Another take on what makes a good cryptocurrency

Sent to the Lifeboat Foundation new money systems group.

The thing is that block size is really irrelevant in the big scheme of things.  What matters is blockchain size.  (I know the two are connected, but the problem is the overall size of the DB, not the size of each chunk.)

Great as it is within its design boundaries, Bitcoin and most other cryptos have a self-imposed limitation that is totally unnecessary and needs to be lifted.  My question is: why in heaven would someone on Proxima Centauri five hundred years from now need to know what I spent on a cup of coffee in a Mexico City Starbucks in 2017?

To some, it is important that it was 30 pieces of silver that were exchanged for Jesus’s capture, for others that Manhattan went for twenty-some dollars.  Yet in no case we know which specific coins were used.  Bitcoin confuses a value transmission and storage medium with a notarization system.  Of course we need to know pretty much forever which land belongs to whom, but that body of knowledge is likely to grow roughly arithmetically.

Payment transactions, if the recent past is any indication, are on the other hand likely to grow with population, AND with wealth AND with technology AND just accumulating with the passage of time.  Cryptocurrency  transactions are also likely to grow with adoption. It is, therefore, disingenuous to gloss over the fact that a blockchain as envisioned by Satoshi will be unmanageable regardless of Moore`s Law et similia.

Notarization is costly.  It need not be as costly as today’s services by protected oligopolies in most countries, but it cannot be free.  Free stuff is used in infinite amounts.   Yet, Satoshi did not bake in any compensation for record keeping nodes.  Increasing recordkeeping needs and no comp are a recipe for collapse, soon or by the time we colonize Proxima.

I lack the math skills to make in code the design changes that I just exposed, but I think until the following appears in a cryptocurrency, whatever its name and be it through a fork, hard, or soft, or a completely new development, the promise of Satoshi will not be realized:

  1. Decouple current ownership from transaction history.
  2. Create a market for transaction storage and make transaction recordkeeping costly.
  3. Truly make transactions confidential, i.e. provable only at the desire of the parts.
  4. Allow multiple paths of transaction chaining, so that throughput can grow in parallel and not only serially.
  5. Eliminate economies of scale in transaction verification, so that mining on a billion cellphones is roughly just as profitable as mining on a petahash asic rig (in proportional terms, of course)

In this vision, all payments could be made in crypto.  No one could censor the network or attack it.  If every person on the planet makes today an average of three payments a day (I know, some of us make a multiple of that, but some still make none) there are today around 20 billion payments per day, i.e. over two hundred thousand payments per second.  Imagine why we need  points 1-4.

Without point 5, Mr. Xi’s successors will hold the keys to the throne of Emperors of the Galaxy.  I wish work on these five points could advance as fast as possible.  It would take not just math, but also economics, strategy and diplomacy and evangelization.


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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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Fedcoin – Less revolutionary, more intriguing.

I had the pleasure of reading a post today by David Andolfatto at the St. Louis Fed. David proposes the creation of a new monetary unit called Fedcoin.  Fedcoin would maintain a value of one US Dollar, obtaining the best of both worlds, i.e. fast low cost transmission and stable value.  Mr. Andolfatto has a very progressive and outspoken outlook on crypto, which I find excellent.  I think Bitcoin is the mirror that all central bankers will (and should) look into for the foreseeable future.  The idea (and name) of Fedcoin is not his creature(see here, referred by David). However, I think that his idea is not taken nearly far enough.  And taken farther, the result might be at the same time less radical in appearance but more dramatic in its effects on the economy at large.

