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IMF Head Foresees the End of Banking and the Triumph of Cryptocurrency (fee.org)
263 points by imartin2k on Oct 2, 2017 | hide | past | web | favorite | 157 comments



These sections of the speech resonate with me:

"For now, virtual currencies such as Bitcoin pose little or no challenge to the existing order of fiat currencies and central banks. Why? Because they are too volatile, too risky, too energy intensive, and because the underlying technologies are not yet scalable. Many are too opaque for regulators; and some have been hacked.

But many of these are technological challenges that could be addressed over time. Not so long ago, some experts argued that personal computers would never be adopted, and that tablets would only be used as expensive coffee trays. So I think it may not be wise to dismiss virtual currencies."

"IMF experience shows that there is a tipping point beyond which coordination around a new currency is exponential. In the Seychelles, for example, dollarization jumped from 20 percent in 2006 to 60 percent in 2008."

"Why might citizens hold virtual currencies rather than physical dollars, euros, or sterling? Because it may one day be easier and safer than obtaining paper bills, especially in remote regions. And because virtual currencies could actually become more stable."

The person speaking: Christine Lagarde, Head of the International Monetary Fund.


What she doesn't state is that central bankers are going to be the biggest supporters of cryptocurrency once they get to endorse one that is fully trackable (BTC fits the bill pretty well on that front).

It's one of the unexpected paradoxes that cryptocurrency is going to be the greatest threat to privacy since the cell phone and not many people see it coming.

This is the reason I agree with her -- it will further consolidate power.


Indeed, this is one of my primary points as well. I've been trying to tell people like Max Keiser that for all its good, BTC is not anonymous, which is one of the primary functions of cash. The totalitarian surveillance society would love to track everyone's purchases.

On top of that, the other problem is that in a fiat fractional reserve system, there's not much stopping the big central bankers from poofing some old currency into existence so they can buy up lots of BTC et al.

That's why right now I am leaning towards Monero and similar at least semi-anonymous coins (without having to use a tumbler separate).


I see the privacy potential of cryptocurrency the same the privacy potential of the internet: for the average person it will be a disaster.


As a counter point, you could argue that the pseudonymous nature of cryptocurrency is simply another technological hurdle that, like the scalability problem, can be overcome in time.


Not really. The trouble with deanonymization in a network is that as soon as anyone fails to follow the proper privacy protocol, the entire network can be unmasked through the social graph.

For example, Flickr users have been identified by their Twitter connections:

https://arstechnica.com/tech-policy/2009/03/pulling-back-the...


I would imagine Palantir has been working on this since cryptocurrencies started being becoming popular, even though they have denied it[0]. Or somebody else such as SABR[1].

[0] https://www.coindesk.com/palantir-quantum-bitcoin-cloud-mini... [1] https://bravenewcoin.com/news/sabr-palantir-for-the-blockcha...


Yep, and we pretty much know what the solution will look like: zero-knowledge proofs, such as the ones used by ZCash.


zeroCash is a pretty good starting point to a solution to the privacy problem.


Verge would be another cryptocurrency that comes with anonymity baked in and considering it uses TOR network, I'd venture to say it is the best tool for protecting your privacy.


and of course, just like real money, it's in the interests of those holding large amounts of it "go along to get along". the big banks know that, that's how they operate. this announcements almost seems like a dog whistle to those new elites and extant elites who may want to diversify their holdings.

so if this comes to pass, it effectively captures the interests of the now-wealthy first-adopters, who are presumably the most ardent proponents of the societal 'benefits' as well.

and then, we are back to square one, with a monied super-class effectively imposing the will of the bankers on the general populace through the very act of holding and controlling the wealth (which is ultimately owned by the state).

the more things change...


> It's one of the unexpected paradoxes that cryptocurrency is going to be the greatest threat to privacy since the cell phone and not many people see it coming.

Unless people adopt a currency like Monero which is fungible and where privacy is default. People just need to recognize that privacy is for everyone. I think everyone inherently knows that, but when it comes to technology, they don't realize they're giving their privacy up.

The difference between a cellphone and Monero (in this context), is that a cellphone can be tracked.


That’s why we shouldn’t talk about BTC that much anymore. It was a breakthrough but nobody but those heavyly invested in the ecosystem would want to see it succeed on a large scale. There are alternatives being developed which will have better tradeoffs and properties. I am somewhat interest in IoTA and Algorand for example. Both are very different from each other and to BTC so it demonstrates the space of possibilities out there.

Let’s hope we don’t do a VHS or HTTP this time around!



I think Op's point is that the cryptocurrency "supported" by the central banks might be as trackable as bitcoin. Sure Zcash has, at least for now, a way to ensure anonymity but this ensures it might not be in running contention for the "central bank supported cryptocurrency".


It's pretty easy to trade your BTC for any altcoin on an exchange, and then trade it back. I bet there will be automated, decentralized exchanges to do it, too.


This is rididulous. How many dark markets accept cash? Bitcoin works just fine for them.


Where I find her position slightly disingenuous is that the role of central banks and of the IMF is precisely to bend the rules when they think it is required, by either printing money or making funds available to states to support them or their currency. So neither central banks nor the IMF will have any interest in a currency which cannot be somewhat manipulated.

Where cryptocurrencies might fit in nevertheless is that they are only as strong as the convention to use a common algorithm. And the choice of this algorithm can be influenced or controlled by law or regulations. Hence the said authorities can achieve the same thing they currently do with crypto currencies than with fiat currencies. Might have defeated the original purpose but is a more likely scenario if cryptocurrencies become mainstream.


What I don't understand is this: if the supply of bitcoin is controlled by a monotonically rate decreasing algorithm which "approximates the rate at which commodities like gold are mined"[0], how is it going to avoid the mismatch between the cyclical and random nature of economic output and the currency to properly represent it, ie, what central banks are fundamentally designed to do?

[0] https://en.bitcoin.it/wiki/Controlled_supply


It doesn’t, this is one of the major criticisms of the gold standard.

