failed to produce all the goodies that it did; indeed, it would have stagnated and spawned social tensions that would put its institutions under a cloud well before 1929. So, the authorities stood by, allowing the bubbles of the 1920s to inflate, leading to 1929 and to the disaster of the Great Depression.

To the extent that bitcoin attempts to emulate the Gold Standard, if a large portion of economic activity is denominated in bitcoin, the dilemmas of the 1920s will return to plague the bitcoin economy. Finance will either have to find ways of introducing bitcoin denominated securities, 1920s-style, that will cause asset bubbles to form or the bitcoin political economy will nosedive into a deflationary spiral that either causes untold hardship amongst its users or leads them, as is more likely, to abandon bitcoin altogether.

The reason that money is and can only be political is that the only way of steering a course between the Scylla and Charybdis of dangerous ponzi growth and stagnation is to exercise a degree of rational, collective control over the supply of money. And since this control is bound to be political, in the sense that different monetary policies will affect different groups of people differently, the only decent manner in which such control can be exercised is through a democratic, collective agency. In brief, while apolitical money is a dangerous illusion, a Central Bank that is democratically controlled (as opposed to the indefensible notion of an ‘independent’ Central Bank) remains our best hope for a form of money that is for the people and by the people. Bitcoin, despite its many interesting features, can never be that.

Bitcoin enthusiasts, just like believers in the Gold Standard, understand money as if it were some commodity which has spontaneously emerged as a unit of exchange – a little like cigarettes did in the POW camp ‘economy’ that R.A. Radford (1945) described so brilliantly. This is a gross misconception based on the unexamined (and dangerously false) faith that there is no substantial difference between Radford’s POW camp and a modern capitalist economy; that, like in that POW camp, output is independent of expectations and demand is always abundant enough to absorb the produced output. As for investment, it is assumed to be uni-directionally determined by savings which are, in turn, determined by the rate at which present consumption is deferred to the future. None of that holds in an economy involving not only exchange but also production and investment. It is these two activities, production and investment, that preclude the possibility of apolitical money.” (http://yanisvaroufakis.eu/2013/04/22/bitcoin-and-the-dangerous-fantasy-of-apolitical-money/)

The (a)political economy of Bitcoin

Vasilis Kostakis

Bitcoin emerged as an incarnation of the fantasy of “apolitical” money, i.e., a currency of the people, by the people, for the people, as Varoufakis eloquently puts it. We are not going to describe what Bitcoin is or how it was created as this has been done in detail elsewhere. First things first: there is no such thing as apolitical – even being ostensibly “apolitical” is a political stance–, therefore, a “de-politicised currency” is not possible. Bitcoin is premised on scarcity and wherever you have scarcity, power structures emerge. For instance, we are observing the creation of a “Bitcoin aristocracy” consisted of those who entered the Bitcoin ecology early and/or those who own the so-called “monster machines”. For this and various other reasons, such as speculation and instability problems (read Varoufakis’ piece and an April BBC report on Bitcoin panic), we deem that Bitcoin is not a Commons-oriented currency designed to serve effectively social purposes, rather a manifestation of a new form of capitalism, called “distributed capitalism”. In a true Peer-to-Peer (P2P), Commons-oriented currency, the peers must be humans, not computers. In Bitcoin, the computers are peers, but some humans can have thousands of computers, and others none.

It becomes obvious that the political identity of Bitcoin is by no means apolitical.

While Bitcoin represents a model where P2P infrastructures are designed to allow autonomy and participation of many players, the main focus rests on profit-making: trading and exchanging through a currency designed for scarcity. Under such conditions, any Commons is a byproduct or an afterthought of the system, and personal motivations are driven by exchange, trade and profit. Many P2P projects, such as Bitcoin or even Kickstarter, could be seen within this context, striving for a more inclusive, distributed and participative capitalism. In Bitcoin the role of distribution is not related to the distribution of the means of production for enabling autonomous, Commons-oriented productive efforts, but as part of a vision of a virtual economy based on scarcity and, thus, on competition.

On the other hand, Bitcoin can be viewed as part of an anti-systemic entrepreneurialism directed against the traditional monopolies and a proof that the hypothesis of a digital currency is feasible. So our second argument, is that the idea for a digital, global, distributed currency is worth-trying, though with a more Commons-based orientation. A Commons-based currency(-ies) could jump start the creation of a “Global Commons” on a transnational global scale. As we notice in Commons-based peer production (CBPP) –this community-driven, hyper-productive mode of immaterial value– productive efforts are distributed and facilitated at both local and global levels. And the conjunction of CBPP with desktop manufacturing technologies (such as 3D printing) could create ecologies in which the resulting micro-factories, essentially networked on a global scale, would profit from the mutualized global cooperation both on the design of the product, and on the improvement of the common machinery. Any distributed enterprise could be seen in the context of transnational phyles, i.e. alliances of ethical enterprises that operate in solidarity around particular knowledge Commons. The participating enterprises, with the supportive infrastructure of a Commons-oriented currency, could be the vehicles for the commoners to sustain Global Commons as well as their own livelihoods.

