Oleg Andreev
Month
In this post I address issues of competing government currencies, competing private currencies, gold, silver, bitcoin and alternative “crypto-currencies”.
We all know that variety and competion is a good thing. We all want slightly different things, value the same things differently or make different trade-offs. That’s why we have a wide variety of products, prices, quality, colors and materials on the market. Interestingly, money is different. We all want one single universal money. It may not be obvious to many people, so let me explain.
How money is different from everything else? On one hand, money is just an asset. You can produce, buy, sell or hold it. On the other hand, money is a medium of exchange. It allows you to trade your 8 hours in the office for a new iPhone. It also allows you to delay consumption decision. You can spend 8 hours of work today, but then be free to decide when and for what to spend your salary. If suddenly you need to buy a ticket to Hong Kong, you can do it without working extra couple of hours to earn it.
The function of money is to exchange the widest variety of products between each other. iTunes credits allow you to choose between many songs. This make them money to some degree. But dollars are even better money because they can buy all those songs, but also a myriad of other things as well. Therefore, people tend to keep savings in dollars, not in iTunes credits.
It seems obvious that the best money is the cheapest and the most widely recognized and accepted one. Cheapest in a sense of handling it. If your money is a huge stone you have to carry around, it is more expensive than a small gold coin (provided they both have the same price in terms of goods they can buy). Piece of paper named “gold certificate” could be even cheaper than gold itself, but carries a risk of fraud, so in some cases it could be even more expensive to hold than the gold itself.
For a huge part of the civilized human history we used two metals as money: gold and silver. They were not perfect, but universally accepted and recognized. All other things like seashells, diamonds, IOU papers were less universally recognized, so they were naturally used in some very niche markets while everyone was keeping cash in gold or silver.
Both gold and silver were durable, easy verify, easy to cut and melt together, compact enough to be stored and moved around cheaply. And they were very hard to obtain, so there was very low inflation cost (every new gram of gold created eats into everyone’s savings because it increases purchasing power of its owner comparing to everyone else around). Other things were either easy to produce, or not durable, or hard to split in arbitrary parts.
Why gold did not outcompete silver? Or vice versa? That’s because they both had weight. For small purchases gold would have to be split in tiny difficult to handle pieces, while to make big purchases one would need to move several kilograms of silver comparing to much smaller amount of gold. This naturally created two parallel global markets: one for small purchases where the silver was used (and small droplets of gold would be impossible to handle) and another market for big purchases where silver was too heavy, so the gold was used instead.
Make a thought experiment now: if there was a gold-like metal that allowed moving both big and small amounts equally cheaply, it would be useful on both “small” and “big” markets. Thus it would be more marketable (more exchangeable) which by definition would make it a better money. Better than gold and better than silver. People would then tend to keep their cash in that magic metal because it would allow them access to bigger variety of goods: from bread to houses. And they would not lose money on conversion rate like when they sell some silver for gold or the other way around.
There was a competition in private coinage. Kings and private merchants were making their own coins in gold and silver and selling them for premium. The well-recognized coin was easier store and to verify if you trust the issuer. Instead of measuring each coin, you could simply read the number on its face. Names like “dollar”, “pound sterling” and others were all names for private coins or bullion and meant particular weight of the metal. That is, dollar was not some sort of separate money, it was simply a name for a certain amount of silver, like “gram” or “ounce”. The money was still the same — gold or silver, but there was a big variety of shapes of that money.
Of course, gold and silver were still quite limited. You could not drop a bag of gold across the ocean. That’s why people invented banking. Bank was simply a warehouse for your metal. You give them gold, they give you a receipt. Then, if the bank had good reputation and connections with other banks in the world, you could transfer those receipts of any face value quite cheaply anywhere. The only real cost was trust in those banks. Because if the bank is robbed or steals your metal, your receipt becomes worthless. If the bank prints additional receipts for the same amount of metal, the value of your receipt goes down proportionally (or you face a risk of bank run, when more people try to redeem their receipts than is available in the vault).
In old days, private currencies were simply those receipts for gold or silver. Each currency could have different name and different reputation. Bigger bank’s notes had more value on the market because they had less risk associated with them and as a result, wider acceptance. But ultimately, they all were receipts for the same metals that you could redeem at any time and move to any bank or under a mattress. Because people valued receipts only for their ability to represent readily accessible metal. Without the metal, those pieces of paper would be worthless.
Today things are different. After several huge economic disasters created by the governments of Russia, Europe and U.S. in the beginning of 20th century, we now have state-issued money in almost every country with a nice twist that now the money is not redeemable for metals. People use that money, though, because various controls and regulations make it almost impossible to use gold, silver or respective certificates in daily transactions. Every bank needs expensive license and must not be very creative at what it can offer to its clients.
