
Direct use value of Bitcoin - oleganza
http://blog.oleganza.com/post/42262765318/direct-use-value-of-bitcoin
======
contingencies
It can be useful to frame such discussions in some conventional reference,
thus here's my top of head summary of Bitcoin vs. the well established three
main uses of money; ie. money as a...

 _Unit of account_ : Works fine but has issues due to the relative volatility
of its value. Also, the complexity of accounting that can result from
blockchain rollbacks and other Bitcoin-specific issues (new
"invoices/receipts" scheme, etc...)

 _Store of value_ : Far too volatile at present to be much good; though it has
been heading upwards, an individual party could easily destabilize the entire
economy.

 _Medium of exchange_ : Excellent speed and reach, theoretically an
improvement on existing systems due to a lack of chargebacks (finality).
Realistically, increasingly complex to implement, particularly securely, and
especially for real time goods and services. Unfortunately the market is
relatively small and spotty right now, so any benefits here are largely
negated for general commerce.

I can't help but feel the blockchain-tricks referenced by the author (in
addition to the upcoming "invoices/receipts" mechanism) are nought but scope
creep, best left out as violators of "do one thing and do it well", and in
general a bad sign for Bitcoin's future.

That said, I am all for Bitcoin, I think it's great. It's just important to be
realistic about its objective properties vs. other systems.

~~~
netcan
Perfectly said.

I'd also add that I'm not sure bitcoin ever needs to be anything more than a
medium of exchange. In digital commerce there is no reason not to denote in
one currency, exchange in another while marking to a third.

Chargebacks, speed, etc all get translated to transaction costs. Lower
transaction costs by an order of magnitude or two and all sorts of things
become possible.

~~~
oleganza
You miss one thing, though: the block chain has real costs. If you want
another block chain for the document timestamping, for instance, then you'll
have to convince people to mine that block chain. Inevitably, it'll be just
another currency not very different from Bitcoin. And since both have almost
the same objective properties and Bitcoin is already more valuable, nobody
will spend CPU on your currency. So you'll end up using the Bitcoin block
chain anyway.

This is exactly what is happening to Namecoin: initially, it was just another
blockchain, but very soon people realized that nobody is willing to spend any
CPU/GPU time on Namecoin if Bitcoin is worth more (no matter how much more).
So Namecoin guys proposed "merged mining", which is just a fancy way to reuse
proof-of-work done on Bitcoin block chain without asking people to devote any
resources specifically to Namecoin.

~~~
MacsHeadroom
The Namecoin and Litecoin blockchains have relatively large/robust
user/contributor networks behind them.

Both are almost identical to Bitcoin, with very little modification.

------
zby
He writes about direct value of Bitcoin - but half of the examples he mentions
are about crypto in general not about the particular system:

\- Smart Property is just a theoretical proposal for a system and the linked
page says: Smart property was first proposed by Nick Szabo in his 1997 paper,
"The idea of smart contracts". There are currently no implementations of this
idea.

\- decentralized DNS is realized in a different system that uses the code from
bitcoin software but is not connected in any way to the bitcoin system itself:
<http://dot-bit.org/Main_Page>

I guess you can use bitcoin to do secure time-stamping of messages that can
fit into the format of a bitcoin transaction (there is some place for comments
or something) - so you can piggyback a message on a bitcoin transaction.

Finally <https://en.bitcoin.it/wiki/Contracts> seem to be connected to the
existing bitcoin system, but it is not clear how much of it is already
implemented in the clients.

~~~
jerguismi
More accurate title would be "direct value of cryptocurrency". Bitcoin has
very conservative approach with this. The core developers won't merge any
features which don't serve the basic idea of currency.

However alternative chains could be used to develop many of these systems. I
think there can be a tremendous value with public database, not controlled by
anyone. Lately I have been thinking about alt-chain which could be used as a
distributed stock/asset/IPO ledger. Similar to <http://www.bitcoinx.org/> ,
but done in a separate chain to server the needs better.

~~~
oleganza
See my comment above. Many cool features (like timestamping) do not need any
modification of the existing software. E.g. it is entirely possible to make
DNS without alternative chain (like Namecoin), but fully on the existing block
chain with timestamping through deterministic addresses.

------
scotty79
Gold: limited, durable, easy to use as physical transfer of value because of
high value per unit of mass (due to rarity)

Bitcoin: limited, durable, easy to transfer between any two connected users

Whether you can make jewlery or timestamp things doesn't really matter for the
main usage.

~~~
nhaehnle
How durable is Bitcoin, really? In case of major economic turmoil, the value
of Bitcoins can drop to zero _and stay there permanently_.

This is very different from gold. In a truly apocalyptic scenario, gold also
becomes nearly worthless. However, when society bounces back, the value of
gold can be re-inflated based on the intrinsic value of gold.

