Stanford paper evaluating bitcoin

[triplehelix]

http://crypto.stanford.edu/~xb/fc12/bitcoin.pdf

Bitter to Better -- How to Make Bitcoin a Better Currency

Abstract.  Bitcoin is a distributed digital currency which has attracted a substantial number of users.  We perform an in-depth investigation to understand what made Bitcoin so successful, while decades of research on cryptographic e-cash has not lead to a large-scale deployment. We ask also how Bitcoin could become a good candidate for a long-lived stable currency.  In doing so, we identify several issues and attacks of Bitcoin, and propose suitable techniques to address them.

[Piper67]

This'll make for some nice, light reading over the weekend 

[cypherdoc]

another example of how researchers shouldn't make economic assumptions:

"Hoarding: a moral hazard? Bitcoins much more than any other currency in existence
derive their value from the presence of a live, dynamic infrastructure loosely constituted
by the network of verifiers participating in block creation. Because of their appreciation
potential, bitcoins will tend to be saved rather than spent. As hoarded bitcoins vanish
from circulation, transaction volume will dwindle and block creation will become less
profitable (fewer fees to collect). If circulation drops too much, it can precipitate a loss
of interest in the system, resulting in “bit rot” and verifier dearth, until such point that
the system has become too weak to heal and defend itself."

they've made the conclusion that price will rise but neglect the fact that as price rises more participants will enter the market especially if its a good idea thus increasing tx's that will maintain miner profitability.  does the LBMA suffer from a dearth of gold future trading from gold hoarding?

"Economic motivation. The strong deflationary characteristic of Bitcoin further compounds the problem. On the one hand, Bitcoins are a currency poised to explode in
value, ceteris paribus, as already discussed; and hence so will the incentive for theft.
On the other hand, the way deflation comes into play, driven by a hard cap on the money
supply, will all but eliminate the money-minting incentive that currently draws in the
many verifiers that by their competition contribute to make block creation a difficult
problem. With this incentive dwindling, laws of economics dictate that the competitive effort devoted to verifying transactions and creating blocks will diminish. In other
words, while block difficulty may continue to increase for some time into the future, it
will eventually start to decrease relatively to the power of the day’s typical PC. History
revision attacks will thence become easier not harder."

as was said before, tx fees should provide plenty of incentive to mine as will the potential for further price appreciation.  do gold mining companies have a problem with not getting paid tx fees?  no, they mine for appreciation.

[realnowhereman]

When will this hoarding fallacy die?

In essence it says "People will hoard bitcoins because they will always go up in value.  Hence they won't be used; hence they won't go up in value.... DOOM".

It's a circular argument.  If they aren't going up in value, then people won't hoard them, so they will spend them.  So they'll go up in value.  So people will hoard them.  So they won't go up in value.  So people will spend them....

As with all economics, the two sides will create two pressures.  The magic of the market means those two pressures will compete until a balance is found -- at a particular price.

Jeez, it's a supply and demand curve.  Isn't that pre-university economics?

[ineededausername]

When will this hoarding fallacy die?

In essence it says "People will hoard bitcoins because they will always go up in value.  Hence they won't be used; hence they won't go up in value.... DOOM".

It's a circular argument.  If they aren't going up in value, then people won't hoard them, so they will spend them.  So they'll go up in value.  So people will hoard them.  So they won't go up in value.  So people will spend them....

As with all economics, the two sides will create two pressures.  The magic of the market means those two pressures will compete until a balance is found -- at a particular price.

Jeez, it's a supply and demand curve.  Isn't that pre-university economics?

Revalin's quote illustrates this phenomenon best: "Bitcoin is the devil's way of teaching geeks economics." 
When cryptographers attempt to analyze Bitcoin as a currency rather than as a protocol, they show their ignorance... after all, they're cryptographers.

[DeathAndTaxes]

Also the author (I guess standford isn't what it use to) forgets that to miners that # of BTC is mostly irrelivent.  If 99.9% of BTC are hoarded then value will be higher.  Yes there will be less transactions and less fees IN BTC.  However the value of those BTC will be more.

It is like saying.  Currently I get 1 ounce of gold a day.  If gold is hoarded more the price will skyrocket and I may only get 0.1 ounce of gold a day.  OH NOES.  Gold Rot.  Er wait except under such a scenarion gold might be valued 20x as high.  So that 0.1 ounce has the same PURCHASING POWER as 2 ounces today.   Desite a lower nominal value I am doing better.

TL/DR
Hey Stanford:
Why is 1 BTC in fees when BTC is worth $5 better than 0.1 BTC in fees when BTC is worth $2,000?


Still I love all these papers.  They seem to be more and more and at a faster frequency.  People need to first start talking and thinking about Bitcoin so while some of the conclusions may be dubious they are at least thinking about Bitcoin.  That is huge.

[Gabi]

Bitcoin is a distributed digital currency which has attracted a substantial number of users.  We perform an in-depth investigation to understand what made Bitcoin so successful, while decades of research on cryptographic e-cash has not lead to a large-scale deployment. We ask also how Bitcoin could become a good candidate for a long-lived stable currency.  In doing so, we identify several issues and attacks of Bitcoin, and propose suitable techniques to address them.