Therefore, we, as commoners, conclude that what we need is a digital currency premised on a different political economy, one breaking the shackles of capitalist opportunism and ushering in a new era of economical transaction based on the finer aspects of the human spirit.

(http://blog.p2pfoundation.net/the-apolitical-economy-of-bitcoin/2013/07/11)

TripleC paper

The (A)Political Economy of Bitcoin: http://www.triple-c.at/index.php/tripleC/article/view/606

Abstract:

The still raging financial crisis of 2007–2008 has enabled the emergence of several alternative practices concerning the production, circulation and use of money. This essay explores the political economy of the Bitcoin ecosystem. Specifically, we examine the context in which this digital currency is emerging as well as its nature, dynamics, advantages, and disadvantages. We conclude that Bitcoin, a truly interesting experiment, exemplifies "distributed capitalism" and should be mostly seen as a technological innovation. Rather than providing pragmatic answers and solutions to the current views on the financial crisis, Bitcoin provides some useful and timely questions about the principles and bases of the dominant political economy.

Why Bitcoin is Flawed from a Monentary Reformers' Point of View

Anthony Migchels:

"Bitcoin’s existence is very useful for all monetary reformers as it will allow us to gather information about the strategies that the adversary will use to disable it.


Notwithstanding these revolutionary breakthroughs, Bitcoin does suffer from a basic flaw. It’s designed to behave like Gold. Nakamoto clearly believes Austrian Economics to the last word, including the idea that hyperinflation is the main threat to the system.

As a result Bitcoin suffers from the same problems as Gold: it is deflationary and expensive. There is never enough of it. True, Bitcoins can be divided in ever smaller denominations, so ‘physically’ there will never be a shortage, but it means Bitcoin is designed to appreciate for ever and this is the definition of deflation.

Worse still, Bitcoin does not address the interest issue. There is no possibility for cheap credit and if the unit matures, a banking system will be necessary to provide credit based on deposits.

Not only will this exacerbate the scarcity of money, it will also lead to very high cost for capital.

Yet another problem is that with a full reserve banking system as required by bitcoin (and Gold too, by the way) would allow the Money Power to mop up the money supply through compound interest within one or two decades, as you can find out here..

The basic conceptual flaw is, that Austrian Economics believes a currency should be a good store of value first and foremost. This is the fatal mistake: money is a means of exchange, and it is the agreement to use it as such that gives it value, not the other way around. This is even true of Gold today: the reason Gold is now expensive, is because many investors are speculating it will be currency again.

Because of this design flaw, Bitcoin is being hoarded by its users. They prefer to have it sit in their ‘account’, instead of spending it, hoping it will appreciate. As a result turnover is lower than it could be. The unit is already an object of speculation, hindering its primary function: to finance normal trade.


Bitcoin is a revolution and a badly needed bit of fresh air. Peer to peer and independent of banks and Government it is an example for all of us. Yes, we should press for reform at the Government level, but no, we should not await it. There is a free market for currencies and it is ours for the taking.

However, it is not credit based and it does not allow for interest free credit. It’s deflationary by nature, which is very problematic.

Its decentralized peer to peer nature and its convertibility mechanism are its main strengths. If these can be harnessed in interest free credit based units, the Money Power would be really hard pressed.

Bitcoin is a shot heard far and wide, but it is only the proverbial first shot across the bow." (http://realcurrencies.wordpress.com/2012/05/18/bitcoin-impressive-but-flawed/)


A possible p2p critique of the current p2p protocol?

Michel Bauwens:

"The great achievement of Bitcoin is that we have the very first "socially sovereign" digital currency, independent of government and corporation, that is workable, technically "peer to peer", and that it creates the enthusiasm of the hacker community, which almost certainly means it will be adapted and used later by more people. So, in this way, this is a tipping point. However, the Bitcoin design may also have some serious flaws. First of all, the way it is mined privileges the technical community itself as it can have access to networks of botnets to generate coins, in a way most people can't. Secondly it is a 'scarcity' based currency, subject to hoarding and wealth accumulation (only 21m bitcoins will be created, insuring a constant growth in value), that does not really change what is 'wrong' with the current currency system. As many so-called 'peer to peer' technologies (such as crowdfunding, crowdsourcing, etc..) it may increase wider participation and 'distribution' but without necessarily changing the dysfunctional neoliberal functioning of the market. Nevertheless, what it really shows is that socially sovereign currencies are viable, and could be created as a tool of the countereconomy, though this may require a different ruleset for its functioning. so that true 'social' peer to peer values can be integrated in the design of future 'post-Bitcoin' currencies."


Is Bitcoin truly p2p?

Victor Grishchenko:

" The very basis of Bitcoin design assumes that every node needs to be aware of every transaction in the system just to prevent double-spending:

- We need a way for the payee to know that the previous owners did not sign any earlier transactions... The only way to confirm the absence of a transaction is to be aware of all transactions.


