Bitcoin: The Digital Kill Switch

[AnonyMint]

Bitcoin: The Digital Kill Switch

by Shelby H. Moore III

March 29, 2013

Bitcoin is the first peer-to-peer (P2P) digital currency and payment system to gain significant interest. This month its marketcap surpassed $1 billion.

P2P currencies promise some differences from credit cards, such as increased privacy, no control by authorities, instant signup, lower fees for the merchant, and no chargebacks (buyer at the mercy of the merchant to issue refund if dispute).

Unlike a credit card which allows the merchant to see your details, making unauthorized charges to your P2P account is impossible, unless you allow someone to get your private key. Note credit cards are adding for example Verified By Visa to provide a similar degree of security.

The government control increased on March 13, when FinCEN ruled that transactions for goods and services paying with P2P currency are not regulated, yet exchange to other currencies is regulated and can't be anonymous. Since most users need to exchange from legal tender to and from P2P currencies, some of the purported privacy has already been lost. Also instant signup has been effectively eliminated for many, as now many new users must "practically give a DNA sample" to become verified by exchange providers— however this tsuris may not exist in all jurisdictions.

The anonymity of payments for goods and services is given by the fact that each sender and receiver of a payment is just a number without any other identifying information attached. New numbers can be generated by users at-will. However, the authorities regularly collect information from the internet about usage activity using various means of tracking such as man-in-the-middle routers, spyware, and requests for information from sites that collect information via cookies such as Google's ads and Facebook's Like that appear on many pages of the internet.

So what are the compelling advantages of P2P currencies, since most of the differences from credit cards are being diluted?

For merchants it is the elimination of the 2 - 5% fees charged by credit card companies, the elimination of the ability of the buyer to issue a chargeback, and accessing a new market of highly motivated buyers. In some cases however, the buyer will not like this "no chargeback" provision and prefer to use a credit card.

For the buyer or payer, there appear to be no remaining significant advantages. Even most merchants don't accept P2P currencies yet. The non-merchant has one significant reason to buy digital coins— the expectation of appreciation.

Valuation

The supporters of Bitcoin are projecting very high valuations ranging from $1000 to $1 billion per coin in the future, based on a limit of 21 million coins to ever be created, and a projection of percentage share of global transaction processing.

Notably 50% of Bitcoin's future money supply was issued to the founders and early adopters in first 4 years ended 2012, and by 2016, 75% of the 21 million coins will have been created. By 2020, 87.5%. By 2024, 93.75%. By 2028, 97%.

This accelerated phaseout in the creation of new coins is creating a mad "gold rush" to get in before it is too late. Even though at least 59% (but most likely 75 - 95% since that is only a lower bound that can be measured reliably) are holding long-term and not spending, the skyhigh valuations are based on the hope for adoption by merchants and then increased spending on goods and services in the future.

The 21 million Bitcoins are replacement goods with low barriers to entry and thus can be debased by market share. If competing P2P currencies issue many more coins, then the total finite demand for P2P coins has to be spread between the coins in all P2P currency competitors. However, this spread of market share is not uniform. Today, Bitcoins traded at $75 - $95 with 10.8 million coins issued and Litecoins traded at $0.58 - $0.68 with 2.5 million coins issued. Given real-time exchange between P2P currencies, there is nearly no barrier-to-entry, since merchants will want to accept as many no chargeback currencies as they can if value is rising or stable. Also Gresham's Law dictates that coins will higher issuance will drive coins with less issuance out-of-circulation towards a higher store-of-value. Valuations are also crucially based on market share of transaction processing to be captured in the future, which requires circulation of the currency. So it is quite naive to think that the 21 million coins of Bitcoins are immune to debasement by competitors, unless all competitors suck and have no desirable differences.

Much of the fervor is further amplified with a false sense of altruism under the delusion of being part of a momentus and historic creation of what supporters expect to be the first meritocratic money system— one which can't be debased by the power elite who control the strings on banks in the fiat fractional reserve systems society uses now.

Scaling

For Bitcoin to meet the expectation of investors in its digital coins, the transactions for goods and services has to scale up.

And here is where the hidden diabolical quality of Bitcoin (and Litecoin too) becomes too obvious when the technical details of the design are closely scruntinized by an expert programmer such as myself.

