Interesting article on Bitcoin's inception and how it works. Bitcoin is a purely virtual, digital, online, non-state "currency" that can be used for purchases in a network that accepts it, as well as be exchanged for state currencies internationally in its network. It seems to be catching on.
21 comments:
Yea this is where I come from. I desire to create another crypto-currency with a better foundation in economics. It will be interesting to see how the board responds to this.
I would appreciate comments or questions from the astute MMT crowd :D . I have a little experience in developing parts of bitcoin.
Worth a look: New Bitcoin: An improved Peer-to-Peer Electronic Cash System. Steven Mooij, June 7, 2011.
Chapter 3 - Current limitations and shortcomings:
- Higher transaction fees lead to slower transactions
- Enforced limits are not optimal
- Not truly decentralized
- Unmanageable storage requirements
- Technical difficulty
- Unconfirmed transactions are not safe
- Current distribution is unfair
Explanation of unfairness:
If the Bitcoin system ’becomes big’ and about all commodities on this planet would be convertible to bitcoins, with just over 10 bitcoins the author would, at the time of writing, own enough to be among the top 1 of the richest people on this planet. So why bother?
Two elements make the distribution very advantageous for early-adopters:
* There is less competition in the beginning, early blocks are acquired at less cost (lower difficulty) than later blocks.
* More bitcoins are rewarded for early blocks than for later blocks.
If greed is put aside and common sense is let back in, it can only be concluded that a system like this will not ’become big’. At some point a majority of ’latecomers’ to the system will realize that the system is unreasonably biased towards ’early-adopters’ and start either a new fairer system or at least a new block chain among themselves.
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(I'm not connected with newbitcoin.org or the author of the paper).
Good point, Vytautas. This has been a major issue in the multi-level marketing (MLM) field, and it has killed a lot of plans.
I like the idea of distributed private networks such as MLM and open source. But the devil is in the details.
The idea of distributed networks is sharing within a community in order to exclude concentration and rent-extraction. If that doesn't happen due to the institutional rules, then the basic idea is violated and the purpose vitiated.
Bitcoins are more like "techno gold" than modern fiat currency. There's no way to size the money supply with the economy's need as prescribed in MMT. Supply is capped at an arbitrary number and computing power determines how many bitcoins are "mined."
Who needs anonymous currency?
The problem with bitcoin is that each bitcoin represents one solution to a complex arithmetic problem. There are only a limited number of solutions that can be calculated to solve the problem therefore the number of bitcoins of is limited. Since there is no public & quantitative plan on how the bitcoin programmers will limit/allow the creation of bitcoins in the future once all solutions are exhausted it creates uncertainty. So far the answers they have given either deny it will be a problem or suggest they will re-use solutions to the current problem. None of these solve the need for additional bitcoins in the future. To "mine" for bitcoins by using your computer to calculate a new solution to the problem has grown exponentially in complexity. Now it takes dozens of powerful computers working together for extended periods to find a single bit coin and it will get exponentially more computer intensive as each new bitcoin is mined.
I have not heard much about bitcoin, but when I ask the question, cui bono? It seems to be early adopters. Is that wrong?
Vytautas -->
The author raises some interesting points, but the premises of her/his arguments are largely false. From the 'article' there is little proof that the author understands the cryptographic foundations bitcoin is built upon.
The Achilles heel of bitcoin is that there is no formal way of paying for the infrastructure needed to support bitcoin. Rather bitcoin relies upon donations to pay developers, promotions, education, etc. Libertarians argue donations will be enough to sustain bitcoin, an unlikely assumption.
Also there is no way to force people to spend. This is essential IMO as the rate of economic growth is related to the rate of financial asset exchange.
I think if Satoshi(the bitcoin creator) had his time again inflation would have been built into bitcoin. This would have provided an incentive to spend bitcoins.
Someone else raised an interesting point arguing that to keep bitcoin safe, half of the world's computing power will be devoted to bitcoin. I agree with this. This is comparable to the Spanish raiding the Mayans for gold or the current surge in gold prices. It serves no productive purpose for society.