Thus, every “full” node needs to maintain a dossier on every “coin” out there and, preferably, to keep the entire history of transactions. First of all, that is the opposite of scalability. Such a system is not “decentralized”, but more like a “replicated center” system, as there is an absolute necessity to gather all the existing data in a single point to make any meaningful operation. Partial knowledge does not work. The authors describe those full nodes as “super-peers” saying that

- Bitcoin nodes could easily keep up with both VISA and MasterCard combined, using only fairly modest hardware (a couple of racks of machines using todays hardware)... the intention is to evolve it towards a more typical two-tier structure in which low powered client nodes connect to long-lived, high powered supernodes.


Thus, Bitcoin is only “peer-to-peer” in the sense of the British Peerage system. Bitcoin “commoners” must appeal to their “lords” who have sufficient means to judge on validity of transactions and to seal those transactions as valid, likely for a fee." (http://www.pds.ewi.tudelft.nl/~victor/bitcoin.html)


Bitcoin as a libertarian currency

Jon Matonis on the "Austrian economics" background

"Mises has written that, “Value is not intrinsic, it is not in things. It is within us; it is the way in which man reacts to the conditions of his environment.”

While I and other Austrians wholeheartedly agree with Mises on this, the notion of a decentralized bitcoin has eluded many in the economics profession. Peer-to-peer bootstrapped currencies secured by cryptography in a distributed computing project were not anticipated by Menger nor Mises. They are a reaction to our ‘politically-hostile’ environment for free market currencies. Public-key cryptography, as opposed to symmetric key cryptography, is a relatively new phenomenon that Austrian economics has not yet come to terms with.

Some may not like it, but bitcoin is a Mengerian-, Misean-, Rothbardian-, Austrian-currency in its purest form. Still actively debated within the Austrian economics community on whether or not bitcoin satisfies the regression theorem, I have gone so far as to propose a corollary." (http://www.forbes.com/sites/jonmatonis/2012/08/26/economist-appearing-on-max-keiser-show-forced-to-resign/)


The deflationary economics behind Bitcoin's design are libertarian

Phillip Pilkington:

"The most popular aspect of the libertarian doctrine today is probably the idea that deflation is not such a bad thing – indeed, it may even be a morally purifying cure. Uncomfortable – like a cold shower – but necessary to rid a gluttonous populace of its worst excesses.

The economic argument among actual libertarians for this view runs broadly that prices in a competitive economy should generally be tending downwards rather than upwards. The rational argument – as is typical of extremist ideologies – for the most part masks a more deeply embedded emotional appeal. Simply put, the argument plays to the hoarding impulse so prevalent among gold-bugs, who appear to overlap strongly with libertarians.

While it would be too much of a distraction to go into the origin of the compulsive hoarding impulse here, it should simply be noted that among right-wing libertarians it is often mixed up with saving. Not only are these two distinct concepts within the sphere of economics – hoarding being a removal of wealth from circulation and saving being the deployment of present wealth to procure future wealth – but they are generally recognised as distinct concepts in psychology, both popular and medical. Even children can distinguish between Scrooge and true capitalists.

The argument for deflation appeals to the idea that the saver – who is seen as the origin of wealth and production by the libertarian – benefits because the money that they have saved becomes worth more. But, of course, this is not true of the productive capitalist whose fixed capital investments depreciate rapidly as they lie unemployed. It is only true of the hoarder, the gold bug and the miser who removes wealth from circulation or transfers it into useless fetish-objects and sits upon it until he acquires more purchasing power.

In order to get around this inconvenient fact the libertarian supplements their argument by saying that all investments that fall as the deflation tears the economy apart were merely “malinvestments” made at a time when money was too cheap. It is thus that the wanton destruction of societal wealth is justified as a sort of Judgement Day. Those who go bankrupt are simply sinners. Thus the fact that deflationary conditions wreak havoc on all those in the economy that are not unproductive hoarders is veneered over through a moral appeal to the supposed quality of outstanding investments.

Tied to this is the idea that production that does take place in a deflationary environment is morally pure. It is seen as “lean and mean” in that it requires real effort on behalf of the investor to accomplish, this in contrast to the “profligate” investment decisions that might be made when money is easy to come by. In a deflationary environment the men, as it were, are sorted from the boys. This crass notion ignores many aspects of how modern economies actually operate; for example, the fact that monopolies, oligopolies and giant corporations will find it far easier to weather a serious recession or depression than a smaller firm simply due to size and outstanding credit relations. But it is an argument that is made nevertheless because it appeals to a sense of moral righteousness and rewards the libertarian’s anti-social hoarding tendencies.

It is here that nostalgia rears its head. Libertarians often hold the 19th century up as a sort of model for what the present should be. Unlike extremist left-wing ideologies, like Communism, libertarianism is backward rather than forward-looking. Where Communism projects into the future a mythic ideal, libertarianism mourns over an ideal past that has supposedly been lost. (Would it surprise the reader to learn that the hoarding impulse is thought to be tied to fantasies of the womb?)