The processing of transactions in P2P currencies is provided by "mining" peers, who provide some Proof-of-Work to insure that double-spends can not exist in the single correct copy of the distributed database. These peers are computers connected to the internet and interacting in a protocol with the other "mining" peers.

To incentivize the "mining" peers to offer their hardware and electricity to this task, they are given the new digital coins created with each new block of transactions. Also they may be offered an optional transaction fee by some payers.

However, the rate of creation of new coins is halving every 4 years, and will eventually stop. Given the fervor the supporters have over non-debasement for meritocratic money system, the end of the creation of new coins is "non-negotiable".

If an attacker can muster 51% of the Proof-of-Work capacity of a P2P system, the attacker can take over the system. There are differences of opinion as to the degree of malicious behavior an attacker could do. However, one unarguable mathematical conclusion is that an attacker that had for example 60 to 90% of the Proof-of-Work capacity could process 60 to 90% of the transactions. If this attacker did not do any thing noticably malicious and did not charge a transaction fee, then virtually all customers would not find it necessary to offer a transaction fee, because over just 3 blocks of waiting time the 60 to 90% becomes 94 to 99.9% of all transactions.* If this was sustained for sufficient months or years when the production of new coins had ended (or declined significantly), then all the other miners would go bankrupt because their costs are not subsidized. Such attacker would then control virtually 100% of all transactions processed. Note this 60 - 90% could be built up over time, because offering free transactions to a percent of the market (when no new coins are being minted), drives some percent of the other miners bankrupt thus increasing the percent the attacker has— it is a snowball effect.

This was explained to some of the developers of Bitcoin who hang out at bitcoin.stackexchange.com, but they claimed it is only an opinion and not a fact. How can math be an opinion?

*First block, 60 to 90% + second block 60 x (100 - 60) to 90 x (100 - 90)% + third block 60 x (100 - 84) to 90 x (100 - 99).

Digital Kill Switch

There is an expectation that large retailers such as WalMart, Amazon, etc., will want to provide the "mining" peers at no transaction fee cost to the buyers, so as to gain a competitive advantage over other retailers.

But we see from the prior section that the incentive is very great to create a cartel that has control over all transactions. Once you have that cartel, you can eliminate those outside the cartel by delaying their transactions or charging transaction fees only to your competitors (billing the competitor, not deducting from the payer in the system). So this is just the credit card fees we have now all over again, except then they will also have a public global record of all transactions in the world (total end of privacy).

Then the government could easily collude with these cartels to turn off the transactions of political dissidents, free speech advocates, gun rights advocates, Ron Paul supporters, and any other classification of terrorist. With control over the processing and the merchants who depend on it, they can easily force an upgrade to the protocol which requires a SSN or other government tax ID to be attached to each transaction.

This is not a stretch at all. The design of Bitcoin and Litecoin encourages it— I go so far as to say they were designed for it given there are alternative designs (I proposed one) that don't have this diabolical possibility.

Having numerous competing P2P currencies does not escape from this diabolical threat, if all of them have the same diabolical design. A non-diabolical design would either have debasement that never ends and/or a minimum transaction fee.

I doubt one can create a non-diabolical P2P currency at any time in future, because the first-mover advantage will apply inspite of low barriers to entry. Because if the users already have Bitcoin and Litecoin, they may not see any compelling reason to add another, in spite of the diabolical quality which does not affect them directly (as a member of the majorty and not a dissidant or other threatened class).

Not Gold

The P2P currency fervor was further stoked by the illusion that they are somewhat like gold. Gold is a private hedge against government malfeasance, it can be traded privately with no public record. P2P currency ownership and transactions are stored in one public database that is never erased forever!

Gold's money supply is always increasing forever (we can mine it in outer space if we run out on earth) and the rate of nominal increase every year is also increasing. Bitcoin and Litecoin are geometrically decreasing the rate of increase of the money supply and will terminate production of new coins at 21 and 84 million respectively. Some people think this makes them even better than gold and silver.

Many people have the illusion these days that inflation is bad and deflation is good. Sorry to bust their bubble, but both transfer wealth to the power elite. The power elite have more savings relative to their expenses, thus they can switch their savings between investments which increase during both inflation and deflation. Whereas, the middle-class are hurt by inflation since they must spend more their income, and they are hurt by deflation, because their wages decline.