Bitcoin could never be gold even if it wanted to. Making gold proper hard currency is easy, just merge two neutron stars and you’ll have a finite amount to drill up. That’s nothing like having to compute some hash where you simply set up the rules of creation. Gold cannot be distributed or forked via github, it’s simply a fundamentally flawed comparison.

There’s people who think it’s just fine and dandy to have multiple currencies making the rounds in the economy. The problem is that it’s just a horrible user experience in the end. It reminds me of those anarchists who believe we should all govern in free assemblies and have those dull daily meetings. Aint nobody got time for that, few months and you’ll have people paying some guy to go get into arguments with some other guy and to make their decisions for them. Sounds familiar doesn’t it.

You’re not going to get farmers, clowns and housewives to check the daily fluctuations between the dozen or so cryptocs-du-jour and decide which one to invest in, hedge against or transfer to. Well, unless you spend the majority of your time thinking about that stuff and getting paid to do so. You could make a decent buck doing just that... hmmm, if only we had something resembling it.

Keep it simple, brains like simple. Don’t make me think. If you make my computer think, at least have tractable math without a gazillion variables.


So there will be one or two major currencies for people who don't want to think, and thousands of others who want to play the investment game, just like what happens every day in the stock market.

We currently have one currency for most people's everyday use (local government currency), and they don't bother to read up on what the stock market is up to, but there are plenty that will and choose to buy shares in whatever they think is worth buying.

And we'll probably even have the equivalent of retirement accounts and mutual funds for cryptocurrency, we're not even that far away from that reality today.

So yeah, there are people who aren't going to want to pay attention to all that, and they won't need to whenever we've reached that tipping point. They'll just have bitcoin (or whatever) and deal exclusively in bitcoin, and they won't care what its price is compared to everything else, just like no one bothers to peg the US dollar to any particular share.

It's because fiat currency is still so dominant that bitcoin appears to be volatile in comparison, because they're using USD as the anchor. If bitcoin becomes the dominant coin, it will appear to be just as stable, if not moreso, as you won't have quantitive easing or government manipulation to worry about.


I'm not sure from your tone if you're implying that Bitcoin is thus subject to the same criticism, which it seems to by your content. If you're not, it begs the question: who decides the complexity behind the hash calculation, or in your words, how to "make my computer think"? Some bureau?


the argument that if cryptos become large they fluctuate too much is flawed, as as asset becomes larger it will become correspondingly less volatile. Already there are periods where BTC has has similar volatility to gold and if it follows its current trajectory will be MORE stable than gold.


I think a deeper question to ask is whether the monetary controls of which you speak are designed to serve the masses or to maintain current power and wealth distribution?

The world functioned without those things for much longer than we've had them. In the past, the only controls were whether new precious metal or other resource deposits were found.

I think the cryptocurrency approach affirmatively rejects the notion that a central bank's controls are a net positive.


> The world functioned without those things for much longer than we've had them. In the past, the only controls were whether new precious metal or other resource deposits were found.

The oldest forms of scripture we’ve found are mesopotamian clay tablets depicting the debts of people relative to eachother (John still needs to pay back Don for that ox he got last year). They were stored in temples and administered by the clergy... centrally.


Credit existed before currency and currency well before national markets or anything resembling modern economics.


  I think a deeper question to ask is whether the monetary 
  controls of which you speak are designed to serve the masses 
  or to maintain current power and wealth distribution?
Consider how all the major cryptocoin supplies have been minted and distributed. Anyone with established wealth has had disproportionately easier access to take over these cryptocoin networks due to the supplies being produced in quantity early on and at low computational/energy/capital costs.

Assuming the existing network is not made obsolete, and if there is any on-going demand then later users will need to sacrifice disproportionately excessive trade into the network as the early adopters simply horde the majority of the supply.


The difference is that it's a one-time upfront situation, whereas the current monetary systems in place have permanent ongoing rewards: the US federal reserve system where a select few chosen long ago have a permanent guaranteed income return that is written into law.

I'd rather have transparency and one-time benefit to a select few than a permanent, secretive benefit.

The US federal reserve system works pretty well and I don't really have a huge problem with it. My point is simply that the downsides to cryptocurrencies you rightly highlight have to be viewed in context of the current alternatives.


A large share of an asset which appreciates over time is a permanent ongoing reward. The effect of a conventional fractional reserve currency is the opposite; inflation erodes the value of currency holdings unless they're directly or indirectly invested in producing stuff (Sure, who has access to what investment opportunities isn't even and nor is the initial distribution of wealth, but cryptocurrency doesn't attempt to solve that problem)


  In economics, the Gini coefficient is the standard measure 
  of how inequitable a society is. This is tricky to 
  determine for Bitcoin, as it's not quiet a "society" in 
  the Gini sense, one person may have multiple addresses and 
  many addresses have been used only once or a few times. 
  (The commonly-cited figure of 0.88 is based on one small 
  exchange in 2011.) However, a Citigroup analysis from 
  early 2014 notes: "47 individuals hold about 30 percent, 
  another 900 a further 20 percent, the next 10,000 about 
  25% and another million about 20%"; and distribution 
  "looks much like the distribution of wealth in North Korea 
  and makes China's and even the US' wealth distribution 
  look like that of a workers' paradise

  Dorit Ron and Adi Shamir found in a 2012 study that only 
  22% of then-existing Bitcoins were in circulation at all, 
  there were a total of 75 active users or businesses with 
  any kind of volume, one (unidentified) user owned a 
  quarter of all Bitcoins in existence, and one large owner 
  was trying to hide their pile by moving it around in 
  thousands of smaller transactions. (Shamir is one of the 
  most renowned cryptographers in the world and the "S" in 
  "RSA encryption")"

[1] "Attack of the 50 Foot Blockchain" via https://news.ycombinator.com/user?id=davidgerard


In my opinion the secret is that the algorithm can be changed anytime. In fact there was a debate recently to amend bitcoin, which in the end resulted in bitcoin cash. So as long as the central bank controls the algorithm (i.e. can force by law or regulations miners to switch to a different algorithm), they have full control on the supply of money.

