Before modelling cryptoeconomics maybe someone should apply some sound basic economics to the existing blockchain. Having a cryptocurrency where the founder owns 5% of all the currency that will ever exist and deflation is builtin and fixed seems like it fails some fairly basic things we know about standard economics before we need to start modelling the impacts of cryptoeconomics. Just had an interesting discussion about this on reddit:
If Bitcoin had been based on "proper" Keynesian economics then the price would probably still be under a cent and no one besides a few cypherpunks would care about it. To bootstrap a successful cryptocurrency you need a critical mass of speculators attracted by crackpot Austrian monetary policy. Unless this problem can be solved it will continue to cast a large shadow over the entire concept of cryptocurrency.
The technology can be developed and then simply it will have to be society en mass to decide when and if we switch over to using it. Perhaps even the global community requiring the adoption at the same time, however nations will likely only want to transition when they are in a better position value wise compared to other nations. I think it could happen.
Not yet - the internet is fairly recent technology though. Even our voting mechanisms and processes are rudimentary and can greatly improve with things like citizens being able to micro-vote on anything and everything - with policies in place to not flood people with too many decisions, while giving them enough confirmed time (e.g. proof of awareness) to make a decision to allocate a vote to an issue.
Voting is a really hard problem: beyond the massive and likely intractable security problems[1] you start getting into problems with knowledge. Say you push out a vote on a big trade deal or a proposed change to the healthcare system – what percentage of voters have the time and knowledge to even evaluate the options? What percentage of them have time to do so before the deadline?
1. Consider how you'd handle an employer coercing their employees to vote in a particular way. Absentee ballots are already a problem here but they're not used frequently enough to be decisive in most elections.
To your first problem point - the quick thought I have is to allow people to appoint a person they trust specifically for that. I don't know how it would unfold, however hopefully you'd be able to do research on someone - to see what their character is, how they behave, etc.
How would an employer learn how an employee votes? And fuck that shit - with UBI hopefully people early on in life will learn to not tolerate force/pressure and control like that.
See Dogecoin for an example of an inflationary cryptocurrency that never went anywhere. Although apparently it's surging again, so who knows. https://coinmarketcap.com/currencies/dogecoin/
Another thing cryptocurrency people get wrong: Referring to an eventual fixed supply (e.g. 21M BTC) as "deflationary" and an eventual unlimited supply as "inflationary".
In reality, deflation means demand is increasing faster than supply and inflation means supply is increasing faster than demand. A cryptocurrency with open-loop monetary policy may be both deflationary and inflationary at different times. Bitcoin and Dogecoin are no different in this respect; they both use open-loop policies that lead to massive volatility. Real-world currencies use closed-loop monetary policy to consistently target a particular level of inlation/deflation, but this is too "boring" for cryptocurrency.
Thank you for referencing economic policy as a feedback loop. Once you take that concept for granted, it's much easier to analyze what exactly is wrong with the Federal Reserve's policy (of which Bitcoin et al are a direct reaction to).
In a technological economy, we would expect to see prices for real goods continually dropping, as decreasing prices are the expected result of market optimization. However, the Federal Reserve closes the feedback loop for consumers but injecting money into the financial sector. Thus to make the CPI constantly rise, everything that is tied to the financial sector (housing, cars, healthcare) shoots through the roof. And this isn't even just a direct handout to consumers looking to spend, but a bigger debt ballchain that they're expected to pay interest on!
I wouldn't just blame the Fed. There are multiple feedback loops currently concentrating funds in the financial sector. The US monetary system is one of the fairly stable ones - it has a remarkably constant monetary expansion rate at around 2x/ decade (compare and contrast with Russia which is up there at 20x decade).
Correct for the monetary expansion rate, rather than CPI, and you can get a reasonable idea of how the prices of real goods are actually dropping over time, as are the majority of people's salaries, as money gets sucked into the financial sector primarily as a side effect of loan securitisation, and crony taxation policies.
>they both use open-loop policies that lead to massive volatility
Is that really the (only) reason that there is a massive volatility? Why isn't gold more volatile than it is then?
I'd say that another reason for massive volatility is the newness of everything and the consequent lack of confidence that something about the system (technical or otherwise) won't break down in time.
Wouldn't implementing that mean giving control to a specific party, as opposed to the level of inflation/deflation? How could the system determine it automatically?