If distributed to the middle-class, some minimal debasement is beneficial to offset the guaranteed (government backed stopped) usury interest income the wealthy earn during deflation. I am not a socialist and I love free markets, but the fact is that money is a social collective institution and this is the reality of the math. Either you redistribute algorithmically with debasement and mining of new coins, or you redistribute with taxes and politics. I would much prefer the former.

It is possible to make a P2P currency that more closely emulates gold's money supply. And has the advantage that no one controls its rate of debasement and thus can't manipulate it to create false business cycles.

[AnonyMint]

One thing to bear in mind, now that Bitcoin has shown success, everybody and his half-uncle are going to be trying to create a new P2P currency.

Buy low, sell high. Arbitrage is your friend. But no one knows timing, unless they are manipulating and controlling a market.

As an investor, you need to discern which new P2P currencies have the unique features, quality, professionalism, etc... to be taken seriously.

Anyone thinking $10,000 or $100,000+, you are not living in reality. Please don't get angry at me, but markets respond to opportunity cost. There is no way that other smart developers won't respond when now they see $100 per coin created out-of-thin-air.

[marcus_of_augustus]

And here is where the hidden diabolical quality of Bitcoin (and Litecoin too) becomes too obvious when the technical details of the design are closely scruntinized by an expert programmer such as myself.

hehehe, quite full of ourselves aren't we? You seem to like that word diabolical too much, make  sure it doesn't boomerang on you there.

Will be waiting and watching for your best imitation of Satoshi's genius, for that's all it will ever be, an imitation. Might even buy a few if they are good enough,  .

[AnonyMint]

the current rules aren't set in stone, there may very well be a minimum transaction fee or other such things you are concerned with in the future.

I believe it to be impossible to force in any protocol that can be imagined.

If a corporation wants to provide free tx fees, even if the protocol attempts to enforce it, they can just refund the money back in another transaction.

So users will route their transactions to those corporations.

I believe the only possible way is forced debasement and NO tx fees.  

You must remove the user's incentive for a Tragedy of the Commons.

P.S. this is why I suspect Satoshi had evil intentions. He made a big deal about lying and saying Bitcoin's money supply was modeled on gold.

[AnonyMint]

And here is where the hidden diabolical quality of Bitcoin (and Litecoin too) becomes too obvious when the technical details of the design are closely scruntinized by an expert programmer such as myself.

hehehe, quite full of ourselves aren't we? You seem to like that word diabolical too much, make  sure it doesn't boomerang on you there.

Will be waiting and watching for your best imitation of Satoshi's genius, for that's all it will ever be, an imitation. Might even buy a few if they are good enough,  .

I had written that I would put you on ignore (dearth of facts & rationality in your criticism), but I guess I am too sleepy and read your msg too fast. I see you are just issuing me a challenge. Thank you.

I believe I am sufficiently smart on the level of Satoshi and apparently more than the developers of Bitcoin on global design visualization. But of course I am not saying I am a better network engineer, or any specific skill set. There are always experts within various specialties. That is why we do it open source.

I am more than happy to have the necessary changes made to Bitcoin, but I think they are non-negotiable in both Bitcoin and Litecoin.

So we may have no choice but to create a new P2P currency. I have sufficient financial backing of course.

I really don't want to do it. I have many other projects that I am already working on. I really wish I could convince the developers here to change the non-negotiable item, but I think it would make the market angry.

I think any such change has to come in a new P2P currency.

I guess everyone knows that my design is based on hard-disk space. So any one with a PC would be able to mine effectively and get coins.

The "distributed hash table" round-robin portion of my design is actually very old. I designed it in 2006 before Satoshi did his. I didn't implement because I didn't think P2P currency created-out-of-thin-air would catch on.

[AnonyMint]

Re: Can the government shut down BitCoin?

Yes...

I know the standard answer... - the government can't do nothing about BitCoin, it's a peer-2-peer thing, and it shall survive just like bit-torrent survived no matter what, and they will have to shut the internet in order to shut down bitcoin....

You are expecting the less likely threat, because the power elite don't shutdown what is popular, they find a way to own it.

The bigger threat is the government will not shut it down, but rather embrace, help it grow, and control it so they can turn off your ability to eat individually if they don't like you:

Bitcoin: The Digital Kill Switch

https://bitcointalk.org/index.php?topic=160612.0

Bitcoin is diabolical, but only an expert can see it.