That defeats the original purpose of bitcoin, but that could be their intention. The settlement of the currency could be decentralised but the supply of the currency could be controlled.

In my opinion that leaves many other challenges, some fundamental like the concept of public ledger, incompatible with the secrecy of banking (i.e. the payments you make is not public information).


That would be a problem if we only had one cryptocurrency, but actually we have hundreds, and can add more anytime. Rather than a gold standard, we have something like the system of multiple privately-issued currencies advocated by Hayek. He thought it would self-adjust without any need for central administration.


Hayek wasn't familiar with modern research into chaos and non-linear dynamics. He assumed an equilibrium and stable growth path, though he didn't use such terms.


I'm not claiming he was right, just that his system is what cryptocurrency is building.

But I do think it makes at least as much intuitive sense to say "we can make as much money as we need, and competition between currencies will limit inflation" as to say "we won't have enough money so the economy won't grow."


The trick with intuition is that we need the right metaphor for it to work. The one in my mind is an inflating balloon.


But doesn't the principle of being able to add more cryptocurrencies grant the balloon infinite expansion?


That's more like having many balloons. Tho I don't know much about the coins other than Bitcoin. Are they all doomed to deflation?


assuming bitcoin were the main currency, then, as soon as political pressure grew strong enough to demand real monetary flexibility, (e.g. to track a business cycle and reduce unemployment, or to fight a deflationary spiral) someone (in government) would start innovating.

that innovation could mean replacing bitcoin with another currency through forceful governmental intervention of some kind. or it might mean modifying (i.e. distorting/destroying) bitcoin's current protocols or algos. bitcoin is in its early stages, but so are governmental efforts to regulate it.


> bitcoin is in its early stages, but so are governmental efforts to regulate it.

And so are government efforts to compete with it. I think that eventually, the Treasury Dept. will see so much convenience in crypto currency(s), they will issue their own coin, the only 'legal' tender in the land.


Even if it can't fiat the creation of more coin, the central bank of a high-income country can still extend a nearly infinite amount of credit denominated in that coin.


The part which interest me a lot is this:

"Why might citizens hold virtual currencies rather than physical dollars, euros, or sterling? Because it may one day be easier and safer than obtaining paper bills, especially in remote regions."

This could be read either ways. This could also mean expanding network to ensure people are able to transact online using dollars held in their accounts but not in physical form ie "virtual dollars".

Then there is the word - "virtual currency". Sure bitcoin exists online so it is "virtual" in nature. But the supply control is defined by cryptographic proof so it cannot be created, at least for now, in an unlimited supply.

This makes me wonder what is Christine Lagarde even talking about.


She explains that quote clearly here:

"For instance, think of countries with weak institutions and unstable national currencies. Instead of adopting the currency of another country—such as the U.S. dollar—some of these economies might see a growing use of virtual currencies. Call it dollarization 2.0.

...citizens may one day prefer virtual currencies, since they potentially offer the same cost and convenience as cash—no settlement risks, no clearing delays, no central registration, no intermediary to check accounts and identities. If privately issued virtual currencies remain risky and unstable, citizens may even call on central banks to provide digital forms of legal tender."


Oh. Her. The one who oversaw one of the biggest corruption scandal in France (until we get confirmation of the Gaddafi affair) and who was a member of the Sarkozy administration, the closest thing to Trump we had their.

Assume she is no smarter than a bad VC who is falling for buzzwords. I don't trust her analysis for a minute.


argumentum ad hominem!

Her analysis is actually pretty unbiased and well balanced. I never expected such a open statement from the head of the IMF.


I would argue that when talking about criminals, known to have committed fraud (which is what corruption is) it is in fact relevant to know this. She has been caught deliberately lying and organizing fraud, anything and everything she says needs to be triple checked and quadruple checked at least.

Of course, there's a LOT of high up finance people who have been convicted of fraud and/or corruption directly or indirectly.


Her analysis is pretty standard. If you really want to remove ad hominem then just ignore she was IMF head and assume this is a comment on a BTC enthusiasts forum. This is the exact value I attribute to that comment.


"the underlying technologies are not yet scalable" - What does this mean?


Their number of transactions per second are orders of magnitude lower than VISA. Work is being done to address this, most notably Lightning Network.


Also sharding, Plasma, and proof of stake.


>> ... too energy intensive

This argument has become so triggering to me. When I hear this, two things become immediately clear to me about the speaker. They do not recognize the vast economies of scale of a network secured by proof-of-work. They also do not fully understand Bitcoin's value as not only as medium of exchange but also a STORE OF VALUE.

The total number of Bitcoin addresses is 2^160. Yes, the Bitcoin network is currently securing 1,461,501,637,330,902,918,203,684,832,716,283,019,655,932,542,976 payment addresses. That's enough for each person alive on this earth (~7.44 billion in 2016) to have 196,385,600,286,334,710,857,791,565,804,391,698,421.92 separate bank accounts that all fit in your pocket.

How much energy do people think it would take to build a bank (or group of banks) that could collectively account for and secure the wealth in 2^160 bank accounts? Don't even consider that it needs to be accessible from all over the world. It would take A LOT OF ENERGY! Now, how much more energy would it take to also run a payment network on top of it? It would take EVEN MORE.

What I want to know from everyone who cites this tired old argument is this. Just what is an acceptable amount of energy to secure potentially all of the wealth in the world?


> Just what is an acceptable amount of energy to secure potentially all of the wealth in the world?

As little as necessary. While Bitcoin incentivize to spend as much energy as possible, up to the (partially arbitrarily specified) mining reward as financial cap.

Also it is very dishonest to compare potential address space to actually used address space. You could easily extend the number of digits of current bank account without really increasing energy consumption. If you'd actually start to use those address spaces Bitcoin again would scale a lot worse, since nodes would actually have to spend computing power to process all wallets. Hell the current bitcoin blockchain size already makes running a node not worth it for me, thus we might should not promote its scalability. Though this has less to do with proof of work.