Some economists have argued for replacing central banker judgment with a fixed function as a way to bring clarity to policy and make the rules fairer. Something like the Taylor rule perhaps:
It can't. For example if you target a certain level of money velocity people could just spam large fake transactions and cause inflation.
Bitcoin does enable some interesting monetary ideas like demurrage, or constant recycling of the money supply. It also runs "open loop". This is implemented in some super small cryptocoins like Freicoin.
I share your concerns, however we already have assets with deflationary values like gold. I'm wondering why hasn't every saver already put all his money into gold? Is it just because you can't use it to pay small amounts (like rent and food)? Or is it because other investments like bonds and stocks have better returns? If the latter is true then I wouldn't worry too much about bitcoin.
If a cryptocurrency is too deflationary then most people will only lend it at very high rates. This leads to hoarding rather than investing. Consequently such a cryptocurrency will not find much usage for transactions which in turn will decrease its value. I think this will naturally lead to the adoption of currencies with stable values, where the supply is adjusted for demand - ie. the system which is supposed to be in place today.
However central banks have recently gone out of their way to flood the markets with cheap money without inflation increasing notably while at the same time punishing lots of savers with ever lower interest rates. Cryptocurrencies like bitcoin might serve as an important protection against such extreme monetary policies and simply limit a central banks ability to implement monetary policies. This is why I view cryptocurrencies not as an asset which in the future will dominate all other currencies but as a defense for savers against overzealous central banks (or governments for that matter).
>This is why I view cryptocurrencies not as an asset which in the future will dominate all other currencies but as a defense for savers against overzealous central banks (or governments for that matter).
I agree with all you said pretty much but I don't think even that is a problem. No one should be holding currencies as savings. The real defense from central bank trickery is holding actual assets.
It's not strictly deflation in terms of a shrinking money supply which is the nasty case. In principle a bitcoin currency would provide a constant supply of "money" - which since it is something that has never really existed, does raise interesting questions about how the financial system would behave if it did.
However, that presupposes that nobody starts performing fractional reserve lending using bitcoin as a currency. If that is allowed, then we're back to the existing banking system and it's varying supplies of money in proportion to banking debt. Nothing has really changed except that we have slightly more efficient inter-bank exchange mechanisms...unless we get a proliferation of alt-currency lending models, in which case we're back in the US wildcat banking era (circa 1840's) - a period that was not exactly renowned for its financial stability.
Alternatively, in the hypothetical world (because it's really quite hard to stop) where there is no bank lending any more... then we have the problem of how is a modern economy going to work without banking debt? As you say, lots of interesting questions on the economics side.
it is literally impossible to do fractional reserve lending with Bitcoin. each coin has chain of custody back to the inception by mining reward (blockchain) so you can't send BTC you do not own. an altcoin could be built for fractional reserve lending where the coins are created by some form of consensus by a group of authorities. you could trade BTC and this theoretical altcoin but really we already have digital fiat currency for this purpose.
Fractional reserve lending of bitcoin would happen in the same manner as fractional reserve lending of gold coins.
E.g. a bank attracts deposits of bitcoin (i.e. the bank gets the bitcoin, the customer gets an IOU/note in legal records saying that the bank owes them a bitcoin), lends these bitcoins out, some of the lent bitcoin get deposited in another bank and re-lent, etc. In this manner the on-chain bitcoins travel around faster, and the total money supply (bitcoin + all bitcoin-denominated IOU's) can easily grow.
I would argue that it's not really backed by Bitcoin since it isn't on the block chain. Who is backing the lending by sending real Bitcoins? The bank would never do that they would get scammed constantly.
no one has actually convinced me this is bad. when you save instead of spend shouldn't your stored potential increase instead of decrease? this makes sense to me and would encourage frugality and a break from the consumerism race to the bottom. If you give someone your food it would make sense to get more food the farther you have to wait instead of less food the longer you wait. Of course the current corporate system does not want this they want you to spend all you have and be a debt slave. Think.
Very much agreeing with you in principle that punishing savers is a terrible idea.
That being said, if bitcoin:
* Isn't backed by government (participation is voluntary)
* Is inherently delationary & encourages hoarding
* Loses coins from the system due to accident (eg, people losing passwords)
Then it follows that at some point we expect, say, plumbers to do actual work for someone who's contribution was that they were there buying bitcoin in 2015. It might be troublesome to get the plumbers buy-in to bitcoin specifically vs a new competitor where all participants are pulling their weight in the real world.