[AnonyMint]

If you read my technical thesis in the OP (opening post), then realize that the alleged takeover by corporations will occur subtly over a decade or two.

You will be lulled to sleep. Then once it is too late, they can start turning off the ability for dissidants to transact. By that time, probably all payments will be digital, even in the local market using your mobile phone (which by that time may be wearable).

Thus you won't eat if the corporate-fascist government apparatus doesn't like your behavior (politics, open source projects, etc).

[chmod755]

Notably 50% of Bitcoin's future money supply was issued to the founders and early adopters in first 4 years ended 2012, and by 2016, 75% of the 21 million coins will have been created. By 2020, 87.5%. By 2024, 93.75%. By 2028, 97%.

I had more coins back then. It's not like everyone who started using it in 2010/2011 knew that it would be successful. Those who mined had to pay for GPUs and electricity too…
The first people who started using gold or anything else to pay for something had the same advantage (btw.: they're all dead now - and I don't think we'll be here forever). Back then nobody ever imagined that we could ever go to outer space or create virtual currencies.

Gold's money supply is always increasing forever (we can mine it in outer space if we run out on earth) and the rate of nominal increase every year is also increasing. Bitcoin and Litecoin are geometrically decreasing the rate of increase of the money supply and will terminate production of new coins at 21 and 84 million respectively. Some people think this makes them even better than gold and silver.

That's true, if we'd really get to a point where it's 100% hoarded and not being used to pay for products & services I think it would collapse. But we could change it e.g. to 1 BTC = 100,000,000,000 units in case it's not enough

There's also the question if it's worth to start mining it in outer space…

[joris]

If you read my technical thesis in the OP (opening post), then realize that the alleged takeover by corporations will occur subtly over a decade or two.

You will be lulled to sleep. Then once it is too late, they can start turning off the ability for dissidants to transact. By that time, probably all payments will be digital, even in the local market using your mobile phone (which by that time may be wearable).

Thus you won't eat if the corporate-fascist government apparatus doesn't like your behavior (politics, open source projects, etc).

Bitcoin is being developed as a supposed superior alternative to another form of money, which was developed as an alternative to another form of money, which was...

OP, why would this process end and why does Bitcoin has to be a perfect form of money right now?

[AnonyMint]

@chmod755: AFAICS apparently you entirely missed the point of the OP as to the technical threat. Please try re-reading it.

@joris:

OP, why would this process end and why does Bitcoin has to be a perfect form of money right now?

Excellent question. I want to hear arguments on both sides of this.

Here is my current thinking.

The first mover advantage is causing a lot of capital to be dedicated to Bitcoin, and also complex financial systems such as hedge funds and futures markets, meaning the institutional capital is coming in.

Once the big capital is in, they won't like to lose their investment. Everyone will have an incentive not to switch to an alternative. And remember I assert the diabolical part will come slowly and so no one will care (until it is too late, it was like that in every diabolical outcome such as Nazi germany most people never thought the thing would affect them, only the other guy).

So yes, I believe the window for saving mankind from The Digital Kill Switch is fast closing and then will be locked shut by marketshare and inertia. Remember a currency is a social institution. Its value is derived from the collective usage. Thus small inertia is bad, and big inertia is good.

The simpleton masses don't give a fuck as long as they can buy their junk. Once they are on board, you can never gain inertia with a competing P2P currency.

This is why I had limited patience with the developers of bitcoin who were telling me that "yeah but first we can do some good by eliminating credit card fees, then later we can look into fixing transaction fees". That is nonsense, we have to fix it from the start and transaction fees can never be the fix, for the reason I stated in a prior post.

[Come-from-Beyond]

Having numerous competing P2P currencies does not escape from this diabolical threat, if all of them have the same diabolical design. A non-diabolical design would either have debasement that never ends and/or a minimum transaction fee.

Is it a diabolical design or not - http://qubic.boards.net/index.cgi?board=theconcept&action=display&thread=1 ?

[wormbog]

Once you have that cartel, you can eliminate those outside the cartel by delaying their transactions or charging transaction fees only to your competitors...

Bitcoin already accounts for this. Before the cartel can squeeze its competitors it must identify them. It is trivially easy for anyone to create new address pairs that are not obviously linked to any identified account. If your payment address changes with every transaction it will be impossible for a cartel to blacklist you.

