["TRUSTLESS" MONEY]

Liked this Reddit post I made so I thought I'd share it here as well.  

Here are my two favorite ways of understanding and explaining Bitcoin's core value proposition.  (I've made a lot of these points before in comments so my apologies if this stuff is old hat to anyone.  I thought it was important enough to put together in one place.)

"TRUSTLESS" MONEY

You often see people describe Bitcoin as money that "doesn't require trust."  Unfortunately, they rarely take the time to really explain what that means.  I think in order to fully understand why Bitcoin's "trustless" nature makes it so revolutionary, you need to do two things: (1) explicitly consider trust in the context of both value storage AND value transfer; and (2) compare Bitcoin's performance in these two respects with the performance of the "Big Three" conventional monetary alternatives, namely, digital fiat, physical cash, and gold. Ok, so how does the competition stack up?

1. Digital fiat

Storage - Most people in this sub probably understand that the dollars in "their" bank account are nothing more than bank-issued IOUs for dollars. As such, holding dollars in a bank requires that you trust the bank to make good on those IOUs (and not say, freeze your account or steal your money) as well as requiring you to trust the bank with your confidential financial information (i.e., your balance and complete transaction history).  Storing your funds in fiat also requires you to trust the central bank not to erode your money's purchasing power through arbitrary expansion of the money supply.

Transfer - In order to send digital dollars to someone else using the conventional financial system, you have to trust a central authority (a bank, PayPal, Western Union, etc.) to effectuate that transfer in accordance with your wishes. And that means you also need their permission. If the transfer you want to make is one that the central authority (or the government it answers to) doesn't approve of (e.g., a donation to Wikileaks), you're out of luck.

2. Cash

Storage - Holding cash doesn't require you to trust your commercial bank, but it still requires you to trust the central bank's management of the money supply. Furthermore, securely storing cash yourself (without the aid of a trusted third party) is difficult, if not impossible. You can't make backups of your physical banknotes (or they'll call you a counterfeiter), can't encrypt them, and can't use the equivalent of multi-sig or Shamir's secret sharing algorithm to eliminate the loss of those unique physical items as a single point of failure.

Transfer - you can transfer cash from one person to another without a trusted intermediary, but only if you and the recipient are in the same physical location.  That's obviously a massive (and usually unacceptable) inconvenience in a modern global economy. Moreover, large in-person cash transactions are not without their own set of risks (e.g., the risk of being robbed or receiving counterfeit banknotes).

3. Gold

Storage - With gold, you don't have to worry about a central issuer arbitrarily expanding the supply, but attempting to store gold in a secure and trustless manner presents the same types of logistical challenges as storing a significant quantity of cash.

Transfer - The analysis here is pretty similar to the one for cash.  In-person transfers are possible without a trusted intermediary (although still problematic), but trustless transfers at a distance are simply not possible.  Of course, IOUs for gold can be transferred across distance electronically, but transacting in IOUs simply reintroduces the requirement for a trusted central authority.

Ok, so why is Bitcoin revolutionary under this framework? Because it's the first form of money that lets you both store and transfer value (including across distance) without the need for a trusted intermediary.  With Bitcoin, there's no central authority with the power to arbitrarily create new units, freeze (or seize) your account, or block a particular payment from being processed.  And payments can be made quickly and trustlessly to anyone anywhere in the world without the requirement of physical proximity.  They don't call it magic internet money for nothing.