By the way i wonder how different POW algorithms and chains with similar ones will be able to coexist in the long term without weakening its POW.


You've made up a requirement to fit your argument. Why would we need to secure 2^160 bank accounts?


For privacy reasons you probably want to create a new bank account for every atomic "coin" you have and might want to transfer. Also you might want to move them to new wallets in random intervals to make it look like they have been transferred and more difficult to identify/correlate actual transfers. That would of cause be impossible with Bitcoin's current 7 transactions per second. Its a long road ahead til crypto currencies will replace the current banking system, even ignoring POW's questionable energy consumption.


Do we need a trigger warning on comments about bitcoin energy consumption now?


What if I told you that it's possible to create a medium of exchange and store of value without consuming appreciable energy?


I'd ask you how.


SCP.


One question : the deflationary nature of cryptocurrencies means that early adopters are rewarded disproportionately. Is this a bug or a feature? It seems unfair for the late adopters and is also one of the reasons people draw parallels to a ponzi scheme. I've not come across a good explanation for this, so any thoughts?


Cryptocurrencies aren't necessarily deflationary. Some aspects are quite inflationary, in fact. They can fork. They can have arbitrarily-imposed coin limits increased by changing a single line of code. Other aspects are deflationary, such as the ability for coins to be destroyed or lost forever. How these two forces are balanced against each other is up to the consensus stakeholders (miners) in each case. They should be expected to act in what they perceive to be their own best interests, which could be either deflationary or inflationary, in different scenarios. The interests in PoS and PoW systems could diverge significantly, as in a PoS system the miner's universal interest would presumably be to maximize the value of the currency, whereas in a PoW system the miner's interest would presumably be to maximize both the value of the currency they retained as well as the value of their real-world mining assets.


I'm aware I might be fighting a losing battle here but the term is "expansionary" not "inflationary".

Inflationary means that the value of a currency tends to go down over time. Expansionary means that the supply of a currency tends to go up over time.

Bitcoin is mildly expansionary at the moment because the rate of coin creation is (presumably) greater than the rate of coin destruction. At some point this will flip and it will become contractionary.

Regardless, Bitcoin is obviously highly deflationary as the value of a Bitcoin tends to go up over time.


The emission rate of most crypto-currencies is actually relatively high, the problem is that their value have been increasing faster than the coin supply have inflated. To keep value stable, you need an intelligent entity which can control emission, which kind of kills the point of decentralization. Bitcoin halves it's emission rate every 210000 Blocks, or roughly every 4 years. This is because of an adherence to the Austrian School of economic thought. Ethereum is planning to move towards an emission rate somewhere in the realm of 0 < Grow Rate <= World GDP Growth Rate, which should make it's value increase slightly.

So to answer your question succinctly; The deflationary nature of Bitcoin is intended. It's quite possible to build inflationary Crypto-Currencies, but it would be difficult to gain traction with early adopters.


Early adopters are rewarded proportionally to the risk they took (and the work they put in).

Bitcoin wouldn’t even be here today if the early adopters hadn’t spent many years making it usable and valuable. Why would anyone who was uninvolved expect to profit from that?


What's the incentive for anyone uninvolved in the early stages to become involved? The hope that the value will increase indefinitely? If that's true then there is will be no liquidity as no rational person is willing to part with an appreciating asset.

It's precisely this deflationary effect of earlier adopters profiting at the expense of later adopters that makes the whole thing seem like a pyramid scheme.


I don't understand what the difference is to a stock - those investing hope it will continue to go up but it's a risk. And they hope to sell at the right moment.


Even if the price stagnates, that beats fiat inflation. But infinite growth is on the table too since there are mathematical guarantees about rarity and few fundamental means of crashing it.


The incentive is that bitcoin is (for some uses) superior to existing payment/wealth storage technology even if you can’t make a bunch of money on it.


It really isn't. If my physical wallet is stolen I can call my bank and have the cards cancelled and interim charges reversed; and I am guaranteed fraud protection at their expense. If my BTC wallet is stolen I'm fucked.


Personally, the more I use my cryptocurrency hardware wallet, the more I feel horrified that in legacy systems I make payments by giving merchants the ability to withdraw as much of my money as they want. It's a fundamentally insecure system, made sort of workable by layering on hacks like manual overrides, statistical fraud protection, and banks just eating the losses.


that is unless the bank themselves are fraudsters.


I'm not sure why you're being down-voted, you speak the truth. I myself didn't participate beyond a cursory download and trial years ago, because I perceived it too risky and fad-like for my time... boy was I wrong :/


I don't think it's accurate to say that the risk of spending $1 per Bitcoin in 2011 is proportional to the $4000 reward I have today.


It is proportional, humans are just bad at multiplying extremely low expected payoffs. There were millions of other equally (a priori) viable things you could have invested $1 in that didn’t pan out.

It’s also more obviously proportional for people who put in over $1000 a few years ago.


>>Early adopters are rewarded proportionally to the risk they took (and the work they put in).

I hope they thought through that risk properly enough, because we didn't sign up for it and don't care what happens if you end up losing it all.

>>Bitcoin wouldn’t even be here today if the early adopters hadn’t spent many years making it usable and valuable.

Bitcoin wouldn't have to be anywhere. Either way we will ditch it and spawn our own currencies as we deem fit. Why should be start poor in any scheme.

>>Why would anyone who was uninvolved expect to profit from that?

We won't. We don't even want bitcoin, we will start our own ones later.


> I hope they thought through that risk properly enough, because we didn't sign up for it and don't care what happens if you end up losing it all.

I agree, anything else would be hypocritical of me.

> Bitcoin wouldn't have to be anywhere. Either way we will ditch it and spawn our own currencies as we deem fit. Why should be start poor in any scheme.

Unfortunately you won’t have a choice, due to the network effect. You can’t, in general, expect to make money out of nothing. If you think that’s a viable business model, you probably don’t fully understand why bitcoin became valuable or the work involved.

> We won't. We don't even want bitcoin, we will start our own ones later.

