Bitcoin solved a major technical problem, but not an economic one

http://krugman.blogs.nytimes.com/2013/12/29/an-ubernerd-weighs-in/

by dimitar • 13 years ago

43 78 13 years ago

krugman.blogs.nytimes.com

czbond• 13 years ago

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

gizmo686• 13 years ago

1) All major currencies can already be easily exchanged. The only reason they depreciate rather than appreciate is that we have decided that depreciating currencies are good for the market.

2) Bitcoin maintains a public record of every transaction. There are still ways to anonomize yourself (mixing services, proposed extensions like Zerocoin), but cash would still be my first choice.

johndevor5• 13 years ago

As for your 2): why did the Silk Road explode in popularity? I think, done correctly, Bitcoin offers people on-the-couch access to anything they could want, with the level of risk largely depending on their technical expertise.

johndevor5• 13 years ago

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

nawitus6• 13 years ago

I don't believe bitcoin has a floor value in the same sense as gold or silver. A currency doesn't need to have a floor value just because currencies traditionally had. Besides, modern currencies are fiat money without a true "floor" value.

declan2• 13 years ago

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

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

salient• 13 years ago

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

lovemath• 13 years ago

Except in this case he's only quoting John Levine.

patrickaljord• 13 years ago

He's quoting a friend of his who happens to agree with him. Shocking.

tvladeck2• 13 years ago

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

http://krugman.blogs.nytimes.com/2013/08/18/the-dynamo-and-b...

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

Edit 2: Another post by him on the value of ICT: http://krugman.blogs.nytimes.com/2013/10/11/the-ict-revoluti...

hexis• 13 years ago

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

nhaehnle3• 13 years ago

So don't go to Krugman for technology insights. Go to him for economic insights. Consider the recent discussion about "positive vs. normative economics". It's a similar point here.

There are Bitcoinistas who would like governments to abolish their own currencies and make Bitcoin the currency of the land, or perhaps adopt a Bitcoin-standard akin to a gold standard.

Those are economic policy proposals. Are they good ideas? It makes sense to listen to what economists have to say when you are trying to figure out the answer.

praptak2• 13 years ago

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

GFK_of_xmaspast• 13 years ago

Personally I consider a stack of (non-counterfeit) twenty dollar bills to be 'useful.'

nawitus6• 13 years ago

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

praptak2• 13 years ago

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

hatu• 13 years ago

A bank run would be as devastating on any other currency as it would be to Bitcoin of course. Loss of confidence in a currency destroys it. The same is true for the Yen or the Euro or USD too.

mercurialshark2• 13 years ago

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

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

venomsnake• 13 years ago

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

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

mercurialshark2• 13 years ago

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

AKA he's justifying his dumb thoughts...

etherael2• 13 years ago

No.

This is like a religious fanatic retreating from a god of the gaps corner, but never considering the possibility that he might be fundamentally wrong.

Of course I can show you irreducible complexity! Look, Eyes! No wait, that doesn't work, I mean blood clotting! No no no hang on, I mean flagella based molecular motors! Ok, look, that's wrong too, but I'm still right, just, look, let me get back to you on this, OK?

Alright, good, are you there? Forget irreducible complexity. That's just hokum, but this will just knock you out of the park, are you ready? Ok, here; Bananas are clear proof of intelligent design!

Hello? Where did you go? Why is nobody listening to me? Anybody? Bombardier Beetles!

trentmb2• 13 years ago

What's the overlap between people with access to stable or reliable banking and stable or reliable power and stable or reliable internet access?

nawitus6• 13 years ago

Majority of Africans own a cell phone, and they already use it for payments.

