
Flaws in Bitcoin make a lasting revival unlikely - cromulent
https://www.economist.com/finance-and-economics/2019/03/27/flaws-in-bitcoin-make-a-lasting-revival-unlikely
======
apo
Looks like the flaws are:

1\. "overstatement of activity"

2\. 7 transactions/second

3\. constrained currency supply (21 M)

4\. fraud in exchanges

Odd that only one of these points (2, scaling) relates to Bitcoin the protocol
itself. And that scaling issue has raged from Bitcoin's first public
disclosure. This clock has been stuck at noon forever.

The remaining three points have little to do with Bitcoin the technology and
more to do with how Bitcoin is being used. All can be viewed as either a
feature or bug, depending on your worldview. Consider the counterpoints:

\- Nobody knows exactly how often Bitcoin is used for payments or what it's
used to buy. As such, its users can enjoy much more privacy than they can with
other payment methods.

\- Constrained supply means protection against inflationist central banks.

\- A currency that isn't used to commit fraud isn't very useful. Therefore, to
say that Bitcoin has failed because of fraud is dishonest at best.

The article does to mention Lightning Network, but doesn't give enough context
to make anything of. It's operational now and there's been a flurry of
development activity in the last year. LN has the potential to:

\- increase transaction throughput well beyond 7 transactions/second

\- increase user privacy

\- increase usability

I don't expect journalists reporting on Bitcoin to go very deep. But it would
be nice if they changed the playbook every once in awhile.

~~~
tbabb
> \- Constrained supply means protection against inflationist central banks.

This keeps being touted as a feature, but unless you are Zimbabwe it is a bug.
"Supply-constrained" means "demand-driven price" which means "volatile." A
useful currency is one that measures wealth consistency, like a meter stick.
You don't want your money to mis-count your wealth. Hoping that it will mis-
count your wealth in your favor is speculation, which is a bad, dangerous role
for currency. You want to know that you can afford rent/bread next month (to
say nothing of being able to pay your workers or business partners).

These are more fatal, fundamental design problems than low transaction rates
or questionable usage-- they are built into the very philosophy of
cryptocurrency. Explained in more detail here: [https://www.bzarg.com/p/what-
bitcoin-shows-us-about-how-mone...](https://www.bzarg.com/p/what-bitcoin-
shows-us-about-how-money-works/)

~~~
roenxi
> A useful currency is one that measures wealth consistency, like a meter
> stick

Currency doesn't measure wealth consistently, and makes a terrible measuring
stick. That is a great analogy to take literally - most of the developed world
cuts 2% off our monetary measuring stick per annum as a matter of policy. or
people who aren't unusually interested in maths and finance (ie, most people)
that is highly confusing, because they set their expectations then think that
somehow they are getting ahead if they get a 1-2% pay raise.

~~~
tbabb
That is yet another feature which is mistaken by crypto advocates for a bug.
The 2% per annum is deliberate and useful; it means you have economic
incentive to put your wealth to work on creating things-- new businesses,
technology, public infrastructure-- by investing it, rather than passively
sitting on it.

Imagine the reverse: a deflationary currency, which becomes more valuable over
time. You would have little choice but to hold on to your wealth to avoid
missing out on the gains. Why would you spend your money building a business
or hiring workers? That would be a losing proposition compared to keeping a
bank account which grows if it just sits there. Deflationary circumstances
were, in fact, what precipitated the great depression.

2% is a gentle nudge to participate in the economy.

This is addressed and elucidated in the linked article.

~~~
jhoechtl
> The 2% per annum is deliberate and useful; it means you have economic
> incentive to put your wealth to work on creating things-- new businesses,
> technology, public infrastructure-- by investing it, rather than passively
> sitting on it.

I think that's what the child poster meant by bug. It's artificial and still:
Why?