For the right-wing libertarian the 19th century is the era of a true capitalism with little or no government intervention. Indeed, even warfare was limited and required little government meddling. Yes, this era was unstable – even the libertarian would not deny that – but this instability gave rise to a dynamism and a freedom that was crushed in the “statist” 20th century.

But it is not the inflationary era of high liberalism that is often looked back upon through rose-tinted glasses, but the deflationary era of the third quarter of the 19th century. This would be unusual if we did not already understand the motivations for the libertarian argument for deflation. The right-wing libertarian needs an era that was both non-inflationary and at the same time one of “free” competition as a screen on which to project their utopian fantasies. But, as we shall see, in this they are trying to have their cake and eat it.


2.

he most peculiar aspect of the argument favouring this deflationary period is that it completely ignores the broader historical picture. The libertarians, hiding as they are in the trees, completely fail to take notice of the woods all around them. For it is widely recognised by historians that this was the era when laissez faire capitalism fell and the ground was cleared for a new era characterised by government intervention, monopoly men and imperial conquest. As the great British historian Eric Hobsbawm put it in his ‘The Age of Capital’:

- The new era which follows the age of liberal triumph was to be very different. Economically it was to move away rapidly from unrestrained competitive private enterprise, government abstention from interference and what the Germans called ‘Manchesterismus’ (the free trade orthodoxy of Victorian Britain), to large industrial corporations (cartels, trusts, monopolies), to very considerable government interference, to very different orthodoxies of policy, though not necessarily of economic theory. The age of individualism ended in 1870, complained British lawyer A.V. Dicey, the age of ‘collectivism’ began. (P. 354)

Or again:

- A new era of history, political as well as economic, opens with the depression of the 1870s. [This era] undermined or destroyed the foundations of mid-nineteenth-century liberalism which appeared to have been so firmly established. The period from the late 1840s to the mid-1970s proved not so much, as the conventional wisdom of the time held, the model of economic growth, political development, intellectual progress and cultural achievement, which would persist, no doubt with suitable improvements, into the indefinite future, but rather a special kind of interlude. (P. 63)

This new era was to be one in which trade unions grew to become a serious force while the first true wave of corporate mergers would establish a new monopoly or oligopoly structure for the capitalist system. It was also an era in which the government would begin to play an increasingly large role in economic affairs. The foundations would thus be laid for the state capitalist systems of the 20th century – the very systems that the libertarians decry – not to mention for the rise of socialism.

Indeed, when the lifeblood of cheap money had run out the era of high liberalism ground to a halt and economic forces began to become increasingly concentrated. This is no coincidence. But nevertheless right-wingers today continue to fool themselves into believing that austerity and deflation rather than easy money and credit are the path back to some sort of purified capitalism. They are no such thing. For the libertarian right-wingers are chasing an historical ghost – a ghost that never existed in corporeal form and so one that they have no chance of resurrecting. In clinging to these crude ideological notions and historical myths it is their own ability to engage in practical politics that they bury – and those politicians who embrace their creed will not last long." (http://www.nakedcapitalism.com/2012/09/philip-pilkington-the-19th-century-long-depression-how-it-fostered-oligopolistic-capitalism-and-serves-as-a-model-for-austerity.html)


Bitcoin is incompatible with the state system and should not seek legitimation

Jon Matonis:

" I was a radical before most of you Bitcoin users were born. That doesn't make me any better than you (hopefully I did a few things to make you better than myself), but it does give me a better perspective; time just works that way.

I've been watching the recent developments in the Bitcoin markets, and having seen this drama before (too many times), I thought I'd pass along a lesson. This will strike its target in some of you, but others of you are also likely to reject it, because it doesn't match what you want to be true.

Here's the lesson: Trying to go 'legit' will destroy the Bitcoin market.

For those of you who haven't turned away, I'll explain:

There's nothing really wrong with Bitcoin itself. The developers are doing a nice job of addressing its problems and a heartening number of people have jumped up to create new tools and new services. No problem here.

The problem is that too many people in the Bitcoin market are thinking the old way.

Understand this: Bitcoin is a new thing - it is not compatible with the old financial system.

Bitcoin and state banking systems are born enemies: only one can survive. If you are imagining that they can peacefully coexist, you are fooling yourself.

Bitcoin exposes the fraud that is state banking. If you think that politicians and bankers will calmly allow it to take over a significant percentage of world financial flows, you're in denial. States will come after Bitcoin, and hard. They have no choice. Their money can only exist if there are no competitors.

Alan Greenspan may have done a lot of bad things, but he is not stupid. And before his adventures at the Fed, he wrote this:

"(Under a fiat system), there is no way to protect savings from confiscation through inflation' If there were, the government would have to make its holding illegal, as was done in the case of gold."

What gold was then, Bitcoin is now -- times five.

