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Author Topic: Would Bitcoin Suffer a Similar Fate as that of Unix on the Desktop?  (Read 4109 times)
flyonwall
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March 23, 2013, 05:28:42 PM
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I have seen the Grand Canyon of Arizona, and I am still smarting from its effect on my perception of reality. Its grandeur reminded me of a paradox, the paradox of what I would call "chance and permanence": nature works mostly by chance, but what it has wrought so far is almost permanent. In the beginning, I am sure the path of the mighty Colorado river that formed the Grand Canyon was determined mostly by chance. As time went by, and the canyon went deeper, what was determined by chance is now almost permanent. Every twist and every turn, every steep cliff that formed, every rock that stayed put and not washed away is there by chance, and yet now permanent. It would take great effort, time, and money to change the path of the Colorado river. So we, as observers of the Grand Canyon, can appreciate how its path was formed mostly by chance, but can also appreciate its permanence. And so it is with the rest of the universe.

We can consider even human institutions in terms of the same paradox. Sure, we'd like to think that all our institutions are there by design, and not by chance, and that is true. But there are certain important aspects of our institutions that become permanent purely by chance. We cannot possibly know beforehand which little twists and turns in our lives become very important later, but there is no doubt in my mind that the sum total of those decisions can make each one of us successful or lose out and simply become a statistic. It certainly makes sense to leave less to chance, and the less we leave to chance, the better.

Just as an example, let's take the Windows operating system. It has now become an institution. It is very difficult to replace precisely because it has become an institution. We can appreciate the fact that until now, despite the presence of free (and some say even better) alternatives like Linux, Windows remains the most widely adopted operating system, by a wide margin. It is not that the proponents of Linux have not tried enough. A huge effort is being spent, not just by the Linux community, but also by the Apple OS community, to dislodge Windows from its position as number one, but so far to no avail. This is what I mean by becoming an institution, mostly by virtue of Windows' virtues, but also partly by chance. There were crucial steps that Microsoft took, during its early days, that caused Windows to be an institution. Some of those steps, like partnering with IBM in the early days, did not happen by chance. What was left to chance was which little OS to start with, during the earliest epoch called "DOS".

(Microsoft started not with an OS of its own making, but bought out some OS from an obscure company.  Incidentally, it would be wrong to conclude from this that Windows won by great marketing alone. It had to be a good OS also, limited only by available hardware, and had to continue to compete by being the best. Being a good OS is a minimum requirement, and by now that should be obvious.)

Now I have no doubt that Bitcoin will become an institution, something that maybe very difficult, if not impossible to change in the near future. I would not invest in it myself if I did not believe in it. But there are a couple of things that worry me, and I am writing this to see what other serious thinkers would say.

There have been several attempts to bifurcate the path of transactions. Let us remember that these attempts had a sinister purpose. I believe it is also possible to bifurcate the path of transactions, to have more than one set of transaction files, simply by distributing another branch of the software.  The system is designed to protect itself from invalid transactions with a sinister purpose. However, if this is done NOT with a sinister purpose, but in order to come up with a better currency, then politically such new branch would be adopted by a large number of users, which would then cause the path of transactions to bifurcate. We would end up with not one database of transactions, but several incompatible databases. The Bitcoin currency would then bifurcate several times to spawn several other currencies, all competing against each other.

Remember Unix? I believe that Unix should have been the number one OS instead of DOS/Windows. It was certainly better, by any measure, than DOS. It did not win out because it bifurcated several times into different versions, all incomptible with one another. Would Bitcoin suffer a similar fate?

The other thing that worries me about Bitcoins is the rule that puts a hard limit to its quantity. I believe that this is reason enough for it to bifurcate. I still have to hear from a reputable monetarist thinker that a hard limit on quantity is good. Here is why I think it is bad.

What makes gold still THE number one standard currency is the fact that its quantity cannot be increased by a simple human decision. It has to be mined. There have been times when its quantity increased by more than the world economy can sustain, and it inflated just like fiat currency (during the Gold Rush, for example). However, there is no hard limit to the quantity of gold in circulation, and I think that the reason it remains the best currency is because it continues to be mined and so continues to increase in quantity. In the end, I think that it's not the increase in quantity of a currency per se that's bad, it's HOW it increases in quantity. I believe that the best currency is one that increases in quantity in relation to worldwide economic activity. In the future, gold cannot remain the best currency because its increase in quantity is not necessarily a good arithmetic function of worldwide economic activity.

A currency is only as useful as how convenient and beneficial it is to use as a medium of exchange. In this regard, Bitcoins are far more useful than gold. Gold has other values apart from its use value as currency. It has jewelry or ornamental value, it has industrial value (as electronic connector in integrated circuits), and monetary value. Its monetary value has now exceeded its two other values because the U.S. dollar is failing in this function as worldwide currency. Contrast this with the pure monetary value of Bitcoins. Bitcoins have no other value than its use for exchange. We can say it has pure exchange value. One of its attractions is that, by being based on the power of the Internet, it is money that can travel friction-free from one point in the world to another. Very much unlike gold, which weighs so much it takes not just some reliable means to transport, but also a secure one. It takes a lot of money just to transport gold; it takes almost zero to transport Bitcoins.

