The Future of Bitcoin

[Wesley]

I would first like to preface this by saying that it is a relatively advanced discussion of bitcoin. If you do not understand the basics of what bitcoin is, then it will likely not make much sense to you. For the absolute basics on the bitcoin currency app, feel free to read my Bitcoin: Getting Started thread. If you understand everything in there and want to research and move to the next level, this post will provide my initial thoughts and then this thread will hopefully develop from there.

 

Explaining a New Technology Using Bad, Old Terms

 

It is one of the banes of any new technology that you have to explain it in terms of something that already exists.

 

As many of you have figured out by the terms used around bitcoin, about none of them actually apply to bitcoin.

 

For instance, bitcoin is not a coin.

 

You don’t have a wallet full of coins.

 

You don’t even send coins really.

 

Bitcoin is a store of value that is cryptographically embedded on a distributed ledger. This ledger uses Proof-of-Work (POW) to verify and confirm transactions. Bitcoin is just numbers that move around on the ledger. They can only be spent when a mathematical signature says the coin is now located at a new place in the ledger. Simple, right?

 

Not at all! Bitcoin makes no sense to people who are new to the idea. Even using “old” terms, bitcoin is still confusing and leads to many people criticizing it according to old standards which do not apply to bitcoin. It makes things very difficult to explain. Thus, all of these old terms that do not apply exactly need to be used in order to analogize bitcoin with our existing ideas about money.

 

The TWO Meanings of Bitcoin

 

This brings me to the bitcoin name itself. The truth is that Bitcoin the network is just a distributed proof-of work protocol. On top of this, we have the application called bitcoin that is used as a exchange of value system.

 

What This Means

 

Bitcoin the network will very quickly have a lot built on top of it.

 

Think about the internet. You have TCP/IP as the base protocol. On top of this, you have built the HTTP protocol. On top of this, you have many browsers that you use which bring these complexities to the "user" level. On top of this, you have the various apps and plug-ins which bring things down to an "individualized" level.

 

Bitcoin is exactly the same. In fact, several years from now, very few will know what bitcoin is but they will use it- or a derivative- every day (similar to how few know what TCP/IP is, but use it every day).

 

The Next Layer

 

There are a few companies popping up that are trying to build the next layer. Mastercoin is one that is just starting. It would allow titles of property, assets, stocks, bonds, etc to have registered ownership titles in a distributed system. It would also allow anyone to make their own “coins” for a project or for themselves in order to parse out value, or stake in a project or company.

 

I am not aware of others, but I am sure that a few may exist and the next couple years will see a lot of development in this area.

 

Beyond That

 

There are many places where bitcoin could go, but in time there will be many layers of apps on top of the system that the technical knowledge you currently need to use bitcoin will be silly and obsolete for the average user. Things will become second-nature and basic exchanges will happen instantly without much thought.

 

Advantages of Bitcoin Revisited

 

Thus, besides the many, many advantages of lessened counterparty risk and lessened third party risk and lessened overhead and lessened centralization and increased anonymity and more that bitcoin the current realization of bitcoin the currency provides, these things can be applied in the future to all assets, transactions, interactions and more.

 

The limits are only in the imaginations of entrepreneurs as to where bitcoin can go.

 

 

 

This post as a bit shorter as I do not know as much about the topic as it is new, and that it introduces a lot of new topics and ideas even to people who are potentially familiar with bitcoin the currency. If you have any questions, trouble, additions, or edits, feel free to ask them and I will try to respond as best I can.

 

Also, if you want to see another post or topic about bitcoin, you can PM me or add it below and I will research or put something together- especially if I think others would benefit from the post.

 

Thanks for reading!

[judywhite]

Sure thing, Bitcoin is the future. I believe that not only stores and companies will be adopting it but as well as venture capitalists.  

[ThomasDoubts]

Wesley, I noticed you made note of it in a reply in your "Getting Started" thread, but I think one would be remiss to not mention the deflationary property anytime the advantages of Bitcoin (the application) are generally discussed.  Maybe I'm nitpicking, but this property represents, what I believe to be, a profound change to the status quo. 

 

The incentive to delay consumption/gratification, rather than disincentivized savings, has the potential to drastically change the way we think about allocating resources.  I think this would change the way we think about spending/saving and risk taking/credit/interest rates, and by extention, how we allocate our other finite resource: time.  I may be off base here, but I don't think it's too far fetched to say that a monetary system that encourages immediate gratification in "economic" matters, also trains us to an extent to expect/desire immediate gratification in all other matters of life. 

 

To have a given unit of currency be worth more tomorrow, rather than less, and "governed" by mathematics with relative certainty is a fundemental change.  One earns a return by not consuming, rather than being required to take risk to avoid a loss.  What is the incentive to purchase a government bond if you needn't hedge inflation and preserve purchasing power? 

 

In my estimation, the ramifications of a mildly deflationary currency are very much underappreciated.  Perhaps I could go into more detail on this point, but I think I'll make a thread on it in the next day or two, for debate and exploration.  I hope I'm distracting from the intent of your post, but I think this is an important point that deserves to be made every time one talks about Bitcoin.  What do you think?

