The Five Paradoxes of Bitcoin

[jedunnigan]

edit: these are not paradoxes; their substance still stands, though.

There are a number of interesting paradoxes that arise from the blend of human nature and programmatic expression. Bitcoin suffers, you might say, from this plight in its own special way. According to Bergestra & Leeuw, there are five such paradoxes–let’s walk through them.

First up is the expectation paradox, a consequence of Bitcoin’s deflationary model. The conundrum is as follows: as a deflationary currency, Bitcoin lends towards hoarding–a predictable but unfortunate phenomena, because for Bitcoin to thrive, it must not only be used as a long-term store of value, but also as a means to transact value, quickly and cheaply. To spend or not to spend, that is the question.

Next we have the programmer loyalty paradox, a conflict of interest that arises from the Bitcoin core devs that extract economic value from Bitcoin independent of their contributions to the Bitcoin source code. It is conceivable that development priorities could be shifted on that basis alone. This goes on now (see: Bitpay and Jeff Garzik) [note: I am not claiming bias with this specific relationship, just mentioning it].

Third is the standardization paradox. As it stands, this issue hasn’t come to light but with eventual power shifts in the dev team this could become problem. The question being: are the Bitcoin developers committed to building an open standard for Bitcoin “that is a family of specifications of intended behavior for Bitcoin clients of various kinds that work independently of their implementations” or are they committed to releasing [official] clients that require people to rely on core devs to keep up with changes in the Bitcoin source code. It would appear that these two motives cannot operate harmoniously.

Fourth is the idealogical paradox. At first glance it would appear as though some (if not all) of the Bitcoin development community has arrived at the conclusion that an international finance system can operate stably without central or fractional reserve banking to maintain inflation and deflation. There is nothing inherently wrong with that conclusion, in fact it’s a reasonable one if you ask me; however, to maintain the integrity of the Bitcoin project, developers must remain unbiased against the legal and economic aspects of managing money.

Finally we have the legality paradox, everyone’s favorite. I’ll just take this one straight from the horses mouth:

Bitcoin “strives” for official and normal prominence, so it seems, but its strength is really shown beyond any doubt if it survives a world wide prosecution. It may turn out to be at least as strong as the internet, in no need of any official confirmation.

These paradoxes speak volumes about many of the political/social/idealogical issues Bitcoin will face in its lifetime. While not immediate threats per se, it is vital we keep an open dialogue about these issues and begin formulating solutions before they become a problem. Such are the reasons I believe it all the more important to develop a philosophy of Bitcoin that builds a framework of language for understanding Bitcoin, both pragmatically and philosophically.

You guys agree, disagree? Any the authors missed? etc...

Original post: http://btcgsa.info/?p=186
Source: http://arxiv.org/abs/1304.4758

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[LightRider]

Any currency is paradoxical, in that it supposedly has value, but in reality is merely an idea, with no tangible benefit or physical utility other than coercing and manipulating others.

[AltCryptoStore]

Interesting read, thanks.

[AliceWonder]

First up is the expectation paradox, a consequence of Bitcoin’s deflationary model. The conundrum is as follows: as a deflationary currency, Bitcoin lends towards hoarding–a predictable but unfortunate phenomena, because for Bitcoin to thrive, it must not only be used as a long-term store of value, but also as a means to transact value, quickly and cheaply. To spend or not to spend, that is the question.

I've thought about that some.

I think if allowed to it will be self correcting. If everyone is saving (er, hoarding) the currency won't have much utility or interest from new people, causing the value to drop. This drop in value will result in some selling from the savers, dropping the price further which will attract new buyers and increased spending.

I think the net result will be a lot of people saving more than they would with fiat but honestly I don't think that's a bad thing.

[monkeybars]

Thanks for a thought-provoking post

[nebulus]

Great post!

[hate_the_face]

Bitcoin cannot become mainstream if there is no incentive to use it over already established currencies.