THE THREE REQUIREMENTS FOR GOOD MONEY

The second way of understanding Bitcoin that I really like starts with a very fundamental consideration of the nature of money. What is money? Money is memory. Money is a societal IOU. Money is a favor voucher.  Money is an accounting ledger for keeping track, in a provable way, of value given but not yet received. (If you want to get really fancy, you can describe money as a "formal token of delayed reciprocal altruism.") The paradox of money is that while everyone wants it, no one actually wants it (they want the stuff they can exchange it for). The "real" economy is the exchange of useful goods and services for other goods and services. Money is simply a way of keeping score, a medium of exchange that facilitates that real value exchange across time and across multiple parties. (In contrast, a traditional barter transaction involves a simultaneous bilateral exchange of value.)  Ok, so I've now said the same thing in about half-a-dozen different ways.  Why?  Because it's that important.  You need to understand what money is in order to understand what properties a system of money should have, which in turn allows you to understand why some of us are convinced that Bitcoin has the potential to be the best form of money the world has ever seen.  So what are the requirements for good money? Well, you'll find lots of discussions on this topic that identify six or so very specific properties ("divisibility," "fungibility," "portability," etc.), but personally I think it's more intuitive to think in terms of just three requirements.  Those three requirements can be mapped, more or less one-to-one, onto the three traditional functions of money. They are:

• transactional efficiency - This requirement corresponds most closely to the "medium of exchange" aspect of money.  I'd argue that, from a modern perspective, this requirement necessitates digital representation.
• reliable scarcity - This corresponds to the "store of value" aspect of money.
• network effects / widespread acceptability - Only a form of money that is widely accepted is suitable for use as a "unit of account."

In other words, a good monetary ledger must be easy to update; the information contained in the ledger must be reliably accurate or "honest"; and the ledger must be one that people--preferably lots of people--are actually using. Gold is reliably scarce but not transactionally efficient. Fiat (and specifically, electronic fiat) is transactionally efficient but not reliably scarce. Both fiat and gold have high degrees of acceptability. Bitcoin is even more reliably scarce than gold and even more transactionally efficient than fiat. But its acceptability is, for now, comparatively low. And, at least in the short-term, the network effect requirement is by far the most important of the three.  But while gold can't become more transactionally efficient (sorry, Peter Schiff, the CombiBar doesn't quite cut it) and fiat can't become more reliably scarce, Bitcoin can become more acceptable as more people begin to use and accept it. Indeed, the nature of the network effect creates the potential for a virtuous cycle as greater Bitcoin adoption leads to greater usefulness, which can in turn incentivize greater adoption, leading to greater usefulness, etc.

I was pretty happy with this longish piece I submitted to reddit so I figured I'd post it here as well.

https://www.reddit.com/r/Bitcoin/comments/2jxndm/the_two_categories_of_bitcoin_skepticism_and_why/

[Bruce Greenwald:]

http://www.fool.com/investing/general/2013/10/13/1-investing-gurus-take-on-the-future-of-bitcoin.aspx

Bruce Greenwald: I don't think it's traditional banking. Don't forget that what traditional banking does is it enables you to write checks. Or do wire transfers.  There is a transaction infrastructure.  And if you go back to the traditional definition of money. It's as a medium of exchange, it's as a measure of value, and it's as a store of value. So it's a unit of account, it's a medium of exchange, and it's a store of value.  Turns out as a unit of account, nobody is going to price anything in bitcoins. It's always going to be the currency.  Because that's just the dominant way to do it. And there are big network effects from that, and it's very hard to get people to change.  In fact, they measure the value of bitcoins in, you guessed it, dollars or whatever currency it is.  So you're not going to get it as a unit of account.  It's not a medium of exchange. You don't have to keep a bitcoin balance to pay your bills. So what you're left with is a store of value. We got lots of stores of vaue. We got gold.  We got all sorts of other kinds of real assets that you can have, we have inflation -- we have TIPS. we have all sorts of real stores of value that are probably more liquid than the bitcoins and are less easier to manipulate, and are less subject to insider trading.  Look, in the old days, every bank used to issue its own currency and it was very unstable what the relationship between the currencies were. Having lots of different Bitcoins has a lot of the flavor of that, but it's got no natural advantages over gold or any other real measure of value.  I think as a rule if the Winklevoss twins are talking about it, it's almost certainly opportunistic and they almost certainly are not the people who know how to make money out of that idea as Facebook showed.  So you don't want to invest with them.

