My email to Lew Claasen on the Bitcoin Foundation Manifesto

Dear Lew,

Thanks for your message.

Please see my comments to the Manifesto.  I appreciate the effort put into it, and I thought I would give you my remarks.  Would be happy to discuss further.

Cheers,

 

Claudio Migliore

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I can recognize the intentions in this manifesto and some are hard not to agree with.  Nevertheless, I would give another whirl to it:

  1. The listed truths are arguably correct, although they range between timeless principles and contingents short term facts
    1. You could argue that the first statement is confusing, since gold backed money is not strictly fiat
    2. Even when there was some gold “standard” around the world, governments happily debased their currencies and then they played around with words to get some legal cover.
    3. The statement about the gold standard is very US centric and is only good to cling to often repeated stats about the loss of dollar purchasing power.
    4. Truths 3 to 7, while significant, refer not to systemic economic issues but rather to the contingent state of financial intermediaries
    5. The huge truth that is not mentioned at all is that:
      1. The Internet has subverted and continues to subvert all connections between humans, making intermediaries generally unnecessary
      2. Crypto makes permissionless transactions possible
  2. The word “accordingly” suggests that the Foundation beliefs somehow derive from the listed truths, which I do not think to be the case.
    1. All the listed rights probably derive in cascade from the principles already established (if routinely trampled upon) by the constitution and laws of most of the world and not from the before mentioned “truths”
    2. More in detail:
      1. Although politically correct, it is debatable whether the expression “transactions harming no others” has any real meaning
      2. The right to economic participation is also a PC term.  There could be mention to economic freedom, but this also entails the right of anyone NOT to transact with anyone else.
  3. About the MISSION:
    1. The Bitcoin Foundation cannot coordinate any efforts of free people.  It can only attempt to, based on intellectual leadership and personal effort of its members.  The statement contrasts with the factual observation five lines up about the different views within the ecosystem.
    2. The mission could, and does not, address the issue of scientific study and understanding of the cryptocurrency phenomenon from and economic and technical point of view.  Past the simple though substantive statements  in Nakamoto’s paper, little has been done regarding understanding the ramifications of Bitcoin adoption, with the irony that a legacy institution of dubious neutrality like the Bank of England has been a major contributor in this field.
  4. About the VISION:
    1. I think it is a bit narrow.  I believe Bitcoin will play a crucial role as global money, but it is naïve to assume that there will be no third parties.  In fact some initiatives within Bitcoin are creating third parties.  Third parties will always exist in any advanced free economic system since anyone can attempt to, and may succeed in, adding value in a transaction chain.  The point of Bitcoin is permissionless access, not lack of intermediaries.
    2. The vision should, I believe include the contribution of Bitcon to freedom and economic progress
  5. About the values:
    1. PC at work again.
    2. “Guaranteed financial access”?  Who is guaranteeing? What is financial access?
    3. What is “financial access” and how is it different from financial inclusion? Why is one guaranteed and the other is not?
    4. What does the word “Autonomy” mean?

Stable money supplies (Plural?) is very vague.  It sort of tries to reassure inflation hawks.  I am one, by the way, and am not reassured.

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Bank Soundness and Competitiveness

Competitiveness 

 

I just read the World Economic Forum (WEC) Global Competitiveness Report and the useful (and pretty) charts Bank of America derived from it.  Then I did some comparisons.

I picked two countries (randomly-lol) and overlayed their graphs. (Note that the third panel is my responsibility, not BoA’s.)  Argentina ranks hugely better against Brazil on two categories and marginally better or worse in four.  The only large outperform by Brazil is on Bank Soundness and yet Argentina fares dramatically worse in WEC reading of Competitiveness!

Although I could not find the weights in the report, clearly (and probably rightly) the WEC places a substantial weight on Bank Soundness in promoting country competitiveness.

The argument is probably solid.  Flimsy, flaky, shady banks are no good.  However, what does it say for the evolution of finance, banking and Fintech?  Could it be that a healthy crypto alternative might pick up where sound banks falter?

 

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So bad it’s good

Jihacoin

 

I just read this paper by the Rand Corporation  called “National Security Implications of Virtual Currency – Examining the Potential for Non-state Actor Deployment

It is interesting to read because of the questions it raises:

  1. Why does the US public via government funding pay for this?  If it has any information you already do not know, then it is above your head anyway and if you are wiling and able to comprehend virtual currencies, nothing here is new.
  2. It is written rather poorly, syntax, grammar and logic, so why the waste?
  3. Is it really saying what it says or something else?  It purportedly excludes independent virtual currencies (VC) from the study, but does it?  Why would ISIS be better off with ISIScoin than with Bitcoin and why would ISIScoin be less vulnerable to US disruption than Bitcoin?
  4. Is it not that this analysis is part of a train of thought on how the US government might want to disrupt Bitcoin itself?