Basically, deflation + a long memory makes a monetary system unattractive for people to buy into.
EDIT: I'll point out that _so far_ bitcoin has been an inflationary currency from the point of view of number-of-coins created. That will change.
>when you save instead of spend shouldn't your stored potential increase instead of decrease?
It should and it does if you actually invest your savings in productive assets (stocks, bonds, land, etc). These days it's extremely convenient to do this in almost all modern societies.
>Of course the current corporate system does not want this they want you to spend all you have and be a debt slave. Think.
Misguided hyperbole. If you want to break that cycle you need to stop spending money and instead save by buying assets. An inflationary currency encourages that by making it costly to just sit on your money once you've decided not to spend it. A deflationary currency encourages hoarding currency, not investing it and thus making the whole economy poorer. If you're spending all your money as soon as you get it this is actually irrelevant and you don't hold it long enough for inflation to matter.
Bitcoin is worse for your objective than current stable currencies like the euro and the dollar. Those have a predictable and low level of inflation that allow you to manage your day to day finances with a high level of predictability so you can then take any amount left and invest it in actual productive assets to over time build a return. Teaching people to use the standard financial tools already available would seem a much better contribution to society than trying to build a whole new financial system that doesn't seem to have any actual huge advantages.
If your entire economy has been based on consumer spending for decades and you decide to incentivize people to save instead of spend, you basically just destroyed your own economy. Maybe it's theoretically possible to restructure the economy first and then switch to hard money, but you haven't proposed how to do that.
If you save money by investing it, it does increase. Only if you save money by hoarding it does it just sit there.
Deflation is not a bad thing in all economic theories. An iPhone and many current food items would have cost millions a century ago, yet here we are, richer than ever.
Deflation of individual products from innovation is not the same thing as general deflation in the economy. Economists general consider a small continuous inflation as the best outcome but I'm not an expert.
"
Although inflation causes generally rising prices, it should not be understood as detrimental to all parties involved. It is highly lucrative for the government and the banking industry. When new money is printed (today, created electronically), it greatly benefits the first recipient because assimilating the new money into the economic organism takes time. Those first recipients (government and banks) can purchase goods and services at the old prices. As the money slowly works its way through the economy prices are bid up. Eventually when it reaches the salaried workers, prices have mostly adjusted. This process is a hidden tax on salaried workers, or anyone who receives the money late in the cycle. It is especially detrimental to those on fixed incomes, such as pensioners. Not only does the government understate the effects of inflation in its official numbers, any price decrease that would have occurred as a result of productivity gains are denied to the consumer as well. Inflation is nothing but wealth transfer. The government prints money and buys stuff with it. Prices rise and the salaried worker can buy less stuff. All the stuff the salaried worker could have otherwise bought has accrued to the government. Simple. Politically, it is far more palatable than raising taxes because the process is badly understood and well obfuscated. "
Again, not an expert but austrian economics is far from mainstream.
>The government prints money and buys stuff with it.
And this seems just wrong. In most economies the central bank and the government are sepparate and the government can't just create money to spend. But maybe that's what effectively happens in the end anyway?
Either way the economical argument is usually that you want a small steady inflation and that deflation is much worse. That doesn't refute it.
No, it is worse in practice. A central bank prints money, gives it to blessed private banks, who then loan it to the government so they can get tax dollars in interest for nothing. If the government had printed the money directly they would have spent less on it, but then fewer billionaires would be richer on the taxpayer dollar so that obviously can't happen.
The fact that Austrian Economics is not mainstream doesn't mean it's wrong.
Normally you have two types of deflation, by increasing productivity that reduces prices and by lack of demand where prices are reduced to incentivise buying one is good the other is bad.
But deflation of a cryptocurrency is not general deflation in the economy, because there are lots of cryptocurrencies and we can make more whenever we want. It's not like the gold standard, it's like Hayek's vision of privately-issued competing currencies.