There are ways around this problem. So it will be interesting to see how the bitcoin community responds.
However, unless bitcoin establishes a 'fair' system of allocating resources towards bitcoin infrastructure, then bottlenecks will negatively affect bitcoin.
I also think the 'unfairness' of early adopters is an over-hyped issue.
I guesstimate that in the future people will be able to choose which transaction processors they want to process their bitcoin transactions. I imagine that transaction processors(miners) will be subject to popular vote.
There maybe miner federations, miners forming groups and charging transaction fees that are used to support the bitcoin infrastructure. This would become a pseudo-tax system and would potentially support authority-like organizations. People would be able to choose which federation they want to process their bitcoin transactions.
TomatoBasil -->
Are you saying that there is no definite way of enforcing the declining bitcoin creation rate?
Others -->
Bitcoin raises an interesting question, what exactly drives fiat? I think the MMT answer of 'taxes' is inadequate. There is some other set of properties that makes fiat the prefered medium of exchange.
NEW CRYPTO-COIN
If I was to rebuild bitcoin, there would be a way of associating bitcoin accounts to people. Keeping this information anonymous is difficult but not impossible.
By associating bitcoin accounts to people it will be possible to utilize democratic processes.
The following associated properties would be built into crypto-coin:
The surplus/deficit rate is calculated by popular average.
Imagine bitcoin with a new transaction type called the "money printing rate". People could choose the rate of money printing/burning, the result would be an average of these values.
Popular Institutions receive tax-receipts
Individuals would vote for the number of Institutions they want, the result would be an average of these values.
Using a preferential-like voting system people would rate institutions.
The most popular institutions would be elected. They would be entitled to spend tax-reciepts.
Tax-rate across all transactions. Institutions would recieve tax-receipts via bucket distribution.
The tax-rate across all transactions would be a popular average. The tax-receipts would be distributed individually, via bucket distribution.
Bucket distribution means allowing each individual to take a bucket(fixed-size) of tax-receipts and allocated them to an Institution.
Each bitcoin transaction would be stripped of the tax amount. This tax-fee would be placed into a bucket. Once full the next individual in sequence receives the bucket. They allocate the tax-reciepts in the bucket to a worthy institution. Repeat.
Feedback appreciated :)
NEW CRYPTO-COIN
If I was to rebuild bitcoin, there would be a way of associating bitcoin accounts to people. Keeping this information anonymous is difficult but not impossible.
By associating bitcoin accounts to people it will be possible to utilize democratic processes.
The following associated properties would be built into crypto-coin:
The surplus/deficit rate is calculated by popular average.
Imagine bitcoin with a new transaction type called the "money printing rate". People could choose the rate of money printing/burning, the result would be an average of these values.
Popular Institutions receive tax-receipts
Individuals would vote for the number of Institutions they want, the result would be an average of these values.
Using a preferential-like voting system people would rate institutions.
The most popular institutions would be elected. They would be entitled to spend tax-receipts.
Tax-rate across all transactions. Institutions would receive tax-receipts via bucket distribution.
The tax-rate across all transactions would be a popular average. The tax-receipts would be distributed individually, via bucket distribution.
Bucket distribution means allowing each individual to take a bucket(fixed-size) of tax-receipts and allocated them to an Institution.
Each bitcoin transaction would be stripped of the tax amount. This tax-fee would be placed into a bucket. Once full the next individual in sequence receives the bucket. They allocate the tax-receipts in the bucket to a worthy institution. Repeat.
Feedback appreciated :)
Unless you are an old-school monaterist, there really is no point to this. How is this any different from a gold-backed currency?
Funny enough, bitcoins have fallen sharpy in the last days.
Right now this is not a coin, is just pure gambling.
@Anon-2
Yea, unfortunately the price has dropped a bit :(.
@Anon-1
Bitcoin and my proposed crypto-currency are not backed by anything, except the faith of the labour.
Crypto-Currencies are like modern unbacked fiat. They are backed by the people's(labour's) faith in the state.
