
Beyond Bitcoin: Truly Decentralized Banking - calafrax
https://medium.com/@ersun.warncke/beyond-bitcoin-truly-decentralized-banking-d7793edc7d99
======
quantdev
"The embrace of Bitcoin is largely driven by dissatisfaction with the modern
banking system but the designers and proponents of Bitcoin have made the
fundamental and fatal mistake of believing that the problem with modern
banking is that paper and digital money have no intrinsic value. Since digital
coins must be created out of thin air the creators of Bitcoin developed an
ingenious method of making coin creation take computational power, thus
imposing a cost on creating new coins, and allowing them to limit the total
circulation of coins. These measures give Bitcoin an intrinsic value (the cost
of creating a new coin) and make inflation impossible by setting a hard limit
on total currency issue."

This is just filled with misunderstanding. The purpose of mining is _not_ to
give intrinsic value to Bitcoin. It is to economically incentivize a fair
system of transacting without centrality. The cost of mining is the price the
Bitcoin system pays for distributed, trust-less consensus.

Just like fiat, Bitcoin has no intrinsic value. Just like fiat, Bitcoin is a
bubble that seemingly never pops, because it is a collectively imagined means
of transacting. A discussion of the disadvantages or advantages of Bitcoin
should start with this understanding.

~~~
jotjotzzz
Actually, the purpose of mining gives Bitcoin value.

The value of gold and silver is that it is a store of value. In order to
acquire those gold or silver, it required doing expeditions to search for
where they are, it required heavy machinery to mine it out of the earth, it
required human labor paid to mine them, it required factories to process them
to purity, it required transporting them, etc...

All of that WORK is stored in the value of the gold or the silver to make it
rare. This is why they are real money. Bitcoin digitally replicates this using
computing power. This is important because essentially it ensures that a BTC
has stored value. It is still currency but it ensure banks and the Federal
Reserve cannot just print them digitally whenever they see fit.

"Bitcoin developed an ingenious method of making coin creation take
computational power, thus imposing a cost on creating new coins, and allowing
them to limit the total circulation of coins. These measures give Bitcoin an
intrinsic value (the cost of creating a new coin) and make inflation
impossible by setting a hard limit on total currency issue."

~~~
laretluval
No, value does not come from rarity alone. Many things are rare but are not
valuable.

> This is important because essentially it ensures that a BTC has stored
> value.

If people believe bitcoin has 0 value, then it will have 0 value, regardless
of the work that was put into it.

------
Mattasher
> While it is true that pound-for-pound gold is more valuable than paper it is
> not true that gold has any other magical properties that make it any more
> useful as a currency.

I'm not a "gold aficionado" (author's term) but gold has plenty of "magical"
qualities: it's fungible, divisible, universally recognized and easy to test,
non-reactive, enduring, beautiful, scarce, and essentially indispensable for
some industrial uses.

~~~
wu-ikkyu
>universally recognized

The value of gold is not universally recognized, and is inflated more from
idolization than by its practical uses.

>When I was older, I learned what the fighting was about that winter and the
next summer. Up on the Madison Fork the Wasichus (white people) had found much
of the yellow metal that they worship and that makes them crazy, and they
wanted to have a road up through our country to the place where the yellow
metal was... Our people knew there was yellow metal in little chunks up there;
but they did not bother with it, because it was not good for anything.

-Black Elk Speaks

~~~
njarboe
People have used many things as "a token of delayed reciprocal altruism" in
different times and locations. People in pre-Columbian North America used
wampum and other items instead of gold for that token and, not surprisingly,
would not find much value in a such a soft metal.

------
placeybordeaux
This is a pretty poorly researched and written article, but the core idea of
switching to a trust-the-individual decentralized network is a solid one. It
seems like we'll need a couple more advances before it's reasonable, but if
you can move to a system where there is no ground truth, but rather a record
of successful transactions or proof of stake/reputation in an identity then
you only need to reach out to the global state to see if there are outstanding
deals with an identity or broken promises.

The basic idea I've been floating is something like the following:

1) Alice generates a private/public key pair 2) Alice performs some work on
their public key (e.g. low hash) 3) Alice finds Bob and promises to send 0.1
BTC to Bob's public address IFF bob performs publically verifiable service X
(e.g. provides boolean assignment that satisfies some constraints or rejects
the problem as unsolveable) 4) Both parties transmit the unsigned contract 5)
Both parties reach out to trust brokers that tell them if either party has
been involved in a broken promise, or has outstanding contracts greater than
their current credit. Don't sign contract if thats the case 6) Both parties
sign the contract (outstanding problem here, this needs to be atomic) 7) If
contract goes well each party appends this to their record 8) If contract goes
poorly offended party broadcasts this to the network and gains some portion of
the lost reputation.