If the cartel chooses to blacklist everyone except their friends, there will be a strong incentive for other miners to return, or abandon the currency altogether.

[Mike Christ]

Satoshi

Satashi

Satash

Satan

He's right!  It is diabolical!

[AnonyMint]

Having numerous competing P2P currencies does not escape from this diabolical threat, if all of them have the same diabolical design. A non-diabolical design would either have debasement that never ends and/or a minimum transaction fee.

Is it a diabolical design or not - http://qubic.boards.net/index.cgi?board=theconcept&action=display&thread=1 ?

Is your argument that there is no first mover advantage, thus a competing P2P currency can be created at any time to fix any design flaw that handed control to corporate monopoly?

As I explained in my prior post, I would not agree. You would have to address my prior post and show me why I am wrong about the first mover advantage.

[AnonyMint]

Satoshi

Satashi

Satash

Satan

He's right!  It is diabolical!

You've not addressed the technical argument.

[AnonyMint]

Once you have that cartel, you can eliminate those outside the cartel by delaying their transactions or charging transaction fees only to your competitors...

Bitcoin already accounts for this. Before the cartel can squeeze its competitors it must identify them. It is trivially easy for anyone to create new address pairs that are not obviously linked to any identified account. If your payment address changes with every transaction it will be impossible for a cartel to blacklist you.

If the cartel chooses to blacklist everyone except their friends, there will be a strong incentive for other miners to return, or abandon the currency altogether.

The cartel knows who the merchants and retailers are, they are publicly visible.

Once you have the inertia with the simpleton masses able to buy their junk from Walmart, Amazon, etc, then no one is going to be able to induce those masses to switch to a different P2P currency/payment system. When the cartel wants the users to upgrade their clients, they will have them click a button on amazon.com for example before they checkout. They can then convert the client to auto-update.

Once the cartel has this inertia, they can change the protocol to require tax id on every transaction (to "comply with government regulations", but of course they own the government, so it is just a ruse).

Welcome to 1984.

[marcus_of_augustus]

I guess OP hasn't heard about merged-mining?

If a superior form of crypto-currency blockchain comes along, it can co-opt the bitcoin mining power and take-over ... it is a level playing field for any good ideas to compete upon.

Wait, don't tell me, that is diabolical?

[AnonyMint]

I guess OP hasn't heard about merged-mining?

If a superior form of crypto-currency blockchain comes along, it can co-opt the bitcoin mining power and take-over ... it is a level playing field for any good ideas to compete upon.

Wait, don't tell me, that is diabolical?

You fail to understand the technical problem in the OP. Merged mining does not fix the threat. The threat is the corporations can make it uneconomic to mine because they can offer it for free and the other miners will get paid nothing for mining, thus they control all of the mining (merged or otherwise). Before you attack that, go re-read the OP more carefully.

[bV]

merged mining has its own set of tradeoffs

[wormbog]

Once you have that cartel, you can eliminate those outside the cartel by delaying their transactions or charging transaction fees only to your competitors...

Bitcoin already accounts for this. Before the cartel can squeeze its competitors it must identify them. It is trivially easy for anyone to create new address pairs that are not obviously linked to any identified account. If your payment address changes with every transaction it will be impossible for a cartel to blacklist you.

If the cartel chooses to blacklist everyone except their friends, there will be a strong incentive for other miners to return, or abandon the currency altogether.

The cartel knows who the merchants and retailers are, they are publicly visible.

Once you have the inertia with the simpleton masses able to buy their junk from Walmart, Amazon, etc, then no one is going to be able to induce those masses to switch to a different P2P currency/payment system. When the cartel wants the users to upgrade their clients, they will have them click a button on amazon.com for example before they checkout. They can then convert the client to auto-update.

Once the cartel has this inertia, they can change the protocol to require tax id on every transaction (to "comply with government regulations", but of course they own the government, so it is just a ruse).

Welcome to 1984.

Simpleton masses? Who are you, Dr. Evil?

The cartel decides to blacklist Wal-Mart because they won't play ball. John Q. Simpleton goes to walmart.com to buy a new NASCAR shirt and some Slim Jims. Wal-Mart generates a never-before-used public address for John to send in his payment. How is the cartel going to identify it as a Wal-Mart address?