gojomo2• 13 years ago

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

• global always-on connectivity

• encryption constructs

• easy discovery/formation of communities-of-interest

• open source collaboration

• instant rich search and giant archives of past behavior

• delegation of policy to ever-improving software/automation

• cheap powerful handheld computer-phones

• ...etc

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

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

pron• 13 years ago

It's hard to recognize the importance of technological breakthroughs and impossible to predict the future. With Bitcoin the problem is doubly difficult because the technology is new but the economics may be old. Unlike, say, digital publishing that democratized a process that was once in the hands of gatekeepers because of high costs, crypto-currencies try to do away with gatekeepers that were put in place because decentralized currencies didn't work so well. This discussion bears resemblance to others about economic regulation, which, just like Bitcoin fans, ignore the fact that regulation was put in place, at least in America, to save Americans from the horrors of the Gilded Age.

gojomo2• 13 years ago

Many of the problems with private/decentralized currencies in the past – problems that motivated the state monopoly and regulations – are no longer relevant, with modern technology. The global network, encryption, and transparent open-source governance render obsolete lots of the old concerns.

Also, while regulations and state monopolies always have an surface rationale based on solving actual problems, sometimes the real reason they're put in place, or maintained even as circumstances change, is because they benefit certain narrow entrenched interests.

We owe older regulatory arrangements some respect, for the effort that went into their initial crafting and their longevity across eras where (whatever other problems we have) we've survived and thrived beyond the past. (I agree with the "Chesterton's Fence" principle: don't take down a fence until you know why it was put up.)

But we shouldn't fear that old regulations and traditions are the only thing protecting us from 'horrors' of the past. The world has changed, some old risks are obsoleted by new levels of understanding and wealth, while all-new risks have arrived – including many created by the privileges and inflexibility of older 'solutions'.

nawitus6• 13 years ago

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

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

stephenbez• 13 years ago

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

blahbl4hblahtoo• 13 years ago

every time i have read a statement like this in the past it has been followed at some point by a crushing, total and complete, reversal that shows that the exact opposite effect was produced from the anticipated outcome.

allochthon• 13 years ago

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

doctorpangloss• 13 years ago

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

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

nhaehnle3• 13 years ago

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

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

fonosip• 13 years ago

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

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

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

trothamel• 13 years ago

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

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

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

eru3• 13 years ago

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

wlievens• 13 years ago

Cost does not equal value. One could rather say the cost of mining bitcoins is analogous to... the cost of mining gold, not the industrial value it represents.

anonymoushn• 13 years ago

I can't flip my miner into reverse and produce electricity while destroying BTC. The ability to convert $800 to 1 BTC by mining does nothing to keep the value of 1 BTC above $10.

jostmey• 13 years ago

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

Estragon2• 13 years ago

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

codex2• 13 years ago

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

apw• 13 years ago

Bitcoin is far more than "just" a solution to the Byzantine Generals problem.

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

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

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

predius• 13 years ago

That's what so many people miss. They see "Bitcoin" and forget about the technology behind it. The ability to create "cryptocurrencies" at no cost is going to be very interesting, I can't wait to see what we can build on this basic logic.

Artifex• 13 years ago

| A whole generation of kids is going to grow up soon routinely using small Bitcoin escrows to hedge everyday scenarios.

Could you explain this in more detail? Or perhaps provide a specific example? I've heard people talk about DACs and such (which I also don't really understand very well). At the risk of sounding stupid, I honestly don't understand what kind of scenario this would prove useful (or at least simple enough to warrant its use over traditional methods).

rlpb• 13 years ago

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

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

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

Estragon2• 13 years ago

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

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

baddox2• 13 years ago

I think that's true, but clients can change.

wmf2• 13 years ago

Let's go to the source: https://en.bitcoin.it/wiki/Script "Note that there is a small number of standard script forms that are relayed from node to node; non-standard scripts are accepted if they are in a block, but nodes will not relay them."

It seems there's enough flexibility left to do some interesting things. I see discussions in the forum of things like M-of-N, nLockTime, and anyonecanpay.

oleganza• 13 years ago

Some operations were disabled by Satoshi because they were incompete/buggy/risky. Those need majority consensus among all miners and users to enable or modify.