There are many outstanding problems that are not fundamental, but serious
obstacles to writing this today. The ones that I know of off the top of my
head are:

1) Need well understand exchange rate of reputation -> contract value (might
be doable if you can buy reputation) 2) Need non-Sybil trust brokers (e.g.
trust broker with rep >> contract value) 3) Atomic contract signing 4)
contracts need to be publicly verifiable.

Any problems I am missing?

------
nodamage
Two things bother me about Bitcoin and other cryptocurrencies:

1\. The process of "mining" seems like arbitrary busywork that is ultimately a
massive waste of computing power and electricity. At least Folding@home was
contributing to scientific research. Is there any way around this?
Incentivizing a bunch of computer geeks to build massive GPU clusters and
waste tons of electricity mining for coins doesn't seem like a great idea.

2\. Much of the "wealth" of these coins is concentrated in the hands of early
adopters. This seems to be by design (due to the increasing difficulty of
mining) and is not the result of actual economic activity, but merely because
those early adopters started mining first.

Can anyone (more familiar with Bitcoin than I am) comment?

~~~
eduren
To your first point:

While there are definitely valid concerns with just how much energy we spend
maintaining the bitcoin network and the blockchain, it's hard to call it
wasted and it's definitely not busy work.

The energy we spend doing all the mathematical problems behind proof-of-work
can be seen as an investment. In the blockchain there is a mathematically
certain record of all transactions that have happened since 2008. While that
may not sound all that impressive think of it like this: if a single entity
was responsible for building that ledger, it would have taken less "energy",
but that entity would have to be trusted by every participant transacting.

With the mathematical underpinnings of proof-of-work, we are instead spending
energy to create that trust model inside the currency (network+blockchain)
itself. Not busy-work.

Think of it like adding microchips to paper money for counterfeit detection.
That is materials and energy spent creating a more trustworthy system.

There are certainly alternatives to the BTC proof-of-work that might make for
a more efficient protocol, and they might win out in the end. That should be
explored. But BTC mining has value.

~~~
platform
@eduren, WRT " _Think of it like adding microchips to paper money for
counterfeit detection. That is materials and energy spent creating a more
trustworthy system._ "

Building up merkle tree root, distributing the merkle tree, I agree, is like
'adding a microchip'. But what's not clear, at least to me, how does,
specifically finding hashes with certain number of 'leading zeroes', helps
with counterfeit detection?

~~~
kyboren
It helps detecting counterfeit blocks claiming some transactions never
happened.

More specifically, it provides confidence that some minimum amount of energy
must have been used to calculate that hash. As blocks n+1, n+2, ... are added,
the amount of energy that must have been used to create an alternate history
of transactions since block n increases. After a certain number of blocks have
been added, the cost in energy to forge a longest chain that does _not_
include some transaction (while that transaction does exist on the original
chain) will eventually exceed the potential benefit gained by "stealing back"
that transaction's BTC. Note that this doesn't guarantee such an attack
doesn't happen, it just guarantees such attacks would be uneconomical.

Thus, the "energy waste" of mining is really more like a security limit on
transaction amounts and latencies. As the energy used--more specifically, the
cost of the energy used--for mining increases, Bitcoin becomes more useful for
transferring larger amounts more quickly.

------
irln
The main issue isn't solved by replacing fiat currency with a digital crypto
currency. The problem that must be solved is how do you manage (the
creation/destruction) of a medium of exchange in a manner that is equitable to
ALL participants. The current system uses a combination of central banks,
plain ole banks, and government bonds. I'd argue that their management hasn't
met the goal of being equitable to ALL participants, however, I don't see how
crypto currency improves on this.

~~~
s73ver
It doesn't. It just puts a different set of people on top.

------
walrus1066
Bitcoin would be a very flawed currency. It has deflation baked into it's
design.

Imagine if bitcoin was legal tender in the country. If my country produced 5%
more goods and services in a year, but the bitcoin supply increases by just 1%
due to the mining mechanism, resulting in deflation.

This means I am better off hoarding my surplus bitcoin, stashing it under the
digital mattress, as I know it can buy more in the future. I won't spend it on
goods and services, or risk it by investing in a company.

Most others would do the same. The reduction in demand for goods and services
means companies would have to lay off workers or close down, causing
unemployment. The reduction in investment will mean less companies starting
up, and less coin for companies to invest in staff or equipment to increase
efficiency.