[Wesley]

Wesley, I noticed you made note of it in a reply in your "Getting Started" thread, but I think one would be remiss to not mention the deflationary property anytime the advantages of Bitcoin (the application) are generally discussed.  Maybe I'm nitpicking, but this property represents, what I believe to be, a profound change to the status quo. 

 

The incentive to delay consumption/gratification, rather than disincentivized savings, has the potential to drastically change the way we think about allocating resources.  I think this would change the way we think about spending/saving and risk taking/credit/interest rates, and by extention, how we allocate our other finite resource: time.  I may be off base here, but I don't think it's too far fetched to say that a monetary system that encourages immediate gratification in "economic" matters, also trains us to an extent to expect/desire immediate gratification in all other matters of life. 

 

To have a given unit of currency be worth more tomorrow, rather than less, and "governed" by mathematics with relative certainty is a fundemental change.  One earns a return by not consuming, rather than being required to take risk to avoid a loss.  What is the incentive to purchase a government bond if you needn't hedge inflation and preserve purchasing power? 

 

In my estimation, the ramifications of a mildly deflationary currency are very much underappreciated.  Perhaps I could go into more detail on this point, but I think I'll make a thread on it in the next day or two, for debate and exploration.  I hope I'm distracting from the intent of your post, but I think this is an important point that deserves to be made every time one talks about Bitcoin.  What do you think?

I would be interested to see that post. 

 

The point of this thread was that anyone who looks at bitcoin as just a currency is fundamentally missing most of what bitcoin is, let alone what it will become.

 

I do not think that bitcoin will necessarily be deflationary, especially with potential future altcoins and applications like "Wescoin" that will create some value external to the current bitcoin app. If anyone can create any coin they want, it would be hard to call it deflationary as in some strange way, people can print money- though it only gains value based on the value they provide in exchange for it.

 

Also, it is hard to tell if bitcoin is inflationary or deflationary as right now it is still in the introduction phase, before the block reward lessens to be less than the transaction fees. Inflation (the increase in the money supply) is technically happening. Inflation (the rise in prices relative to the currency) is not because of increased awareness, added value in the bitcoin economy are moving faster than the increase in money supply. It also seems apparent that bitcoin's current inflationary status, as well as the surges in awareness fueled by the media create very similar short-term bubbles as have been seen in the past. However, because of the value in bitcoin itself, it survives the bubble (just like houses had value after the housing bubble, but paper currency may not)

 

Finally, there are advantages to inflationary currencies and there are advantages to deflationary currencies. There also are disadvantages for each. For instance, if bitcoin were to become deflationary, then Keynes argued that the increased hoarding would lead to some sort of deflationary spiral that would kill the currency. I do not think that this is likely and I do not fear deflation, but I do see problems with a medium of exchange that may deflate too quickly. However, I do not think bitcoin will have this problem for reasons stated earlier.

 

If you create this other thread, I will post any further thoughts there

[BennyHoward]

I agree that it would be too hard to tell if bitcoin would be infationary or deflationary until it becomes adopted as a standard. I think most likley it'll go through cycles of inflation and deflation upon standardization. Just like the US dollar when tied to gold resulting in mostly no net inflation/deflation. Refer to this chart for more:

http://www.economics-charts.com/cpi/cpi-1800-2005.html

 

However, with that being said price of consumer good is likey to fall with technology. Also, it seems that ultimately a digital currency is likely needed or the future. If in the event we do mine space and it's profitable then specie (example gold) currency will become inflationary. For bitcoin the money supply is know in advance and it will not expand beyond a certain limit.

This is not to say that the gold standard is a bad choice if a less elastic currency supply is called for, but in the event of a commodity surge from mining space then we'll end up with a situation similar to the Spanish silver inflation. Refer to this YouTube video to learn more about it:

 

This brings me to 2 questions.

1) What would banking look like with bitcoin?

Fractional reserve banking occurs because it loans the depositors savings while keeping the number on the depositor's ledger the same. But in bitcoin no organization can control the bitcoin ledger.

 

2) How will contracts work under bitcoin?

Since it is inherently anonymous it would require revealing identities so that restitution can occur in the event of disputes. And a fraudulent actor can always move their stolen goods to another bitcoin wallet to prevent recovery of stolen coins.

[ribuck]

This brings me to 2 questions.1) What would banking look like with bitcoin?Fractional reserve banking occurs because it loans the depositors savings while keeping the number on the depositor's ledger the same. But in bitcoin no organization can control the bitcoin ledger.

 

Fractional reserve banking would be done outside of the block chain. You would send your precious bitcoins to your chosen bank, who would promise to lend them out many times over (fractional reserve or even zero reserve), and in return would pay you interest (unless they went bust).

 

I think we will also see banks that hold your bitcoins safely with 100% reserve (i.e. not lending them out). Because the bank is not earning interest on your coins, they would not pay you interest. In fact they would need to charge you a small fee (the same as if you pay a vault to store your gold).

