All you ever wanted to know about bitcoin but knew you shouldn’t ask an academic

Prologue to a blog post:

Gentle Troppodillians, as you know, we keep up with the times here at Troppo. Some people like to think just five minutes ahead. Here at Troppo we’re focused on the long-term – eons are seconds in TroppoTime – or seconds are eons depending on the way you look at it. So I know you want to get the latest on Bitcoin – and in that regard this post should not disappoint. It is indeed about bitcoin. But . . . there’s more. This post is also a meta on academic discourse – and how limited it is.

Academia is where one would hope to find a large proportion of the most insightful minds. But for some time I’ve been struck by how limited the academic genre is at engaging with the social and economic transformations that are going on around us. Thus Tim O’Reilly’s “What is Web 2.0” and Clay Shirky’s Here comes everybody, were far more insightful than anything in academia. Indeed I remember the articles on government and web 2.0 I first came across in around 2008 or so were particularly woeful.

Their methodology was often something like this:

• Interview some practitioners
• If it’s an article about government, interview some government practitioners
• Ask them some questions and then report their answers in wide-eyed form.

Voila, there’s your article – ready to be published by some worthy mid-level government administration or policy journal. And something you can present at seminars. The people you’ve interviewed may not have a the slightest clue what they’re talking about, but their ‘outputs’, give you ‘inputs’. They’re answers to your questions (they might not be the right questions either) will give you ‘data’. And you understand what that means. It means that in seminars you will be able to begin responses to questions with expressions like “According to our data”.

Your conclusions will contain such gems as “Make sure objectives are clearly specified”. “Be clear about who your stakeholders are, and what they are seeking from the project”. “Stay in close touch with stakeholders”. “Ensure the project is flexible and responsive to feedback”. “Evaluate the success of your project when it’s complete and (if you’re feeling frisky or a little flamboyant, ensure that evaluation methodologies are considered throughout the process).” All deliciously useless, masking a total lack of insight in generalities. One could offer this advice about any and everything from building a bridge to toilet training your kids. Further elaboration can be had here.

Anyway, here’s another example of the  . . . 

contrast between the culture of academia – which valorises pre-validated outputs – ie outputs according to the protocols that must be met for learned journal publication – and the process of actually trying to engage with things on their merits.

Until recently, I had an ‘economists’ view of bitcoin, which is to say it is oriented around all the standard questions. We assume we already know what money is, and then ask “will Bitcoin cut the mustard?” Or to put it another way, “is Bitcoin just a bubble”. And if it’s an academic paper in economics – you’d want to do some mathematics on it – otherwise it wouldn’t really be economic reasoning would it (unless you’re name is Adam, Ronald or Friedrich)? Anyway here’s an example in the genre – which looks like a good paper and is interesting as far as it goes.

Is Bitcoin a Real Currency?by David Yermack – #19747 (LE ME)

Abstract:

Motivated by Bitcoin’s rapid appreciation in recent weeks, I examine its historical trading behavior to see whether it behaves like a traditional sovereign currency. Bitcoin has exchange rate volatility an order of magnitude higher than the volatilities of widely used currencies, undermining Bitcoin’s usefulness as a unit of account or a store of value. Bitcoin’s daily exchange rates exhibit virtually zero correlation with bona fide currencies, making Bitcoin useless for risk management purposes and exceedingly difficult for its owners to hedge. Bitcoin also lacks access to a banking system with deposit insurance, and it is not used to denominate consumer credit or loan contracts. Bitcoin appears to behave more like a speculative investment than like a currency.

Now have a look at this blog post (HT Stuart Kearney), because if you’ve wondered about Bitcoin I guarantee that you’ll find it fascinating (or that you’re a dull dog – but then that’s what Samuel Johnson called Adam Smith, so maybe things are pretty OK for you).

Bitcoin will eventually be recognized as a platform for building new financial services. . . .