I'm struggling with this because some people model bitcoin as a currency whose value is based on its transactions and some people value it as a store of value, a sort of cryptogold. You're arguing the first option but most other are arguing the second. For the second you can't just invent new forms of gold every day so what you suggest wouldn't work. And even for the first having to constantly invent new currencies to get around the fact that each is deflationary seems cumbersome at best. I still haven't found a use case that cryptocurrency makes possible that our current financial system can't already do.
I'm not so much arguing for it as describing what actually exists now. There are hundreds of separate blockchain cryptocurrencies, plus a bunch of tokens built on top of Ethereum.
I'm not saying it's not economics, just that bitcoin (and the other cryptocurrencies in existence) seem to have quite a few fatal flaws going forward from just our understanding of normal economics, let alone a new branch someone wants to start.
I have no issue with the people that invented a specific technology getting rewarded for that. But that's not what's happening here. You're giving a few early adopters most of what you want to then use to price all the assets in the world.
I'm not sure anybody is saying that bitcoin will be used to price all assets in the world. USD currently isn't, for example. It's just the dominant currency.
A reasonable estimate for all the dollars in the world is 10 trillion. Say that bitcoin being a full sucess is it being valued at a total of 5 billion. Now consider that Satoshi has about 5% of all bitcoins that will ever exist. That puts him as 3x richer than the current richest man in the world. I don't see anything in bitcoin that justifies that kind of payout and that's for the inventor of the thing.
We don't have a justice system. We have a legal system. And this seems to be allowed under our legal system, so I'm not sure the moral argument is valid.
Why do you feel it's immoral for Satoshi to own 5%? We don't even know if he's alive or still has access to the coins, but let's say for the sake of argument that he does.
To go one step further, who says inventing a better currency shouldn't be worth 3x as much as creating e.g. walmart or microsoft? Sounds exactly like the sort of civilisational step forward that should be rewarded handily. Remember, we're talking about a world in which bitcoin has absorbed 50% of the world's assets, presumably because it's better in some real way than other currencies.
>Remember, we're talking about a world in which bitcoin has absorbed 50% of the world's assets
Bitcoin proponents keep misunderstanding this. Most of the world's assets are not currencies, they are stocks, bonds, land, etc that we do use currencies to price but we are not holding currencies when we own them. The fact that central banks can inflate currencies doesn't change the value of assets just their pricing under those currencies. So creating a new way to price assets with something that has a guaranteed fixed supply is not a big innovation. If you want that just use gold. It has a much longer history, much less volatility, much less chance of being replaced by the next fad, and isn't mainly owned by a few recent early adopters.
>presumably because it's better in some real way than other currencies.
That's the point someone still needs to make. Modern financial systems are pretty efficient and featureful. Bitcoin is for people that believe in a narrow scenario where normal institutions have failed and yet the internet and the mining infrastructure is still working. To me that seems incredibly unlikely especially given how mining economics and evolution have made it highly centralized in a few players in China.
>I'm not sure anybody is saying that bitcoin will be used to price all assets in the world. USD currently isn't, for example. It's just the dominant currency.
Most things are actually priced in dollars to some extent, perhaps with some conversions. Maybe euros in some other cases.
>Why do you feel it's immoral for Satoshi to own 5%? We don't even know if he's alive or still has access to the coins, but let's say for the sake of argument that he does.
I'm not making a morality argument. Just pointing out that it will be a hard pill to swallow that for the (in my view small) advantages of cryptocurrencies we as a society complete the most massive wealth transfer to a single individual ever attempted. For me it's an argument as to why it's implausible crypto currencies will take hold as they exist today. They require a huge wealth transfer to a few early adopters for very little gain. If the advantages were greater it seems more likely to me that a new chain would be bootstrapped but I'm not even convinced it's worthwhile enough that it will actually take hold on a massive scale.
> bitcoin (and the other cryptocurrencies in existence) seem to have quite a few fatal flaws going forward from just our understanding of normal economics
How long would Bitcoin have to survive these flaws before you start to question your understanding of economics?
It's not enough to survive it has to become a relevant currency and/or store of value worldwide. At 40B$ in market cap bitcoin is still a curiosity in financial terms. Worldwide dollar supply and US GDP are in the 15-20 T$ range. If Bitcoin reaches half that in value and in transactions without fixing any flaws I'll be impressed.
This isn't consistent with your original claim ("fatal flaw" implies that the perception of any existing value will be destroyed), but OK. I'll check back in ~25 years.