Mankind came to what it is 99.9% of time without artificial devaluation.

~~~
bildung
_> Mankind came to what it is 99.9% of time without artificial devaluation._

Because productivity was practically constant for this 99.9% of human history.
Therefore the monetary base could be practically constant, too. With the
industrial revolution, growth became obviously exponential.

Have a look at the following graph (nominal GDP):

[http://3.bp.blogspot.com/_VO-2HbQsbSU/S9BbLF6MxBI/AAAAAAAAAR...](http://3.bp.blogspot.com/_VO-2HbQsbSU/S9BbLF6MxBI/AAAAAAAAARw/ctyCSuzVJdA/s1600/PubDebtGDP.bmp)

Or this one (real gdp):

[https://ourworldindata.org/uploads/2013/11/GDP-per-capita-
in...](https://ourworldindata.org/uploads/2013/11/GDP-per-capita-in-the-uk-
since-1270.png)

Inflation means the value of money stays coupled to the changes in GDP, just
as in the millenia you apparently value for exactly this constant money <> gdp
relationship.

------
mcnichol
Every time I read something about Bitcoin dying I cringe.

It's another article written for the attention seeking readership.

Bitcoin (and many blockchain based coins) spiked astronomically. They all came
back down as well but still unbelievably higher than where they were after the
Mt.Gox crash.

20k wasn't even realistic due to the fee's being insane. The entire system is
a system with sliding levers on consistency and forced supply and demand.

If you want to argue about a flaw, ASIC's were the mistake. CPU hashing would
have eliminated the centralization risks, GPU's could have been expected and
ultimately ASIC's after that.

This system is like water with all of the cracks able to be found for optimal
strategies. There is so much to unpack in this it needs an article which has
been written a thousand times but when you pick apart FedNet, ACH, and all of
the systems amidst that, you just have something that you've grown up and
obliviously trust.

Bitcoin networks provide you visibility into all of it....none of this is
pretty, but it's a lot more obvious from Point A -> Point B.

~~~
aeternus
>If you want to argue about a flaw, ASIC's were the mistake. CPU hashing would
have eliminated the centralization risks, GPU's could have been expected and
ultimately ASIC's after that.

There's really no way to prevent ASICs. With any function you pick, it will
always be possible to create a custom hardware + memory design that beats a
general-purpose CPU/GPU.

~~~
latchkey
This is the big ProgPoW debate currently being waged over in Ethereum land.
You are right, it isn't possible to prevent ASICs, in fact everything is
technically an ASIC.

So, with that in mind, the goal of ProgPoW is an attack on the economic
incentive to build an ASIC, not an attack on the ability to build one.

In other words, make purchasing a commodity GPU as inexpensive as a custom
ASIC. If that is the case, there won't be an incentive to build ASICs.

ProgPoW also has a second line of defense where a hard fork with a minimal set
of changes, can brick existing ASICs.

~~~
trevelyan
Distributed POW eliminates ASICs by not paying for centralized mining:

[https://medium.com/@SaitoOfficial/eliminating-51-attacks-
in-...](https://medium.com/@SaitoOfficial/eliminating-51-attacks-in-proof-of-
work-blockchains-e95c60d6085a)

The problem is that the approach does not pay the peer-to-peer network. But
then neither does LN, so who is counting?

------
tptacek
Am I reading this right:

 _Chainalysis reckons that Bitcoin accounted for around $812bn of genuine
transfers of value._

 _Of that, Ms Grauer reckons, only a fraction was used to buy things. Around
$2.4bn went to merchant-service providers, which handle payments for
businesses—a piffling sum compared with the $17trn of transactions such as
Alipay and WeChat Pay, two Chinese payment apps, in 2017. Darknet markets,
which sell stolen credit-card details, recreational drugs, cheap medicines and
the like, made up $605m, and gambling sites $857m. Most of the rest was
related to speculation._

Is this saying that less than 1% of all "genuine transfers of value" in
Bitcoin are for goods and services other than speculation?

~~~
duiker101
Honestly, I wouldn't be surprised if it was even lower. With the exception of
"stunt purchases" I very rarely see any real use of any sort of
cryptocurrency.

~~~
jandrese
The Silk Road drove a fair bit of actual commerce (illegal though it may be)
until it was shut down, judging from the amount of money Ross Ulbricht
apparently made off of the transaction fees.

------
xorcist
Bitcoin obituaries aren't what they used to be.

~~~
SilasX
For anyone who doesn't get the reference, people keep declaring bitcoin dead:

[https://99bitcoins.com/bitcoin-obituaries/](https://99bitcoins.com/bitcoin-
obituaries/)

~~~
Macross8299
Being the author of one of those super early articles (< 2012) really must
sting, even if all your points were technically accurate and even if Bitcoin
does completely fail one day.

