Mention that "bitcoin is the most powerful computational system ever organized by mankind for a common purpose."  In one sense, the internet itself is the most powerful computational system ever organized, but it's not for a common purpose.  I think many people, upon hearing that, would  think that there must certainly be a powerful idea behind this if that many people are devoting that many resources toward this common purpose.  You could get into the geeky stats (i.e. more powerful than the top 500 super computers combined), but I think that actually takes away from the message.  People start thinking more about the numbers and less about the bigger picture.

I would suggest avoiding talking about tax evasion (or "voluntary taxation), money laundering, buying illegal drugs, or using it to purchase anything illegal.  Talk about "privacy" instead of "anonymity" (which is really the same thing but has a more sinister sounding tone).  If you talk about transaction and asset privacy, anyone interested in such things will put 2+2 together and you don't have to give the banks/gov't any sound bytes to use against bitcoin.  

Talk about how the founders of the US likely never imagined a scenario where privacy in financial dealings was effectively impossible, and yet eCommerce has brought about just such a scenario.  Had the founders had such fore sight, they likely would have put provisions in the US constitution to protect financial privacy rights.  

Mention how bitcoin can help impose fiscal discipline on politicians by competing with national currencies.  In the long run, that makes our economies healthier and stronger (which eliminates a big precipitant for war).  Gold as an alternative currency serves that role in theory, but due to the inconvenience of actually using gold, we've developed these debt backed fiat currencies that always ultimately lead to over indebtedness, financial ruin, and war.  The fiat system requires an ever expanding money supply to provide the money needed for repaying debts…and because new money is only issued with debt backing, by extension, the system requires an ever expanding credit.  Needless to say that in such a system, you'll periodically find yourself at a point where debt is over-extended and consequently on the verge of system collapse…and at the very least, extreme and disorderly deleveraging.  With bitcoin you would have less dramatic swings of expansion and contraction of credit because debt is not at the foundation of the system.

Talk about how money is information.  Talk about how it's money designed for the Internet age.  Talk about how all other methods of online transactions require third party involvement.  Talk about how credit cards were designed in the 1950's and ACH in 1972…these technologies are old and could never have anticipated the digitally interconnected we live in today.

Lay out the case where, given the unique properties of bitcoin, it really could serve as the basis of a new, Internet era, financial system.  Make bitcoin synonymous with the future.

I'm pretty sure this is the way things will go.  The cost of transactions will rise to a point where there is an incentive to minimize the volume of block chain transactions.  I don't think using account based solutions is the best way however.  Instead, I think privately issued coins that have most of the properties of bitcoin, but don't require mining, is the way to go (transactions can just be verified with the issuer(s) rather than replicating a block chain everywhere).  This is similar to the role that gold serves today.  Using gold directly for transactions is cost prohibitive and thus people use various paper instruments for transactions while maintaining gold as reserves.  Debt (as well as equity and various forms of paper) are also a necessary complement to bitcoin to allow the effective monetary supply to expand & contract with market demand (which will also serve to help stabilize the value of bitcoin).

Of course, by that time, your average cell phone might have 200 TB of storage, capable of 20Gbps data communications, powered by nuclear fusion and cost less per month than your average fast food meal (but you'll still have to pay extra for text messaging).

That's true of the default client, but not true of all nodes and is a perfectly valid thing to do (and there are a number of cases I can think of where you'd want/need to do this).  I think overall what I would say is that the cost of relaying a transaction is tiny (I expect the vast majority of the time you're just passing along a small INV message… but I don't have stats to back that up) and all things being equal, staying in sync with the network and having accurate intelligence about what is happening far outweighs the small cost of relaying (especially for certain types of nodes).  But, even if you don't find that to be compelling, the small cost of relaying a transaction is tiny in comparison with the benefit it has for the network and by extension the value of bitcoin itself.  I still don't think there is an incentive problem here…even if all miners never forwarded fee bearing transactions, I don't think we'd have a problem.  

It may even be a simpler method of creating healthy market for transaction processing than the rube goldberg machinery that Microsoft proposes.  You could for example submit fee bearing transactions directly to the mining pools (who don't forward them)…you could create several different versions of a transaction, each with a different fee depending on what different pools are charging…the one that wins collects the fee and the other transactions are discarded (because they are conflicting).  You could also submit a zero fee version to the network at large..the pools would have to beat the rest of the network at large to collect their fee.

I don't see it either…the overall amount of work being performed for a given transactions increases as the number of nodes increases, but it's not exponential.  The mesh topology of node inter-connections means that there is an exponential increase in a subset of the communications protocol, however INV messages are quite small.  The work the network performs as a whole to validate a transaction is also not exponential as the number of transactions increases (given a constant number of nodes in the network).