I would answer you question from a Marxian perspective. The most successful fiat system will facilitate the exchange of 'socially necessary labour time' the most effectively. IMO this means a financial system with the least amount of 'unfair distortions'.
Also I define the financial system as anything indirectly or directly that affects the flow of financial assets. So this not only means banks, but also the laws and government.
An unfair distortion is when a subset of the population manipulates the structure of the financial system such that their social values are unfairly represented. This means the rich person having to much influence over prices, but also the poor person not having enough.
If labor can freely mobilize between financial systems(socially necessary labour time systems) then I assert that labour would migrate to the financial system that has the least unfair distortions.
Currently people can not mobilize between different financial systems. They are generally stuck with the one in their country. For example America's financial system is heavily distorted by the top 1%.
The is also another requirement: the rate of financial asset exchange(or the 'enforcement' of socially necessary labour time).
So given these assertions I would say that this new crypto-currency will be the best because:
People can choose the amount of financial distortion
Where the financial distortion occurs
The rate of financial asset exchange
Such control is unprecedented. The huge unfair distortions present within American society will be unlikely, and the low-rate of exchange present in bitcoin will also be unlikely.
People will be able to equally influence the structure of the financial system. This will mean that labour is used the most efficiently, and the result of such labour distributed fairly.
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Allow me to pose a scenario to MMTers.
Instead of the government printing money lets allow banks to do the following:
For each loan reduce the collateral asset value to market value, and at the same time reduce the loan value below the market value. Take a contract over collateral assets that prevents debtors exiting the loan.
This will put the bank into a position to create new loans. The credit from new loans can only be accepted by account holders of the same bank.
Such an outcome would encourage financial asset exchange between account holders at the bank. Which equates to goods and services being exchanged.
The banks would not be anymore exposed because they have a contract over the asset. The account holders with the bank would become wealthier compared to external parties. This would cause wealth to flow from the external community towards account holders of the bank.
The bank would benefit from increased fees and interest.
Such an outcome would be deflationary.
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"Instead of the government printing money lets allow banks to do the following:"
Banks have completely destroyed trust. The thrust should be instead toward taking their franchise away and have all money directly injected by Treasury issuance of notes and bills, ending issuance of bonds in offset of deficits.
Currency as the national unit of account is properly viewed as a public utility and money creation, fiscal policy, and monetary policy should be entirely under the control of the people through elected representatives who are accountable to voters.
Bankers have known for a long time that whoever controls the money supply controls the country. That is their agenda. The people should know this too, and take control of their own destiny by taking back control of money.
If other wish to issue private money, good luck to them. Revenue from private money will still be taxed, just as barter and barter club money is now, and taxes are only payable in the official currency.
My two cents.
@Tom
I completely agree with you, but I meant what would the economic outcome be ignoring the moral and ethical considerations.
If banks were somehow held accountable to popular opinion what would the economic outcome be compared to the government printing money.
I would argue that they are both equally efficient mechanisms of increasing financial asset exchange.
The government printing money devalues pre-existing holdings and therefore encourages people to exchange financial assets.
The banks reducing loan/collateral amounts, initially pushes prices down which is followed by inflation. Thus encouraging financial asset exchange.
So I guess I wanted an opinion of the economic merit of such a proposal excluding ethical and moral considerations.
Shuan, the issue is not money but circular flow of production-distribution-consumption. In a market system, the flow is managed through markets as the distribution mechanism. This involves a willing and able buyer (effective demand) being provided with goods by sellers at a price that provides for a continuation of the cycle through both investment (future supply) and income (future demand). For price stability there has to be just the right amount of money in the system. Too much drives effective demand beyond the ability to supply, resulting in inflation, and too little contracts effective demand, resulting in economic contraction and rising unemployment.
There are three ways to do this, public, private and a combo thereof. Right now, we have a combo system, in which government is too restricted and the financial sector is too unrestricted. The result is a focus on rent-seeking, asset appreciation driven by speculative and ponzi finance, and control frauds.