------
DINKDINK
Same story, different halvening: "A digital commodity which is the only kind
in the world whose supply function is solely governed by time had an extreme
absence of ask liquidity and unrelenting demand which caused prices to
increase ~15X relative to the previous supply era. Here, let us compare the
third layer of the existing financial system to the first layer of a
decentralized one. Maybe a corporation or other top-down institution will make
something more game stable than a bottom-up group of independent agents?
People were willing to pay for the service miners were providing. Let's
compare P.999 to P.001 of a metric"

I look forward to the 2022-2023 version of this article

The minimum capital flows between supply-era one and two increased 30X,
between supply-era two and three (thus far) it's increased 8X. For every
global dollar of speculation, about 0.1-0.3% is flowing into bitcoin. The
market's expectations of returns:probability (Kelly Criterion) right now are:
99.786% on 13% YoY returns on SPY, ~7% on 15X return on bitcoin over the next
halvening.

------
ziddoap
Although I agree with some of this article, I find the closing paragraphs
frustrating.

How can they go from "Twitter's boss [...], Facebook is working on some kind
of crypto [...]. Market analysts and pundits provide cheery reassurance [...]"
and then close with "This one guy is sceptical" and present the two sides as
completely equal?

One side has, in their own words, market analysts (plural), among the top tech
companies... The other side is a single computer scientist (read: non-market
analyst), yet both sides have equal weight? Or, more accurately, they weigh
the opinion of the single computer scientist over the above mentioned?

~~~
freyir
The one guy has public perception on his side: Bitcoin has been talked about
to death, but besides a few booms and busts fueled by speculators wanting to
get rich quick, it feels like a failure to launch. The onus is increasingly on
the Bitcoin proponents to step up and deliver real value.

~~~
andirk
I can donate to wikileaks when visa and the other credit issuers blocked them.
Bitcoin isnt popular as a day to day currency but neither is gold or
hairballs. But yes I agree it's time proponents to push it into mainstream.

------
Zak
> _The final problem is fraud. Transactions are irreversible_

NAPWAD. Fraudulent transaction reversal is a problem for other payment
platforms, which has kept someone I know from using Paypal to accept tips for
open source projects. That means Bitcoin may not be ideal for certain
transactions, or that escrow services should be used.

~~~
shobith
For the purposes of fraud prevention, payment processors can be viewed as an
escrow service (along with other things, of course). This can still be
programmed on top of bitcoin, someone like amazon/eBay can build this escrow
system and charge a fee.

~~~
Zak
Several people have built escrow systems for Bitcoin. Whether you trust those
people is another matter.

~~~
Macross8299
Using escrow systems also detracts from a core appeal of Bitcoin and other
cryptocurrencies - being able to exchange money online with little trust in a
third party intermediary.

There are still the monetary policy trust issues that Bitcoin resolves (not
having to trust a central bank) if you are particularly libertarian or
whatever, but I don't think that's really a driving cause for any sort of
adoption in any other countries other than Venezuela and maybe Cyprus 5 years
ago?

~~~
aeternus
The Bitcoin script language allows you to create escrow systems without any
trust in a third party intermediary.

A working example of this is the lightning protocol which is implemented on
top of Bitcoin script. It uses time-based escrow written in Bitcoin script to
eliminate the need for trust or third party intermediaries.

This is an important benefit that isn't very well known.

------
ohhhhhs
Current bitcoin supply is 1800 per day. @ $4k each, you need $7.2 million net
inflow per day to maintain current prices. This needs to continue until May
2020 when additional supply drops to 900 per day.

This is only about 3 billion USD inflows required to maintain the market until
the halvening, and then supply really drops hard.

Uber is looking to list with a market cap of $120 billion. Australia has $2+
trillion in pension funds alone. Vanguard has 5.3 trillion. $3 billion inflows
to get to the halvening should be pretty easy. Return of Goxcoins will have
some effect, but any hype at all will send bitcoin on a crazy moon mission
again.

------
Mengkudulangsat
Wait a minute, cheap medicine through the dark web?!

Won't that be a killer app for the desperate?

------
ajcodez
Flaws in USD make a lasting outcome unlikely.