So, let me try this again: Going legit gives the state a handle to grab you with. 'Legit' means registered and regulated, doesn?t it? You have to tell them your name, where you live, and where you put your money, right' It means that they can control you whenever they want to." (http://www.dgcmagazine.com/the-old-radical-how-bitcoin-is-being-destroyed/)


How the Bitcoin 1%'s manipulate the currency

Stanislav Datskovskiy:

" One of the world’s greatest cryptographers, Adi Shamir, published the following analysis:

- "We discovered that almost all these large transactions were the descendants of a single large transaction involving 90,000 Bitcoins which took place on November 8th 2010, and that the subgraph of these transactions contains many strange looking chains and fork-merge structures, in which a large balance is either transferred within a few hours through hundreds of temporary intermediate accounts, or split into many small amounts which are sent to different accounts only in order to be recombined shortly afterwards into essentially the same amount in a new account.” (source: Dorit Ron and Adi Shamir, Quantitative Analysis of the Full Bitcoin Transaction Graph.

Most bitcoins are, in fact, in the hands of a very few people. Are you surprised? I’m not.

We also learn that, of the approximately 9 million bitcoins which currently exist, less than 2 million actually circulate – that is, change hands with any appreciable frequency:

- “It is remarkable that 97% of all owners had fewer than 10 transactions each, while 75 owners use the network very often and are affiliated with at least 5,000 transactions.”

And it would appear that most of the non-circulating coins are in the hands of a very small number of people – who, one may reasonably suspect, were involved from with building and propagandising Bitcoin from its very beginning. So, who are the lords of Bitcoin?

...

The most damning fact revealed in the paper is not the extreme top-heaviness of the Bitcoin ownership pyramid, but rather the elaborate lengths to which the hoarders went in order to conceal their existence from “rank and file” users. Think of it! Hundreds of thousands of shill accounts, with vast rivers of wealth moving back and forth – for one purpose only: to deceive. None of it was done by accident.

...

Bitcoin turns out to be something other than the fully-decentralized, unkillable network which so many imagined it to be.

People who have invested serious time and wealth in Bitcoin ought to feel angry. Not from any abstract sense of fair play, but from the simple fact that Ron and Shamir’s findings reveal a serious – and quite mathematically-certain – flaw in the sytem. The total number of bitcoins in actual circulation is much smaller than previously believed. If the early adopters were to cash out and place their hoards on the market, the exchange rates (as denominated in anything) would dive through the floor, never to recover. The hoarders, in effect, possess an off switch for Bitcoin.

Whether and under what circumstances they would press the switch, I cannot say. But the Bitcoin kill switch exists.

So, what, if anything, could be done about it? Unfortunately, the one solution which I can think of (other than the idiotic head-in-the-sand solution of not giving a damn, which the Bitcoin user community seems to favour) is a rather unlikely one, and would be quite distasteful – on a gut level – to most users. I am speaking, of course, of proscription. If the Bitcoin community – or a reasonable subset thereof – agreed that the kill switch ought to be neutralized by any means possible, it would be a fairly straightforward matter to declare the hoarders persona non grata and collectively agree to use modified Bitcoin clients (let’s call them Bitcoin-P) which act as if the particular coins currently held by A, C-F, H-K, and M-S were not bitcoins at all. And that such pseudo-coins will never be accepted as genuine in trade for any good or service. In effect, they would be retroactively shitcoined for all time.

This act would not require cooperation from every single Bitcoin user, or the imposition of any kind of governing authority. If even a minority of users were to move to Bitcoin-P, operating separate exchanges and the like, said users would be forever immune to the effects of a future market glut resulting from hoarders cashing out. Users of conventional Bitcoin would feel the effects in full, suffering the loss of most if not all of their purchasing power.

But I am under no illusions that Bitcoin-P will ever happen, given the libertarian bent of most Bitcoin users. They will mutter of dekulakization and the like. Fine, lose your hard-earned wealth to a pyramid scheme operator at some unspecified future date. But if you like the idea of decentralized cryptocurrencies without built-in kill switches, think hard about Bitcoin-P. Anyone who wants to can start using Bitcoin-P right now, without having to wait for others to be convinced of its merits. Just compile a list of the Satoshi gang’s bitcoins, and start pretending that they aren’t coins at all. It really is that simple." (http://newswax.com/2012/10/bitcoin-has-a-kill-switch-and-how-to-disconnect-it/)

Bitcoin Resources

More Information

  • Bitcoin for beginners


Critiques of Bitcoin

  1. The (A)Political Economy of Bitcoin. link
  2. http://www.pds.ewi.tudelft.nl/~victor/bitcoin.html

Video documentation

  1. TWIST Bitcoin episode, Full show: http://thisweekin.com/thisweekin-startups/bitcoin-discussion-with-gavin-andresen-and-amir-taaki-on-this-week-in-startups-140/
  2. Gavin explains the fundamentals of Bitcoin, http://www.youtube.com/watch?v=Ta73DofiT7o
  3. Who is Satoshi, the mysterious bitcoin founder? http://www.youtube.com/watch?v=RDRwgbWkxFw
  4. The million-dollar bitcoin question: Can the system be hacked? http://www.youtube.com/watch?v=G2837h-85O4
  5. Jason sets his software to generate bitcoins and Gavin explains why that's a bad idea, http://www.youtube.com/watch?v=jix4MG5V0-E
  6. WSJ, What's a bitcoin, http://live.wsj.com/video/what-a-bitcoin/D79FF38C-7816-435B-B3B0-F9B177BCA0A8.html