Better get started soon!


Fairness isn't even the biggest problem with the deflationary nature of cryptocurrencies: you won't have growth unless the velocity of money increases, which is dubious (it's been reducing for the last 30 years).


No deflationary crypto currency will be successful for transactions. If a currency only goes up in value there is no reason to spend it. If nobody spends it by definition there are no transactions.


Its not only a bug its a non-starter. This is the same reason why fiat currencies even exist, if a government and its massive defence infrastructure didn't exist to force a fiat currency on its people. Every few years the 99% will call it quits and start a new currency, turning the worth of the entire wealth held by the 1% to 0.

The same thing will happen to Bitcoin eventually. Most of the world won't understand why they are supposed to start poor just because they joined in late. They will spawn local cyrptocurrencies across the world in their local countries, making it very hard for the existing players to watch their advantage go to dust.

How that would go is for any ones guess.


You should check out OpenUDC [0]. There are other similar initiatives, like https://duniter.org/en/. The theory behind these projects is worth reading (especially its Principle of relativity) but I can't find an English translation.

[0] https://github.com/Open-UDC/open-udc

[1] http://trm.creationmonetaire.info/


Thanks for the link. The English Translation is at http://vit.free.fr/TRM/en_US/

It seems to me all the attempts at currency suffer either from the Tyranny of the Gatekeeper (centralization) or the Tyranny of the Majority (de-centralization). Except gold(which is actively being de-emphasized), is there no substitute for an individual who wants to partake in the economy/marketplace and yet not suffer any of the above tyrannies ?


I think the deflationary nature only reflects the ideological beliefs of the creators. Inflation is a type of tax, therefore for a currency to be a "true" store of value it cannot be deflationary. If extra crypocurrency can be printed, who decides when the monetary base gets expanded and by how much? That's not an easy question to answer in a distributed system. So you end up with a fixed monetary base (and therefore deflation).


This is a really complex topic that I don't really understand, but I think there's quite a lot of interesting nuance to the deflationary cryptocurrency question.

For example, you could consider Bitcoin as being like a "specie" or "hard currency" within an ecosystem that also includes various types of "scrip" or "credits".

Ether behaves a lot like that. It's the hard base currency in an ecosystem of tokens ("soft currencies") all with different monetary policies.

There are very interesting Ethereum tokens without fixed supply, for example the token that will be issued by Maker (the "dai") which is basically an asset-backed credit token with an autonomous monetary policy to stabilize the token's market value measured against the IMF's currency basket index (XDR).

This seems to be a really natural pattern: you have a small number of deflationary hard currency (precious metals, basically) that act as global store of value, hedge against local volatility, and neutral means of settlement; and then you have a whole range of other credit instruments.

Random thought: to people brought up with cryptocurrencies, we might be explaining gold as "well, it's like nature's bitcoin: scarce, hard to mine, and very expensive."


" who decides when the monetary base gets expanded and by how much"

You allow entities to trade assets for currency at a central bank.

The central bank can do it (i.e. Fed exchanging currency for TBills). The ECB allows banks to exchange assets (like property) for Euros.

This is good because it allows flexibility in the amount of currency in circulation. Without this, you can get into all sorts of trouble, for example, Spain, Greece, et. al. in the 'Euro trap'. Monetary policy can be dangerous, of course, like anything powerful, but it can be used for good.

Also to the commenters point about 'inflation is a tax' - well, it's a 'tax on cash' and a 'negative tax to everything else'. It's really nothing like a tax at all, it shouldn't be referred to as such. Inflation/deflation is just the changing value of one good vis-a-vis another.

There are a lot of 'stores of value' out there and anyone with significant enough portfolio can easily take advantage of those if they chose for whatever reason not to hold a specific currency.


The aspect where the majority of the supply is generated in the first few weeks after the genesis block is what makes clear the designers are running a scheme to gain control of the supply, exploiting any would be normal users in the longevity of the project.

Satoshi could easily have changed the coin minting production curve to suit a long term project, but instead chose to mint the majority of coins for miners running very low hash power nodes at the start of the project. Along the lines of 10,000 bitcoins being worth 2 pizzas - this means the majority of bitcoins in existence have gone to disproportionately low value capital traders (both in computational power, actual production and electrical cost, and external capital traded for BTC) whereas now coins being produced require several magnitude more computational power to mint and the rewards are less. Paradoxically, the miners require more energy input in return for less and less rewards.


If there's a functioning market, then there will be exactly as many miners as needed to make the value proposition slightly positive or even.

Early miners took great risk in holding on to BTC to see if it would become more valuable. Many did not (my hand goes up) hold on to their BTC, thinking that it was a fad that would pass and didn't want to get left holding the bag.

It's easy to underestimate the allure of being able to buy 2 pizzas with CPU power. That purchase made 10k BTC feel enormously valuable (as compared to anything else you could passively do with a home PC).

(FWIW, I would've bought pizzas if I'd had the BTC at the time, instead I gave some away and forgot about the rest and formatted the hard drive.)


  Early miners took great risk
This is verifiability untrue, as early miners used the lowest amount of energy to produce and acquire the largest percentage of the total supply ever produced.

Any rational "investor" trading capital or computational energy into BTC or similar minting algorithms would be deterred by this model as the losses increase while the network grows older.


The risk of which I spoke was to hold on to the BTC instead of spending it early on pizzas or other goods.

No one had any idea that the value was going to go up so much. It could have easily gone the other direction meaning 100k BTC would be the price of a pizza, or more likely that no pizzeria would accept btc.

And you might say, it wasn't risky because they hadn't spent anything to get the BTC in the first place but that ignores the reality of the moment in time. Even if you look at it as if they had played the lottery and won, once they have the item they are constantly taking risk by holding it when the value of the item in the future is unknowable.


