The Promise of Crypto
Part 1 of 2
“Bitcoin and crypto currencies in general represent a fundamental shift in human society that will rival the shift made by the internet.”
Wow, that sounds like so much nonsense… I know because when I say that to people they get that little snicker in their mouth. Bitcoin? Change the world? You’re nuts. It’s just money. And not even that really. It’s a pyramid scheme…
And yet within minutes of talking, a realization comes to them and their eyes get wide. “Really? Wow!”
So what really is the promise of Bitcoin ? How will it change the world?
Bitcoin is money
“Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given socio-economic context or country.[1][2][3] The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past, a standard of deferred payment.[4][5] Any kind of object or secure verifiable record that fulfills these functions can be considered money.”
Bitcoin as a protocol has three distinct components: the ledger itself, the crypto around the ledger guaranteeing the veracity of the ledger, and the reward system for the miners to run the crypto.
The reward component of Bitcoin fits the criteria of money. The system gives 25BTC to anyone who manages to “mine” a coin. You can then trade, keep or sell your coins, and many other people are willing to trade FIAT currencies like the US Dollar or the Yuan for your BTC. (I would be willing as well)
But why? Why would you give up your trusted and safe US Dollar for something that you can’t even buy groceries with? Well, I call it the bacon answer. Do you like Bacon? I like Bacon. I like MORE bacon.
Bitcoin=MORE Bacon
Nicolas Kirpatrick posted this great image a few weeks back. As you can see the price of Bacon as denominated in Bitcoin has declined over the last 3 years, while denominated in USD it has gone up. This is because Bitcoin is a controlled supply currency. There can only ever be 21 million bitcoins and while we’ve only discovered 12 million of them, the remaining nine million will be discovered over the next 126 years. The Bitcoin foundation predicts that the last coin will be “mined” around 2140.
That means that as governments print more and more fiat prices will follow the bacon mode above, and I like MORE bacon.
Bitcoin as a Trusted Transaction Ledger.
Notice from above “or secure verifiable record that fulfills these functions can be considered money”. And what is Bitcoin? A Trusted (or secure) publically distributed (verifiable) transaction ledger (record)”. So in that way also Bitcoin is money. And in that way, it is also much more.
How did writing and counting start? “Writing numbers for the purpose of record keeping began long before the writing of language” “The earliest known writing for record keeping evolved from a system of counting using small clay tokens. The earliest tokens now known are those from two sites in the Zagros region of Iran: Tepe Asiab and Ganj-i-Dareh Tepe. [6]”
Counting was needed for the trade of goods. Writing was invented to describe the goods. Traditional archeology holds that writing started in Sumeria around 3200 BC (as well as Mesoamerica) but recording inventory, or accounting was already in widespread use and evolving as far back as 4000bc.
Counting is a survival skill in our world. Without counting you do not know how much food you have, or how quickly you’ll use it, important information in the cold dark of winter. Without this information you might die.
The counting aspect of Bitcoin, the TRUSTED ledger, is the true innovation of Satoshi Nakamoto. It changes everything. As I mentioned in my previous article, “In mining, we trust”, everything is a ledger. Stock market results, deed management, elections, accounting, they are all ledgers. Ledgers that currently can all be “fudged”. Granted some manipulations are harder than others to pull off undetected, but as the scandals of the last six years have shown, no ledger that is NOT independently verifiable can really be “TRUSTED”.
And aside from financial ledgers, elections are also ledgers, are they not? Think about the 2000 US General election for example. George Bush vs Al Gore, Palm Beach county, Florida. Senior citizens counting votes manually, holding tickets to the light to see if they’ve been punched. “Hanging Chad” entered our vocabulary then. What a horrible night that was for our democracy no matter which side you supported. A clean and fair election is the least we should be able to expect from our government.
Imagine voting via “Vote Coin”. You go to the DMV and register. They take your biometrics, and put it encrypted on file with the key being quite literally “you”. Maybe with a device similar to this. http://www.bionym.com/ . When you go to vote, YOU open your one time election wallet and send each of the coins to the candidates you select. The tally continues in real time, open and publicly visible and no-one can tell which specific vote was yours since your wallet ID is also encrypted. This certainly doesn’t solve every problem, but it does solve the 2000 election debacle, and that’s pretty good.