Other Digital Currencies

"While Bitcoin is relatively young, digital currencies have been around a long time. Digicash, released in 1994, is considered a pioneer of electronic cash using cryptography to maintain anonymity. The Ripple currency project relies on interpersonal relationships to allow communities to create their own money systems (which is similar to the Local Exchange Trading System). There is also the anonymous digital cash system eCache, which can only be accessed via the anonymous onion routing network Tor. There are also numerous other digital money projects that have been proposed over the years; Bitcoin is just the newest chapter in the ongoing effort to create wholly digital currency." (https://www.eff.org/deeplinks/2011/01/bitcoin-step-toward-censorship-resistant)

Of interest to p2p/commons community:

  1. Freicoin
  2. Occcu


  1. eCache: an anonymous bank operating over the Tor network.

Miscellaneous


  • From the original Metacurrency Project entry=> "= The meta-currency project is about defining an approach to creating a currency network: MetaCurrency is the name for the infrastructure and protocols necessary for an open source economy, and Free Currencies to flow in an interoperable and standardized way. This requires new technological capacities which need to function in a non-monopolizable manner.

URL = http://www.metacurrency.org/ [24]

Example: the Flowspace project


Description

"The common message of New Economy movement is the vastly expanded definition for the term “Value’ – far beyond that which can be articulated with money. Very few organizations hold this idea as explicit to their DNA as The Metacurrency Project.

metacurrency 300x45 New Economies at SIBOS; The Metacurrency ProjectFew can deny that the Sun delivers all value to our Earth. The Mass of our Universe provides the rest; Gravity, Motion, and time. In this context, money is a trivial device that simply articulates the relatively archaic things that humans can manage to conjure and horde from the vast natural resources that are delivered to us for free.

The idea that Energy can exist is many forms cannot be separated from the fact that Value can and must also exist in many forms. The challenge that we face as a civilization is to build an economy that articulates all Value completely and truthfully.

The Metacurrency Project has become a Worldwide conversation expanding the definition of value and building systems to articulate such value in communities, companies, and society." (http://www.ingenesist.com/general-info/new-economies-at-sibos-the-metacurrency-project.html)


Characteristics

1.

"We are building platforms and protocols necessary for an open source economy. This requires new technology capacities which need to function in a non-monopolizable manner.

  • Open Identity: Create, manage and own your identity in a trustworthy manner, independent of any central authority.
  • Open Rules: Know the rules of any currency you participate in and see when they change.
  • Open Transport: A protocol to enable a participant to transact with any other participant and a currency to interact with any other currency.
  • Open Data: The ability to share, decentralize and distribute data (like your account balance) and ensure its integrity and privacy… also, to allow you to be a reliable authority of your own data. (You can represent your own accounts, and I can validate your data.)"

(http://www.metacurrency.org/)


2.

"The Metacurrency sees 5 different layers (steps on the ladder), each building upon each other, like emergent systems of small components:

  • Stream-scapes: a communication composition
  • Decision making: this is about flows, decision making, event based
  • Currencies: language for expression of value/wealth
  • Holoptinets: a new way of visualization of (big) data. Beyond graphs: with the richness of dimensions in an aquarium, a fish tank. The idea is to have an interface that fully exploits the human sensory capacities
  • OS earth: hat the Metacurrency is after is nothing less than a self-describing computing."

(http://petervan.wordpress.com/2011/10/31/metacurrency-collabathon-a-wealth-system/)

Introduction

Discussion

Eric Harris-Braun:

"What we are claiming in the meta-currency project, is that the seemingly different social phenomena of monetary exchange, eBay reputation points, grades, coupons, airline-miles, etc.., are similarly expressions of a common pattern. They are all:

- formal information systems that allow communities to interact with flows

And we call those systems currencies, i.e. trade currencies, reputation currencies, loyalty currencies, performance metric currencies, etc. In each case the flows they interact with, or the ways they interact with flows may be in different realms of social manifestation, just as sound, light and water waves all have wave properties in different realms of physical manifestation. But what we have found, is that once we recognize this common pattern, we experience a paradigm shift: we change our focus from the information tokens, to the flows themselves. We begin to actually be able to see these flows, and see how the flows are what create wealth, and how the information tokens just help us interact with the flows.

Thus, the goal of the meta-currency project is to create a new expressive capacity, a "flow mechanics" that amplifies our ability to see and shape the flows that underlie healthy social systems. This is much like how "wave mechanics" is an expressive capacity that gave us amplifies our ability to build physical systems.