In the case of Bitcoin, such a bounce-back is not as likely to happen, because
it would be so tempting for people to just start an entirely new blockchain.

~~~
scotty79
As durable as P2P network. In truly apocalyptic scenario I'll most likely be
dead so I don't really care.

Resetting accounts to zero might be favorable scenario over getting killed
over few pounds of gold in my basement and my suspected withholding of the
information where is more.

------
TheSisb2
The first two paragraphs seemed to be directed towards the layman, and then
the author takes a tangent with: "For example, the block chain (distributed
transaction history) is designed to be extremely hard to forge and very easy
to verify." You lost me completely.

~~~
inoop
The bitcoin blockchain is a replicated database (not distributed, as this guy
claims) which contains a copy of each and every bitcoin transaction ever made
since the beginning of time. It's basically how they 'solve' the so-called
double spending problem where a digital coin can be duplicated (spent twice)
unless there is some way to verify the uniqueness of said coin. Given a total
history of every transaction ever made, a recipient can check whether a coin
hasn't been already given to someone else by the sender.

The idea is that anyone can participate in the peer-to-peer network that
maintains this database, and that this database is signed on a block-by-block
basis by the participants to maintain consensus. Hence the term 'block chain'.

Now, since the data in the block chain is a set of time-stamped transactions
that are difficult to forge (unless someone controls >50% of the network), one
can use it to store other time stamped information such as contracts.

(disclaimer: the above is just a semi-laymans attempt to explain the block
chain to OP, feel free to correct me where I am wrong:)

~~~
quinndupont
(One of the better explanations I've seen). Indeed, the bitcoin.org website
claims that the blockchain is the central innovation in Bitcoin (since the
rest of the ecash crypto has been around for decades)

------
eduardordm
Oleg,

I learned quite a bit with your article but there is a statement that is not
quite accurate: "dollar bills do not have any value in themselves"

Legal tenders like dollar bills are the value themselves, it might even come
to a situation where the material used to build it costs more than the actual
value of the medium (1 cent coins).

I wrote an article some time ago and I would be very happy if you could read
it and give your thoughts:
[http://eduardo.intermeta.com.br/posts/2013/1/18/bitcoins-
and...](http://eduardo.intermeta.com.br/posts/2013/1/18/bitcoins-and-the-
future-of-electronic-money)

~~~
weavejester
How do you figure that a dollar bill has any intrinsic value? The raw
materials have some minor value, sure, but the cost of making a dollar note is
significantly lower than a dollar.

A dollar bill is a promise of value, conceptually no different to a cheque
from the US government. If you believe that money has any value in itself,
then I have some Zimbabwean dollars to sell you.

~~~
eduardordm
I did not 'figure'. What you described is representative money, not fiat/paper
money.

~~~
weavejester
Representative money is a particularly vague term, which usually means money
backed by a physical commodity, but can also encompass fiat money as well.

There's nothing inherently magical about something being legal tender. The
only difference between a $1 cheque and a $1 note is risk. The probability of
a cheque bouncing is more likely than the USA economy collapsing into
hyperinflation.

~~~
eduardordm
As you said, once I give you a dollar bill, the transaction is over. If I give
you a check it will takes days for the actual transaction to happen and the
money transferred (which can possibly end up in a physical transfer of cash)

Money does not depend on any kind of backing at all, for instance: the US gov
has been flooding the market with dollars backed by the promise it will buy
them back someday. Some countries don't even bother buying dollars anymore,
they rely 100% on swap agreements.

Even if the economy collapses, the dollar will still be accepted for paying
your gov duties, which means it will collapse too, equalizing the system.
(inflation and deflation can be too complex for me to have any useful
discussion)

~~~
weavejester
You say money does not have any backing, and then immediately after you say
that dollars are backed with a promise from the US government.

Fiat money is backed by the faith in a countries economy and government. A
dollar is worth something to me because I can ultimately exchange it for goods
or services produced in the United States. If this were not possible, for
instance if the USA completely closed their borders to all foreign trade and
travel, then the dollar would be worthless to anyone outside the country.

You mention that a cheque needs time for the money to be transferred. So you
give me a cheque for $1, I would have to wait for the dollar to be transferred
from your bank account to mine. But what if I didn't cash the cheque? What if
I gave that cheque to someone else as a substitute for a dollar bill? If Alice
gives a cheque to Bob, then Bob can pay Carol with that cheque if Carol trusts
Alice is good for the debt.

Finally, regarding the dollar being accepted for paying my government duties,
that's only true for countries that have the US dollar as their official
currency. If the USA disappeared tomorrow, the dollars I own would be
worthless; they only have worth because they're backed by the USA, much has a
cheque only has worth while a particular bank account exists and has funds.

~~~
eduardordm
Interesting how the cheque situation you explained (not cashing and passing it
to others) is somewhat similar to what happens to swap agreements. It's really
interesting how currency can manifest itself without a regulated system.

The main point of my article (I think my poor writing didn't help me convey
the message) is that even when we move on to electronic money (like bitcoin)
people will still not want to carry them (having their own wallets at home),
they will prefer a bank or service to take care of this. I think this is great
because we could start using bitcoins with systems that are already in place,
I even built a small demo for Verifone PoS which integrated nicely with our
current systems (I run a credit card company)

Sometimes I also think that electronic money, like credit cards, could not be
as democratic as paper.