[The case against e-curriences]

http://www.infoworld.com/d/security/dont-trust-anonymous-e-currencies-bitcoin-219932?page=0,0#disqus_thread

The case against e-curriences
So why don't I trust e-currencies? For the following reasons:

Traditional currencies are backed by nation-states and regulated financial industries, and as much as you might hate or distrust those entities, they have staying power. In my nearly 30 years on the Internet, I've seen e-currencies come and go. When they go, everyone immediately loses everything. Just ask Liberty Reserve's customers.

Nation-states have laws, police, and armies. Those laws make the fiat currency legal. People in those systems accept the their currency. No one in the real world has to accept your e-currency or rock with a hole in it. If someone steals your real currency, the police will at least try and help you get it back. In cases of online theft, you may have a hard time getting a law enforcement authority to determine if a crime has happened. Even then, it's often only because the intangible online value could be immediately traced back to real money. For example, if you tell the police someone stole your gaming points, you'll have a harder time proving a crime occurred if you earned them during the game than if you purchased them with your credit card.

Let's not forget nation-state armies. Ultimately, those armies protect the treasures of countries. If they didn't, another country could bust into your country, take the money, and walk away with it. I don't know of an army willing to send a soldier to recover a stolen Bitcoin.

The safety net
You don't even need nation-state armies to get back your stolen money. In most industrialized nations, if you can prove that a malicious hacker stole your money, the bank will often put the money right back. For example, some bad guys broke into a friend's stock account and stole more than $50,000. He notified the stock trading company where he had his account, and in a few minutes, the money was back. The entities that put your money back don't even require you to work too hard to prove your money was stolen. It's a cost of doing business, and they're ready to help get back what you lost. Try that with your e-currency. In almost every case, if your e-currency is stolen, it will be gone for ever.

In the real world, if you lose your credit card, checkbook, or even bank account log-on password, your money isn't gone. In fact there are lots of services and laws to protect you and your money. Not so in the e-currency world -- check out a statement posted on a Bitcoin Wiki Faq regarding the potential loss of Bitcoins: "Consider it a donation to all other bitcoin users."

Ultimately, most e-currencies possess the security of whatever your email address and password is. If hackers break into your computer, learn your password -- or even break in and steal all your money at the bank -- it will be replaced fairly quickly. This is absolutely not true of e-currency sites.

I'm not saying that e-currency schemes are evil. And I'm not saying fiat money is perfectly trusted or protected -- the runaway inflation that led to wheelbarrows of money being exchanged in Weimar Germany come to mind. I'm just saying that by comparison, over the long run, there is no comparison. The trust equation isn't even close.

The perfect e-currency would be one that is widely accepted, where I'm protected against malicious loss -- by armies, law enforcement, or the fiduciary entity creating it. Oh, yeah, I already have that. It's called real money.

http://money.cnn.com/2013/05/18/investing/winklevoss-bitcoin/index.html?hpt=hp_t3

The brothers are betting that the cyber currency can turn them from millionaires into billionaires. They've invested in buying the coins directly (they told the New York Times that they began "dabbling" last summer, when prices were in the single digits), and this week, they disclosed their first Bitcoin venture investment: A stake in New York-based payment processor BitInstant.

So when a bitcoin-focused startup takes on venture capital cash, how does it do it: Traditional money or actual bitcoins?

"American dollars," says David Azar, a private investor who participated in the round. "Only American dollars."

Bitcoin: Buyer Beware, This Is A Classic Bubble And Possible Fraud

http://seekingalpha.com/article/1325271-bitcoin-buyer-beware-this-is-a-classic-bubble-and-possible-fraud?source=google_news

Has anyone ever bothered to understand what a "bitcoin" is before buying into this concept? It has every marking of a fraud. Believe it or not, people don't even know who created the bitcoin, or who is behind it. The whole concept was created by a pseudonymous person or group named Satoshi Nakamoto. And it only gets worse from there.