The current market cap is not appropriate for the current usage of bitcoin - it's like a startup valuation that "prices in" the assumption that the usage will massively increase.
Thus any limitations that would prevent a large growth in adoption would also destroy most of the existing/stored value, since whenever "the market" would believe that the usage growth is going to stop, the price and the market capitalization would drastically decrease.
> whenever "the market" would believe that the usage growth is going to stop
If you're talking about transactions-per-second, how could the market not already know that this is the case? Computers have finite resources, and a decentralized immutable proof-of-work ledger would be really inefficient to run on ten billion devices forever.
But if you mean growth in total perceived value, Bitcoin's use as a trust-less standard for floating other currencies could continue indefinitely. I'm not able to talk seriously about the proof-of-work/proof-of-stake argument, or the inflation/deflation argument, but there's no known technical reason that each Bitcoin can't be worth a trillion dollars in the far future. In addition to the economic and political theory, you're basically betting that asymmetric crypto, SHA, and the Bitcoin source are all mathematically sound, and probably that physics imposes serious limits on computing power, if you want to make that (super) long play.
There's nothing rethorical about saying that something that currently works at a small scale can reveal fatal flaws when it tries to reach a large scale.
To be honest I'm a bit baffled. Are you claiming that once these flaws are revealed, the perceived value in Bitcoin will be destroyed? If no, what purpose does the word "fatal" serve? If yes, couldn't you answer my original question?
As an aside, the phrase "rhetorical question" has a special meaning, but the adjective "rhetorical" just means anything relating to discussion. I was trying to say that you veered off into a meta-argument about the words we were using, which unfortunately I'm now continuing.
It seems like you're nitpicking terminology but in case my original intent wasn't clear I'll try again. I'm saying that bitcoin has fatal flaws to work as a global currency at scale (I've estimated what that means) that aren't fatal flaws to work as a niche currency (it's present scale). So the answer to your original question is that surviving at it's present scale forever would not be surprising. Scaling and then revealing its flaws would indeed be fatal as there's no going back to being a niche once it scales and fails to work properly.
>"a cryptocurrency where the founder owns 5% of all the currency that will ever exist and deflation is builtin and fixed seems like it fails some fairly basic things we know about standard economics"
This is the flaw I was pointing at. Others have said that while there's some research there doesn't seem to be a solution for it. A cryptocurrency that scales it's size in rough proportion to its trading and thus keeps prices in check with maybe slight inflation would be interesting. It's almost surely difficult to accomplish given the restrictions in what you can do in a distributed consensus type of setup.
I'm not convinced it even matters though. Of all the important things we need solutions for in the world cryptocurrency doesn't seem to help any than I can see.
> A cryptocurrency that scales it's size in rough proportion to its trading and thus keeps prices in check with maybe slight inflation would be interesting.
These already exist, with all kinds of incentive schemes and target inflation rates. If you're saying that deflationary Bitcoins can't possibly "win" in the long term, but something else could, I guess it's plausible and I don't know a lot about that.
I do know that Bitcoin was started partly in protest of inflationary Fed policy.
Think about it differently. The network is a new kind of nation state. It's a way to create sparcity in an environment (digital) where none really doesen't exist.
It doesn't defy standard economics all it's done is move the trust issue to the entire network rather than the issuer (ex. nation states)
I think that is going to be the 2nd generation of cryptocurrencies.
Currently we are at the 0th generation which is just a proof of concept.
The 1st generation will be cryptocurrencies which have figured out the consensus problem entirely.
The 2nd generation will be cryptocurrencies with more advanced built in economics that actually give incentive to users to use them as a currency and put an end to rampant speculation and hoarding.
People have been trying for 6 years to go past proof of work. It's not really ideal. There are also problems with mining capacity concentration. There's still work to be done in that area. Looking forward to see how proof of stake plays out.
Bitcoin and Ethereum's Ether, nor are any of their holders, incentivized to evolve to a generation where they lose the value they've gained or bought into with real USD. Not sure how that plays out to the results you suggest.
This is a great question, but I kind of agree (though my thoughts need much more refinement yet) with the original comment poster here.
I've been following the subject for a while, and many people in those communities tend to expect new tech to supplant the existing ones in time. Maybe not now, but in a decade or few. Besides, even the holders are a little more nimble that it appears. Some are keen, some just pump because they envision it a quick buck.