------
neonate
[https://outline.com/AV35DA](https://outline.com/AV35DA)

------
imtringued
Right now bitcoin is something you buy once and forget about. It's not used
like a currency at all. Years later maybe you're lucky and it went up enough
to offset the -85% crashes which you "survived" because you forgot you had
those bitcoin.

~~~
zanny
The thing is this is largely by design. You don't make an absolutely finite,
reducing supply commodity and expect it to do than anything than turn into a
valuable and rare token.

If you wanted a cryptocurrency to actually see use as a currency it would have
to adopt a monetary policy analogous to at least what the naive version of how
most western fiat policy behaves - you have monetary velocity / inflation / at
rest targets and adjust supply to push the market in the direction you want it
in.

Whats interesting is that in the general case this is perfectly valid to
codify, depending on how far between commodity and currency you want to take
your coin. More aggressive inflation algorithms would pressure users to spend
it whereas less aggressive ones would cause deflation and hoarding.

Of course such a cryptocurrency is untenable because it isn't a valid pyramid
scheme to attract early adopters with. If you build it to just be the ultimate
_currency_ it isn't going to see mass market appeal because its not a get rich
quick scheme like every other crypto has attempted besides maybe namecoin.

------
Tsubasachan
Revival? Even at the height of the bubble nobody actually used it in real
world transactions.

Meanwhile the evil banks are bringing us ever closer to the cashless society
of instant electronic payments we all dreamed of.

~~~
zanny
Instant electronic payments with upwards of 5% transaction fees for technology
that costs them what rounds to nothing.

I feel like at least the payment processing part of finance today is something
ripe to be nationalized if you had a democratic representative government you
would trust to do so. It feels exactly like infrastructure, the same way fiber
to the home should be a public works project, but instead its possessed by
global corporations using rent seeking and crowding out effects to make gross
amounts of money off of it.

------
otabdeveloper1
"Revival"?

Is there something to revive?

------
raverbashing
Bitcoin was the victim of a group of technically centered people whose
knowledge about economy was summed up as "big banks bad".

But they didn't worry about liquidity, about speed of transactions, about the
energy/processing costs, about the issues related to a limited monetary base
and the deflationary effects of it.

~~~
HashThis
Bitcoin is crawl. Next comes walking. Then running.

Dial-up modems weren't created to be the final goal of the internet. They were
designed to start traveling that road toward fiber, etc. Same with crypto
getting the simplest to get started.

TCP/IP was created. It took 12 more years until HTTP. It is okay to get
started simply.

~~~
raverbashing
Ah yes, this makes sense

------
kristianp
Paywalled.

~~~
ignaloidas
Firefox containers go around that nicely, as Economist offers several free
articles per month

------
xiphias2
,,The bust has been correspondingly brutal''

I don't recall having a brutal bust. 80-85% is the historical average of
previous busts, but I'm not sure if statistics is needed for an economist
journalist (it should be). It's too bad that I'm paying for the magazine
because I haven't found anything better.

~~~
chris_mc
You are saying an 80-85% loss isn't brutal? Man, bitcoin people are way
tougher than I am, because losing that much value in my investments would make
me want to die. I only lost like 15-20% during the 2008 crash and recovered
that and way more over the last 11 years.

edit: this is good for bitcoin, apparently.

~~~
mayamatrix
If you'd been in Bitcoin over the past 10 years you would have witnessed at
least five 85%+ drops and still be up over 300,000%.

~~~
the_gastropod
Yea! And if you'd invented Facebook 13 years ago, you'd be worth BILLIONS!

What's your point? That 85%+ drops in value are a reasonable thing for a
currency? That a 300,000% increase over 10 years is a reasonable return? These
are two sides of the same coin telling the glaringly obvious tale that:
Bitcoin is an absolutely awful store of value.

~~~
not-satoshe
+200% APY is an excellent store of value.

~~~
the_gastropod
Do you think 200% annual growth is sustainable? Do you think that would make
for a useful currency? Why do you think economists consider low (but positive)
inflation to be desirable for currencies? Do you think such growth, mixed in
with sporadic 85+% drops (aka: high volatility) is a good attribute for a
currency?

~~~
not-satoshe
No, 200% APY in waves is expected as it becomes the reserve currency. Then it
grows in value at a rate equal to the growth in productivity, closer to 0%.

States think positive inflation is good, because it's a hidden tax that they
profit from. I think 0% inflation is better for all participants.

Yes, I think growth in waves is a great start for a money. Same thing happened
with salt, gold, and other commodity monies.