Bitcoin encapsulates four fundamental technologies:

• Digital Signatures – these can’t be forged and allow one party to securely verify a transaction with another.
• Peer-to-Peer networks, like BitTorrent or TCP/IP – difficult to take down and no central trust required.
• Proof-of-Work prevents users from spending the same money twice, without needing a central authority to distinguish valid from invalid transactions. Bitcoin creates an incentive for miners, who run powerful computers in the network, to validate transactions and to secure them from future tampering. The miners are paid by “discovering” new coins, and anyone with computational resources can anonymously and democratically become a miner.
• Distributed Ledger – Bitcoin puts a history of each and every transaction into every wallet. This “block chain” means that anyone can validate that a given transaction was performed.

One can use bitcoins as high-powered money with distinct advantages. Bitcoins, like cash, are irrevocable. Merchants don’t have to worry about shipping a good, only to have a customer void the credit card transaction and charge-back the sale. Bitcoins are easy to send – instead of filling forms with your address, credit card number, and verification information, you just send money to a destination address. . . . Bitcoins can be stored as a compact number, traded by mere voice, printed on paper, or sent electronically. . . . It has near-zero transaction costs – you can use it for micropayments, and it costs the same to send 0.1 bitcoins or 10,000 bitcoins. . . . 

Even more importantly, Bitcoin the protocol will enable financial services transactions that are not possible today or require expensive and powerful third-parties.

Bitcoin has a scripting language which enables more than a “send money from X to Y” transaction. A Bitcoin transaction can require M of N parties to approve a transaction. Imagine . . .  business accounts that require two of any three trusted signatures to approve an expenditure.

One can even design smart property – for example, a car’s electronic key so that when and only when a payment is made by the car buyer to the seller, the seller’s car key stops working and the buyer’s car key (or mobile phone) starts the car. Imagine your self-driving car negotiating traffic, paying fractional bitcoin to neighboring cars in exchange for priority.

Everyone has a copy of the Bitcoin block chain, so anyone can verify your transactions. You can write software that will crawl the block chain and generate automatic accounting histories for tax and verification purposes. . . . Anyone can verify that the document existed at a given time. If you sign the document with your private key and another party signs it with theirs, it becomes an undeniable mutually-signed contract. . . .

The Namecoin project is building a distributed Domain Name System that allocates and resolve Domain Names without needing ICANN or Verisign, by using the block chain to establish proof-of-ownership. Similarly, look for entrepreneurs to apply this authoritative proof-of-ownership to built P2P Stock and Bond Exchanges – at least one Bitcoin site, “Satoshi Dice,” has sold shares and issues dividends without using a stock exchange. The ownership and dividends are easily verifiable by anyone who wants to look inside the block chain. Predictious.com is combining the transaction scripting and the verifiability to create a prediction market in which you cannot be cheated and third-party arbiters can allocate the winnings.

Bitcoin’s “send-only” and irreversible nature makes it much less vulnerable to theft. Today, anyone with your Credit Card or E-Checque (ACH) information can pull money from your account. This creates chargebacks, expensive dispute resolution and merchants double-checking your identity. Bitcoin is send only. Anyone who has received bitcoins from you can’t request or pull more money from your account.

Most importantly, Bitcoin offers an open API to create secure, scriptable e-cash transactions. Just as the web democratized publishing and development, Bitcoin can democratize building new financial services. Contracts can be entered into, verified, and enforced completely electronically, using any third-party that you care to trust, or by the code itself. For free, within minutes, without possibility of forgery or revocation. Any competent programmer has an API to cash, payments, escrow, wills, notaries, lotteries, dividends, micropayments, subscriptions, crowdfunding, and more. While the traditional banks and credit card companies lock down access to their payments infrastructure to a handful of trusted parties, Bitcoin is open to all.

Silicon Valley knows a platform when it sees it, and is aflame with Bitcoin. Teams of brilliant young programmers, entranced by the opportunity, are working on Exchanges (Payward, Buttercoin, Varum), Futures Markets (ICBIT), Hardware Wallets (BitCoinCard, Trezor, etc), Payment Processors (bitpay.com), Banks, Escrow companies, Vaults, Mobile Wallets, Remittance Networks (bitinstant.com), Local Trading networks (localbitcoins.com), and more.

And on it goes. 

This is a lot to take in. But for me the takeout is the idea of the potential transformative significance of a phase transition as transactions costs fall close to zero