In an e-mail to me Guillaume created a metaphor to illustrate the difference between currency and reputation systems as part of describing why he's not comfortable using the word currency for both. He said: "currency is the water in the conduit, the reputation is the filter in the conduit, but the filter isn't fluid." This metaphor certainly works to an extent, but it doesn't reflect the paradigm shift that I've described above. I think the metaphor is more powerful if it is expanded thus:

The flow of water is necessary to life in a house. We need lots of integrated tools to shape how that water flows. We need pipes to direct where the flow goes, we need valves to keep the flow going in the right direction and in the correct amounts, we need filters to keep out crud from the flow, etc... All together, we call this plumbing. It's an integrated system.

Our goal is to create a platform that will allow communities to build the social plumbing that allows them to interact in all the necessary ways with the many types of flows that will make them radiant and healthy communities. I am totally convinced that such a platform must be flexible enough to carry information about more types of interactions than just trade, precisely because the paradigm shift that I have experienced is about the underlying unity of the patterns and processes involved.

So, my current sense is that claiming an expanded use of the word currency is a powerful strategic move to help awaken the understanding of this paradigm shift. Using old words in new ways is a time honored technique to get us to change our thinking, and that's exactly what's needed. Guillaume does make an excellent point in the post about the how the word currency when translated into other languages doesn't carry with it the flow connotations we have for it in English. That is a serious strategic issue, but I'm not sure how important it is that if we expand the meaning of currency in English that we also have to do so in all other languages. If it doesn't work in a particular language why not find a different word in that language that does? Strategics I think are always language and culture specific. But please note, that I'm not wedded to forcing the word currency into talking about all these types of flow shaping tools. It's just the best I've heard so far. The point is that what I want to focus on is flow shaping information systems for communities to build wealth at all levels, because they are all integrated. But who knows, maybe the best strategic move is to call it the meta-plumbing project!

I want to reiterate that I'm not talking about using this language to explain how to use Twollars, or time banks, or eBay ratings, or any particular currency that is created using the platform. That makes no more sense than talking about wave mechanics when trying to explain how to use a microphone. But to build and design a microphone and the devices it is attached to, we had to have developed and gained fluency in the language of wave mechanics.

Just one more thing: This sounds like an overwhelming task, and really long term. At one level it is, in that the fullness of what will come of it is huge and will only appear in the long term. But getting started is not that hard, or that long term. I believe that at the very least, the crucial components of the kind of expressive capacity or language of flow needed to build this kind of plumbing are actually achievable short term. That, actually, it is like wave mechanics which boils down to some very simple relationships. There are few underlying basic relationships out of which all such flow token systems (including money exchange ones) can be built. These relationships become the basis of the meta-currency technical platform we are building, at the heart of which is the meta-currency protocol." (http://newcurrencyfrontiers.blogspot.com/2009/03/why-currency-in-the-meta-currency.html)

Metacurrency Project as a P2P Currency System

The Metacurrency Project may be the single most encompassing vision of the future of networked currency in the world. As such, it offers a host of options for a P2P Network looking to implement a P2P Currency. The vision allows for personal currencies, as well as network currencies, and it is possible to customize the rules for the currencies to meet the needs of a P2P network above and beyond the minimums of allowing peers to create an destroy currency, and understanding that the use of the currency needs to be understood as utility designed to benefit the network as a whole as well as the individual peer. The Metaproject is large, as already mentioned. So large, in fact, that some folks who see the site might get a little dizzy, and it would be easy then to become distracted by all the possibilities. Currently the project does not offer any turn-key solutions, though this may change rapidly as more groups and individuals seek out currency solutions. The Metacurrency Project Model is far more sophisticated than the Cyclos implementation, but Metacurrency is only an idea, right now, and not an implementation.


How the Metacurrency Project is related to Flowspace

Eric Harris-Braun:

"The MetaCurrency project has included me, Art, Alan, Adam, Jay, Jean-François, Fernanda, Gerry, Ethan, Lewis, and a few others as contributors over time as a loose network. One of our deliverables in the realm of "Open Rules" (http://metacurrency.org/content/open-rules) has been SGFL/XGFL/XPFL as a language, which has been implemented in the context of the Flowplace, as an example use of that language. The development of the Flowplace has been largely the work of Jean-François, Fernanda & myself, with substantial contributions by Adam & Art, and some contributions from others. That particular work has been most talked about in the context of theTransitioner because theTransitioner uses it in it's seminars! But our aim has not been to see it as territorial in any way but for it to embody in action the p2p philosophy. Thus the Flowplace has been open-source and freely available from the start. Also the meta-currency demo that is linked to on the metacurrency website is simply another instance of the flowplace-codebase, with various configuration options tweaked to simplify the UI for the MetaCurrency context.

The flowplace is not an organization. It's a tool created by people who are part of the MetaCurrency project and theTransitioner of which there is some overlap. It was created by individuals in service of the MetaCurrency project, but also in service of the wider goals of theTransitioner, and in service of anyone else who wants to play. It uses protocols developed under the name of the MetaCurrency project. And MetaCurrency isn't a particular tool, it's a project to create a suit of protocols and sample implementations, that any group (like theTransitioner) can use."


