Towards a True Distributed Currency that Ain’t Bitcoin
Maybe you’ve heard of BitCoin. Maybe you’ve haven’t. It’s gotten a lot of press since its inception in early 2009. Wired wrote a great article on it in 2011, called The Rise and Fall of BitCoin. With the Euro crashing, China using public infrastructure projects to fake growth and a run on the banks in Greece, it’s time to think about a true distributed currency again. As far as I can tell there is no George Bailey to stop the good people of Greece from taking all their money out. While BitCoin pioneered the idea of a P2P currency, it’s probably safe to say that any true P2P currency that can stand shoulder to shoulder with the Dollar and the British Pound will look a bit different.
To start with, BitCoin solved one key problem with distributed digital currency. With no central authority, how do I validate that someone else’s money is real? How can I prevent double-spending?
Before Bitcoin’s invention, electronic commerce systems couldn’t operate securely without relying on a central authority to prevent double-spending. Double-spending is a failure of digital cash schemes, when it is possible to spend a single digital token twice. Unlike physical token money such as coins, electronic files can be duplicated, and hence the act of spending a digital coin does not remove its data from the ownership of the original holder, some other means is needed to prevent double-spending.
To prevent double-spending, the network implements what BitCoin’s secretive founder describes as a peer-to-peer distributed timestamp server, which assigns sequential identifiers to each transaction, which are then hardened against modification using the idea of chained proofs of work (shown in the Bitcoin client as confirmations). These confirmations are added to a publicly distributed block-chain, which everyone can see and share, so that the same coin, once transferred to someone else, can not be transferred by the original user again for another transaction.
This is a brilliant idea, that solves a fundamental problem. In fact it may be revolutionary and historic. But many issues remain with BitCoin that another P2P money system will have to address.
For example, the security of the system has never been truly challenged or questioned but overtime researchers may find exploits in the system. Currently, there is no simple way for users to back up their money. If their money gets wiped out by a computer virus, it’s gone. For good. No way to get it back without a backup. Sure your dollars could burn up in a fire, but this is fucking 2012 and no longer acceptable. You expect that your money goes with you even if your house burns down because it is stored in a secure bank that guarantees the deposit. There also needs to be something to bootstrap BitCoins over the tech geek threshold. We need the Skype of BitCoin, something that a grandma can use without having to understand anything about BitCoin at all. We also need much better security from the end user standpoint. BitCoins are subject to hack attacks and viruses that have already cropped up to steal people’s digital wallets. Much better security methods will need to be developed.
The largest problem with BitCoin is its built in limitations. It is designed to only allow the creation of 21 million coins over time. As such it will be subject to severe deflation or even inflation in the right circumstances. The algo was created around the statistics of gold mining. It is designed to die out at a certain point. Of course, we’ve been mining gold since recorded history starts and we are still digging the stuff out of the ground, so my guess is that stats models might not have the entire picture. Overtime, I suspect that a true digital currency will be designed to increase the monetary supply in a step wheel fashion ad infinitum. Realistically, how could it do otherwise? An economy must and should grow over time. Arbitrarily limiting it to something that we dug out of the ground is the reason we got off gold in the first place. Gold could not sustain a solar system wide economy (most likely, barring asteroid mining advances, which are likely).
In the end a post scarcity economy is what we want to create, one where things don’t have value simply because they are rare. BitCoin is very much an experiment of scarcity thinking and at that it is highly successful. It’s a libertarian ideal. Absolutely limit the money supply. Don’t allow it to be arbitrarily increased in times of crisis. It plays out as a smooth mathematical model no matter what is happening in the world around it. But money, like everything else is subject to psychology and its value is not fixed, just because one aspect of it is. It rises and falls with the world around it. Just look at BitCoin’s wild fluctuations over time if you don’t believe that (set the chart to all data).
A much more distinct and real threat to the Bitcoin use is the development of other, superior virtual currencies, which could supplant Bitcoin and render it obsolete and valueless.
A great deal of careful thought and ingenuity has gone into the development of Bitcoin, but it is the first of its breed, a prototype, and vulnerable to more highly-evolved competitors. At present, any threatening rivals have yet to rear its head; Bitcoin remains the first and foremost private virtual currency, but we can offer no guarantees that it will retain that position. It would certainly be in keeping with internet history for similar system built from the same principles to supersede and cast Bitcoin into obsolescence, after time had revealed its major shortcomings. Friendster and Myspace suffered similar fates at the hand of Facebook, Napster was ousted by Limeware, Bearshare and torrent applications, and Skype has all but crushed the last few disciples of the Microsoft Messenger army.
This is actually a good thing. A superior system should come along and kill off BitCoins. As such I think of BitCoin as a way to work out the problems of a P2P currency. Only time and patience will get us to something that Grandma can use.
FYI, faithful readers may have noticed I’ve neglected the blog a bit over the last few weeks. With work hectic, I’ve spent all my free writing time working on my new novel, so rest assured my wrting time is going to good use. But sometimes you just wake up with a story on your mind and you just have to write it. As the late, great Ray Bradbury said “I don’t need an alarm clock. My ideas wake me.” #RIPBradbury.