Haha…funny!  Someone is yanking your chain. 

If the banking industry is really that worried about bitcoin, my advice is to cash out your 401k's your IRA's and buy gold, silver, bitcoins, toilet paper, land, guns and just about anything else you can get your hands on because the financial system is in far worse shape that anyone can imagine.  One small puff and the whole house of cards is likely to blow away.

If you are part of an organization whose mission it is to destroy bitcoin, my advice to you is to take the opportunity to skim a few bitcoins off the top for yourself.  You are in a unique position to be trading with someone else's money and could easily and anonymously trade against them.  You won't be sorry you did.   

Incorrect.  You never know what transactions might precede a transaction that sends bitcoins to an address you control.  Therefore, you are potentially interested in every transaction and have a need to stay in sync with the rest of the network.  If you control address C and there is a sequence of two transactions, A->B then B->C and you don't relay the first one, you increase the chance that the network settles on a transaction that conflicts with A->B and you'll miss out on B->C (or worse, you'll think it's a valid transaction when the rest of the network has already rejected it).

I think what this thread tells me is that it's almost pointless to think in terms of "money supply" …in a digitally connected world where almost anything can be turned into a securitized asset and traded in deep and liquid markets, many things can serve the role of money.  Especially from my perspective where I see the very real possibility of payment in any number of currencies (bitcoin, bank deposits, stocks, MBSes, CDOs, etc) and the immediate conversion of those funds into any kind of asset allocation a merchant desires.  The merchant might want to hold 10% in bitcoins and 50% in mtgox EUR deposits, and 40% in AAPL stock…someone could pay in gold backed tokens and then we convert those gold tokens into these other assets in real time.  To understand how extended the economy is with respect to obligations (in order to project whether we're in store for an expansion or contraction), you would want to understand all of these assets and their volatility, depth and liquidity.  You would want to model what percentage of assets people hold on average that are contractual in nature relative to those that have no counter-party risk (land, gold, bitcoin, etc).

Nodes want to be in sync with the rest of the network, even for transactions that have not yet made it into a block.  The reason is that with such knowledge, you can make a risk assessment regarding whether a given transaction is likely to make it into the block chain.  Again, I assert that there is plenty of incentive to relay transactions.

I don't see the problem with incentives for relaying transactions.  Every non mining node has a very strong incentive to relay transactions.  When you are the recipient of bitcoins, you need to make an assessment of whether that transaction is marketable to the rest of the network.  To do that effectively, you need to be as in sync with the rest of the network as possible.  That means not only receiving transactions, but also relaying them (because, you never know, you might be the first and only one to receive a given transaction…if you don't relay it, you risk getting out of sync and thinking later transactions that you see are valid when the rest of the network does not agree with you).

I read the paper and came to the conclusion that the disincentive for miners to forward fee bearing transactions is actually a good thing.  The reason is that it creates a condition where real markets for transaction processing can develop (where fees get negotiated with miners).  All non-mining nodes have a very strong incentive to relay transactions and blocks (it helps ensure they stay in sync with the rest of the network…which is essential if you need to gauge whether a transaction is valid or not).  I don't think there is any reason to believe transactions will ever cease to propagate very rapidly through the network even if every single miner refused to relay transactions.

Excellent post.  Though I wouldn't say bitcoin is incompatible with fractional reserve banking.  I would instead say that people will view a bitcoin deposit more as a debt obligation rather than as a perfect substitute for actual bitcoins.  For that reason, we may never see fractional reserve banking applied to bitcoin in any kind of broad sense (people might instead hold some of their savings in shares of a loan business).

Even though Steam doesn't accept bitcoin directly, this might already be happening.  A great way to obtain games for a discount is by buying keys online (where people have found the games discounted in retail outlets and offer them up for sale online).  Bitcoin is a great way to mitigate the risk of handing out a game key online.  The keys are effectively bearer instruments and irreversible once distributed.  So, selling them for paypal or CC is risky for the merchant.  Here are a couple places you can buy them for bitcoin:

gamerkeys.net
bitcoin2cdkey.com

I mostly agree (and I think most people here are in broad agreement)...I really enjoy this thread.

Sure they would…I don't consider a mtgox deposit to have the same value as BTC over any substantial length of time. But in the very short run I consider it more valuable than BTC because it can enable me to exchange those BTC for dollar deposits.  The value of a mtgox BTC deposit can fluctuate independently of the actual BTC it represents.

Not exactly…if it were an FDIC insured account, the depositor would not lose anything.  In the BTC case, the depositor would lose actual bitcoins because there is no FDIC backing up the account.  The FDIC backing increases the value of the deposits to the point were is makes those deposits a near perfect substitute.