  • Once one introduces uncle Sam’s full faith and accounting skills of the Fed, the block chain may be public, but it no longer requires any validators (e.g. miners).  That would also mean a dramatic drop in the cost of running Fedcoin.
  • Maintaining one ledger is in itself extremely cheap.  Any two bit financial software can do it and most banks do it for peanuts.  Even if the number of accounts for Fedcoin would the hundreds of millions, the cost per account and per dollar should be not higher than the most efficient money center bank’s.  As Mr. Andolfatto recognizes in his post-script, there is no reason to adopt a mechanism Satoshi Nakamoto envisioned for a trustless system when the system is based on the full faith of the US.  We do not need to pay for many independent verifiers at all.  The cost of such a system would still be very large, no doubt, but it would be partly offset by the retirement of a good deal of paper money (not to speak of the drastic reduction in the general cost of money transmission for individuals, businesses and the government itself.  Someone would have to run the numbers.
  • Fedcoin would be just individual (and corporate) accounts at the Fed.  It seems to me that the Fed shouldn’t needs a fig leaf to renounce KYC.  Just let people open Fed personal accounts as they open any online presence and there you have it.  Just add 2(3, 4, n)-factor authentication mechanisms as you see fit.
  • According to David, a crypto-like infrastructure might be appropriate because the Fed would not be OK with providing non-KYCed accounts.  Following his own logic, this makes no sense (to me).  If the Fed is happy with people passing their (the Fed’s) notes from one anonymous hand to the other, why would they be finicky about registering transfers of ownership on a computer ledger?  Also, why would the system not be permissionless?  Could they not let anyone register with their Google or Yahoo email address and move money around pseudonymously?
  • In that scenario, Fedcoin is just one buck, period. Why would it be a problem?
  • In fact, once you give up the whole cryptocurrency pretense, Fedcoin (you could still use the name for marketing reasons) is just one a plain old dollar.  The whole issue of money supply control, exchange rate stability, minting and retiring, become irrelevant.  19 Fedcoin would be the same as one Hamilton, one Lincoln, a Jefferson and two Washingtons.
  • The minute Fed accounts come online, I could hear the deafening sucking sound of deposits leaving banks for them.  Ironically, if the Fed blockchain is public (good or bad thing?) people and firms might maintain bank accounts only to obscure their balance sheets for privacy or competitive confidentiality reasons!
  • Bitcoin may evolve into Darkcoin or something similar as its users see fit, but If Fedcoin’s ledger is public by design, I would be very uncomfortable using it for anything sensitive, such as paying for plastic surgery for my daughter or collecting my annual bonus.  I think the US military would not want to pay for supplies through Fedcoin either.
  • This last point itself is worth a look.  With a public ledger, it would be impossible for GM to keep its industrial plans hidden from Ford Motors’ eyes.  I think the right to privacy at an individual level and the legitimate confidentiality of businesses would be hard hit by a system such as this.  Of course the same argument is applicable to Bitcoin, but I haven’t seen much discussion of this point anywhere.
  • Banks’ business model would change overnight.  Bank multiplier would tank to nearly one and the credit intermediation business would become a pure play, taking away systemic risk, dramatically reducing economies of scale and opening up for all kinds of specializations and niche industries.  No longer the Fed’s arm for monetary policy and payments system, banks would have a far different position within the business food chain.
  • This is the most seismic of all ripples from Mr. Andolfatto’s proposal.  If it happens, look for the return of The Bank of Brooklyn Heights, The First Bird Watching Enthusiasts’ Thrift and other narrow niche savings and loans institutions.  Goodbye systemic risk!  Goodbye huge payment processing farms!  The difference between M1 and the sum of notes + coins + Fedcoin should be minimal, since the banking system would not be able to create money by lending.

So Fedcoin is at the same time less revolutionary, since there are no byzantine generals, and a lot more far reaching, since implementing it would upend the current financial system.  Indeed, I doubt that such proposal could be implemented overnight.  At best, bank lobbies permitting, it could crawl in very slowly, to allow bank readjustment.  It might be an interesting experiment. When I was a budding young banker a ‘few’ years ago, I loved to say that transaction banking, my line of business, was the best piece, because we had the monopoly of the payments system, in exchange for helping the central bankers manage the money supply.  That has become increasingly not true as the definition of money has moved away from the one I learned from Samuelson’s textbook.  Now it seems to me that an era has gone completely.  Banks do not have the monopoly of the payments system and they may not be needed to help control the money supply.  The payments business hasn’t disappeared, nor I think it will, but it is going to be certainly different in the new era of frictionless payments. Incidentally, Ecuador has floated the same idea.  Although I have very little faith in Ecuador’s Central Bank and regulators, it would be interesting to see how the experiment proceeds there, if it takes off at all.

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The currency is basically a joke, says Jim Edwards, regurgitating taglines

I felt warmly towards this article, until a got towards the end.  The author, says: “Bitcoin similarly threatens banks. Not because it is an online currency. The currency is basically a joke.”

Now, I agree that Bitcoin threatens the banks.

Furthermore, I agree that the blockchain is a powerful insight by Satoshi Nakamoto and it may permeate the economy and society in many more senses than the one shown in the 2008 fateful paper.

Also, through technological progress, changing economies, political upheavals or other assorted forces, Bitcoin as we know it today may not be around forever.

In spite of all this, why is Bitcoin a joke?

Maybe Mr. Edwards hoped to make a killing when he bought BTC @ $1000?

I think it is poor journalism to pick up on widely repeated and badly reasoned headlines and it is even worse when they are not only not substantiated, but also further distorted by simplifying and sensationalizing the concept.

Personally, I think Bitcoin is far from a joke and I believe it is imperative that I affirm it.  Bitcoin is possibly just the first application of blockchain technology, and may not be seen as the most important by the next century, but it is already significant, it will continue to increase its relevance for everyday life and will certainly spawn direct and indirectly many changes for humanity, happy for some unhappy for others.

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