Sorry about the linking to a Wiki, but because of the secrecy of this bitcoin, there aren't a lot of credible sources.

This literally could be the ultimate Ponzi scheme, only this time Ponzi is hidden behind a collective network of computers. Gold can work as a currency because it is inelastic. You simply can't print gold out of thin air. That is not true for a bitcoin. A hacker can "print" as many bitcoins as there are electrons in a blink of an eye.

That is the perfect system to sucker people in, then dump a supply of new bitcoins on the market and quickly shut the whole system down and vanish before anyone can say Bernie Madoff three times.

It's hard to even know what parts to quote. The whole thing is full of gems. 

[If anyone is going to conjure money out of thin air, I would rather it were a living, breathing human being whose motives and judgment I stand some chance of understanding, rather than an anonymous computer formula.]

http://www.thisismoney.co.uk/money/news/article-2304989/How-bankers-mesmerised-politicians-Labour-era.html?ito=feeds-newsxml

Now let us consider the Central Bank of Japan. Last week it announced the most radical new monetary policy of our times. It plans to inject billions of newly created yen into its economy in a bid to create a little bit of inflation.

The idea is that this will encourage people to spend and kick-start Japan’s economy, which has been moribund for more than two decades.

It is a controversial plan –  a kind of quantitative easing with knobs on – and some warn that it will bring disaster.

But I for one would rather trust the economists at the  Bank of Japan than the unknown creators of Bitcoin.

If anyone is going to conjure money out of thin air, I would rather it were a living, breathing human being whose motives and judgment I stand some chance of understanding, rather than an anonymous computer formula.

Bitcoin has already made some speculators some money, of that there can be no doubt. But the value of this virtual currency is extremely volatile.

On Friday, one Bitcoin was worth about $140, up from less than $100 a mere week ago.

What is more, the criteria on which it is being summoned into existence are likely to remain a mystery to most of us for ever.

Bitcoin or yen? I’ll take the yen every time.

I don't even have the heart...

Pretty damn cool.

http://www.reddit.com/r/Bitcoin/comments/19oiht/rbitcoin_lets_share_with_those_in_need_for_every/:

right now 1btc~=$35, so i think it's a fair deal. here's what you have to do to participate:

1) you must donate to any charity of your choice. by this i mean any known, reputable organization that actually helps people (as in medical aid, education or feeding the hungry, you get the drift. no political/social movements types of orgs. please comment/msg me if in doubt.)

2) you must should send a short message to the said charity, explaining what btcs are and why they should consider accepting them as a donation. extra karma for those of you who actually succeed.

3) you must send me a verifiable receipt - i reserve the right to contact the organization you donated to before i send you any bitcoins. don't get me wrong, i believe most of you are really charming, kind, caring people, but there is no shortage of thieves and scammers, and i don't want to make their day.

4) your receipt WITH ALL YOUR PERSONAL INFO BLACKED OUT will be posted in the comments along with txid of your reward; hopefully this get enough momentum to actually make some impact in and outside of the btc community, and i don't want any idiots crying "omg is liek totaly a SCAMM!!11" and whatnot

... and that's it. let's get it going imho there's no better way to promote bitcoins than to share some.

EDIT: Probably should have used the search function. https://bitcointalk.org/index.php?topic=149244.0 

[Kokesh:]

https://www.youtube.com/watch?v=CUqYrWYrc8o&list=UU0RJJ_Wm7jyOU9eY10LgcwA&index=18

Bill Still, maker of the documentary "The Money Masters," is asked about Bitcoin on Adam vs. The Man. Here's the key exchange which starts at around 14:10:

Kokesh: What is your opinion on Bitcoin as something that is rapidly, at least on a limited scale, displacing the dollar?
Still:  Displacing the dollar? I don't think so.
Kokesh: Well, at least to the tune of 400 million dollars.
Still: 400 million dollars? Well, let's see, and what percentage would that be of the 16 trillion dollar American money supply?
Kokesh: a tiny, tiny, tiny drop in the bucket for now
Still: I basically have a lot of trouble being comfortable with Bitcoin. Number one, it was hacked about two years ago. Number two, although it purports to be decentralized money and everybody says 'oh, the security features make it impossible to control centrally,' you know, I just...I have no facts to support it, I just, I'm uncomfortable with the situation.

