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Author Topic: Subsidies and Network Effects  (Read 1209 times)
cunicula
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November 19, 2011, 09:09:57 AM
 #1

It doesn't make sense for business A to work with bitcoin unless other business B, C, and D are doing so.
The same situation applies for businesses B, C, and D. They need more general take-up of the currency in order to be viable.

There are two possible equilibria here:

The Good Equilibrium
Businesses A, B, C, and D operate with bitcoin.

The Bad Equilibrium
Businesses A, B, C, and D do not operate with bitcoin.

The standard solution for moving from the bad equilibrium to the good equilibrium is to distribute subsides to all business that are open to bitcoin business, essentially rewarding them for contributing to the commercial network. The cheap way to do this is with a large pre-mine. Nonetheless, I'm pretty certain that almost everyone here would be against this.

Why the opposition to subsidies?



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November 19, 2011, 09:46:29 AM
 #2

The network effect you write is not correct. Customer is also a part of network. As far as only one company can provide product for me and have benefit in bitcoin, it is enough reason to use bitcoin. Network effect between companies are smaller than the network effect of the whole network.
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November 19, 2011, 09:57:03 AM
 #3

Some subsidy for consumers makes sense to. Consumer subsidies are already available through the mining process, however. Similar business subsidies are not available. Applicable models suggest that the lion's share of subsidies be distributed to businesses not consumers.  See this for example:

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.80.35&rep=rep1&type=pdf

Ignoring whether I am correct or not, generally ignorant, or an asshat, etc....

Why do arguments for subsidies encounter resistance from the bitcoin community?

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November 19, 2011, 10:24:02 AM
 #4

You can subsidize whomever you want. 

Play Bitcoin Poker at sealswithclubs.eu. We're active and open to everyone.
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November 19, 2011, 11:06:55 AM
 #5

I will not respond to off-topic posts.

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November 19, 2011, 03:58:05 PM
 #6

Bitcoin is, itself, a subsidy to businesses that are smart enough to use it. Bitcoin enables higher profit margins.

This is why it will be adopted over time, and will overcome the network effect.
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November 19, 2011, 04:13:04 PM
 #7

Bitcoin is, itself, a subsidy to businesses that are smart enough to use it. Bitcoin enables higher profit margins.

This is why it will be adopted over time, and will overcome the network effect.

That is true, but it doesn't mean that there is no way to speed up the process. For example, adoption rate could be increased with an application that enables automatic salary payments in bitcoins, because that would save a lot of money for a company and encourage use of bitcoins instead of fiat money.
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November 19, 2011, 04:16:24 PM
 #8

Okay, if you believe that bitcoin will grow organically, then the argument for subsidies isn't that persuasive (though still valid as Serith points out).

However, I think that many people believe that bitcoin will likely fail even though it could be successful if 'bootstrapped' to wide adoption.

Does anyone here believe this? Are people who believe this also opposed to subsidies for bitcoin businesses?

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November 19, 2011, 04:52:26 PM
 #9

Does anyone here believe this? Are people who believe this also opposed to subsidies for bitcoin businesses?
Why limit it to bitcoin businesses?

Somebody should create a website where you can get a few bitcoins for free, to subsidize adoption.

You mean give a significant amount of bitcoins to the 'important' businesses?

Who decides which are 'important' ?

How do you make sure somebody isn't creating fake businesses just to get free bitcoins ?

If you want to subsidize bitcoin businesses and have answers to those questions, then I heartily encourage you to go for it!

How often do you get the chance to work on a potentially world-changing project?
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November 19, 2011, 04:57:33 PM
 #10

Gavin is the biggest subsidy to everyone =)
cunicula
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November 20, 2011, 06:09:07 AM
 #11

Why limit it to bitcoin businesses?
Somebody should create a website where you can get a few bitcoins for free, to subsidize adoption.

You mean give a significant amount of bitcoins to the 'important' businesses?

Who decides which are 'important' ?

How do you make sure somebody isn't creating fake businesses just to get free bitcoins ?

If you want to subsidize bitcoin businesses and have answers to those questions, then I heartily encourage you to go for it!

Two Responses:

A. Gavin points out an important reason for opposition to subsidies. Subsidies require an individual or small group to exercise arbitrary power (e.g. pre-mine 3 million coins and slowly dole them out to whichever businesses seem likely to make a large contribution). The individual or group would need to actively screen businesses to make sure that they are legit (e.g. order from them, solicit reviews from trusted sources, etc.). I can see that many people take a negative view of arbitrary, command economy-style arrangements like this. I think these kind of interventions are necessary to ensure a good equilibrium outcome.

B. Gavin asks: Why not just subsidize everyone via the faucet?

My answer: One should do this. However, faucet subsidies are not enough. Consumer subsidies and merchant subsidies are complements rather than substitutes.

Explanation:
Subsidies for Merchants
M1) 10 BTC/day drips to merchant conditional on his maintenance of an attractive BTC storefront
    [this subsidy increases the supply of attractive BTC storefronts. The subsidy differs from a consumer subsidy because it is larger and you need to have a store open to be eligible to receive it.]

Subsidies for Consumers
C1) 1 BTC drops from faucet into wallet of Consumer A
C2) Consumer A decides to either a) trade 1 BTC for goods b) trade 1 BTC for USD c) hold on to 1 BTC for speculative purposes

If Consumer A makes choice (C2a), then faucet subsidies encourage merchants to supply BTC goods and services. That's great! If Consumer A chooses (C2b) or (C2c), then faucet money will leak out and fail to encourage merchants to supply anything. That sucks! However, one can intervene to make the faucet subsidy more effective. If more merchants are subsidized, then more attractive storefronts will exist and consumers will be more likely to choose C2a. Accordingly, the provision of merchant subsidies makes faucet-style subsidies more effective. This is why merchant and consumer subsidies are complements rather than substitutes.

For a mathematics/statistics heavy exposition, which explains why merchants should probably get the lion's share of the money, you can look at the paper I linked to above. It is about ACH banking transfers, but the principles are applicable to bitcoin.



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November 20, 2011, 06:41:57 AM
 #12

I think if something needs subsidies, it's not a good area of investment. There are niche markets that bitcoin has an advantage in right now, meaning a profit motive exists to use bitcoin, that should be focused on.



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