
Bitcoin solved a major technical problem, but not an economic one - dimitar
http://krugman.blogs.nytimes.com/2013/12/29/an-ubernerd-weighs-in/
======
apw
Bitcoin is far more than "just" a solution to the Byzantine Generals problem.

Inside every Bitcoin transaction is a small program that contains no loops. If
that program when executed returns true, the transaction is valid.

The simplest, most boring kind of transaction--but the one that most people
assume " _is_ Bitcoin"\--is a transfer from address P to address Q. Where
things get more interesting is in using those little programs in more creative
ways; e.g., k-of-n escrow, attestation of ownership, etc.

A whole generation of kids is going to grow up soon routinely using small
Bitcoin escrows to hedge everyday scenarios. They won't quite able to believe
that their parents operated in a world based on centralized authority subject
to rent-seeking corruption.

~~~
rlpb
> Inside every Bitcoin transaction is a small program that contains no loops.
> If that program when executed returns true, the transaction is valid.

I've read elsewhere that the official client no longer processes any such
scripts except for ones that are whitelisted. That reduces the current
protocol to a single feature set, instead of the promise of future extension
without requiring further agreement from miners.

Can anybody verify this? Does today's client still process arbitrary scripts?

~~~
Estragon
I stopped following bitcoin about 18 months ago so it's possible my
information is out of date, but I think your assertion is only true in the
sense that today's client does no mining.

It is miners which run these scripts, and when I was following bitcoin it was
miners who decided which script features they would allow. There were some
significant mining pools which allowed nonstandard script features.

------
gojomo
This analysis is true to a point, but overlooks that the 'decentralized cloud
bank' innovation now allows a whole bunch of other technologies to be applied
into an important economic domain without the old gatekeepers and limitations.
Those other technologies are a bit more familiar to people:

• global always-on connectivity

• encryption constructs

• easy discovery/formation of communities-of-interest

• open source collaboration

• instant rich search and giant archives of past behavior

• delegation of policy to ever-improving software/automation

• cheap powerful handheld computer-phones

• ...etc

These may not seem to be similarly novel breakthroughs; we're getting used to
them, over the last 5-20 years. But now they're being applied to a monetary
domain, via Bitcoin (and other cryptocurrencies), where progress was formerly
bottlenecked.

So while I'm wouldn't generally put a lot of weight on the cheap, shallow shot
against Krugman – "he thought the net wouldn't have more impact than the fax
machine" – there is a somewhat similar failing here. By looking at one aspect
of Bitcoin in reductionist isolation, he (and his tech friend) are missing the
combinatorial effect of all these new possibilities together.

~~~
nawitus
Bitcoin to money is what app store is for mobile software, or the web is to
newspapers etc. It's decentralization of power. There's no gatekeepers to
prevent new innovative payment services. You need $100 to create a new payment
service, not millions. You don't need to ask anyone permission to do what you
want.

In practise, individuals will now have the power that only large corporations
used to.

~~~
stephenbez
I'd disagree that Bitcoin is to money what the app store is for mobile
software. If you are talking about the Apple App Store, they are the
gatekeepers to what software you can load.

~~~
nawitus
I agree that it's not a perfect analogy. App stores (I'm talking in general,
not referring to Apple's store) are still centralized and act as gatekeepers,
but the "gatekeeping level" is in another level to what it used to be. Before
app stores it was practically impossible to for a lone developer to create an
application and release it.

~~~
nhaehnle
You do realize that software development existed before app stores, right?
Lone developers created and released applications all the time. App stores are
about convenience, and so they are _not_ like your other examples, which are
about _decentralization_. They just don't fit.

~~~
nawitus
>Lone developers created and released applications all the time.

The context was applications for mobile phones.

------
mercurialshark
Krugman has spent the past few months qualifying, trivializing and disclaiming
his previous asinine and uninformed remarks about bitcoin. Does he have a
single shred of dignity left? Insufferable.

Moreover, Krugman is blissfully unaware of the hundreds of millions of people
that don't have access to stable or reliable banking. How does opening the
markets to untold millions, via peer-to-peer transactions, not solve an
economic problem?

~~~
venomsnake
How dare a guy change his opinions when he gets to know the facts better.
Travesty I tell you.