Some specific kinds of scripts are marked as "standard", all the rest are "non-standard". Non-standard scripts are valid and all miners will validate blocks containing such scripts. But non-standard transactions (i.e. transactions, containing a non-standard script) will not be relayed by default by the bitcoind nodes. Every node and every miner may decide for themselves whether they relay/mine non-standard transactions or not. I'm not sure how many miners accept non-standard transactions, but there are some. You can also pay some miners directly to mine a specific transaction. Or you can mine your non-standard transaction yourself, if you can afford it. Non-standard transactions typically require higher miner fees and take longer to confirm (as not every miner will include them).

The point behind standardness is to contain damage if some complex scripts will turn out to allow DoS attacks, allow losing funds or something like that. In 2012 Bitcoin was extended with P2SH ("pay to script hash") type of transaction (which is also standard) that allows you to define the redemption script during redemption, not during payment. Payer sends coins to a "hash of script" instead of the script itself. Payee then needs to provide not only signatures to redeem the payment, but also the script matching this hash (however complex it is). This has several advantages:

1. Payer does not spend higher miner fees because of the complexity of the script.

2. Payer does not wait indefinitely long till the transaction confirms.

3. Payer may not know the contents of the redemption script until it's being used. In some protocols this could be a useful feature for privacy reasons.

So with P2SH a service may already use arbitrary non-standard scripts shifting the burden of mining non-standard transactions from its customers to itself. For the customer it will look exactly like sending money to a Bitcoin address, although that address will start with "3", not with "1" (which is reserved for the usual "pay to public key hash" script).

panarky2• 13 years ago

their parents operated in a world based on centralized authority subject to rent-seeking corruption

Krugman is surely correct that it's silly to waste resources digging gold out of the ground only to re-bury it in a bank's vault.

And if Bitcoin was just another currency, it would be equally silly to waste compute resources mining it.

But if crypto-currencies could disrupt even a small part of the centralized, rent-seeking, mafia-economy, then the cost of mining dwindles to insignificance.

It's not about intrinsic value. It's about changing how people transmit value over distance and time. It's about freeing that process from the gatekeepers who control it and extract rents from the labor of others.

hackinthebochs2• 13 years ago

It's about freeing that process from the gatekeepers who control it and extract rents from the labor of others.

And do you think these gatekeepers are going to relinquish their power quietly? There are many ways that the entrenched powers can stall or even kill bitcoin. One declaration by China saw a loss of 50% of bitcoins value in a day or so. The claim that bitcoin is disruptive to the system is vastly overblown. Guns still rule in meatspace as well as cyberspace.

fragsworth3• 13 years ago

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

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

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

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

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

joe_the_user2• 13 years ago

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

Uh, the problem is that this is not a one-time succeed or fail thing. If one fine day, enough people think bitcoin will fail (or just think it no longer serves their purpose, say, it no longer has a chance of significant value increase), the consequences for many people may be very painful - even if for many previous days, most people thought bitcoin would succeed, even if some imaginary point had reached where some commentator could say "wow, looks like bitcoin has actually succeed".

fragsworth3• 13 years ago

Uh, the problem is that this is not a one-time succeed or fail thing.

I think you're misunderstanding the risk here. If the mining network reaches a point that it is no longer secure, because the market cap and trade volume is not high enough to support a large computational network, then a single widely publicized 51% attack can cause a near-complete loss of faith in the system.

The damage to cryptocurrencies after such an event is probably irreparable.

heurist3• 13 years ago

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

fragsworth3• 13 years ago

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

wmf2• 13 years ago

Successful alternative cryptocurrencies ... backed by governments or businesses

It seems like this could have been done 15 years ago with Chaumian digital cash (which requires no mining and is more anonymous than Bitcoin) or even earlier with plain public-key crypto if you don't care about anonymity. Why hasn't it?

codex2• 13 years ago

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

SwellJoe• 13 years ago

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

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

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

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

Bitcoin solved a major technical problem, but not an economic one

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