Adding to that, it's quite possible for these named techs to evolve through community suggestions, code, and consensus (even if it does get messy surrounding each fork).
Company stocks are not designed to be used as the basis for trade for whole economies. Fractional ownership of an operating business if very different from fractional ownership of a whole currency.
What value? The market cap of bitcoin relies on an assumption that it will be used on a large scale as a transactional currency - its usefulness for transactions and the expectation that this usefulness will increase in the long run is the only thing that makes bitcoin valuable.
Without this assumption there's no inherent value; and thus it's also a bad store of value since the current market cap can't be justified if it doesn't stay/become a popular transactional currency.
This might have been true five years ago. These days most of its perceived value is due to the fact that people around the world trust it to hold value better than other investments available to them.
It sounds like nonsense because it is, but so is all of economics in a way.
people in venezuela have been experiencing double and triple digit inflation. two years ago it was 100/USD now it is 1000/USD. you could argue that gold is a good store of value for them but there are problems with storage of it and hiding it from corrupt state officials if you wanted to use it for daily purchases. contrast this with Bitcoin that literally anyone with a cellphone can own and transact with anyone else with a phone or computer. you can hide and send any amount of Bitcoin anywhere you can write down a string of digits. as we solve the scaling problems for daily transaction type purchases it will really take off big time.
>Bitcoin that literally anyone with a cellphone can own and transact with anyone else with a phone or computer.
I doubt it's actually possible to run a full node on a phone. If you're relying on an exchange then you're not really using any special bitcoin feature. Normal internet banking to a geography that isn't screwed up would work just fine.
It seems to me that bitcoin proponents will change between saying that it's useful for transactions and useful for storing value depending on what's convenient for the argument. If the point of Bitcoin is to be the cyberpunk version of gold where the founder gets 5% of the total global value it seems a niche technology at best. And if it's that, let's stop calling it a cryptocurrency and just call it cryptogold.
Has anyone found how to solve the double-spend problem WITHOUT global consensus?
The original Ripple idea used trustlines. The nice thing about those is that you don't have the double-spend problem. Each entity issues its own currency, so to spea, making it credit-money rather than value-money. I really love the absence of a global ledger recording every transaction ever made - both from a privacy point of view and this one:
But the problem with trustlines is that it's hard for anyone to pay anyone, and the bandwidth of trustlines can be pretty small. Plus, you do have to have the permission of all the intermediaries to make a payment.
I would love to have each community issue its own currency without being able to control who pays whom, and without the double spend problem, and without a global ledger of all communities in the world. What are the latest solutioms to this?
What I think a lot of people will initially miss in the critique of money provided by blockchains (read: Bitcoin) is the topology of the network as helpful in modeling cryptoeconomics (read: economics).
Any meaningful definition of a blockchain should prove useful in modeling the systems of money preceded by it. I honestly don't know why people think bitcoins and dollars need separate economics.
Terrible article. So many suckers in this mania. 99% of people writing about, trading with, and investing in cryptocurrencies don't know how blockchain or bitcoin even works. It's worse than 1999. The hype and ignorance is astounding.
While I tend to agree with this comment, look at the world 17 years after the .com bubble burst. Amazon (founded in 1994) and Google (founded in 1998) absolutely dominate their categories, and the Internet has drastically changed virtually every sector of the economy that it touches.
Just like the .com mania, I think there will be a huge fallout when the bubble bursts. But I also think there will be a couple dominant winners to rise from that rubble, and blockchains and cryptocurrencies will have a strong impact in future payment systems.
So what are the most optimistic projections of where blockchain and cryptocurrency could take us? How about the most pessimistic? Presumably, the likely outcome is somewhere in the middle. What would that look like, say, 20 years from now?
It really stresses me out how folks have equated PoW algorithms in a chain with a general Byzantine Fault solution.
They haven't, and Bitcoin essentially lives and dies by the proposition that it is more valuable to the majority of miners alive than dead. The instant this is not true, there is a potential for a majority of miners to defraud the system and extract value until the value of the currency drops to 0.
And of course, the damage to the system just 2-3 colluding miners could do if they wanted is pretty significant, especially if the goal was DoS instead of theft.
https://www.reddit.com/r/programming/comments/6okg5v/a_hacke...