If the only incentive is that it bypasses government ran monetary systems but at the same time allows its users to remain anonymous, how will there be any accountability for underhanded tactics? How can you trust the system at all? At least the government has a face to it and allows people to believe they can change it with voting. What can the average person change to bitcoin?

here's a paradox I'll say until I'm blue in the face

Bitcoin is trying to compete with the current world currencies. The only thing rapidly shifting the price of Bitcoins is the belief that they will return a greater amount of the currency that was invested into them at the start.

It didn't start out as a Ponzi Scheme, but Jesus H Christ it is starting to look like one.

[waxwing]

I'm sorry to be dismissive, but the writer(s) of this piece don't understand what "paradox" means, and moreover has failed to appreciate the full ramifications of Bitcoin's open source nature (see especially, but not only, the section on "standardization paradox" -  do they know what fork means?).

And in case it needs to be said, Bitcoin does not "strive for official and normal prominence", because it does not strive for anything.
The comment about surviving prosecution is of course meaningful, but these observations have already been made, e.g. by Taleb.
".. it is vital we keep an open dialogue about these issues and begin formulating solutions before they become a problem" - this is the real problem - the need to constantly come up with "solutions" to Bitcoin "problems". It will evolve like anything else, the more people interfere with it the less valuable it will be. Yes, there may be forks to help with technical problems related to scalability, but all these people wanting dramatic changes to the protocol because it doesn't fit their view - well, you're welcome to fork the project and make your own coin.

[hate_the_face]

lol @ Bitcoin being open source

Interested but uninformed person: "how do I get them?"

Bithead: "well you log onto www.mtgox.com and after agreeing to some fees..."

spare me

[waxwing]

lol @ Bitcoin being open source

Interested but uninformed person: "how do I get them?"

Bithead: "well you log onto www.mtgox.com and after agreeing to some fees..."

spare me

Open source means the code is freely available to all to examine, change and compile for themselves. How easy it is to buy Bitcoins is completely irrelevant.

[jedunnigan]

I'm sorry to be dismissive, but the writer(s) of this piece don't understand what "paradox" means, and moreover has failed to appreciate the full ramifications of Bitcoin's open source nature (see especially, but not only, the section on "standardization paradox" -  do they know what fork means?).

And in case it needs to be said, Bitcoin does not "strive for official and normal prominence", because it does not strive for anything.
The comment about surviving prosecution is of course meaningful, but these observations have already been made, e.g. by Taleb.

Yes, you're right. They are not paradoxes, it was poor choice of wording by the author. I should have changed it.

".. it is vital we keep an open dialogue about these issues and begin formulating solutions before they become a problem" - this is the real problem - the need to constantly come up with "solutions" to Bitcoin "problems". It will evolve like anything else, the more people interfere with it the less valuable it will be. Yes, there may be forks to help with technical problems related to scalability, but all these people wanting dramatic changes to the protocol because it doesn't fit their view - well, you're welcome to fork the project and make your own coin.

See, that's the problem though. Even determining 'minor' technical changes is not an easy thing to do, and problems arise when deciding on the best possible solutions. The intensity of debate will scale in proportion to the number of players who have an increasingly large stakes in the outcome of Bitcoin.

I don't want to over think the situation but we certainly want to be prepared for anything. Being complacent and letting the code do the work won't work; Bitcoin is as much a collection of individuals as it is a protocol for transacting/storing value. Their use-value cannot be separated. You must treat them and their problems as equals. Not to mention these problems extend beyond technical aspects of Bitocin; legal guidance by regulators will still happen, and it's best we position Bitcoin in a way to promote its acceptance. That is one of my main concerns.

[AliceWonder]

Bitcoin cannot become mainstream if there is no incentive to use it over already established currencies.