 

2) How will contracts work under bitcoin?Since it is inherently anonymous it would require revealing identities so that restitution can occur in the event of disputes. And a fraudulent actor can always move their stolen goods to another bitcoin wallet to prevent recovery of stolen coins.

 

Until now, most people just use the Bitcoin protocol to send and receive coins. But the protocol also allows a wide range of programmable contracts. You can set up rules such as "The money gets returned to the sender after 30 days, unless two out of the three parties digitally sign an approval, in which case the money gets sent to some other address". I'm paraphrasing here, because a simple programming language which is built into Bitcoin must be used for this.

 

Not much work has been done on exploiting built-in Bitcoin contracts yet, but they're powerful and exciting. For more information see the Bitcoin wiki:

https://en.bitcoin.it/wiki/Contracts

[Wesley]

1) What would banking look like with bitcoin?Fractional reserve banking occurs because it loans the depositors savings while keeping the number on the depositor's ledger the same. But in bitcoin no organization can control the bitcoin ledger.

It is hard to predict. However, most likely banks would issue metacoin apps on top of bitcoin. This would allow blockchain-like security and transparency as to the value of the coin. They would then loan out bitcoin and provide interest and value to the account holder in the form of the metacoin. When someone wanted to withdraw money, it would be a simple exchange conversion.

 

People would be able to easily judge what the value of their coins will be after the exchange vs before based on an exchange and past history of inflation and deflation within the metacoin. This would provide a lot of potential tools for banks to attempt to provide value to their customers. I would not get in on these systems unless they are trustworthy or provide some sort of insurance. It would be interesting to see how it develops.

 

Banks in the form of storage will probably exist minimally. There will be some services that guarantee the safety of your coins for a fee (or maybe the fee could be the amount of deflation of the coin, so it technically could be free in real terms). The main service you are getting is a guarantee where if they lose your coins, then they will owe you the value of the coins they lost which would put a large incentive on their being able to keep your coins safe until you eventually want to withdraw them.

 

 

 

For contracts, I would show you to ribuck's response. You do not need to reveal identity in the same way in bitcoin as identity can be achieved through mathematical signature rather than through government identification. Someone would just need to provide the key in order to access a piece of property and to prove ownership.

 

Escrow and contracts also work under bitcoin and mediation services to help people set up escrow and contracts will exist as an escrow third party will require some trust and would be used in the event of large and important transactions.

[TheRobin]

http://bitcoinmagazine.com/9411/new-report-details-bitcoins-potential-threat-federal-reserve/

 

 

For those who haven't seen it, shot article summarizing some of what the FED think tank thinks about bitcoin

[BennyHoward]

It is hard to predict. However, most likely banks would issue metacoin apps on top of bitcoin. This would allow blockchain-like security and transparency as to the value of the coin. They would then loan out bitcoin and provide interest and value to the account holder in the form of the metacoin. When someone wanted to withdraw money, it would be a simple exchange conversion.

Fractional reserve banking would be done outside of the block chain. You would send your precious bitcoins to your chosen bank, who would promise to lend them out many times over (fractional reserve or even zero reserve), and in return would pay you interest (unless they went bust).

This makes perfect sense. Then banking even as we know it need not change. If anything this system may eliminate the need for physical banks and favor the formation of more online banks. This would lower the cost structure thus allowing for more competition between the bitcoin banks. However, I don't see much of a need for a bank that only holds bitcoins in reserve as would be done with gold , except for escrow. I just checked out the bitcoin white paper, it seems as likely to get stolen from a person as would a bank. Which is good because it's one more cost that's been lowered thanks to this advancement.

Until now, most people just use the Bitcoin protocol to send and receive coins. But the protocol also allows a wide range of programmable contracts. You can set up rules such as "The money gets returned to the sender after 30 days, unless two out of the three parties digitally sign an approval, in which case the money gets sent to some other address". I'm paraphrasing here, because a simple programming language which is built into Bitcoin must be used for this.

Checked out the reference you gave on contracts. Looks simple enough, you many not need a third party for escrow or contract formation if you have sufficient technical skills. Most people don't, but I'm sure it won't be too expensive nor difficult for a third party to assist. So far bitcoin (or to be more precice a something like it) has a low barrier to adoption. It would seem that only time is needed for a full adoption of bitcoin (or more likely a successor).

http://bitcoinmagazine.com/9411/new-report-details-bitcoins-potential-threat-federal-reserve/  For those who haven't seen it, shot article summarizing some of what the FED think tank thinks about bitcoin

I read the congressonal report (mostly skimmed) you gave in your reference and I don't get the impression that the Fed sees bitcoin as a threat to the system, but more as a toy for enthusiasts with some potential for tax evasion, money laundering, and illicit purchases. But, there is a section in the report that clearly outlines the reasons for wide spread adoption and barriers to wide spread adoption. This might be a good read for anyone interested in the future of bitcoin.http://www.fas.org/sgp/crs/misc/R43339.pdfI think this video (the attitude of the host) is fairly representative of what their attitude toward bitcoin.