Bitcoin's value is decentralization

http://paulbohm.com/articles/bitcoins-value-is-decentralization/

by ujeezy • 14 years ago

93 86 14 years ago

Codhisattva2• 14 years ago

There is no such thing as "intrinsic value". All value is perception and subjective. Complicated arguments may enhance perceived value in others but keep in mind the subjective nature.

Once confidence collapses, "intrinsic value" flees out the door.

TazeTSchnitzel• 14 years ago

Yes. Gold has no intrinsic value, but humans have a tendency to assign it a value, hence it is treated as if it has one.

tomkinstinch2• 14 years ago

Gold does have value: as an industrial commodity for coating electrical contacts and for IC wire bonding, among other uses. Its elemental characteristics are unique. This value is probably much lower than its present market value though.

robertskmiles• 14 years ago

This is true. The easiest way to make this clear to someone is to ask them to define 'value', and note that they can't do so without either a) talking in terms of people and their subjective beliefs or b) relying on words that are just synonyms for 'value'.

erikpukinskis3• 14 years ago

You can avoid talking about people's subjective beliefs about good or services, and instead talk about their subjective beliefs about their lives. You can then measure the curve of subjective satisfaction with their lives and value can be defined as "the impact of a good or service on the satisfaction curve of a recipient's life".

Tying value to the subjective experience of the outcomes is qualitatively different than tying value to subjective beliefs about the goods or services.

For example, someone might buy a million dollar McMansion because they subjectively believe it's valuable to them, and then discover that they're miserable in it because it's horribly designed, poorly constructed, and expensive to maintain. That's fundamentally different from someone who buys a house that is cheap to heat and cool, makes their everyday tasks easier, and causes the release of pleasure chemicals in a sustainable and helpful way.

The latter has intrinsic value in a way the former doesn't.

Edit: You can also define value as the ability for a good to increase your overall wealth. So, some goods have a cost, and do nothing to my net worth (lottery ticket). But some, if you look at the longer term, have a cost, but also add to my net worth (buying a soy milk maker). If you put a dollar value on your experiences, this can cover everything.

guylhem8• 14 years ago

This is an excellent article explaining very well the Byzantine general's problem and how bitcoin provides a solution.

However, even if I agree with the answer, I don't agree with its "jump to the conclusion".

Here is my take on that:

Whether one's believes in decentralization or in centralization, another of bitcoin core assets is that it is not deflationary for prices.

All currencies have price deflation built it, for some macroeconomic reasons about motivating agents that I don't fully understand yet. It could be a good thing for economic growth, or it may not be. Let's leave that issue aside.

The important thing is that Bitcoin doesn't. Being convertible with other currencies means its value can only rise (following the definition of deflation!)

So the only question is whether the rise in relative value - bitcoin inflation - will be faster than the fall of the goods prices' in the other currencies.

And that's where the decentralization part plays its role and the article gives the right answer : if you believe in decentralization and in parties acting in their own best interests, it will be faster.

If you believe in centralization and people acting for the others best interest, it won't be faster.

Bitcoin is a fun experiment on human behaviour :-)

In the end, bitcoin value will still rise - if only because it provides a way to escape from the deflationary currencies. The only question is how fast.

There are negative interest government bonds being sold right now - IIRC, Germany and France do that.

Why one would make sure to take a fall when a conversion in bit coin means that the value can be preserved?

The question of whether it is a good thing for economic growth remains. It doesn't seems to be.

I don't have bitcoin wealth. I wish I did because it seems like a very good placement at the moment.

seanalltogether• 14 years ago

Just to be clear, the reason that governments increase the currency supply is that citizens will do it with or without them. The most fundamental currency is a promissory note, an I.O.U. Every time you write someone an IOU you inflate the supply of currency, because the holder of that IOU can pass that around to others in the form of payment. Instead of sending your bushel of apples to the shoemaker who made your shoes, you now have to send half to the bread baker, and half to the candle maker as that IOU was spent.