I’d say most early miners were techies already making a fair amount of income compared to the average joe in the economy and mining was another fun hobby to throw a couple hundred bucks at or some old gpus at. I wouldn’t say it’s a big risk... maybe the same risk level of a junior programmer using some of his salary to buy a new Drone off eBay for some tech styled fun after work


Chiming in with some 2011-2012 perspective for you, which is kinda-but-not-really-all-that-early. IMO you are wildly overblowing the "success" and apparent foreknowledge of early miners (i.e. you're displaying classic results-oriented thinking, because hindsight is 20-20 ofc). Anyways, anecdote != data, blah blah blah, make your own conclusions, blah blah.

I worked at Microsoft, and one of my coworkers started talking about Bitcoin. He was always one of the more cutting-edge, cyberphunk type of people, and he said he got a group of his tech friends to agree to build a "mining farm" in their closet basically, mostly as an expensive hobby of sorts (he was a motorcycle guy, so he had no problem spending money on expensive hobbies).

They spent around $25k-$30k buying GPUs overall; they had great difficulty acquiring their GPUs, as by the time they had decided to start this venture and went to the local Best Buys and Fry's and whatnot, all the good high-end GPUs were sold out already (meaning there was ample competition in the Seattle area already, as they talked to the Best Buy guys who were also puzzled by the sudden increase in demand for high-end GPUs).

Eventually by late 2012, with the increasing competition for mining, the rise of ASICs, high volatility, and no way to foresee the future, last I heard they eventually liquidated everything, sold their hardware and their BTC, and had recouped their costs and made a small profit, but not much more than anyone with $25k-$30k could've made just gambling on some regular stock picks. In other words, they bought in at or around the bubble to ~$30 in mid-2011, and didn't hold out long enough to see the growth to $100-$200 in 2013.

Myself, I dabbled with pool mining using just the single GPU in my own gaming PC for 3 months in the summer. I told my roommates and voluntarily increased my share of the electric bill (which went up by about $80-100/month, iirc). I received ~5 BTC, which at the then exchange rates, meant that I made like $50 or something silly after paying for electricity (but not counting the $2.5K gaming PC, which I bought earlier and without knowing about cryptocurrency).

---

The point of this story is to say that, even fairly sophisticated and "hardcore" hobbyists, i.e. those willing to spend tens of thousands of dollars to dabble in Bitcoin, were by and large not minting millions and millions. Most people sold their coins along the way, either in the rise and falls between $0 to $1, or between $1 to $30, or between $30 to $1000, or between $1000 to $4000+. There was no grand conspiracy, and certainly no way to know that Bitcoin would actually survive (would you call this thriving?) to where it is today. Almost universally, unless you were on the cutting edge of the ASIC race for a long long time, for every old miner out there who spent thousands (millions?) on hardware, they would've been better off simply buying and holding bitcoin the whole time instead.


So the whales just swallowed up more?

The whales in the room traded minimal amounts of energy and capital in the acquisition of the early majority stake at significantly lower production/energy/capital cost. This is by design from "Satoshi" who created an economic model which effectively functions like a pump and dump or a ponzi. Hold until when? your investment 2x's or 10x's and who's buying [2]? Why are they buying? (hint: it's certainly not because there's a "limited" supply of blockchain ledger networks granting access to a decentralized database [3])

  In economics, the Gini coefficient is the standard measure 
  of how inequitable a society is. This is tricky to 
  determine for Bitcoin, as it's not quiet a "society" in 
  the Gini sense, one person may have multiple addresses and 
  many addresses have been used only once or a few times. 
  (The commonly-cited figure of 0.88 is based on one small 
  exchange in 2011.) However, a Citigroup analysis from 
  early 2014 notes: "47 individuals hold about 30 percent, 
  another 900 a further 20 percent, the next 10,000 about 
  25% and another million about 20%"; and distribution 
  "looks much like the distribution of wealth in North Korea 
  and makes China's and even the US' wealth distribution 
  look like that of a workers' paradise

  Dorit Ron and Adi Shamir found in a 2012 study that only 
  22% of then-existing Bitcoins were in circulation at all, 
  there were a total of 75 active users or businesses with 
  any kind of volume, one (unidentified) user owned a 
  quarter of all Bitcoins in existence, and one large owner 
  was trying to hide their pile by moving it around in 
  thousands of smaller transactions. (Shamir is one of the 
  most renowned cryptographers in the world and the "S" in 
  "RSA encryption")"
[1] "Attack of the 50 Foot Blockchain"

via https://news.ycombinator.com/user?id=davidgerard

[2] https://en.wikipedia.org/wiki/Greater_fool

[3] https://coinmarketcap.com/all/views/all/


You seems to be wrong about weeks, in the first 4 years of bitcoin the creation rate was constant and half of total bitcoin supply was created.


Point being: Satoshi's design for minting was to generate the most amount of coins for the least amount of energy to the smallest group of users.

Satoshi's economic model disproportionately extracts increasing amounts of energy and provides less wealth to participants as the network ages.


Inflation and deflation are both a kind of tax, based on who is buying and who is selling. There are no binaries good and evil in this game.

You leave these things to the natural order or things.

Attempts to create utopia have led to creation of hell.


People are rewarded in proportion to the risk they took. It couldn't be any different.


The same could be said for land?


Yep, and gold, and oil, and any other store of value has been discovered. Early adopters either took risks or got very lucky.


There are inflationary cryptocurrencies out there.

The deflationary ones are designed that way to be attractive as a store of value.

Early adopters of anything are usually rewarded because they take the risk. For instance, early Youtubers have much bigger followings, because they broke the trends, started something new.


early Youtubers have much bigger followings, because they broke the trends, started something new.

Not the best argument. It implies YouTube wasn't inevitable.


Crypto-currencies are not actually currencies (they are generally not used to buy common goods in a common market) - and so it's really not appropriate to use the terminology 'deflationary' or otherwise. I mean - I 'get what you are saying' - but the 'inflation/deflation' is really kind of a second order function of the 'driver' of this, which is really that people tend to 'hold' crytos, as opposed to doing much else.

It's the 'behaviour' of the crypto-owners that's the key thing.

'Inflation/deflation' is the interpreted result of that behaviour.