Dollars can buy things in U.S., euros can buy things in E.U., but if you try to use them in inappropriate places, you would have to pay very high conversion fees. (Setting up your own clearing house or exchange with the lowest fees is not possible due to regulation.) It should be clear now that if, for instance, U.S. Dollar can buy more than Russian Ruble, Russians would tend to use Dollars in daily life. The reason why it does not happen anymore (it used to during liberal times in the 1990s) is stricter controls on currency exchange that make it illegal to price goods in dollars and expensive to exchange currencies frequently. For the same reason, gold and silver are not used: they are too expensive or illegal in some contexts, or there is a huge risk and cost on those who are going to store them. Several years ago, Liberty Dollar, alternative silver-based currency was shut down and all silver was confiscated by U.S. government. Founder was pronounced guilty of “making, possessing, and selling his own currency”.
Here we do not discuss whether it is good or moral to make your own currency or store other people’s money. The point is about demand for a single, most universally accepted money. If gold, silver and foreign currencies need violent intervention to not be used, it’s only a proof of existing demand. Because if there was no natural demand, no government would care setting up restrictions in the first place.
Now we enter crypto-currencies. It is a fancy name for Bitcoin and its many clones based on the same source code. Bitcoin itself is very different to ubiquitous government money, application-specific “credits” (like in multiplayer games) or gold and silver. It is absolutely digital, does not have a single controlling entity and is very cheap to store and transfer both huge and tiny amounts of money. This property makes Bitcoin very useful on certain markets: be it illegal market, or “sending money to family in another country”, or a market where banking is unavailable or too expensive.
What about alternative Bitcoin-like currencies? They all provide the same security risks and benefits. Nominally, they all have different divisibility (so called “larger number of coins”), but at the scale of trillions of smallest units in total money supply extra divisibility does not really matter.
Economically, all Bitcoin clones (altcoins) have the same problem: they all have much smaller market exposure than Bitcoin while not technically superior. When people decide in which one to keep their money, they would keep it in the money with the biggest market. There is not point in “diversification” in the long term. If Bitcoin fails for some reason, all its clones fail for the same reason automatically. If Bitcoin works well, any amount in altcoins is simply inferior in its purchasing power. It does not mean there won’t be any market. You can always keep some empty plastic bottles for selling later, but the bottles can only buy cash, while cash can buy anything.
Second problem of alt coins is mining. In the long term, any miner will throw 100% of computing resources into the most profitable currency. Even if Bitcoin is only 1% more profitable than Litecoin, since there is no fundamental difference between them, all the resources will be thrown into Bitcoin. In the short term, there are plenty of enthusiasts who find themselves equipped with a lot of outdated GPU hardware that was once used for Bitcoin, but now cannot compete with specialized ASIC hardware. These people now mine Litecoin in short-term expectation for any amount of reward. It is sort of a private club of people trading in their own funny money. All new miners devote all their energy to Bitcoin, while people who will sell or retire their GPUs will make Litecoin network weaker and less technically stable.
In the end, it is clear that we want the single money to be able to sell anything and buy anything. We all want it to be cheap to store, move and verify. And secure. With as little trust in middlemen as possible. Today we find ourselves with a lot of artificial barricades in the sphere of money, which causes artificial demand for various local currencies. Gold is being seized or moved from the country. Foreign currency is prohibited for merchants to price their goods at. Legal tender laws force you to accept government-issued currency as a payment for debts. Regulations and licensing limit variety of private currencies or money substitutes. But all that trouble only proves almost universal desire to use the single virtual entity for buying food and saving for the future. Bitcoin gives us a mechanism to overcome all these regulations and trade as freely as was ever possible. Maybe it will allow us to achieve that single, most marketable entity that we all so desire.
A moral argument must be universal, or it’s just bigotry.
“If you do nothing wrong, you have nothing to hide” either applies to everyone, including those who snoop around, or is not a moral argument.
“Thou shalt not kill” either applies to everyone, or it’s a lie to let some people to kill others without much resistance.
History of the world shows that really universal activity never had any moral commandments (e.g. “thou shalt eat”). History is full of people who use moral arguments to use other people. Starting with ancient religions till nowadays with laws, bills and constitutions.
Therefore, almost any moral argument you have ever heard or will hear is not a real universal argument, but an instrument using which some people want to hold you by the balls.
When no one steals, it’s easy to be a thief. If somebody is stealing from you, then you either put a bigger lock, or you figure out why so many people hate you so much. That’s why only thief will go to great lengths to educate people to not steal to have a whole territory open only to him.
You don’t have “right to privacy”. Rights are invention of the rulers. In your normal life you connect to people on a “be nice” basis. You tolerate their oddities, they tolerate yours. You try to stay closer to people you like and farther from people you don’t like. There is no black and white morality. People in Texas love carrying guns, but I don’t. So what? I simply do not live in Texas.
If you believe you have rights, you are supporting a person who wants to enforce such right using a threat, not a dialog. If you hate that someone’s watching you, simply close the window. Do not go and demand even more violence to be directed on “bad guys”. In such case you would simply add to an uncontrollable chaotic killing structure operated by maniacs.