A currency that doesn't grow will be naturally replaced by one that does. This is my biggest problem with bitcoin.

guylhem8• 14 years ago

"A currency that doesn't grow will be naturally replaced by one that does." seems right, as long as the minimal discrete value of the currency that doesn't grow cause a problem for the economy.

But if you can move from discrete to continuous space (bitcoins can be cut up to 1E-8, and according to what I've read this is not a fixed limit), why bother moving to the other currency ?

(I hope I get it right - it's an area I don't fully understand)

YokoZar2• 14 years ago

There is no reason we can't start issuing tradable IOUs for bitcoins without actually having our hands on the bitcoins.

There could even be a billion bitcoin derivatives market with only a million real bitcoins (just moving around a thousand times each)

DavidSJ• 14 years ago

The important thing is that Bitcoin doesn't [inflate]. Being convertible with other currencies means its value can only rise

Value is a function of supply and demand, not just supply. The value of a bitcoin can fall, as it has done many times in the past.

guylhem8• 14 years ago

Yes, it can fall at any point whenever demand goes down. But on a longer run, I believe demand won't go down but up, since it has this competitive advantage over other currencies.

hristov• 14 years ago

I think you are confusing the concepts of inflation and deflation there.

guylhem8• 14 years ago

Depending on how you read the message and on the perspective you take, yes I did.

When I checked my text just prior to posting I thought it wasn't clear enough, so I added the "price" thing and posted. Oops.)

I though about editing and clearing up the original post but as it stands it can easily be figured out and doesn't impact the meaning.

EDIT: just posted a reply to define the vocabulary I used and the perspective I took.

YokoZar2• 14 years ago

This is not uncommon when criticizing bitcoin. "It can only increase in value, therefore it is worthless" is clearly a contradictory statement -- it's essentially arguing that no one will want to buy bitcoins because too many people want to buy them.

rprasad2• 14 years ago

I don't think you understand how currencies or economics work.

Currencies are by nature inflationary in a growing economy. This is a good thing, because inflation encourages spending and/or investment. Deflation is fatal to an economy: because the value of the currency will grow with non-use, deflation inhibits spending and investment.

Bitcoin's fatal flaw is that it is deflationary. At any given monent, you're better off not spending your bitcoins, because that same quantity of bitcoins will be worth more in the future.

Bitcoins other fatal flaw is that roughly half of all bitcoins mined thus far are held in the hands of the inventor of bitcoins and his closet buddies. They haven't been spending their bitcoins--but they're encouraging others to spend bitcoins as they are mined. This is close to (but not quite) the definition of a Ponzi scheme.

davidw• 14 years ago

> Currencies are by nature inflationary in a growing economy.

That depends on the supply of the currency though, no? If it's not expanding, but the economy is growing, it will cause deflation, which is indeed viewed as 'bad'. Right? Or am I missing something?

erikpukinskis3• 14 years ago

| At any given monent, you're better off not spending your bitcoins, because that same quantity of bitcoins will be worth more in the future.

If I am hungry, I am better off buying bread than watching my bitcoin wallet's "value" increase on a computer screen.

A deflating currency might disincentivize spending, but it won't halt it. And what's so great about incentivizing spending?

guylhem8• 14 years ago

There is an obvious inflation/deflation twist, as explained in another post. My mistake - I'm not familiar enough yet with economists vocabulary and perspective.

If the economy is not growing as fast as your currency supply is, I'd prefer calling that "purchasing power" deflation since I think on the purchaser side - and you will get less and less stuff for a given amount of your money (while of course the token price will inflate - sorry if this was not clear)

Besides that twist, I don't agree with your conclusions.

It's all about perspective, and IMHO you are too clear cut.

Currencies being inflationary in a growing economy - it's good if you are productive and don't have much capital. It's not good if you are not productive but already have acquired capital, because you must then do something - like invest or spend - or you will be less well-off.

There is a clear link between spending, investment and economical activity, but saying that this link is better to the alternative - the link between not spending, not investing and not trading is all about one's values.