However, and this is a big caveat, even a Bitcoin itself can see its exchange value reduced. It can reduce in exchange value precisely because its perceived value, or market value, is increasing. As it increases in market value, many holders will start to horde it. (Like me: I plan to hold on to as much quantity of it as long as I can.) Now when it is hoarded and stashed away, the total count of Bitcoins in circulation necessarily goes down. Hoarding necessarily affects the count of daily transactions that occur per quantity of Bitcoins: its so-called net velocity goes down. When the velocity of a currency goes down, we can say its usefulness as currency goes down also. Therefore, what we may see happen is a long-term trend upwards in market value, but punctuated by violent fits of steep drops in price, as the exchange value compensates for market value, and vice-versa. This is precisely what we want a currency to fix: the occasional steep drops, the violent business cycle.

I propose that the violent cycles of ups and downs can be avoided, simply by increasing the quantity of Bitcoins, not asymptotically as it is now, but as a function of velocity. (It should not be a function of market price because market price by definition is always in relation to another currency, like the U.S. dollar, which can also be volatile.) Velocity is easily measured by the count of transactions per minute or per hour or per day even. Note that "velocity" is different from speed (as in elementary physics). Velocity includes the component of direction, not just speed; so for example, a million transactions that occur only between two accounts contributes less to velocity than transactions that occur between many different accounts.

I am a programmer by trade, and I can go in there and make this modification myself, and come up with a different distribution. If enough people believe that my version is better, then the database of transactions will bifurcate, which is not good. Rather than do that, I have chosen to discuss this matter with the Bitcoin community. Even just two currencies competing at this early stage can be fatal. We have a world to conquer out there, and we don't want to end up like Unix. Rather, we want to be like the Colorado river, cutting deep into the very foundation of world commerce. However, we want Bitcoin to be successful less by chance like the Colorado, and more by conscious decisions like Microsoft's Windows OS on the desktop.

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ThickAsThieves
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March 23, 2013, 05:33:18 PM
 #2

Tell me more!
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March 23, 2013, 05:41:09 PM
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In the nearest future people will start to exploit asteroids. I wonder what people who invested in gold will say, when some company will bring someday asteroid made of gold on earth.

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March 23, 2013, 05:53:11 PM
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Considering that Unix in one form or another is one of the most (if not the most) adaptable and widely used OS ever--it can be found in every current Apple and Android device, many smart TVs, most Web servers, and many other "smart" devices--I say it would be a good thing if Bitcoin "suffered" the same fate.

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March 23, 2013, 05:59:27 PM
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Fate of Unix? Do you mean as in UNIX running most of infrastructure of The Internet. I expect that yes it will.

Not sure "suffer" is the proper term here. I would use "enjoy" instead.


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March 23, 2013, 06:15:18 PM
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He's just worried anyone with the know-how can start a crypto-currency, just as the wild-west of Linux all it's many distros........

@OP, get in where you fit in.

In Cryptography we trust.
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March 23, 2013, 06:19:56 PM
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Yep probably nobody read that wall of text. OP read the words below my avatar. Then google "network effect".

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March 23, 2013, 06:30:39 PM
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Linux dominates server market.
Linux dominates smartphone market.
iOS and OSX are Unix (literally, Apple paid the fees to get certified as such)

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[]
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March 23, 2013, 06:49:41 PM
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This is the last known photograph of Satoshi and Linus together.




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March 23, 2013, 07:31:38 PM
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The metaphor may not be correct in that Unix derivatives now dominate the handheld and embedded markets, but if we limit our discussion on the desktop market, there is no doubt in my mind that Windows has won. Of course, we are now in the handheld era, and in this market Windows is clearly losing. My only mistake here is that I did not qualify what I meant by "fate" -- which should be the Unix fate in the desktop.

Rather than dispute the metaphor, I want to get people's opinion on the real subject, which is Bitcoin bifurcation, and the reason described why it makes sense to do it, to start another currency that has no hard limit on quantity.

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March 23, 2013, 07:35:23 PM
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Not this again.

There is no reason to not "start another currency that has no hard limit on quantity" you can do it. It is easy. I dare you to start it right now. In fact, such shitcoin is sorely needed. It would be great to have all inflation lovers to start using their own inflationary currency and leave us Bitcoiners alone.


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flyonwall
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March 23, 2013, 08:03:59 PM
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Quote
Not this again.

There is no reason to not "start another currency that has no hard limit on quantity" you can do it. It is easy. I dare you to start it right now. In fact, such shitcoin is sorely needed. It would be great to have all inflation lovers to start using their own inflationary currency and leave us Bitcoiners alone.

I am a Bitcoin enthusiast myself, and am invested in it. It is also in my interest to see Bitcoin thrive, but emotions aside, an objective analysis of the situation really puts a question mark on the hard limit. Like I wrote in the opening, I believe it is not the unlimited quantity per se that is bad (about fiat currencies), it is rather the absence of rules about increasing the quantity. As I have shown, increasing market price will cause hoarding, and thereby reduce velocity, which is not good for any currency.