 

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Why the problem is not the block size but the blockchain size, the math and the philosophy

Bitcoin needs to support thousands of transactions per second, maybe millions. No amount of tweaking can make the numbers jive. I argue so in this post. At the same time, some of the fundamental design choices are naïve and unnecessary.  I start with this bold statement because, since I am not Mile Hearn, I do not expect anyone to read on without an initial teaser.

From SN seminal paper, bitcoin intended to have some characteristics that made it into a good currency, money, numeraire, or whatever you want to call it. Initially, it seemed that the design attained those characteristics, and indeed its phenomenal success suggests it did.

However, I think the design has not scaled well and is reaching a point where it cannot continue to grow and maintain the originally desired features.

The design assumed that the pure ‘progress’ (like Moore’s Law) would keep up or surpass the operating requirements of the btc network. Nevertheless, this is being proven unrealistic.  Even if Moore’s law continues, the scaling of btc has been and needs to continue to be explosive.

To be relevant, let’s say Bitcoin needs to account for 1% of the world’s transactions.  Roughly, if Visa processes 10k transactions per second, let’s say overall card transactions are ten times that and other transactions are on the same level, so there are today around two hundred thousand transactions per second.  That would be 17 billion transactions per day, i.e. 2.5 transactions per person per day on the planet.  This is back of the envelope, but probably not far from the right order of magnitude.

With those assumptions, Bitcoin needs a bandwidth of 2000 transactions per second (1% of two hundred thousand) just to be on the radar. And that is just 2015 rate, but it doesn’t take too much reading to see that other innovations (IOT, for instance) will add some zeros to the figure.

A naïve vision of Bitcoin as planetary (or even intergalactic) currency, then, is like the Jetsons’ view of everyday life. Cool in theory, but numerically unviable.

Again, an issue of the blockchain and its size. But there are economic and not just technical questions:

When I was a kid, they sold special “airmail” envelopes, made of lighter paper, because only critical mail was worthy of the expensive air delivery. Nowadays, all mail is airmail, even junk.

For the same reason, critical payments used to be the only handheld ‘real time’ transfers, while run of the mill transactions could take several days. Now payments are converging to real time, regardless of size, and cost is plummeting.  Special high value private networks that made sense before are merging into the internet following the same pattern.

Bitcoin’s current bandwidth, however, doesn’t even match the throughput of high value networks.  There are various proposals to bifurcate the rails, like sidechains, Lightning network, altcoins, etc. It seems as we are reliving a millennium of payments kludge history in just a year. In a world where Faster Payments is implemented in a few countries and private firms are marketing this service to many others however, a system that can only handle high value transfers is a weak competitor.

If I could send a little note to Nakamoto-san in 2008, I would tell (her/him/them/it?): “Think this through a little longer. Bitcoin is not ready.  Your fundamental ideas are sound, the implementation still is not. In six years your heirs will be squabbling over details because the whole thing is bursting at the seams.”

Next issue: Judas, Manhattan and my great grandfather

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Blockchain Inside Regulations Is NOT Innovation

I agree with the thesis of this article by William Mougayar.  However, in my view, a definitional point is in order to be fair to all involved.  Financial firms have innovated, or at least evolved their product lines.  As someone old enough to have had his tongue gummed up with stamp glue from mailing checks, things have indeed come a long way.

What is incompatible with regulated enterprises, though, is disruption. Regulators and their charges can hardly destroy their business model, after all.  As Shumpeter had pointed out way before we entered this current age of acceleration, creative destruction is not a gradual, but a traumatic phenomenon.  As for permissioned blockchains, I struggle to find parallels from the past, but I have this image of chariot makers adding speedometers to their horse drawn vehicles to compete.

 

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Fedcoin Helpers

Following up on posts by David Andolfatto et al. on the issue of state sponsored digital currency, I came across the following article.  IBM is looking to support central banks in setting up some form o digital currency.  Whether or not it is the right approach, it seems to me that the arrival of industrial strength suppliers is good news.

Ultimately, even if taxpayers’ money is not put to the best possible use, community/open sourced alternatives will not be crowded out, but rather spurred by any large scale implementation.

Reuters article on IBM move here

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