(I mean, like many here I share your opinion, hence my initial remark about bitcoin not being good for economic growth, but many leftists and "deflating" folks would say that it would be better for the planet and so on if we stopped growing and even inverted the tendency)

Likewise, half of the bitcoin being held by the inventor is a good thing for this inventor, and is a statement of how good he think his product is. Just like an IPO - he hasn't cashed in yet, so I take this as a statement of trust.

It's not good for you and me because it might have bad effects on bitcoin if the cash-out is too fast.

snitko2• 14 years ago

Inflation is not the only reason why I want to spend/invest money now rather than save them. In fact, it's not even a good reason, because it forces me to spend money.

Deflation doesn't discourage spending by itself. The price of holding to the money is the lost opportunity of investing those money into something else. I'd say, generally saving money is a good thing rather than bad because it allows me to only invest them when I consider the opportunity good enough. Presently, inflation punishes me if I save money. So, if we talk about particular individuals saving money, inflation is not a good thing for them. It might be good for specific groups of people who receive the money I spend, but then one might say it is good for them at my expense. Which brings us to the idea that inflation is simply a tax.

andreyf• 14 years ago

Any basis for this, or just spreading FUD?

aprescott2• 14 years ago

Maybe I'm mistaken, but I think the specific value of 12 in this example is an error from using an original description at http://www.mail-archive.com/cryptography@metzdowd.com/msg099... — the original description uses the value of 2 hours (12 * 10 minutes), whereas Paul's does not.

enki10• 14 years ago

author here: i've written 12x10 minutes, and the original description writes 12x10 minutes. is there something i've missed?

it takes 10 minutes to find a solution, but only after 12 solutions have been found (the chain has been extended 12 times total), can the authenticity of the first of those 12 be guaranteed.

aprescott2• 14 years ago

The original description uses the value 12 because of the prior value of 2 hours, whereas you seem to just have N generals and no such hourly time from which to derive 12, plus this:

The existence of the 12-block chain is proof that a majority of them has participated in its creation.

Why is the existence of 12 verifications proof that a majority of N have participated?

zby• 14 years ago

Sure bitcoin is an interesting solution - but there is a problem with cost of all that busy work.

enki10• 14 years ago

author here: there's a cost with storing gold in the ground and securing it, and there's a cost with printing counterfeit-resistant paper and finding and jailing counterfeiters (and a cost with not doing so - unbounded inflation)

an interesting question then is: are the above costs greater than the cost of operating bitcoin? it might seem so at first, but don't be so sure and run the numbers on the back of an envelope.

also walk around downtown in SF and NYC and look at the amount of skyscrapers that are nothing but banks, scratch your head, and ask yourself what value they're actually adding.

_red• 14 years ago

>also walk around downtown in SF and NYC and look at the amount of skyscrapers that are nothing but banks, scratch your head, and ask yourself what value they're actually adding.

True. But I suppose one would need to define "what is a bank". From a pure "money warehouse" definition they don't deserve to be that big, however from a lending / investment perspective there is more value there.

I think in the end, a decentralized lending scheme (Mike Hearn has spoken and written on this subject) integrated to bitcoin as the possibility to radically change the social order.

It will very hard to fund wars without a printing press.

epscylonb• 14 years ago

This to me is one of the most interesting aspects of bitcoin.

Some have speculated that if bitcoin is widely adopted in the global economy, then a certain percentage of all energy produced on the planet will have to be spent doing proof of work to secure the blockchain.

It's pretty easy for me to see a swing back to centralised currencies in that situation, it's only worth all the energy needed if you really don't trust the central authority.

There are a number of suggested solutions to this problem, one of which is proof-of-stake and there is already a client based on bitcoin called ppcoin which uses it. Currently ppcoin is a hybrid of proof-of-work and proof-of-stake but potentially could be a low energy version of bitcoin.

I have often thought that if bitcoin is really successful it will be worthless, because it will have forced the central authorities to be more fiscally responsible, removing the reason for bitcoins existence.