Now think about how many ledgers you use every day. At the gas pump, at the checkout counter, at work, at home, shopping, driving, etc .. Hundreds. Thousands. Every day. But does it make sense for my morning cup of coffee to be on the same transaction ledger as my deed? Or as your lunch in Beijing? Of course not. The current Bitcoin block chain is 13Gb. It is already unmanageable for many, especially for those in the developing world. Sync times for new wallets are measured in hours in the US and in days in the third world, an unacceptable rate for mass market adoption. 13Gb, and we are only at .017 of global adoption? Scary!
Another concern with Bitcoin is the 10 minute transaction settlement time. The system is designed to solve each block (or to verify each transaction) in the last 10 min. If you’re selling things across the internet that take a few hours to ship, a 10 minute window to see that the payment is good is fine. However, if you are selling electronics or brand name goods or jewelry in a retail environment, a 10 minute window is far too long. Customers won’t hang around waiting for the settlement. So you risk giving away expensive merchandise and not getting paid. Bitcoin is great, but it’s not perfect and doesn’t fit every solution. So that implies many currencies, many “bitcoins”, each with different properties. Each coin would be made for its transaction style. Stock market trading needs sub second reconciliation speed; they would pay for a sub second settlement window. Deed management isn’t as fast, but would need offline cold storage, etc … There would be geography differences, language differences. You would even have your own transaction ledger to keep track of everything you’ve spent and to reconcile it with the bank. All quick, automated, without significant auditing, because it is already TRUSTED.
We can see the beginning of this in the burgeoning Alt market with over 260 coins currently in existence and more being introduced daily, and the somewhat embarrassing success of DOGE coin. (Disclosure: I own DOGE coin and actively mine it at times). By the way, the success of DOGE will surely be scrutinized in the near future. I can see the Ph.D. thesis now: “The propagation of money memes in a social network”.
How much time will we save in doing our taxes? In auditing our institutions? In double checking the books? Not only that, but if you can see all activity, and if everyone can, then our trust in those institutions increases and our ability to direct our institutions increases as well.
“Payloads with Paychecks”
Bitcoin, and other alt coins, within them, have the ability to carry a “payload”. Any data, encrypted or plain text can be stored within the block chain. So that means that I can wrap a “payload” with a “paycheck”. Being able to attach instructions or code to money means that I can pay “machines” to work.
Every automated transaction between different owners and many transactions between same owners is a potential market. Wanna buy a movie from Amazon? Here ya go. (Coincidentally Netflix announced that they are working on an “on demand purchasing mechanism” for Bitcoin. This is not yet “Payloads with Paychecks”, but it does make the point). How about software wrapped in money? Run this and get paid?
Think about the implications of that. Large corporations spend millions every year accounting for their IT work. How much of that processor did we use for the HR job? How much for accounting? How do we allocate the costs? If I can wrap a payload with a paycheck, you don’t need to ask. You know.
I can envision an entire industry based on systems payload management, systems payment integration, priority queues, etc … Wanna change that light to green? Send an instruction with the payment. System will accept payment, check instruction, check safety and other instructions, turn light green. Want to account for depreciation of software? Build a micro payment into each instruction. Want to sell cloud services? Publish a schedule of commands, and their costs. Then accept payloads … with paychecks. Want to hire systems or people to do piece work? Yep, payloads with paychecks. Entire odesk/ebay type websites where jobs are offered, processed and reconciled using “payloads with paychecks”. Imagine, no receivables, no “float”, no interest. Just simple payment for work. Simple.
As a matter of fact, Ethereum is the first tentative implementation of “payloads with paychecks”. It should hopefully become an enablement language that allows anyone to create a “payloads with paychecks” application. Contracts, deeds, trusts, can all be made more efficient with Crypto and Ethereum.
Remember, none of it works without TRUST, and TRUST requires mining, and all of the mining equipment available is currently being used. The supply chains are full, and new plants take years to come online.
And no, this is still not the full promise of Bitcoin and Crypto. These functions, while revolutionary in of themselves, pale to the final concept of what Crypto can do for humanity. But that will have to wait for part 2.