We want that will think on Wednesday the same they thought on Monday, no
matter what happens in the world on Tuesday. (Shamelessly stolen from colbert)

~~~
mercurialshark
Eh, sorta missing the point there, brah. He's not changing his position that
Bitcoin is a farcical experiment. He trivializes every argument that favors
bitcoin, therefore allowing him to save face.

AKA he's justifying his dumb thoughts...

------
fragsworth
The success of bitcoin, in large part, relies on faith that people will
support it _as a currency_. If its market cap and/or trade volume isn't high
enough, then a secure mining network cannot be supported, and the entire
system, including all of its extra features touted by techies, will collapse.

Bitcoin will succeed if enough people believe that it will succeed, and
bitcoin will fail if enough people believe it will fail.

Krugman is attempting to damage the future prospects of the system by
spreading asinine notions about how it's not "economically viable". This
really hits a nerve, because it serves no purpose other than to gain
readership and to make him feel better for not investing in it. There is a
risk that he, and others, could destroy bitcoin's future by convincing enough
people that it shouldn't be trusted.

No economic arguments (especially Krugman's) about it are valid. Bitcoin's
success or failure is entirely a self-fulfilling prophecy.

Two factions will form (or have already formed) - supporters and haters. The
system needs enough supporters (and their investments) for it to be viable.
The hope is that the supporters will grow in number or at least remain
unchanged. Krugman is trying to turn supporters into haters, reducing the
viability of the system.

~~~
heurist
I don't think it will be viewed as a currency (I agree with Krugman), but I do
think it could viably be viewed as an asset backing a currency. Here's my
idea: There's nothing stopping cryptocurrencies from eventually becoming
centralized. Successful alternative cryptocurrencies will pop up and will be
backed by governments or businesses, giving them real value. There will be a
market between all cryptocurrencies and centralized currencies will be built
on top of that market. Inflation will happen whenever anyone creates a new
currency and people want to buy it. So crypto-assets will serve as a base for
viable (inflationary) currencies. It wouldn't matter if bitcoin or any other
individual cryptocurrency succeeds or fails as long as that market remains,
and it will due to all of the benefits of cryptocurrencies in general. I'd be
happy to hear any flaws in this idea, I haven't talked about it with anyone
yet.

~~~
fragsworth
It may be a mistake to assume that small alternative cryptocurrencies are
automatically viable. 51% attacks may become a severe problem, especially for
very small mining networks. We may eventually see enough 51% attacks on
altcoins that most people revert to the few largest networks (Bitcoin,
Litecoin, and maybe a couple more). Or maybe we won't, and each new altcoin
inflates the system.

~~~
heurist
That's a good point, I'll have to think about that more. My initial thought is
that at least exchanges wouldn't be limited to currencies with that
vulnerability. Most small currencies would also have limited or no initial
value and probably wouldn't be worth taking over unless it was a pump and dump
scheme, but centralized exchanges might be able to mitigate that.. Interesting
idea, thanks.

------
doctorpangloss
I think transaction-fee-free money transfer is a pretty radical economic
problem Bitcoin solves.

Unless we think banks taking 3% of all Internet transactions is a good thing.

~~~
nhaehnle
The problem with that thinking is that Bitcoin is not transaction-fee-free.
Transactions are subsidized by block rewards, but already today, your
transactions might get stalled if you don't pay fees. And this is only going
to get worse.

Taking a 3% cut of transactions (or even more in some of the walled garden
ecosystems) is obviously too much for a service of _irreversible_
transactions. We'll see whether (a) reversible transactions and the related
insurance problems can be solved more cheaply than today's credit cards and
friends, and (b) whether irreversible electronic transactions will be accepted
by people given the sorry state of computer security.

------
salient
I wouldn't go to Krugman for technology insights. This is the same guy who
basically said the Internet has no future, and now he's repeating it for
Bitcoin.

~~~
tvladeck
He came around on the Internet (and admitted his mistake), and now believes
there will be large productivity gains from Big Data.

[http://krugman.blogs.nytimes.com/2013/08/18/the-dynamo-
and-b...](http://krugman.blogs.nytimes.com/2013/08/18/the-dynamo-and-big-
data/)

Edit: I realize I'm not addressing your larger point. He still may not be the
guy to go to. But that being said I think his opinions are more nuanced.

Edit 2: Another post by him on the value of ICT:
[http://krugman.blogs.nytimes.com/2013/10/11/the-ict-
revoluti...](http://krugman.blogs.nytimes.com/2013/10/11/the-ict-revolution-
isnt-over/)

~~~
hexis
No doubt that when bitcoin's success is obvious, he will also admit his
mistake and go on to make another uninformed prediction.