So, yes - if there were super-super strict monetary policy in the US - it would probably be 'deflationary' - but - that's a function of that economic system.


Remember that when a government or government-ish bureaucracy does something that hurts Bitcoin/cryptocurrency, it's proof that big-government bureaucrats are hopelessly incompetent and shouldn't be trusted with anything.

But when they do something that helps Bitcoin/cryptocurrency, it's validation from the wise, eminently competent leaders who have proved once again why we trust them with such power.


that's sarcasm right?


>... no clearing delays, ...

I think ultimately this is the aspect of virtual currencies that will create the biggest change in the world. The great majority of the messing around with money has traditionally involved overcoming time delays in the system. A world without payables or receivables would have to look quite different.

Without the friction of delayed payments the whole world economy might turn into a giant kanban[1] system. Everything would be a gig at whatever scale.

* [1] https://en.wikipedia.org/wiki/Kanban


Meh. She's got a history of being an austerity fan. Since cryptocurrencies basically guarantee pro-cyclic austerity programs, of course she's going to push them.


> cryptocurrencies basically guarantee pro-cyclic austerity programs

I never heard about this, can you elaborate a bit more this idea, or point me to some article about it?


If you can't print your way out of debt (fixed money supply), the corollary is that you would be forced to cut in times when debt was in short supply (not able to borrow, no surplus), you wouldn't be able to simply create debt out of thin air as all the central banks have over the last decade, with yet to be seen side-effects (aside from the asset bubbles).


I have a question. This might turn out to be stupid. What happens if the value of 1 bitcoin falls below the required threshold i.e the cost of energy + hardware to mine. I do understand that the probability of such an eventuality might be close to 0.


It will become uneconomical to mine and therefore people will stop doing so, causing the hash rate (and therefore the cost of energy + hardware required to mine) to plummet, eventually making it economical again.


Hashing does not materially impact the global price of electricity.

Also, hardware is a fixed cost, fixed costs don't affect the price at which miners would stop mining.


Mining fees will grow.


*as the network stops processing transactions


Can a bank make huge amounts of crypto money out of thin air? Then lend them to other banks so that they can also make more crypto money out of thin air? And then lend them to people for buying houses and cars, paying for education and medical services, so that our economy can reach record heights? It seems to be an important part of money, required for our civilization to exist.


Sure they can. And so can you.


Note:

> For now, virtual currencies such as Bitcoin pose little or no challenge to the existing order of fiat currencies and central banks. Why? Because they are too volatile, too risky, too energy intensive, and because the underlying technologies are not yet scalable. Many are too opaque for regulators; and some have been hacked.

This I can fully accept: there can be a future where some cryptocurrency becomes the world standard. Sure. Doesn't change all my critiques about the current situation which are so often downvoted.


The problem is that every single article about crypto has people like you coming out of the woodwork and commandeering the thread to "critique" cryptocurrency. Not everyone who uses or is interested in crypto claims it is perfect or will save humanity.

The incessant criticism with every thread is about as sensible as complaining about python's general shortcomings in every article about a new python library.


It's a healthy to do this as otherwise there would be just too much hype posts on cryptocurrency. I am actually quite interested in blockchain and have been observing the Bitcoin and other crypto space for years now but it gets quite frustrating to read some of the hype articles written in order to pump prices. So in those cases I try to balance the discussion with some valid critique.


This article isn't the equivalent of talking about a new Python library though. It's the equivalent of "W3C Head Foresees the End of Programming and the Triumph of Python".


I agree actually. I'm just explaining why the person gets downvoted in other threads.


A good analogy.


What do you expect? It's a natural reaction to evangelism and hype. When everywhere you go someone is extolling the virtues of X and how everyone should be using X and X is so much greater than everything else and you're an idiot for not using X, you're going to get people who push back against it.

See: Linux Desktop, Rust, and The Cloud.


AI, VR, Augmented Reality, Functional Programming, etc...


Except functional programming has its uses already (actually it is probably the future) while Bitcoin currently is... well, it doesn't have any legal uses. (And yes we had this discussion one too many times, no, money transfer is unusable because the recipient needs to jump through hoops to get their money, you can't ask that from normal people.)


> doesn't have any legal uses.

That statement just demonstrates your total ignorance and completely nullifies your opinion.


I have had this conversation so many times and I have yet to hear about a legit use, one that ordinary people can and want to use.


No, noone claims python was a conspiratory pyramid scheme designed to track users and beat privacy. That's not a meaningful analogy although pythons are poisonous.


well, this is funny, my comment was removed and resubmission is nuked as well. Now I'm just testing how secure the automation is: original comment:

>No, noone claims python was a conspiratory pyramid scheme designed to track users and beat privacy. That's not a meaningful analogy although pythons are poisonous.


commandeer v. To force into military service. v. To seize for military use; confiscate. v. To take arbitrarily or by force. See Synonyms at appropriate.

Who is forcing whom?


That's a common English idiom, meaning the same thing as "co-opt".


From the little that I've managed to learn, it seems like cryptocurrencies have immense potential but, beside the natural opposition from those who prefer the "conservative way of doing things" (due to a variety of reasons, some legitimate and some less so), it seems that the blockchain (as ingenious as it is) does not really scale well to handle a global economy. There are ongoing efforts and solutions to solve this but I think they are all essentially equivalent to a person trying to do crazy contortions in order to wear in a badly made suit. There are a few projects that propose interesting and scalable alternatives to blockchain but once the herd has decided then I assume more money will be poured on making a wrong solution workable than making a right solution the standard.


There are a few projects that propose interesting and scalable alternatives

Any examples?


The most ambitious one imho is qbitcoin[1]. It's based on quantum teleportation and quantum digital signatures. That gives it quite a low Technology Readiness Level[2], but hey, we see articles about actual implementation of quantum teleportation everyday, so who knows?