But I can't also help thinking that maybe we just need several competing global centrallly printed currencies, and you can pay or be paid in whichever you choose. As long as a cartel doesn't form competition should keep the central authorities honest.

negamax2• 14 years ago

Even from the comments and my own understanding is Bitcoin acts more like an asset. It be very tough to run an economic cycle using it. Imagine someone ordering a truckload of clothing and promising salaries to the workers but by the time it's ready, value of Bitcoin would go up, hence that person will receive less Bitcoins unless specified. The buyer i.e. holder of Bitcoin will always try to delay payment, so they will have to pay less amount.

enki10• 14 years ago

the dollar and euro are also assets in that way. you're usually just not aware of its fluctuations (against each other, against other currencies, and against commodities)

look at any of the US dollar indexes, which examine the exchange rate of the dollar against other currencies to shake the belief that the dollar is stable: https://www.google.com/finance?chdnp=1&chdd=1&chds=1...

negamax2• 14 years ago

Not quite. My point is Bitcoin is more like gold rather than any fiat currency. Gold can still be inflationary by finding new mining rigs and asteroid mining in the future but Bitcoin has a upper limit. So it will always be an asset against all fiat currencies. Which will hinder trade as the way I have listed above.

lojack• 14 years ago

I believe the term you're looking for is a commodity.

Keep in mind that commodity based currencies (like gold) have existed for thousands of years. Bitcoin acts more like a commodity than these because there's a specific upper limit on the maximum quantity and you can't discover new bitcoins (at least after they are all mined.

But yes, this could be considered a good thing (no one can control it) or a bad thing (no one can control it).

icebraining3• 14 years ago

Why would they receive less bitcoins? If you agreed to pay 30 bitcoins, that doesn't change just because the BTC has increased in value. Conversely, when I agree to pay $200 to a lender, he can't tell me after than I have to pay $203 to cover the inflation costs.

What happens in that people make those agreements with the inflation/deflation rates already in mind, and Bitcoin actually has an upper hand since its rate of growth follows a stable pattern, unlike currencies that can be printed at whim.

mistercow3• 14 years ago

The problem with this article is that in the very second sentence, the author switches from discussing bitcoins themselves to discussing the bitcoin monetary system as a whole. Of course the whole system has intrinsic value, but that is a separate issue from whether or not the currency itself has intrinsic value. In fact, it is generally necessary for a non-commodity currency not to have significant intrinsic value.

enki10• 14 years ago

How is bitcoin a non-commodity currency? If bitcoins have value because they allow you to do things you couldn't otherwise do (my point), it's a commodity.

why is it desirable for a currency to be a non-commodity currency?

gizmo6864• 14 years ago

Bitcoins do not have value anymore then a paper dollar has value. People are willing to accept it as payment knowing that others will also accept it as payment. You can (and I have) set up your own bitcoin system and get as many as you want. The only difference with that one and the main network is that the main network is bigger, and has a genesis block that people recognize as identifying it as the main bitcoin network.

If everyone changed their programs to recognize my genesis block as the correct one, then all of the main bitcoins will be worthless.

mistercow3• 14 years ago

I was trying to avoid the term "fiat money" to describe bitcoin, because the term has several meanings, and some argue that bitcoin is not a fiat currency because it is decentralized.

What I mean by "commodity currency" is a currency that is (or is backed by) a currency. Gold would be the obvious example.

>why is it desirable for a currency to be a non-commodity currency?

One of the most important tasks of a monetary system is to regulate the money supply. This can be done via various methods. This can be done with monetary policy as in the case of the US dollar. Or it can be done by leveraging a commodity with a (hopefully) predictable market, as with gold. Or it can be done, as with bitcoin, by creating an artificial process which is provably predictable.

Now, when you use a commodity, you have a problem which is that you are hoping that no new developments will come about that completely throw off your assumptions about the market. If you were using precious aluminum as a currency in 1850, your economy would have collapsed in 1886 when the Hall–Héroult process was invented, causing rapid inflation. That's a supply side problem.

But a demand side problem is also possible. Imagine if indium had been our currency, for example. Indium is a rare element and was rather useless until the latter half of the 20th century. The rapidly increasing demand for indium as a useful commodity would have caused severe deflation.