Metacurrencies for funding open source ventures

John Robb:

"what this metacurrency project is about (at least my intent) is to find a way to rapidly build successful open source ventures (and over time: build an open source economy). These open source ventures:


1. generate incomes for the participants ($$, yen, Gold, Euros, food, etc.),

2. automate the allocation of rewards based on contribution, and

3. don't require a corporate hierarchy/bureaucracy to manage them (which ultimately dooms every corporation to stagnation/death/inefficiency).

The short term objective of the project is to build a social network enabled Internet venture, using metacurrencies, that proves the concept.

Let's examine this in detail:

First, why focus on social network enabled Internet ventures? They grow very quickly, require little capital (fixed costs are low), and the tasks required to operate them are quantifiable. They are also VERY lucrative. Further, the only true obstacle to building a successful venture of this type is a large network of people willing to advance the system.

Second, what is a metacurrency? At the top level, metacurrencies make it easy to build a large social network that can accomplish complex tasks. Let's deconstruct this.

A metacurrency isn't a traditional currency. It more of a currency that awards currencies. In other words, it's about finding automated ways to determine who makes a contribution, how much they should be rewarded for that contribution, and when they get that reward.

All ventures, at core, are a bundle of tasks that run continuously. These tasks, in aggregate, solve the problem the venture was formed to solve. These tasks can be decomposed into specific functions that can be accomplished by individuals or groups. The measure of whether these functions are successfully completed or not can be automated. Further, these functions can be attached to a reward. The combination of automated measurement of a venture function + reward is a metacurrency (the rules of which are transparent).

So, by extension, any venture = a bundle of metacurrencies. Some metacurrencies, like deal sourcing in Groupon's case, are venture specific. Others, like reputation and skill at a particular task, are applicable economy wide (part of the platform).


Metacurrencies can be configured in a variety of ways.

  • They can be binary = yes or no.
  • They can be continuous = like a meter that measures % of max contribution at any given time.
  • They can be complex, with feedback loops = ratings or completion metrics that modify the results of any single process (as in, the customer satisfaction level of this process is very high, so the value of the completed process is increased).


Where do we go with this if it works? Here are some ideas:

  • It would be possible to leverage existing metacurrencies to quickly create new ventures.
  • The addition of MMOG (massively multiplayer online game) mechanics to metacurrency construction (structured randomness to some portion of the rewards) would accelerate adoption.
  • Connected metacurrencies (across ventures) would make for very interesting dynamics. i.e. local food production venture connects with the reward allocation of a coupon venture.
  • Levels and status. Continual success with a metacurrency could yield advancement in skill level -- unlocking new metacurrencies with new reward structures.
  • Rapid group formation that can accomplish a variety of tasks (i.e. resilient communities)."

(http://globalguerrillas.typepad.com/globalguerrillas/2010/11/the-open-source-economy-and-metacurrencies.htm

More Information

  1. Draft description at http://docs.google.com/Doc?docid=dfgbzhbp_274dxtmfpg5&hl=en
  2. Some background at http://blog.p2pfoundation.net/open-money-as-a-necessary-next-step-for-democracy/2009/03/23
  3. Progress report via the blog of Eric-Harris Braun: http://eric.harris-braun.com/
  4. first design document for the MetaCurrency platform at http://metacurrency.org/sites/metacurrency.org/files/docs/Design_for_a_Meta_Currency_Platform.pdf
  5. http://metacurrency.org/blog/2010/10/22/composable-abstractions-for-wealth-building

Video:

Audio:


  • From the original OpenCoin entry => "OpenCoin has the appeal of being a distributed protocol-based system, like Bitcoin, and is 'currency agnostic' like Ripple. In these ways it is the best of breed, and has already found it's way to the Symbian mobile platform, enabling peer transactions on the go. OpenCoin meets the criteria for a P2P Currency, and could be used in a localized P2P Network alongside a reputation and matching system to facilitate redemption of currency."


  • From the original Open Money entry => "Open Money is a wide, deep collection of information about currency systems. The primary thrust of the project is the promotion of P2P currencies, and there are some tools available for testing on the site right now. The Open Money page on the P2P Foundation wiki lists attributes for Open Money like decentralization, mutual credit, interest free, and applicable to any resource."


  • From the original Ripple entry => "Ripple allows participants to take part in unlimited arbitrary currency networks and to create new currencies on their own. This facility, and the low infrastructure entry cost, make Ripple an excellent utility for P2P Networks that need flexibility, but are able to manage the complexity of providing trust, authentication, and reputation systems for the peers in the network. Ripple is easy to get into. In 20 minutes you can create a currency and send a payment. By itself, Ripple is only as good as the people you know, though, and in smaller networks this can be a boon, but in larger networks some additional information layer that allows users to match wants and needs is important, and if that can work alongside a reputation system, then there's an increased chance of adoption and widespread use."


  • From the original Threebles entry => "The Threebles concept is a sound base for a P2P Currency. While the model was constructed as a recession fighting anti-inflationary Business-To-Business currency, peers in a network can fill in the roles of the businesses as long as they are willing to engage in the process of offering credits and debits against their productive output."


All entries from the P2P Currency Systems category:


Also see:GNUrho