If the only incentive is that it bypasses government ran monetary systems but at the same time allows its users to remain anonymous, how will there be any accountability for underhanded tactics? How can you trust the system at all? At least the government has a face to it and allows people to believe they can change it with voting. What can the average person change to bitcoin?

here's a paradox I'll say until I'm blue in the face

Bitcoin is trying to compete with the current world currencies. The only thing rapidly shifting the price of Bitcoins is the belief that they will return a greater amount of the currency that was invested into them at the start.

It didn't start out as a Ponzi Scheme, but Jesus H Christ it is starting to look like one.

Bitcoin is not anonymous and doesn't claim to be.
You can trust it because every transaction is public record and the cryptography used is solid.

Some people might see it as competing with world currencies but that's not how I see it.
I see it as cash for the Internet.

When I buy with a credit card, I have to give my card number and legal name to the vendor.
When I buy with cash, I don't have to do either.
Bitcoin functions as cash for the Internet and thus is a more secure way to do business because information never sent can't be abused.

Fiat still has a place and purpose and so do credit cards.
But bitcoin does a better job at Internet purchases I don't need financed.
That's how I see it.

[knybe]

lol @ Bitcoin being open source

Interested but uninformed person: "how do I get them?"

Bithead: "well you log onto www.mtgox.com and after agreeing to some fees..."

spare me

Not sure I get the correlation between buying bitcoins on mtgox and open source software...

[HappMacDonald]

are the Bitcoin developers committed to building an open standard for Bitcoin “that is a family of specifications of intended behavior for Bitcoin clients of various kinds that work independently of their implementations” or are they committed to releasing [official] clients that require people to rely on core devs to keep up with changes in the Bitcoin source code. It would appear that these two motives cannot operate harmoniously.

I do not think there is any conflict of interest, here, save perhaps the ever-present conflict of short- versus long-term interests in a capitolist system.

The developers, as probable holders of large sums of Bitcoin, are invested in the optimal success of the ecosystem. This ecosystem will thrive — and with it the value of the Bitcoin they hold will prosper — in direct proportion to it's usefulness and adoption as a payment platform. To that end, obviously an open standard and a bazaar model will have the most powerful effect.

The only conflict of interest is one of short term gain, of potential for someone to choose to try to short change the future of the ecosystem for a very short term and limited scope profit.

[HappMacDonald]

lol @ Bitcoin being open source

Interested but uninformed person: "how do I get them?"

Bithead: "well you log onto www.mtgox.com and after agreeing to some fees..."

spare me

As others have mentioned, Bitcoin is a wallet software and a payment protocol. What you use it for (the moving around of accounting units) is nothing but a result of how you run the software, but the core software is 100% freely available and the protocol by which all Bitcoin participants must communicate is 100% transparent. That is what open source means in this context.

Contrast, please:

Interested but uninformed Linux user A: "How do I make XYZ change to the kernel?"

Linuxhead B: "Well, you log into www.linuxheadconsulting.com and after agreeing to some fees..."

A: But I thought Linux was open source?

B: Fine then, spend 20 years learning the arcane code and put in all the work to do it yourself. See if I care.

A: But it's haaaaaaard..

----

Interested but uninformed person A: "how do I get them?"

Bithead B: "well you log onto www.mtgox.com and after agreeing to some fees..."

A: But I thought Bitcoin was open source?

B: Fine then, build or purchase a mining rig and compete against the rest of the world, or post a buy ad to localbitcoins.com and do it yourself. See if I care.

A: But it's haaaaaard..

[jedunnigan]

The developers, as probable holders of large sums of Bitcoin, are invested in the optimal success of the ecosystem. This ecosystem will thrive — and with it the value of the Bitcoin they hold will prosper — in direct proportion to it's usefulness and adoption as a payment platform. To that end, obviously an open standard and a bazaar model will have the most powerful effect.

The only conflict of interest is one of short term gain, of potential for someone to choose to try to short change the future of the ecosystem for a very short term and limited scope profit.