All this will depress economic growth, and cause unemployment. Which in turn
reduces demand even more, causing a reinforcing cycle of economic contraction.
A great depression in other words. The similarity is apt, because the great
depression was partly driven by the gold standard, which had the same dynamics
as my hypothetical bitcoin economy.

~~~
montaguy
So say your country produced 5% more goods, and the bitcoin supply increased
1% or even decreased. Production is higher than monetary supply increase.

Seems to me that sure, the cost of investment would rise in this deflationary
scenario, but to assume this results in no investment is a foregone
conclusion. Wouldn't you just get a new investment vs savings equilibrium? One
that may be more aligned with responsible investments and purchases? Why is it
a downward spiral? If saving is greater than investment than production
wouldn't stay at 5%, it's ostensibly fall, reducing deflation, and making
investment more appealing relative to saving.

Doubtless this 'target inflation' debate has raged for the past century. Does
anyone have any book recommendations that explore these ideas?

~~~
taw55
Debts are denominated in money, if that money becomes more scarce, people will
spend a lower fraction of their income on consumption articles out of fear of
not making ends meet. At any point in time total spending equals total income,
so this will reduce total demand inside the economy. If people's income
diminishes, their debt-to-income ratio rises. This results in what is called a
debt-deflation spiral.

------
orblivion
Anybody else irked by the use of the word "myth" to mean "a position I am so
confident is false that I'm now going to talk down to the opposition"

------
taysic
I appreciate this article because of how radical it is and I think it's worth
thinking of different systems but, its sounds silly to me.

"If everyone issued their own money in a free market the free market would do
what it always does which is regulate supply and demand."

I don't really have time to do a credit check on every person I interact with?

"When you swipe your card you are giving your consent for the merchant to
obtain your credit score. The merchant’s system then decides whether or not to
extend you credit based on your credit score and the credit policy the
merchant has specified."

Really? With every transaction, such as in this example a coffee, your credit
score would be checked? And who would do the checking? Would that be
centralized?

I like Bitcoin but I think it faces a few challenges unrelated to this
article: 1. It takes longer than 10 minutes to explain what value it provides
to the average person (particularly in a Western country where their currency
has not been devalued) 2. Its slow and cumbersome to move dollars onto an
exchange in order to attain Bitcoin. 3. It's highly risky. I think it has
plenty of intrinsic value reflected by the network of people willing to
sustain it but at the end of the day, it's more like a stock than a currency.
4. There's no one to call if you lose your hash - no customer support, no
backup. Does this really work well for most people? 5. And it now has a lot of
competitors who offer a similar/better setup and want a piece of the pie...

------
grondilu
I like bitcoin and gold, yet I don't think they have "intrinsic value". At
least that's certainly not the main point. To me gold has no intrinsic value.
It's just a metal. I can't eat it. I have on a personal level no use for it.
It's terrible as a construction metal, I'm not interested in jewelry and there
are probably many shiner alloys anyway. "Intrinsic value" is not the point,
and I don't think money needs any such thing to be useful.

Money is a complex concept, but to me one of its functions is to be a tool for
measuring value in economic exchanges. All other things being equal, the value
of goods is inversely proportional to their amount. For instance if the amount
of gold was suddenly multiplied by two, then the price of gold would drop by
half.

Thus, to measure the value of goods, one needs to get an idea of its quantity.
So you need to compare quantities. You thus need a fixed reference of quantity
for comparison. Just as for measuring say length you need an object of fixed
length somewhere to use as a reference.

That's why bitcoin proponents often also like gold : they are attracted by the
idea of a fixed amount of money.

By contrast, most central banks pilot the amount of money in circulation in
order to try to keep the price of goods stable. This is, imho, as absurd as
changing the length of the meter because we've noticed that generations after
generations people are getting taller and taller.

When prices vary, this is supposed to have a meaning in the economical sense.
Prices are economical signals. Tempering with them defeats their purpose.

~~~
wu-ikkyu
>By contrast, most central banks pilot the amount of money in circulation in
order to try to keep the price of goods stable. This is, imho, as absurd as
changing the length of the meter because we've noticed that generations after
generations people are getting taller and taller.

Indeed, and this is why central banks are counter productive to automation.

The two primary goals of the Federal Reserve are to maintain stable prices and
achieve maximum employment, despite the fact that automation is making goods
and services better, faster, and cheaper and designedly eliminating the need
for human labor.

------
woah
Interesting concept, but there's only one paragraph explaining it with very
little details after pages upon pages of handwaving theories about bitcoin and
gold.

~~~
mLuby
Would love to read a deeper dive into this concept.

