A Few Thoughts on Bitcoin

I have been aware of Bitcoin’s existence for a while, and while I was excited about it a few years ago, it had somewhat dropped off my radar. Perhaps because over the past few months, Bitcoin has seen a big increase in value, I started to revisit it and analyze it as a technology. My experience has been nothing short of breathtaking.

A few years ago, Bitcoin was pretty cool. I even wrote a paper about it, discussing the huge potential of the technology and decentralized, autonomous transactions could totally upend the banking industry. But back when I first got into Bitcoin, I was also interested in Austrian Economics, which I’m largely over now. Their focus on control of the money supply and dire warnings about the Federal Reserve weren’t really borne out by the rather mundane economic growth of the last few years.

Nonetheless, the Bitcoin community has been working on without me, and it has paid off: you can now use Bitcoin to purchase from all sorts of retailers, including Dell, Overstock.com, Newegg, and more. You can also buy all sorts of internet specific services, which to me seems like the clearest use case. These include Steam credit, VPNs, cloud hosting, and even Reddit gold.

The price has jumped up to over $1000 at the end of April 2017 (that’s over $18 billion in total market value of all Bitcoins), and it was briefly even higher a month ago on speculation the SEC would allow for a Bitcoin ETF. The ETF was rejected, but the potential of the currency remains. And technologically, Bitcoin is far more impressive than it was, most notably with a concept called the Lightning Network.

This technology would allow for instantaneous Bitcoin transactions (without having to accept risky zero confirmation transactions). These transactions would have the full security of the Bitcoin network, and would also likely allow massive scaling of the Bitcoin payment network. Drivechain is another project with great potential to scale Bitcoin and allow for applications to be built on top of the Bitcoin blockchain. It would create a two-way peg, enforced by miners, that allowed tokens to be converted from Bitcoin to other sidechains and back again. This would allow experimentation of tons of new applications without risk to the original Bitcoin blockchain.

Hivemind is particularly exciting as a decentralized prediction market that is not subject to a central group creating markets; anyone can create and market and rely on a consensus algorithm to declare outcomes. If attached to the Bitcoin blockchain, it also wouldn’t suffer from cannibalization that Ethereum blockchains like Augur can suffer from.

Mimblewimble is another interesting sidechain idea. It combines concepts of confidential transactions with (I think) homomorphic encryption to allow for completely unknowable transaction amounts and untraceable transaction histories. It would also do this while keeping the required data to run the blockchain fairly low (the Bitcoin blockchain grows over time). It would have to be implemented as a sidechain, but any transactions that occur there would be completely untraceable.

And there are even more cool projects: Namecoin, JoinMarket, the Elements Project, and of course other cryptocurrencies like Ethereum, Monero, and Zcash. This really makes the future of Bitcoin and cryptocurrencies seem pretty bright.

However, we’ve skipped a big point, which is that most of these cool innovations for Bitcoin can’t be done with Bitcoin’s present architecture. Moreover, the current number of Bitcoin transactions per block has just about maxed out at ~1800. This has resulted in something called the Scaling Debate, which centers about the best way to scale the Bitcoin blockchain. Upgrades to the blockchain must be done through consensus where miners mine new types of blocks, institutions running nodes approve of those new blocks, and users continue to create transactions that are included in new blocks (or else find another cryptocurrency). Before any of that can happen, developers have to write the code that miners, validation nodes, and users will run.

Right now, there is a big political fight that could very briefly be described as between users who support the most common implementation of the Bitcoin wallet and node (known as Bitcoin Core) and those who generally oppose that implementation and the loose group of developers behind it. I certainly am not here to take sides, and in fact it would probably have some long term benefits if both groups could go their separate ways and have the market decide which blockchain consensus rules are better. However, there is not much incentive to do that, as there are network effects in Bitcoin and any chain split would reduce the value of the entire ecosystem. The network effects would likely mean any two-chain system would quickly collapse to one chain or the other. No one wants to be on the losing side, yet no side can convince the other, and so there has been political infighting and digging in, resulting in the current stalemate.

There will eventually be a conclusion to this stalemate; there is too much money on the line to avoid it. Either the sides will figure out a compromise, the users or the miners will trigger a fork of the chain in some way and force the issue, or eventually a couple years down the road another cryptocurrency will overtake Bitcoin as the most prominent store of value and widely used blockchain. A compromise would obviously be the least costly, a chain split would be more expensive, but could possibly solve the disagreement more completely than a compromise, while another cryptocurrency winning would be by far the most expensive and damaging outcome. All development and code security that went into Bitcoin would have to be redone on any new crytocurrency. Nonetheless, Litecoin just this week seems to have approved of Segregated Witness, the code piece that is currently causing the Bitcoin stalemate. If Bitcoin’s stalemate continues for years, Litecoin is going to start looking pretty great.

