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The recent discussion about high denomination banknotes has extended into the merit of paper cash.

In so far as paper cash is needed, does it need to be done the old school way? For buying goods in legal market, probably not, an alternative would be to use “bearer numbers” (implemented as QR-code or barcode) that could be printed on paper if people want that.

The way it would work would be something like:

  • ATMs are replaced by an online banking facility that debits the client’s account, credits the bank’s account at the central bank (or whoever is the barcode cash clearer), which in response issues a new random number associated with the amount. The number is printed in computer readable form on a ticker the punter puts in their wallet.
  • In a shop the punter shows the number (the ticket) which the cash register redeems with the central bank computer. A new number is issued for change and printed on the receipt. These numbers can then be spent at other shops.
  • People can also simply give away the printout to others, as long as the recipient trusts the giver not to spend a copy before them.
  • Splitting a ticket would require an online app similar to the shop’s cash register.

This reproduces something similar to paper cash but without the need for actual ATMs with a stock of high value banknotes, or a banknote printing and processing infrastructure.

The principal disadvantage is that it requires all non-trusted-parties transactions to be online, to check the value and validity of the number with the centralised issuer/redeemer computer system.

The issuer could be a Bitcoin-like system — you can indeed do all of the above with Bitcoin — though current blockchain technologies add a delay to transaction authorisation that’s impractical for most shop-style settings.

It could be argued this is less anonymous than paper-cash because all redeeming transactions are logged (like in Bitcoin).  Technically that could be done with current cash as well: banknotes have serial numbers that could be tracked to produce interesting meta-data — a government could easily mandate the use of some scanner widget in the cash registers of all legal businesses.

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Funny news about a granny who shred her cash stash to annoy her heirs. The local central bank will replace the banknotes!

Mattress safety

This bring interesting potential applications. How to make cash under the mattress safer? Just cut it in two and hide it under TWO mattresses in different locations. If you need to spend it, rejoin the two parts and redeem it for spendable currency at the central bank. (This doesn’t though cover the somehow unlikely scenario where the central bank ceases to operate but the banknotes still have some value.)

Paper multi-sig

This could also be used by a group of people who want to share a stash and only spend it when they all agree: cut each banknote in N-pieces where each party takes one. To spend, the parties must collaborate to reunite the parts and redeem them at the central bank. This is pretty similar to multi-sig addresses in Bitcoin — indeed it could be used to explain multi-sig to people who don’t get the explanation in cryptographic terms.

Shredded will

Back to the granny, a central bank representative is quoted as saying that “If we didn’t pay out the money then we would be punishing the wrong people.” I think it is the wrong attitude. Destroying a banknote is equivalent to making a donation to society, as the value of everyone’s remaining currency increases (there are fewer of them going around). From an accounting viewpoint it decreases the central bank, thus the state, liabilities as there are fewer banknotes to redeem (paper money in circulation show up as a liability on the issuer’s balance sheet). So, the act of shredding the notes was obviously a wilful act of spending on the granny’s side. She could have equivalently bought an expensive object and destroyed it so as to destroy its value.

Technicalities

The ECB says that they do not redeem banknotes damaged intentionally. The Bank of England seems more tolerant. Arguable if people started to use the procedure for mattress safety and paper multi-sig en masse, central banks’ damaged notes redeeming service could be overwhelmed, though economically or morally I don’t see a problem with operating the service, perhaps with a fee to cover direct costs.

One thing I think Bitcoin, or a similar blockchain-based token system, may be useful for is to replace centralised social networks, or more broadly messaging systems.

A core if oft forgotten feature of a social network is how it manages spam and other forms of network abuse. One solution may be to exploit altruistic punishment, a tendency people have to want to correct bad actions even if it’s not in their direct private interest to do so. In familiar terms, people seem to enjoy pushing the “dislike” button even if they get no personal benefit.

How could one devise a cryptocurrency transaction type that cab be used to harness this effect?

One possible way is what I’ll call “altruistic destruction”. The basic idea is to have a transaction that can cancel some of the recipients’ funds, that is enriching everybody else, through the reduction of the monetary base. If this is free to the sender, this is open to abuse — though whether such abuse would be common could be a subject to interesting experiments — so a compromise might be simply that both the sender and recipient destroy some tokens. As a base case a simple matched ratio may do. The altruistic destruction transaction semantic would be as follows.