A fiat currency system works on the assumption that there is no market effect of demand for the money outside of its function as money. In the case of American currency, this assumption is mostly true, but there are small exceptions such as coin collection which have a negligible impact on the money supply (a collected quarter is effectively 25 cents taken out of circulation). If the assumption were rendered totally invalid, the Fed could completely lose control of the money supply.

Tycho2• 14 years ago

The next period of history could be defined as the post nation-state era, and of all the supranational technologies and institutions that will make this so, bitcoin could be the most important.

I'm talking about the ability of governments to restrict the activity of citizens and also to fund themselves from said activity.

htmltablesrules• 14 years ago

There will always be nation-states. Always. Put ten strangers on an island and they will organically form a hierarchy and political alliances will happen. There will never be a government-less world as long as we're human.

Tycho2• 14 years ago

I wasn't imagining that they would cease to exist, just that they would lose a lot of their relevance/expediency/executive.

jcbrand• 14 years ago

There's a big difference between a government-less world and one without nation-states. Also, for the majority of human existence nation states didnt exist.

erikpukinskis3• 14 years ago

Certainly there will always be governing structures, of all scales, but the question is: which governence happens at what scale?

The federalism of the United States is a play to push power to a more state-sized scale (taxation, education) while still allowing for powers at a larger scale that need to be there (civil rights, defense, EPA).

Anarchism isn't really about abolishing power structures, it's about pushing more things down into even smaller structures (cults of personality, architectures, local cultural practices, etc).

The idea behind what your OP is saying isn't that nation-states will go away, it's that many of their current roles will be pushed off into larger, global structures whose "muscle" is not military, but cryptographic.

guylhem8• 14 years ago

A "Lord of the flies" scenario has some costs, and the island scenario set a rules : any of these 10 humans can not move to another island.

As snikto and enki discussed below (great explain guys!) : "using up resources is not valuable by itself. forcing someone to spend on anything, anything at all, does not lead to a good allocation of resources. it might increase GDP, but it does not create value"

I would even say that such a misallocation of resources has a cost - the opportunity cost of the alternative, the proper allocation of resources.

Nation-states existed in Europe before WW2. They may or may not always exist in the future, but now we have something new: countries which borders do not match the ethnic boundaries- the advantage is that citizens are not so strongly bound to a national identity, and thus can start pitting countries against each others.

There is competition between countries for skills. If you are talented and not lucky to have been born in a rich country, you can decide whether to immigrate to Canada, Australia, Germany (etc.) - this is a market.

If you have a european passport, with Shengen rules you freely decided where you are doing to work. Just look at where the talented greeks and spaniards go.

The island scenarios is more like offering people the choice between a german-run island or a greek-run island, each voting with their feet. Sure there still is a cost of having a government, but it's going down, and will go down as fast as new choices are offered.

Identification to nation-states was a limiting factor in the past, but there also seemed seemed to be some kind of network effect where it was harder to be a small country, as it there was some kind of cost (the higher risk of being invaded?)

Now look at Luxembourg and Singapore - it seems than being smaller is no longer a disadvantage.

Something is changing.

ihsw• 14 years ago

This is exactly the reason Bitcoin will see very stiff resistance -- it threatens the powers that be in quite possibly the most effective way, removing control from them.

Bankers hate BTC because it removes them as intermediaries between people and their money, statists hate it because it ruins their socialist dreams of generating funds on demand (printing money) and makes inflation virtually impossible to them.

Fiat currency would fall by the wayside in the most real sense, and that scares the hell out of them (or it will).

shalmanese• 14 years ago

It's not clear from the page but this article was originally written in May 2011.

enki10• 14 years ago

thanks! date added to template!

Greynum• 14 years ago

This was on hacker news last year

gwern• 14 years ago

My take: http://www.gwern.net/Bitcoin%20is%20Worse%20is%20Better

rumcajz• 14 years ago

Nice. Imagine that domain names were mined for rather than assigned by random registration authorities.

Bitcoin's value is decentralization

Related Stories