~~~
tvladeck
I personally find that people who admit their mistakes more trustworthy
because it shows they can at least learn from them. In this case, the jury is
very much still out on whether BTC will succeed as a _currency_ , and not as a
protocol that's useful for some other thing (or many other things), which
seems to be the crux of Krugman's argument.

------
czbond
Not true. Bitcoin did two things that I am aware of: 1) Create a universal
currency which can be easily exchanged and that appreciates rather than
depreciates (over the long run I mean, I am not referring to short term market
fluctuations). 2) It created a mode where many underground (eg: gray or black
market dealings) can take place without the need for laundering money. [Note:
I don't condone, just pointing out the facts]

~~~
johndevor
You're right. The black market gives Bitcoin a "floor" value, just like Gold
or Silver. It is a very efficient means of currency for the black market, as
proven by the Silk Road and others.

~~~
declan
Gold and silver have industrial uses. Gold and silver are used in jewelry.
Gold and silver have proven to be a store of value for thousands of years.
Gold and silver are also, to a first approximation, truly anonymous.

Not one of those four characteristics is true for Bitcoin, so saying it's
"just like" gold and silver is a bit of a stretch. This doesn't mean Bitcoin
is awful, as Krugman's trollish column is titled, but just that it doesn't
have the same intrinsic floor value as gold and silver.

~~~
johndevor
I meant to say that Bitcoin - or something like it - will emerge to facilitate
online transactions of the black market kind. Rightly so that Bitcoin doesn't
inherently gain value from the black market, but I do believe the black market
will use _something_ to do online transactions (as shown by the Silk Road and
others). Thus far, that currency has been Bitcoin.

Gold and silver have industrial uses today. That may change tomorrow (albeit
highly unlikely).

Bitcoin is the currency of cyber criminals today (hence giving it value
today). That also may change tomorrow.

~~~
declan
These are reasonable points. I don't know enough about modern-day black
markets to say how much Bitcoin facilitates them.

If you're right that Bitcoin is a major factor, then yep, that could be an
effective price floor (at least until a better rival comes along). It would be
interesting to learn how much of Bitcoin purchasing is due to black market
transactions. My intuition says it's mostly speculation, but I'd be happy to
be proven wrong.

~~~
johndevor
> The value of the transactions over this period are equivalent to "roughly
> $1.2 billion in revenue and $79.8 million in commissions" and involved
> 146,946 buyers and 3,877 vendors.[13]

That was the value transacted on the Silk Road. Quite impressive numbers,
given that it was a single site and much of that growth occurring in Bitcoin's
less user-friendly days.

~~~
eru
The revenue was in bitcoins not in USD. How was it converted? (If at the end,
then that overstates the volume quite a lot, given the rise of bitcoin's
exchange rate.)

------
allochthon
Paul Krugman is a great economic thinker. These blog posts are no doubt just
him eliciting feedback so that he, as a nontechnical person, can better
understand a new technical phenomenon that has direct bearing on his work.

------
praptak
The scenario with a large number of people wanting to cash out already assumes
Bitcoin lost as a currency, so I'd say it could be a result, not the cause of
Bitcoin's failure. Bitcoin succeeds or fails on whether you can buy useful
stuff with it, buying other currencies is secondary.

~~~
nawitus
The scenario with people cashing out because of regulation also assumes that
most bitcoin users live under a single regulatory area, which is untrue.
Banning bitcoin in the United States, for example, might decrease it's value,
but not destroy it, as there's the rest of the world.

~~~
praptak
Not to disagree about the main point but US could do more to harm Bitcoin than
just banning it internally, especially given that China seems already hostile
to Bitcoin.

------
SwellJoe
I'm sure (or at least I hope), John Levine did not ask to be referred to as an
"Ubernerd". Not to belittle Levine or his accomplishments or his nerd cred,
but I think this article tells us much more about Krugman's ability to
differentiate technical genius from mere competence than anything useful about
Bitcoin. Given the high level of nerdery representd by the people developing
Bitcoin, I'm unlikely to be convinced of a negative outlook for Bitcoin on the
basis of an "expert opinion" from any ubernerd that Krugman chooses to trot
out. The Bitcoin ecosystem has enough nerd cred to withstand pretty much any
argument other than, "here's an exploit that I have figured out" with proof of
said exploit.

I found Charles Stross' critique of Bitcoin far more convincing than anything
I've read from Krugman. But, not on technical grounds; merely on ethical ones.
I do actually worry that we may be replacing a horrible system that enforces
and thrives on inequality with a possibly more extreme system that does the
same thing (possibly with a few new players at the top).