When Alice sends to Bob an altruistic destroy for N tokens,

  • Alice’s account value decreases by M tokens.
  • Bob’s account value decreases by M tokens.
  • where M = min(N, Bob’s balance)

M copes for the case where Bob’s has fewer token than N, assuming the token system does not allow debit balances.

In paper terms, this would be equivalent to burning a bank note with the name of a miscreant on it, where through some magic burning the named banknote would also make a banknote of the same value vanish from the miscreant’s wallet. Economically this reduces the total amount of banknotes in the system thus making holders of the remaining banknotes richer (like simply burning one without magic does) everything else being equal.

For practical use in a spam control system, this would have to be implemented with policies that uses minimum balances as condition of message transmission — a distributed deposit system of sorts.

There may also be other application of that transaction type. The ratio of destroyed tokens between sender and recipient may also be toyed with, but 1:1 may be special in that the cost of inflicting damage is equal to the damage individually, while the social benefit is leveraged: destroying 1 of one’s tokens produces 2 tokens’ worth for the community, and the punishment’s social value is free on top of that.

Having not made divination posts for a while, let’s make a new prediction, that the price of Bitcoin will go down markedly in classic currency terms in the next 3 to 6 months.

Transaction acceptance means net bitcoin selling

The reasoning is pretty simple: one of the main happenings in the Bitcoin world recently has been increased acceptance at legitimate vendors like Dell, Overstock, Expedia (for hotels) and others. Bitcoiners see that as a success and, ironically, some Bitcoin holders see it as doing something of civic value to buy at vendors that accept Bitcoin.

But what happens when someone buys a laptop from Dell with Bitcoin? There is no sign of Bitcoin becoming used in the business supply chain, where it doesn’t really solve any material interesting problem, so Dell will immediately convert the Bitcoins to dollars to pay their employees and suppliers. Indeed one of the reason vendors are accepting Bitcoin is that payment processing intermediaries make that easy by doing it for them and “removing the Bitcoin risk” from the vendor: they price in dollars (or another classic currency) with the payment gateway, and get dollars paid by classic wire transfer.

What happens on the buyers’ side: will people buy Bitcoins to buy Dell laptops? It seems unlikely. Dell is probably more trustworthy than most operators in the Bitcoin ecosystem, and you don’t want anonymity or pseudonymity when buying a laptop: you want them to know your address and deliver the laptop there. So there’s basically no reason to pay using a classic method to get Bitcoin and then use those shortly at a legitimate vendor. So who’s gonna buy Dell laptops with Bitcoins? My guess is mostly people who for some reason or other had accumulated Bitcoins, legitimately or not, and now have an opportunity to spend it on something more useful than Bitcoin t-shirts, and also see it as a “good” thing for the ecosystem.

And then came momentum

As it happens Bitcoin has been on a downward trend since its peak for several months, and has also seen a further boom in “mining” activity. Bitcoin mining, like its real world namesake, is one of those activities which tends to be structurally loss-making as it’s very hard for rational investors not to be outnumbered by innumerate optimists. Volatility and a downward trend may accelerate some of these past optimists giving up on accumulating mining proceeds, and exiting through transactions, which might provide some comfort (product + civic value) even if nursing a net loss.

Raw momentum regardless of mining (“it’s going down because it’s going down”) will also tend to put a further downward pressure, so basically we have a fundamental trend towards sale of Bitcoin created by transaction acceptance, amplified by momentum and mining dynamics.

Absent any new net buyers of Bitcoin, it’s hard to see how it could go anywhere but down on a simple demand and supply basis. It’s hard to think of a source of new net buyers. Most people who may be interested in Bitcoin at this stage — where it has acquired some maturity but is still an emerging underground tech — have probably already jumped in and are sustaining steady-state flows. I just don’t see any new major demand source coming in to offset transaction-driven sales.

Show me the money

So to quantify the prediction for verification, let’s say that BTC/USD will touch US$ 250 (approximately halve in value from now) for at least one day at reputable exchanges before April 1, 2015.

(Disclosure: I have a few pennies on downward Bitcoin bets at shady blockchain betting operator bitbet.us — not a recommended counterparty or investment. Note that if I win I get my payoff in devalued Bitcoins, which, if my fellow gamblers don’t discount that effect correctly, as I expect them not to, will be a pyrrhic victory.)