Well, I'm convinced.

http://www.reuters.com/article/2012/11/07/us-usa-marijuana-legalization-idUSBRE8A602D20121107

This should be interesting.

[when it comes to tipping, the Dipjar is an absolute game changer.]

http://www.cnn.com/2012/10/26/tech/apparently-this-matters-dipjar/

Now, I don't throw the word "genius" around too liberally. Generally, I save it for really important stuff like when a friend suggests we light something on fire. But I'm going to go ahead and drop a G-bomb on this amazing new invention. Because, for better or worse, when it comes to tipping, the Dipjar is an absolute game changer.
...
Basically, the Dipjar is an electronic tip jar for store countertops in which a customer can -- as the name suggests -- dip his or her credit card to leave a fixed-amount tip for the clerk. And these days it's sort of a necessity

Increasingly, we are becoming a cash-free society, preferring the convenience of credit cards to carrying actual paper money. While this can be great for the consumer, it sort of screws over the hipster barista behind the counter who no longer gets to keep your change.

But, hey, he still has giant-gauged ear holes. So that's something.

Not only is cash becoming less popular, but it also seems that more and more credit card companies don't even require a signature for small transactions, thus eliminating the opportunity to write in a tip or, perhaps, leave that really cute server an adorable pickup line.
...
Anyway, Dipjar finally makes it easy for credit card users to tip without signing, and the company makes their money by taking a small percentage of each transaction. However, they insist that they'll always deliver at least 80 cents of every dollar to the store's employees.

At least 80 cents of every dollar?! So the fee might be even lower than 20%? Gosh, that does sound like a game changer. Apparently this is what passes for innovation in the legacy monetary system.  

[This is not the first time Bitcoin has lost money to hackers, but the discovery that they have user information stored in unencrypted files might be what finally prompts a full-fledged run on the Bitcoin bank]

This one's a few weeks old but it doesn't look like anyone started a thread on it. And that needs to be remedied because it's a real gem.

http://www.digitaltrends.com/cool-tech/bitcoin-robbery-exposes-the-currencys-flaws/

This is not the first time Bitcoin has lost money to hackers, but the discovery that they have user information stored in unencrypted files might be what finally prompts a full-fledged run on the Bitcoin bank; no one’s eager to keep their money in an unlocked vault.

Mainstream economics writers are enjoying a good chuckle at the crushing of Bitcoin’s libertarian dreams.  Solidly centrist website The Atlantic was happy to point out that U.S. banks are FDIC insured in order to guarantee that in the event of a robbery, account holders don’t have to depend on the goodwill of the bank manager to get their money back. Bitcoin’s popularity as currency of choice for skeevy sites like drug-dealing marketplace Silk Road further ensures that getting robbed doesn’t win it much sympathy, and there’s no word on whether Bitcoin will turn to the government agencies it previously scorned in order to track down the thieves.

Bitfloor is shut down while Shtylman scrambles to repay users.  He promises that international users who wish to withdraw their money can send him an e-mail requesting withdrawal, a weirdly informal system for currency exchange which calls to mind disturbing images of Depression-era banks understaffing their teller windows so customers couldn’t take out all their money at once. There would be a certain delicous irony if the latest debacle reminds the idealistic libertarians of Bitcoin exactly why government currency regulations became popular in the first place.