Do not like stealing? Close the door. Do not like watching your emails? Use crypto. Don’t like violence? Do not be violent, avoid bad districts, do not go rioting on the streets to be killed by the mob or cops. Don’t like some people? Avoid giving them anything voluntarily. Tell others to boycott them. Do not like what banks do with your money? Use some other money. Do not like uneducated people? Educate them nicely, so they would want to listen. Need support? Go, ask for it. Hedge the risks, save for rainy day, be careful and respect people around you.
But don’t you be afraid of being angry when people attack you. Don’t cover someone’s lies. Look in the eyes of truth. Your emotions are real. If someone’s kicking you, protect yourself, expose the lie covering it. Do not look for a conflict, avoid it. But never lie to yourself and others about what is going on.
You just installed a Bitcoin wallet and received your first 10 bitcoins. Do you think you can easily spend these 10 bitcoins in 10 shops during a visit to a mall? Not really.
Bitcoins do not exist as individual items. Once you received your first bitcoin payment, all you have is a single “transaction output” that you can spend. Once spent, it is no longer valid. In its place you’ll have two new outputs: one as a payment to someone else and another one as a “change” sent to yourself. To pay the second person you need to use this new output (“change”). But this new transaction will not be accepted or even relayed by the network before its parent transaction (you first payment) is included in the blockchain. So to make a second payment you’d have to wait 5-15 minutes before the first one is included. And to make another one, you’d have to wait another 5-15 minutes after that.
In addition, if you try to send a small amount from a relatively “fresh” output, people would ask for transaction fees to relay or mine your transaction. This is done to prevent DDoS attacks on the network. If you wait 24 hours after creating a new “change” output, you could send it for free, but doing so earlier will result in unpredictable and lengthy delays. Although, the usual transaction fee is very-very small at current prices (around 5 cents), you’d still have to wait for all previous transactions to be included in the blockchain before you can successfully publish another transaction.
In a sense, you may call a single output a “coin” (with some amount written on it). The more “coins” you have, the cheaper and faster your transactions will be. Think of it like having a single $50 bill when you need a quarter to pay for parking. You’d need to go somewhere to exchange that $50 for smaller bills and coins. Unlike real coins, transaction outputs are not displayed in any wallet app, so you don’t know in advance how many transactions can you spend. And even if they were displayed, it would add unnecessary complexity for the user.
This side of Bitcoin obviously sucks, but can be managed easily.
First, you may ask to receive money in multiple outputs. E.g. if you receive a big monthly payroll, you may ask to send you money in a single transaction with 10–20 distinct outputs, so you could spend several of them right away. They all may use the same address and your wallet will figure everything out automatically. The only thing you’ll notice is that you don’t have to pay extra or wait longer to get a couple of your simultaneous payments to get through.
Secondly, you can split your money by yourself in multiple outputs. This will result in the same result as above, except now it’s you who will pay transaction fees (fees are calculated per Kb, and for smallest transactions they are rarely required).
Third, your bitcoin wallet can keep track of your spendable outputs and it is running short of them, it may add an extra “change” output to the next transaction to increase amount of outputs. I don’t know if any of the existing apps can do that already.
Also, bitcoin wallet can make automatic transactions on your behalf using rarely needed outputs to split them in a more useful collection of different “denominations”. It can also mix these coins with other users to increase you privacy (so that random merchants wouldn’t know how much do you have in your pocket).
As of today, people don’t pay ten times a day with Bitcoin, but when this happens, we would need an automatic solution to have our transactions relayed quickly and cheap. Hopefully, developers of bitcoin wallets will take a note and think on solving this problem.
I have some interesting ideas on how to make awesome Bitcoin wallet app for OS X (and for iOS too if Apple allows). I will release source code with a beta version, but before that I want to make sure no one will claim that I took someone’s idea (I have some interesting sketches, app icon, security papers and a business plan). To do that I timestamped the latest git commit in the blockchain.
Here is the commit: e09d665d7ffd70d5d6b672305e744916c3c827e9
To verify the timestamp, do the following:
When I release the source code anyone on the planet can independently verify that all my documents were created before June 5, 2013.
Note that I used my git commit ID as a secret key, not as an address. This means that bitcoins are not destroyed, anyone who knows my commit ID can sign a transaction spending money on this address. Obviously, I could recover my BTC before announcing the secret key, but decided to have some fun and post in Twitter for anyone to pick up the money (about 5 cents). Indeed, within an hour someone took all the coins.
This method does not rely neither on brainwallet.org, nor on blockchain.info. You can use your own software to perform the same tasks. (It was the easiest way for me, though.)
In the end, I’ve spend only 15 cents for recording my data with a timestamp. Now all I need is 50000 recent blockchain headers (80 bytes each) and a full block with my transaction (225 Kb). That amounts to just 4 Mb of data. I can now take this data on a USB drive and prove anywhere to anyone that my data existed on that particular date. Because the total difficulty of proof-of-work depicted in the block headers is so huge, it would require thousands of supercomputers working one year non-stop to forge the timestamp.