~~~
weavejester
Ah, okay, so you're more talking about the value of credit? Being able to buy
something in advance of having the liquid funds to cover it?

------
tlrobinson
Isn't this value derived from the system as a whole rather than Bitcoins
themselves? If the monetary value of Bitcoin dropped to zero for some reason
you wouldn't be able to use your existing Bitcoin for these purposes.

It's kind of like saying you could use the comment/memo area of wires/checks
to send or timestamp messages.

~~~
MacsHeadroom
>Isn't this value derived from the system as a whole rather than Bitcoins
themselves?

Capital B Bitcoin (never plural) refers to the system as a whole. Lowercase b
bitcoins refers to the units of currency.

And yes, this value is derived from Bitcoin, not bitcoins- which is what the
article says.

>If the monetary value of Bitcoin dropped to zero for some reason you wouldn't
be able to use your existing Bitcoin for these purposes.

Yes, you would. All of these uses would still apply if bitcoins were
worthless.

Namecoins are essentially free, yet they can be used to do all of these as
well. In fact, Namecoin is the third item on the list in the article.

~~~
javert
_All of these uses would still apply if bitcoins were worthless._

No, because if bitcoins were worthless, there would be no incentive to mine,
and if there is no incentive to mine, there is no security for the blockchain.

------
diggan
> It costs nothing

Doesn't it costs you anything to make a transaction with Bitcoin? That was
more than I knew.

~~~
yuvadam
The costs are negligible - several cents per transaction nowadays, and is
always up to you to define related to how important the transaction is and how
fast you'd like the network to confirm it.

In any case, the costs are miniscule compared to standard transaction fees
that banks charge.

~~~
gst
The costs are neglible now, but based on how Bitcoin works (shared transaction
list) it seems likely that the costs will rise in the future:

1) Currently there's a transaction size limit of 1 MB in the protocol, with
typical "large" transaction sizes being about one third of this. Once average
transaction sizes will hit the limit, miners will probably include
transactions paying higher fees, thus auctioning the available space.

2) Even if Bitcoin users agree on a protocol change to increase this limit
costs will rise, as every transaction needs to be forwarded to all other nodes
(or at least to the miners). So increasing transaction sizes will create
higher hardware requirements for miners, without necessarily increasing their
income. And there's the further complication that a fork will only work if a
majority of the network actually supports it.

~~~
MacsHeadroom
1) No, Gavin (Bitcoin lead developer) says he wants to make the transaction
and block size unlimited (or rather, let the miners limit it). This should
keep fees down. <https://bitcointalk.org/index.php?topic=140233.40>

2) No, costs for the majority of transactions will not go up- in fact, they
may go down. Most miners already charge different fees based on any given
transaction's size. The fees range from about a half-cent USD to about two
cents USD. If someone wants to send a 2MB transaction, the miners will be able
to charge whatever transaction fee they choose for expedient processing.

------
nym
Looking to buy bitcoins?

Here are guides + ratings on how to buy bitcoins, in the united states,
europe, and around the world:

<http://howdoyoubuybitcoins.com/>

Let me know if you have any feedback! We're always trying to improve!

------
wildgift
I thought old transactions in the block chain were rolled up into a new block
and signed. So old transactions do vanish. Am I wrong or right on that one?

~~~
jeremyjh
Just a digest of the previous block makes it into the next. Every client must
have the entire block chain - every transaction ever made.

~~~
oleganza
That's not true. You may want to have entire block chain - if you wish to
verify every block. Miners need to do so, to be sure they don't build their
blocks on top of invalid blocks. Regular people don't require that and can
trust some web wallets or light clients like Electrum, that store only block
headers and keep track of personal keys, but do not verify all the
transactions.

~~~
jeremyjh
It is true if we define client as "client which implements BTC protocol". If
you define it as "random internet strangers I trust with my money" then of
course it does not require the blockchain and also does not provide any of the
strong guarantees from BTC. Even for Electrum which does not have your private
keys, you are still trusting what it says the blockchain contains. If
subverted this could for example lead you to believe that someone had sent BTC
to your wallet that were not actually in the true blockchain.

~~~
oleganza
I didn't say I don't need to trust anybody. I have to trust even the full
client: I need to validate the checksum, make sure I don't have viruses and
keyloggers on my machine, I have to trust my backup system and have to trust
people who understand crypto better than me.

Everyone must trust someone, there is no clear line in the usability-vs-trust
balance. I'm perfectly okay to trust a web wallet on blockchain.info small
amount of bitcoins because they do a very good job with their iPhone app and
SMS notifications. I'm also okay to put some of my money into Electrum and
some - in Bitcoin-QT. And keep some on bitcoin-central.net in case I need to
sell BTC for fiat quickly.

Given all of that, it's not fair to say that "the true" client is this one,
while all the others - are considerably different. For people who value their
time, it's important to be able to sacrifice some trust for usability and vice
versa. If we would always tell them that they _must_ use the full client, we
are just imposing our personal tradeoffs and do not respect theirs.

------
hayksaakian
With widespread adoption, I could imagine software licensing getting a lot
easier.