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March 23, 2013, 08:07:20 PM
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Quote
Not this again.

There is no reason to not "start another currency that has no hard limit on quantity" you can do it. It is easy. I dare you to start it right now. In fact, such shitcoin is sorely needed. It would be great to have all inflation lovers to start using their own inflationary currency and leave us Bitcoiners alone.

I am a Bitcoin enthusiast myself, and am invested in it. It is also in my interest to see Bitcoin thrive, but emotions aside, an objective analysis of the situation really puts a question mark on the hard limit. Like I wrote in the opening, I believe it is not the unlimited quantity per se that is bad (about fiat currencies), it is rather the absence of rules about increasing the quantity. As I have shown, increasing market price will cause hoarding, and thereby reduce velocity, which is not good for any currency.

This is perfectly fine and reasonable point of view you have. If you think 21 million BTC is bad for a currency you gotta go and create one with another limit or no limit. If you are on a mission to change Bitcoin in this direction it is simply hopeless. Not going to happen and frankly there is nothing to talk about much outside of "alternative currencies" section of this forum.

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March 23, 2013, 08:11:18 PM
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What you call "hoarding," I call saving.

Besides, electronics are prone to deflating prices, yet people line up for brand new fully prices Iphones all the time!

Don't they know??? There will be a new one next year!

Saving is exactly what is missing from our current economies. Too much blind consumption to "stimulate" the economy is what is leaving us increasingly impoverished.

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March 23, 2013, 08:15:04 PM
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Savers are effectively persecuted by banksters worldwide. There is a published research claiming that in past 4 years in UK only 102.4 Billion £ were confiscated from savers via quasi-zero interest rates and inflation.

Bitcoin and PMs is  the last refuge of the prudent. You try to take this away and ammo will become the  asset of last resort.





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March 23, 2013, 08:29:53 PM
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The bad news is that there is no such thing as "store of value". There is only medium of exchange. If the Bitcoin currency loses its value as medium of exchange, it will have no other value, and your savings would turn out to be of no value. Remember, it is people that ascribe value to any currency. Not just you, not just me, but all of us. If we all think that Bitcoin is nothing, then it is nothing. And yet it has real value as medium of exchange. Its value resides in us using it as medium of exchange.

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March 23, 2013, 08:41:47 PM
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First of all, OP is a good read, even though I disagree on main points.

The issue of hard limit boils down to psychology and culture. It is stated in the OP how the supply of an ideal currency should scale with the economic growth or recession. In that case, we need to think in terms of changing supply and (ideally) steady real value of the unit of currency. In reality, however, this implies trust in a central authority issuing and destroying currency at their (corrupt) will. It implies uncertainty. Importantly, we have all seen how dysfunctional and corrupt this system is. Taking "experts" seriously would mean mental disease at this point.

Bitcoin, on the other hand, offers a mathematically certain supply (with some minor variation due to hash rate variation and compressed or extended schedule of difficulty adjustments). In the case of Bitcoin, therefore, we need to think in terms of scheduled supply and variable real value of the unit depending on the growth or recession of the economy. If the economy is growing, value of coins is rising, and people may slow down on spending and increase savings, thereby slowing down the economy, thus leading to a slower increase or even to a decrease in the value of a coin, which then stimulates spending, and drives the economic growth... you get the picture. Hard limit on the supply leads to a sane, self-regulating economy, as opposed to the current mainstream idiocy.

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March 23, 2013, 09:17:52 PM
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Thanks for a thoughtful reply, niko. I have been waiting for your kind of reply.

Quote
In reality, however, this implies trust in a central authority issuing and destroying currency at their (corrupt) will. It implies uncertainty.

Not necessarily, right? In the same manner that the Bitcoin network is self-protecting, it can also be programmed to be self-regulating: we can program the increase in quantity, one in which the increase depends only on the velocity, by some (still undetermined) formula.

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March 24, 2013, 02:37:42 AM
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Thanks for a thoughtful reply, niko. I have been waiting for your kind of reply.

Quote
In reality, however, this implies trust in a central authority issuing and destroying currency at their (corrupt) will. It implies uncertainty.

Not necessarily, right? In the same manner that the Bitcoin network is self-protecting, it can also be programmed to be self-regulating: we can program the increase in quantity, one in which the increase depends only on the velocity, by some (still undetermined) formula.
True, and this kind of coin would still be better than the current fiat system because the supply of new coins would be "democratic" - anyone willing to mine could do it. In the case of fiat, there is a monopoly on issuing money, and consequences for attempting to DIY are rather violent and painful.

You would also need to allow for the opposite - a decrease in the supply. But why bother? Just so I can always express a value of a thing in roughly the same nominal price? Why not simply let the value evolve, and correct for inflation/deflation when analyzing historical prices? Why not evolve a correct way of thinking about value, saving, and spending - if people really hold on to their (presumably appreciating) coins until they absolutely must spend them - so be it! The world won't end, and life will find new equlibriums and new games to play. As pointed out in the OP, it will all make sense in retrospect. Wink 

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March 24, 2013, 02:47:26 AM
 #20

So bitcoin may only have a market share of 10% of the worlds currency. 


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