I disagree. Here is an example: The Bitcoin core devs are approached by a collection of nation-states that have an ultimatum: add KYC features to transactions or we will outlaw Bitcoin. They promise to utilize the technical prowess of their collective intelligence agencies to filter network calls to the blockchain and fragment the network.

Here's the problem: core devs want Bitcoin to thrive and prosper, and even if Bitcoin can operate without the need for approval by regulators, it will stymie the growth of Bitcoin thus lowering its value... perhaps sending it into an unprecedented downward spiral. Do they risk losing all this money they made or do they hold true to the Nakamoto architecture? That's one hell of a conflict of interest.

[hate_the_face]

I seriously find it hilarious that people on here think they will be able to just encroach on a country's currency while being incredibly open and obnoxious about it and the governments of the world will just be ok with it.

O Doyle Rules! O Doyle Rules! O Doyle Rules! O Doyle Rules! O Doyle Rules! O Doyle Rules!

[jedunnigan]

Bitcoin cannot become mainstream if there is no incentive to use it over already established currencies.

If the only incentive is that it bypasses government ran monetary systems but at the same time allows its users to remain anonymous, how will there be any accountability for underhanded tactics? How can you trust the system at all? At least the government has a face to it and allows people to believe they can change it with voting. What can the average person change to bitcoin?

That's simply not true. Bitcoin offers heaps of use-value outside 'avoiding' preexisting banking infrastructure. Examples: lower transaction fees, trustless contracts, smart property, micropayment channels, payment infrastructure for bankless locales, list goes on. These are quickly becoming the centerpiece to Bitcoin's appeal.

Bitcoin is trying to compete with the current world currencies. The only thing rapidly shifting the price of Bitcoins is the belief that they will return a greater amount of the currency that was invested into them at the start.

It didn't start out as a Ponzi Scheme, but Jesus H Christ it is starting to look like one.

Of course speculators have entered the market, that was bound to happen. And there is nothing inherently wrong with that--just some cats trying to make a few bucks. Yea they pump and dump and whatnot, but as Bitcoin grows so will its stability.

We are still very much in Bitcoin's infancy there is no way you could make a judgment about how it 'looks' because it doesn't even look like anything we have seen before. There is no cryptocurrency historical data going back 100 years. We simply don't know what's gonna happen.

[johnyj]

No.1 is self-correcting:

If bitcoin's value rise, people's holding will worth more, then they will start to spend part of their holding and still be able to keep the same consumption power, that will increase the coin supply and will cause a drop in the bitcoin value

If bitcoin's value dropped, people will start to hoard, the reduce of supply will increase its value to a point that people are willing to spend again

By the way that is the case for a 100% saturated bitcoin penetration

[crumbs]

[...]
Some people might see it as competing with world currencies but that's not how I see it.
I see it as cash for the Internet.

When I buy with a credit card, I have to give my card number and legal name to the vendor.
When I buy with cash, I don't have to do either.
Bitcoin functions as cash for the Internet and thus is a more secure way to do business because information never sent can't be abused.

Fiat still has a place and purpose and so do credit cards.
But bitcoin does a better job at Internet purchases I don't need financed.
That's how I see it.

Bitcoin does compete with world currencies.
It competes for the same goods, it's functionally equivalent to counterfeit money. 

What harm could there be in counterfeiters printing money? 
Doesn't it just mean that there will be more money for everyone, everyone gets rich as the cash flies off the presses?
Sure, there will be more dollars around, but no more "stuff" to buy with them -- more stuff didn't magically appear along with the new dollars.  *Nothing of value was made.* 

How is Bitcoin different from printing money?  What new "stuff to buy with it" did it bring?  Was it the electricity that was wasted in mining the coins?  No, that's gone, wasted by the miners contributing to entropy, the one that nature tends towards.  An underlying economy?  Nope.  A big nasty army to valuate bitcoins by threat of violence?  No again.  What then?  An algo & a protocol which could be copypasted to make identically useful "currencies"?