Obviously it’s disappointing that even a system built on trustless transactions can’t avoid the pettiness of human politics, but it’s a good case study demonstrating just how pervasive and pernicious human political fights are. Ultimately, because cryptocurrencies are built in a competitive market, politics cannot derail this technology forever. And when the technology does win out, the impact on the word will be revolutionary. I just hope it’s sooner rather than later.


Bitcoin featured picture is a public domain image.

Leave a comment on the official reddit thread.

Links 2016-03-24

Scott Alexander has a new post on happiness and economic growth. There must be a name for this paradox, because it’s blindingly obvious if you think about it: Right now, compare your life to the life of 100 years ago, given your current standing in society. Your life right now is way better, you have time to spend on internet learning and debating about ideas in ways you couldn’t dream of 100 years ago. You have better food choices, longer life expectancy, better pop culture, more stimulating interests, far easier communication with distant relatives, and so on. And yet, the exact same thing will be said about our lives compared to the lives of those who live 100 years in the future. Sure, those lives will be better, but I don’t know how much that bothers us today unless we really think about it. Most people are pretty excited to live today at the frontier of human knowledge, and we don’t see it as a loss that we don’t have cheap self-driving cars and instant delivery groceries for low cost.

But yet, when you do think about it, we hate sitting in traffic or having to go to the store to pick something up, and we wish we had technologies that could get rid of those inconveniences. Yet, I bet people in the future will just have other errands they hate doing just like we hate sitting in traffic. But they will be inconveniences for future people who are tolerating them so that they can do even more awesome things that we can’t imagine, just like people 100 years didn’t sit in traffic because they didn’t own cars at all.

It’s very confusing. On a personal scale, obviously it would be ridiculous to complain about your current standing, because future technologies haven’t been invented yet. So of course everyone is pretty satisfied with what technology level they live in. Yet, our lives are obviously better for having these technologies. How do we reconcile this?

In the last month, I’ve often thought that the closest president we’ve had to Donald Trump is Andrew Jackson; Trump is a loud-mouthed, populist who falls outside of the mainstream party system, yet has significant support from non-elites and were despised by the elites themselves.  This is also the perfect description for Andrew Jackson, who was so successful in this movement, he founded the Democratic Party. David Friedman comes to the same conclusion via a different route.

That last link caused me to run into a real problem with Donald Trump and Andrew Jackson grammatically. One subject is dead and one is alive, so what is the proper verb tense to use? Stack Exchange suggested this, which is honestly kind of lame.

Scott Sumner discusses socialism and France. He makes a short argument that France sounds like a pretty good model country for modern socialism: high amount of skilled civil servants, broad support for socialist policies, a willing government to implement them, and a modern, developed economy.  Yet, Bernie Sanders supporters often reach for the Nordic countries rather than France as the big-welfare state (“socialist”) ideal.  Why is French socialist policy somewhat of a political flop, while Nordic countries are idealized? And would a Bernie-America look like Denmark or maybe better, or perhaps more like France, or even worse? Given the size and diversity of America’s population and economy, France seems closer than Denmark, although both are closer to each other than the US. The only socialistic countries of comparable size seem to be the China and the Soviet Union which have forms of socialism even Bernie Sanders would abhor. Mostly.

Do you have no friends? Never fear, it’s because really, really smart people are better off with few friends.

Bryan Caplan’s model of the Right and Left, and how it’s oddly doing well this election cycle.

Overcoming Bias discusses the cost and benefits of voting. How much would you pay to have your vote count more? His conclusion is that we don’t vote to change the outcome of the election.

Surprise! NSA data will soon be used for routine policing! Coverage from the New York Times, and the Massachusetts ACLU as well.

Bryan Caplan also has a good discussion of libertarian critiques of welfare.  Matt Zwolinski has a good counter post. I like the idea of bleeding heart libertarianism, or market liberalism or whatever, so I think Caplan’s critiques are pointed at exactly what I believe, which is excellent! You always want to have your beliefs critiqued by smart people. I think Caplan is right on many of his points, but I feel like my views are more politically practical. Voters obviously want some form of welfare for the poor, and at least that part could be done more efficiently with my ideas.

This is a good write up on the decentralized crypto-currency-ish entity Ethereum; Reason also did a recent video on it.   Very soon I’ll be able to explain to people what it actually does. Right after I’ve figured out how to install it.  If you want to learn about it without me, here is Ethereum’s website.

Fact checking Trump on trade. Why do we talk about trade deficits? I have no idea why they matter.  Is it a problem if I buy a phone from Apple and I live in New York instead of California? Is there now a trade deficit between New York and California since I sent money out of my local community? No, nobody cares. And for the US, it’s even less relevant, since those dollars that US citizens spent have to come back to the US to be redeemed for goods and services. It would be like if I paid for my iPhone in New York dollars that had to come back to New York. I’m a free trade proponent, but I’m not deaf to some concerns people might have about trade, but this is one of the worst anti-free trade arguments you could make.