Yes, but I quibble with the notion that there is any single definition of money supply.  We're treating lending instruments (of which demand deposits are but one example) as if they are either a substitute or not a substitute (and using that as a test of whether the are included in the "money supply") but the reality is that they can be nearly a substitute, almost a substitute, somewhat a substitute, a substitute under a broad definition of money supply, or not a substitute at all.  And all this really says is that lending instruments have a value and liquidity that can fluctuate independently of the underlying BTC they represent…some are almost as good as the underlying BTC, and some are not.  Those things there are nearly as valuable and liquid (spendable) as BTC would be counted as part of narrower definitions of money supply…things that are less valuable and/or liquid would only be counted under broader definitions of money supply or not counted at all.

I don't know if I would make that assumption (it may or may not end up that way)…I can imagine scenarios involving a ripple-like debt network where p2p, short term lending would be far more common…you would have more adhoc, informal lending on a p2p basis where trust is more important than formal risk assessment…and you would also have your more traditional lending where risk assessment is rigorous.  Under such circumstances, it's conceivable that the multiplier could actually be greater.

Slightly modified scenario.

Yes they did…it's called a BofA bank account balance.  If that balance doesn't happen to be covered by FDIC, would you treat it as a perfect substitute for physical dollars?  No, you wouldn't (or at least you shouldn't) especially considering the ill-health that BofA is in right now.  Substitute MF Global for BofA and the point becomes much clearer.  Now, if the account is FDIC backed, it's a completely different story because you know your balance is protected in the event of a bank failure (because the FDIC has access to the printing press if it needs it).  In that case the bank account balance is a near perfect substitute for base money.

I think the use of "monetary base" to refer to the 21million bitcoins is useful.  Note, I didn't make up any definition of money supply.  The term itself is ambiguous as evidenced by the fact that every central bank publishes many different measures of "money supply" (M0, M1, M2, etc).

It's probably more useful to think in terms of "monetary base" and lending activity rather than try and come up with different measures for a money supply.  You have 21 million BTC of monetary base, that's it.  And then you have various forms of lending, some of which might serve as near substitutes for actual bitcoins, but which are still definitely not bitcoins.  What matters is the level of lending activity and the liquidity of those loan instruments (the higher the liquidity of a particular loan agreement, the more it is able to function like money).  

In the bitcoin world, we'll never likely see anything be a perfect substitute for actual bitcoins due to inelastic supply (just like nothing is a perfect substitute for physical gold).  In the US, since you have the FDIC backing most demand deposits, people can safely treat them as perfect substitutes for physical money (safe in the sense that they'll be worth what any other dollar is worth, but not so safe in terms of the value of those dollars).  If an exchange existed that traded mtgox BTC deposits, they would trade at a small discount to actual bitcoins to account for the counter-party risk associated with those deposits (unlike FDIC backed deposits of USD which would be just as valuable as any physical dollars).

Unless everyone decides to buy gold (or other tangible assets) with that money, in which case the money quickly becomes worthless. 

In the case of bitcoin, it's clear that the supply can never exceed 21 million, no matter how much lending or fractional reserve banking takes place.  However the *effective* money supply could expand with lending activity or fractional reserve banking so long as such obligations are nearly interchangeable with actual bitcoins (i.e. people view 100 BTC on deposit at some bank as nearly equivalent to actually possessing 100 BTC).  It's not necessary to debate whether the money supply is expanded or not…if you're talking about actual bitcoins, it clearly is not.  If you're talking about bitcoin substitutes (like bank deposits or other type of loans or contracts), you could call that credit expansion/contraction.  To the extent those credit instruments can be used like money, you are *effectively* expanding the money supply.

On the question of fractional reserve banking, money supply and money substitutes, it is indeed possible for fractional reserve banking to exist with bitcoin.  While actual bitcoin money supply is limited to 21 million coins, if bitcoin substitutes become popular and widely accepted (ie. mtgox deposits), then you can effectively expand the money supply.  This could be through fractional reserve banking, or it could simply be of the form of a debt owed by one person to another that is widely recognized and which trades almost interchangeably with actual bitcoins (though actual bitcoins should always command a premium).  In the long run, the use of money substitutes based on bitcoin may serve to expand and contract the effective money supply in response to market forces rather than central planning…and this may have a stabilizing affect on the value of a bitcoin. 

What will be different about bitcoin is that it will always be clear whether you're dealing with actual bitcoins or a bitcoin substitute.  Actual bitcoins should always have a premium over bitcoin substitutes (when given a choice would you prefer to be sent actual bitcoins or a mtgox redeemable code for bitcoins?).  You will always know whether you're dealing with real bitcoins or a bitcoin substitute and, in that respect, it should be less deceptive than current fractional reserve banking practices.