Good stuff, right? But the best part comes when the author responds to some comments and reveals the true extent of his ignorance:

Wait, no Bitcoin company? So who is empowered to issue Bitcoins? And if Bitfloor is just, like, some random trading exchange, is there any reserve where a holder of Bitcoins can be assured that he'll be able to exchange them for another currency?

AND

I read the white paper, and it made so little sense I concluded there was a scam. If anyone can make Bitcoins, you've got a recipe for inflation. If everyone can make Bitcoins but there's a ceiling, you've got a recipe for even worse deflation. And either way, you've got no protection if something goes wrong, as it inevitably will. I'm eagerly awaiting the point where the Bitcoin story goes full Bioshock.

http://www.cnn.com/video/#/video/crime/2012/07/07/dnt-illegal-drugs-website.kxan

Lame cnn.com video on the Silk Road. Tor is described but no mention of Bitcoin. 

21,000,000 is the theoretical limit for the number of bitcoins that will ever be in circulation.  But it's not the actual limit. Bitcoins have already been lost. As in lost forever. And more of them will be lost.  I'm wondering how often that occurs and how many coins have been lost.  And at what rate they will be lost in the future.  It seems logical to assume that the greatest loss period was when the currency was very new and not worth very much. How many people with brain wallets (and only brain wallets) are going to die with no one else knowing their code? How many people are going to forget their brain wallet code? How many people will have a hard drive crash without any kind of backup?  How many tiny balances have been given out to people through bitcoinfaucet (or similar sites) who will lose interest and not bother to maintain the records of those tiny balances?  Also does anyone have any horror stories of permanently losing large balances to share?  Any bleeding-edge early adopters who lost interest before bitcoin took off and didn't bother to secure their coins? Curious to hear your thoughts and stories. Thanks!

UPDATE: If this comment bothers you because you view it as a wasteful and unnecessary "copy" of previous threads on the subject of lost coins, try thinking of it instead as a "fork" that borrows heavily from past efforts but adds beneficial new features. In fact, my guess is that within 6 months this will be the definitive thread on lost coins.  If you hurry, your reply could be on page 1!

According to wikipedia, roughly 5.3 billion troy ounces of gold have been mined in all of human history.  Gold is currently trading at around $1600 a troy ounce which means that the total market value of all of the world's mined gold is approximately $8.5 trillion.  The demand for gold (and hence its price) is not driven entirely by its monetary usefulness because it has other uses such as jewelry and electronics.  But a non-trivial fraction of its price comes from its usefulness as money.  How big is that fraction? Let's be conservative and say it's only 25%.  That means that gold's total "money value" is around $2 trillion. Let's pretend as a simplifying assumption that all 21 million bitcoins have been mined.  The total value of those coins based on a current price of $6.40 is $134 million.  134 million is smaller than 2 trillion.  Bitcoin is supposedly a "better" money than gold when you evaluate it according to all the characteristics that make for good money, e.g., it's divisible, fungible, durable, portable, identifiable, and scarce.  And yet, (using all of the previous assumptions) if bitcoins were valued ONLY 1/1000th as much as "monetary" gold, they'd be worth a total of $2 billion, i.e. roughly $95 / BTC. If they were valued AS MUCH as monetary gold, they'd be worth $95,000 a piece. Of course, since bitcoins are at least 10 times BETTER than gold, they should really be worth no less than $950,000 each. And yet, I can't help but notice that I still live with my parents and drive an '89 Geo Metro. That raises a few questions:

1) Why aren't I filthy rich yet?
2) Any other dreamers willing to post their pie-in-the-sky, insanely bullish predictions for what a bitcoin could be worth in terms of purchasing power if it proves to be as revolutionary as we hope it will be?

AND

3) It seems like a lot of people are very focused on bitcoin's adoption by merchants, i.e. the "medium of exchange" aspect of currency, as the key to its success. But couldn't bitcoin still be insanely successful (in terms of its value) if it took off ONLY as a store of value? (And isn't that mostly how gold is used?)