1. https://arxiv.org/abs/1708.04955

2. https://fr.wikipedia.org/wiki/Technology_readiness_level


I can't decide if this is a joke or not :)


Two examples I know of are: https://github.com/metacurrency/holochain/wiki/FAQ and http://bitlattice.org/

Although I'm far from being knowledgable enough to know the disadvantages of these methods in relation to blockchain nor whether they can really deliver on their claims. From what I've learned, my intuition says they're more suited to the task - could be a wrong impression though, hope someone here more knowledgeable on the subject could expand on it.


Christine Lagarde is one smart lady. The fact that she's talking about this is very interesting.


i’m surprised not a single interest group has hired a company like cambridge analytica to influence popular opinion of bitcoin, or a fake news network to aid in pushing the price higher, not that we would know about it, the big players in bitcoin would benefit from a scheme like this, it would be a small investment for greater returns, i am interested to see if it will ever reach a point where people will feel comfortable with it’s volatilty, but i strive to understand how the control of bitcoin network and its software is not in the hands of who contribute code, are we trusting a few now compared to a few banking institutions, is that the underlying tradeoff?


How do you know they have not? As I understand Cambridge Analytica work rather discretely, so how do you know a piece on Bitcoin by say NYT (or even this!) isn’t funded by them?


While they probably work on discrete campaigns, you may have meant "discreetly".


it is a possibility, i guess they would pay the journalist or influence his sources, i guess the old adage of who controls context or environment somewhat therefore controls opinion... similar to the sort of things that spy agencies engage in


The open source nature of Bitcoin, makes sure that development can always be forked. We saw this as recently as with the creation of Bitcoin Cash, which forked form Bitcoin to implement bigger blocksizes, and which is not developed by Blockstream. In the end, if you don't read the code, you'll have to trust someone else did, and would raise a fuss about any shady findings.


Seems like the headline oversells what she's saying.


I'd keep in mind that the head of the IMF is a political appointee, and in this case a former lawyer and politician. I would take technological and banking advice from Lagarde with a pinch of salt.


She's been a very well respected minister of finance for a major economy. She's literally an expert on the subject she's speaking on (which is economy, not technology) - and she's not giving advice, she's offering an analysis.


That’s possible the funniest thing I’ve read in years.

Governments, banks and corporations aren’t going to let it happen. Cryptocurrency will either be co-opted by these groups or outlawed altogether. The people who run the world aren’t about to give up control. In the U.S. we can’t get net neutrality, because the people who run things want more control.


You're assuming they have the power to stop it.


> too volatile, too risky, too energy intensive

I am no expert but those three are features, not defects.

1/ Until there will be a central authority linking cryptocurrencies to the old financial system - impose taxes in CC - it will be volatile.

2/ Computer security is not something that can be definitely solved.

3/ Proof of work is the core concept of the blockchain. Maybe there will be some other CC technology in the future not based on blockchain that will not require proof of work, but that is outside of this discourse.


If only we could replace "proof of work" by "proof of useful work".


One candidate for useful work is TOR-supernode work. If the internet were to become distributed and fully encrypted you'd need a lot of bogus traffic and rerouting so the real traffic becomes invisible. There are many obvious problems with this, but in theory the more computational resources you put into a TOR-like network the more resilient and the more anonymous it becomes.


The morning paper had a post about it the other day[1], but I'm not sure if the solution is acceptable to the usual cryptocurrency crowd because it depends on running the useful code on a secure enclave (like Intel's SGX) to ensure single-threading and correct count of useful instructions that were executed. The miners are then rewarded according to number of useful instructions they executed. (The correctness of the instruction count and the work done can be validated cryptographically with SGX). I thought it was an interesting concept nonetheless.

[1]https://blog.acolyer.org/2017/09/06/rem-resource-efficient-m...


This would give Intel complete control over the global currency creation system. Anyone at Intel could choose to create an SGX-registered privkey off-chip and do as much fraudulent “mining” as they wanted, for free.


Absolutely! And even ‘proof of stake’ alternatives tend to degrade into ‘proof of work’ (citation required: unfortunately I’m on mobile and don’t have the link to the relevant papers to hand!)

Note: Even basic forms of proof of ‘useful’ work, like using the heat from the miners’ CPUs, just act like a subsidy and push the cost of competitive mining further away, rather than making the blockchain more efficient...


Proof of stake degrades to proof of work if you don't have a solution to stake grinding and "nothing at stake," but recent proof of stake designs do. See for example the discussion here: https://github.com/ethereum/wiki/wiki/Proof-of-Stake-FAQ


Managing a distributed ledger is useful work.


Securing a public ledger is useful.

The only kinds of problems that are suitable for PoW are those with predictable computational cost. The only thing that even approaches this and is also extrinsically useful is maybe math problems like finding prime numbers, but we don’t actually know what complexity class that falls under.


The problem with useful proof of work, is that the emission rate becomes very hard to control. In most PoW consensus algorithms, a difficulty parameter is constantly updated to keep the average block-time around 10 minutes. To do useful PoW consensus, you'd need to find a useful problem, where the difficulty of solving the different problems is easily solved, while the solution to the next block, is still dependent on the solution from the last block.


In addition, you need a problem that is hard to solve but quick to verify. I reckon most useful problems would not be quick to verify.


My gut feeling says a set of open AI challenges, where the work is “train to solve this with accuracy > $difficultyParameter”, and the proof is something that both tests the accuracy of the work, and (if this idea is even possible) demonstrates that it wasn’t over-fitting/memorising.


NP complete problems are hard to solve but can be verified in polynomial time.

There are many useful problems in this class.

(Of course here hard to solve would mean in the "worst case", which may not hold for every problem instance).


> In most PoW consensus algorithms, a difficulty parameter is constantly updated to keep the average block-time around 10 minutes.

It's only 10 minutes in Bitcoin, rather than in most PoW algorithms.


On 2: No it cannot, but traditional banks are attacked all the time. That didn't stop us from online banking. The role a bank could play is in secure and easy cryptocurrency.

It's similar to keeping stacks of cash at home. It's possible, but maybe mor secure if 3rd party does it. At this point none of the 3rd party exchanges are really reliable.




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