Bla bla bla, yadda yadda 

[triplehelix]

i'm with deathandtaxes.  while there may be specific elements of the paper people long intimate with bitcoin may disagree with, overall the paper shines a positive light on bitcoin, and the fact that a major, very well respected academic organization is producing papers on bitcoin is a big win.

if you have the proper back ground, i suggest compiling a response to the authors.  a polite and professional rebuttal will most likely be very well received, and possibly checked up on, and possibly worked into the next version (if it comes).

[Gabi]

* Gabi trash his response full of insults 

[herzmeister]

re deflation, hoarding:

news flash: Bitcoin is not a monopolistic currency enforced by a central authority. Hence, economic textbooks of yore do not apply. People will substitute should Bitcoin not be sufficient for them to provide enough liquidity. The market will decide. In fact, Bitcoin and local currencies and trading schemes based on trust providing ad-hoc liquidity could complement each other beautifully.

[kjj]

When will this hoarding fallacy die?

In essence it says "People will hoard bitcoins because they will always go up in value.  Hence they won't be used; hence they won't go up in value.... DOOM".

It's a circular argument.  If they aren't going up in value, then people won't hoard them, so they will spend them.  So they'll go up in value.  So people will hoard them.  So they won't go up in value.  So people will spend them....

As with all economics, the two sides will create two pressures.  The magic of the market means those two pressures will compete until a balance is found -- at a particular price.

Jeez, it's a supply and demand curve.  Isn't that pre-university economics?

If I could decree that everyone had to have a firm understanding of just one concept before getting out of high school, it would be the dynamic equilibrium.  You can hardly swing a cat without hitting dozens of things that appear to be static, but are actually just metastable points in the interaction of two opposing forces that feed back on one another.

A failure to understand this concept is responsible for the difficulty people have with understanding market processes, leading them to extrapolate things that ought not be extrapolated, and then to make economic claims that they ought not make.

If anyone reading this thread doesn't understand what realnowhereman posted above, please, I beg you, go to wikipedia and read about evaporation and precipitation until you understand the common process and can see it in everything around you.

[hazek]

Still I love all these papers.  They seem to be more and more and at a faster frequency.  People need to first start talking and thinking about Bitcoin so while some of the conclusions may be dubious they are at least thinking about Bitcoin.  That is huge.

+1 I mentioned this to that guy on google+ who held a TED speech on Bitcoin that:

6. Another great thing about Bitcoin is that is governed by true free market forces. Finally we have a real experiment, which can't be manipulated in anyway that will show us once and for all that freedom is the best way for a society to govern itself and that all the retarded economic theories out there about how we need a government to regulate or tax and provide certain services, how we need a central bank to monitor the fiat currencies, how we need the bankers to facilitate trade will be put to rest. And good riddance, I will happily dance on these theory's graves.

It doesn't matter what economic fallacies they believe, we now have a real experiment that will show good evidence to what the reality is. So as long as more and more people are talking about the concept even if coming to wrong conclusion on it's economic repercussions that's fine by me!

[cryptoanarchist]

another example of how researchers shouldn't make economic assumptions:

"Hoarding: a moral hazard? Bitcoins much more than any other currency in existence
derive their value from the presence of a live, dynamic infrastructure loosely constituted
by the network of verifiers participating in block creation. Because of their appreciation
potential, bitcoins will tend to be saved rather than spent. As hoarded bitcoins vanish
from circulation, transaction volume will dwindle and block creation will become less
profitable (fewer fees to collect). If circulation drops too much, it can precipitate a loss
of interest in the system, resulting in “bit rot” and verifier dearth, until such point that
the system has become too weak to heal and defend itself."

they've made the conclusion that price will rise but neglect the fact that as price rises more participants will enter the market especially if its a good idea thus increasing tx's that will maintain miner profitability.  does the LBMA suffer from a dearth of gold future trading from gold hoarding?

"Economic motivation. The strong deflationary characteristic of Bitcoin further compounds the problem. On the one hand, Bitcoins are a currency poised to explode in
value, ceteris paribus, as already discussed; and hence so will the incentive for theft.
On the other hand, the way deflation comes into play, driven by a hard cap on the money
supply, will all but eliminate the money-minting incentive that currently draws in the
many verifiers that by their competition contribute to make block creation a difficult
problem. With this incentive dwindling, laws of economics dictate that the competitive effort devoted to verifying transactions and creating blocks will diminish. In other
words, while block difficulty may continue to increase for some time into the future, it
will eventually start to decrease relatively to the power of the day’s typical PC. History
revision attacks will thence become easier not harder."

as was said before, tx fees should provide plenty of incentive to mine as will the potential for further price appreciation.  do gold mining companies have a problem with not getting paid tx fees?  no, they mine for appreciation.

*facepalm* This is why I tell people that colleges, especially Ivy League schools, are more about brainwashing people than actually educating them. They shove Keynesian nonsense into the soft heads of kids who just left their parents' house and haven't lived in the real world yet. They make them memorize false premises that become etched in their heads. The better they are at memorizing bullshit, the more likely they are to be the next Paul Krugman.

Apparently, Stanford doesn't even teach logical fallacies to their students.