Regardless, Krugman is in way over his head on the _technical_ aspects of
Bitcoin and it shows. There has been much better technical criticism from
actual nerds, including nerds who have worked on cryptocurrencies.

I believe we are seeing one of Krugman's famous bits of shortsightedness, and
I believe he is falling prey to the very type of bias he claims to be trying
to avoid. Bitcoin has a _lot_ going for it, whether you call it a "currency"
or something else. I believe that it's impossible to predict how Bitcoin will
play out, exactly, since we've never seen anything exactly like Bitcoin. I
have some vague feelings, as well (like, I feel like it's likely Bitcoin will
be replaced by some other cryptocurrency within a few years...for a variety of
technical and social reasons). But, it's all just a hunch, and I'm unwilling
to take the kind of stance Krugman is taking, which seems almost naive
(certainly on technical issues, probably less so on economic issues) from my
perspective.

------
jostmey
Krugman has said over and over again that bitcoin is bubble. He is right. But
Krugman has failed to understand a crucial aspect about bitcoin - it is truly
an international currency. Here is why this is so important. Krugman argues
that someday news about bitcoin will come out that is so bad it will scare
people away from bitcoin. This will certainly happen, as it has happened
already. But bad news is localized. Just because China may ban bitcoins does
not mean that people will stop using it elsewhere. The "bad news" would have
to be truly world-wide for everyone to abandon bitcoin altogether. Anything
short of that, and the bubble will continue onward.

~~~
Estragon
A key foundation of a modern nation's power over its citizens is the ability
to arbitrarily create and destroy the national currency, to legitimately
demand that taxes be paid in that currency, and to thus be able to use it to
purchase arbitrary goods and services. It seems quite likely that major
national governments will band together to ban transfers between bitcoin and
their national currencies once they realize what a threat a wholesale shift to
bitcoin would pose to their power to tax and spend.

~~~
codex
To any given government, Bitcoin looks like just another foreign currency. In
many foreign countries, you can get dollar denominated bank accounts. How is
Bitcoin any different than this status quo?

~~~
etherael
Governments work hand in glove with banks, they control and are controlled by
the world banking system in turn, they can see what money goes where via the
SWIFT system, they can approve or deny transfers based on AML/KYC laws which
they can enforce if it comes down to it by applying pressure on the banks
themselves, the entire system is old, well understood and thoroughly
controlled.

The reserve bank of Bitcoin is completely immune to coercion, you can't freeze
funds, you can't stop transactions, you can't do anything at all to the funds
in one of those accounts without the consent of the account holder. If the
account holder doesn't want you to, you can't even know who they are.
Altogether, the entire system is the exact opposite of the global banking
system, it is extremely poorly understood and almost entirely uncontrolled.

And that's just with the bank analogies, if you take it up a notch and compare
fiat issuance to bitcoin issuance it gets even more frightening from their
perspective. There's no nation they can apply diplomatic pressure to to change
the fiscal policy of Bitcoin, that fiscal policy is linked to interests
utterly alien to their own, even.

From their perspective it is indeed a dangerous thing, the only question to my
mind is A) How long will it take them to figure this out and B) when they do
figure it out, what kinds of actions will they take to try to destroy it.

------
fonosip
Gold has base value derived from its industrial, ornamental uses. But its
trading value is much larger.

Similarly Bitcoin has a base value in the cost of mining 1 BTC. Right now it
is around $800 or so.

Because of the competition in mining, asic chips development, and More's law.
The cost of mining 1 BTC is going up exponentially.

~~~
trothamel
While I think it's true that BTC won't fall below the cost of mining 1 BTC,
that's not really saying anything.

If BTC falls below the cost of mining people will stop mining and the network
will adjust to the reduced difficulty, making the cost of mining drop.

A problem is that if too few people mine, the network becomes easy to
compromise. That's a problem that bitcoin has, and other currencies (and
things like gold and silver) do not.

~~~
eru
Bitcoin prices will eventually fall below the cost of mining. Guaranteed.
(Because eventually there will be no new bitcoins left to mine. So mining new
bitcoins becomes infinitely expensive.)

------
codex
Bitcoin does solve an economic problem: it sidesteps the usurious interchange
fees of Visa and MasterCard, allowing low friction micro payments to become a
reality on the web. One doesn't even need to hold any Bitcoins to make use of
this feature; just convert on demand.