------
CyberDildonics
> By offering short term credit to each other market participants will be able
> to engage in economic exchange without having to pay the cost of money.

I don't think this person understands bitcoin, currency, debt, or money.

------
okket
> Bitcoin and other digital coins are at the peak of their hype cycle.

Why do you think they are at their peak?

~~~
rcar
It's referring to
[https://en.wikipedia.org/wiki/Hype_cycle](https://en.wikipedia.org/wiki/Hype_cycle)
which is meant to describe the pattern of hype -> disillusionment -> eventual
larger-scale adoption that often accompanies new technologies. Seems like a
fair estimate that it's near that peak given that Bitcoin has broadly reaching
excitement around it but few similarly broad use cases as of yet.

~~~
0xfeba
But that pattern fits the 2014 peak and crash, and thus, now 'large scale
adoption'.

~~~
rcar
Would you really argue that Bitcoin has "large scale adoption"? Most people
aren't using it yet apart from cryptocurrency enthusiasts and currency
speculators.

------
bascule
If these sort of ideas interest you, you might want to check out Interledger:

[https://interledger.org/](https://interledger.org/)

------
JoelJacobson
Great idea. Here comes an idea on how to implement it:

* Everybody (people and companies) trust their bank * All banks trust their central bank * All central banks trust SWIFT

This is effectively a chain of trust. Therefore, piggy back on this existing
trust relationship and let SWIFT be the global CA, and let them sign all
central banks certificates, and let all central banks sign all their banks
certs, and now finally, let all banks sign all their account holders (=people
and companies) certs.

This way, all people and companies only need the SWIFT root CA to verify the
validity of a monetary decentralized transaction from a stranger, since the
stranger can prove the issued IOU-note has been issued by a certain individual
or company, since all banks have verified the identity of their customers (i.e
KYC'ed them).

------
roymurdock
For anyone interested in the idea of using blockchain-based digital currency
to create a competitive currency scheme, I wrote my undergrad thesis on this
topic:

[http://roymurdock.com/thesis/murdockthesis-
final-2.pdf](http://roymurdock.com/thesis/murdockthesis-final-2.pdf)

Hayek, a famous Austrian school economist, had the same idea in the 1980s -
remove control of currency from central banks and governments, and give it to
private institutions, having them compete against one another. Digital
currency removes a lot of the technical barriers to issuing a new currency,
but technical barriers are not the main barriers to adoption.

------
objectivistbrit
This is really confused. Nothing has intrinsic value, but certain things have
objectively-measurable properties that make them more suitable to be used as
money.

Scarcity, fungibility, divisibility and portability are some of these
properties. Mass adoption is another (because money effectively has "network
effects"), but if a society widely uses a particular form of money when a
better substitute is available, they will very likely switch at some point
(see: dollarization).

Bitcoin and gold are both superior to fiat in terms of scarcity. (The author
is correct that the gold supply grew massively at certain points in history,
but there's very little chance of this happening again any time soon. That
said, there's still a lot of Au in the earth's crust left to dig up and with
modern mining techniques the global stocks grow at about 1.5% a year). Anyone
with a lot of usd (or rmb or euros or whatever) puts it somewhere less prone
to inflation (stocks, bonds, real estate). This means there's always a lot of
fiat currency looking for a home - though people at the bottom don't see this
over-abundance of money, it is visible in things like the crazy prices for
premium real estate, the crazy size of tech acquisitions (everyone else is
investing their money in FB/AMZN/GOOG/AAPL, so those guys have huge cash
hoards with little opportunities to put them to use - so they buy many
startups).

On top of that, bitcoin is highly divisible and very portable (it's easier to
send btc around the world than gold or usd). A couple of years ago I saw
nothing that could stop it long term. I've since become convinced that its
weird supply formula makes the price inherently, permanently volatile.
Longterm, the finite supply limit will incentivise everyone to hoard, causing
the price to skyrocket - but if everyone hoards the amount traded will become
so low that even a small amount leaving the hoards (as hoarders suddenly spend
some of their overpriced btc) then causes a big price drop. This bouncing up
and down incentivises people to stay away.

Gold, on the other hand, has ties to economic reality - if the price increases
gold miners can mine more, and vice versa. This natural adjustment in supply
dampens price swings. Unfortunately gold needs to be kept in a vault and can't
be transferred easily (that said, for non-technical users, securing one's
bitcoins appears equally difficult).

If someone made a cryptocurrency with a gold-like supply rate, that would have
real world domination potential. Maybe some startup founder with the
connections to pull this off is reading this - if so, take a look here for
more theory: [https://keithweinereconomics.com/2013/12/28/the-theory-of-
in...](https://keithweinereconomics.com/2013/12/28/the-theory-of-interest-and-
prices-in-paper-currency/) (his argument is more complicated than those you
may have encountered in libertarian/goldbug circles. It's not simply that the
scarcity of gold means it will be more valuable long-term - it's the
arbitrages that modulate the supply and thereby make it suitable as a store of
value).

Writing this comment has gotten me thinking, so here's a few other thoughts on
how this will pan out. I've read many different thinkers who write about such
topics, and spent much time evaluating and integrating, so hopefully some
stray reader will find this of value.

The other thing I've come to realise is that economics is one aspect of human
society. It has a kind of permanent, fixed reality, despite being based on
human decisions and actions, because the incentives humans face are universal
and eternal (everyone needs to save, everyone needs to trade, even in a
socialist dictatorship semi-regular economic activity continues on the black
market). But the ideas that spread in a culture also count. If most people
believe that the usd is money, and bitcoin and gold are for weirdos, then the
usd can remain money for a long, long time. I thought that over time people
would see the bitcoin price constantly rising (though unstably), and realise
that they needed to buy in. (First the risk-takers and early adopters, then
the more adventurous asset managers investing 0.5% of their funds, then the
early majority, and so on). But with the recent price spike, I saw that though
many people suddenly wanted to pile in, they had no understanding and little
interest of bitcoin's fundamentals. They buy now and hope to sell before the
next crash. Maybe some entrants will become long-term holders and help drive
the price up - but not many. The btc market cap is around $50bn - tiny in the
world of finance. If/when it approaches $1tn, things will get interesting. Our
current world economic order (BW2) is a hacky fix from the 70s on an agreement
made in the 40s. It suited the great powers of the time and was based on
certain assumptions. Now the assumptions are proving wrong and the balance of
power is shifting.

I don't believe in the mass automation/sustainable energy/basic income future
most of the tech crowd is looking forwards too. I foresee two likely futures -
one, a return to 19th century great power politics, as Putin hopes for -
definitely not a utopia, but hopefully a world where at least some countries
realise that freedom is the path to prosperity and advancement. The other, a
darker world, where dictatorships (both in socialistic and nationalistic
flavours) become dominant on every continent. In both scenarios the usd is
likely to lose its status as the global reserve currency, but in neither
scenario is bitcoin guaranteed to be the replacement.

------
mtgx
> Gold is a less efficient form of money than paper and Bitcoin is an even
> less efficient form of money than gold.

I don't think that's true in most cases. I can more easily send someone
$10,000 in Bitcoin than that amount in gold. And the larger the sum becomes,
the easier it is to do that with Bitcoin.