I would prefer to see a combination system in which government exogenous money creation supplements private endogenous money creations, with government using MMT rules and the financial sector conforming to MMT proposals. That would strike a good balance between public and private and put credit extension in the hands of the private sector which is better adapted to deal with credit assessment than government. Government would handle that aspect of the economy that the private sector is either unable or unwilling to deal with, or would introduce distortion in the pursuit of profit.
Money is already created in the private sector in a variety of ways, from public/private partnership chartered banking, to shadow banking, to extra-banking finance, to other forms of money creation such as barter club money. However, for settlement in state currency, an entity must either have access to cash or to the Federal reserve system.
I am interested in things like Bitcoin as peer to peer innovations. I think that there is a place for them and would like to see more experimentation, such as peer to peer lending and microfinance.
As far as achieving the right amount of money to stabilize the circular flow, it is government as currency monopolist and financial regulator that must do this using all the tools it has available.
As far as achieving the right amount of money to stabilize the circular flow, it is government as currency monopolist and financial regulator that must do this using all the tools it has available.
Absolutely, the scenario I have outlined would need supporting laws. The banks would need to be forced to lower their loan/collateral amounts.
I just want to compare the state either enacting laws forcing banks to lower loan/collateral amounts, or the state changing the money supply. Which one will be better at increasing the circular flow you mentioned ? I think that they would be equal, ignoring the costs associated with implementing each one.
I'm not saying do away with the state and hope banks do this, just given these two policy options which would be better at increasing the flow?
Like you say the problem is not money but the circular flow. So how do we change the money supply to increase flow ? IMO there are many ways, but all effective mechanisms have one thing in common; They devalue static financial holdings. This means entities holding onto financial assets rather than using them should be penalized. IMO what is the point of having financial assets if their not being exchanged?
IMO any response by the state to encourage economic activity will need to penalize those who are not exchanging financial assets. This means manipulating the financial system structure so financial assets flow from in a certain direction.
This could mean tax-breaks for some activities, higher taxes for others, printing new money and giving it to those who will spend it. It could even mean forcing billionaires to take 'altruistic' drugs causing billionaires to spend more money.
This is one aspect of the financial system; the flow of financial assets. The other aspect is the quality of the flow for individuals.
I have omitted talking about the costs associated with each mechanism, because such costs are not really an issue for a crypto-currency.
If the chairman managing a crypto-currency said "Tom, we hate changing the money supply, instead banks will be forced to lower their collateral and loan amounts. We will let them take reasonable contracts over collateral assets preventing debtors exiting their loans at a profit. We think this will free-up state currency to encourage new loans. This will provide an incentive for banks to lend. The wealth of a bank is proportional to the number of loans on its books, so idle banks will face extinction if they do not compete. The loans will be used to pay other businesses, which will encourage tho flow of financial assets. Based on this logic we don't need to print more money to do the spending ourselves. Don't you think this is as effective as me printing money and giving to people who will spend it?"
The whole point of this hypothetical is to check my understanding of financial systems. More precisely the whole point of financial assets. They serve only one purpose, to be exchanged. The quality of financial asset exchange is an equal but separate issue. I think there is no difference in the mechanisms I have mentioned.
Given that crypto-currencies are not bound by the same logistical constraints as normal fiat then crypto-currencies allow possibly a new set of policy responses to economic difficulties. So from my perspective this hypothetical should be explored before time and effort is devoted to building a crypto-currency.
shaun.hingston@hushmail.com
Shaun, hypothetically it does not matter at the macro level where the money comes from to support circular flow of money proportional to the circular flow of the production-distribution-consumption cycle. There are a variety of means that could achieve the same end — hypothetically.
But the devil is in the details. How to accomplish this practically in a way that seizes advantages of a particular method and minimizes disadvantages is a key issue.
The other is the political feasibility of implementing it when powerful vested interests are involved. Wherever money is involved, there is fierce competition to control it, and many people are willing to risk all to do what it takes to get it.
Thanks Tom. I needed to check my understanding.
shaun.hingston@hushmail.com
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