~~~
drabiega
You're not really transferring Bitcoin though, you're just adjusting a ledger
of who owns what. There's nothing stopping you from doing the same thing with
some gold, you could probably even create a setup where it is done at lower
transaction costs.

~~~
jstanley
> You're not really transferring Bitcoin though, you're just adjusting a
> ledger of who owns what.

If not this, what do you think a Bitcoin transfer looks like?

> There's nothing stopping you from doing the same thing with some gold

The custodian of the gold would be able to steal it from me at any time. I
wouldn't actually be in possession of the gold, whereas I would be in
possession of my Bitcoin keys.

~~~
drabiega
The point is that physically sending the gold is not the equivalent sense of
the word transfer in this case. There will of course be some differences, but
the gold ledger is the best gold analog of a bitcoin transaction.

~~~
andrewla
The question is a matter of trust in the correctness of any such ledger.

Bitcoin only exists as entries in a trustless ledger. The trustless ledger of
gold is physical possession of that gold -- that's the only way that you can
verify possession (or spend freely) without a mutually trusted third party.

~~~
drabiega
Sure, that's a valid issue, but it's unrelated to my comment on the ease of
changing ownership of an asset.

------
abrkn
This article is painful to read. Author seems to have no familiarity with the
space and should read some earlier work[1]

[1] [http://archive.is/TSdxy](http://archive.is/TSdxy)

------
0x445442
"Paper money is a significant technological advance over gold
money"...Bullshit.

Gold is a commodity which marks a certain amount of labor and energy expended
before it can be exchanged for other goods and services. Paper money is a debt
note that represents a promise of labor and energy to be expended in the
future.

So what happens when there's no demand for the already created paper? History
has shown time and again; depression and war.

~~~
Ar-Curunir
Rarity does not endow something with value. There are many things that are
difficult to extract yet are not valuable.

~~~
0x445442
I never implied monetary metals' value is due strictly to the energy it takes
to extract from the ground.

