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Author Topic: market effect of a catastrophic design flaw  (Read 5844 times)
chaord
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August 23, 2010, 09:03:21 PM
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I apologize if this has been brought up before.  If it has, please feel free to merely direct me to the applicable thread.  As an investor, one of the hurdles I am having a hard time getting over is the following:  What happens to the market for bitcoins when/if a vastly superior design is found? What is the probability of an unquestionably superior design being found?

To talk about this, let's propose a hypothetical extreme.  Obviously, the technology for this is not possible right now, but I think it makes for a good argument, so please bear with me.  Let's say there is a new P2P currency that comes about, BitBox.  BitBox is a shoe-box and internet enabled device. Inside your BitBox are "goldbugs" which, when you put a gold coin, bullion, etc into the box they literally eat the gold and digitize it to be sent to someone else's BitBox.  Of course, that means that the goldbugs in the recipients BitBox regurgitate gold, but you get the point.  Essentially, what would happen to the value BitCoins if we could literally digitize/destroy gold in one location of the world and recreate it in another?  Assuming the existing BitCoin features stay in place that allow for a desired level of anonymity, I feel that many of us would prefer BitBox to BitCoin.  Of course, I know this sounds ridiculous.

So the question is this: if BitBox existed, would the market value of BitCoins literally drop to zero?  I tend to argue yes.  There would be a mass exodus from BitCoin over to BitBox (because BitBox has successfully bridged the virtual-to-real gap).  So, from an investing standpoint this is not good as the buyer's market for BitCoins would literally cease to exist, and anyone long BitCoins would be left with a very tired CPU and some worthless data.

Being an entrepreneur, I want to provide solutions.  Perhaps there will be a market for "design insurance."  This would be very similar to a Put Option.  What should the premium be for, say, a 10 year Put Option at the current exchange rate?
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August 23, 2010, 09:42:17 PM
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I apologize if this has been brought up before.  If it has, please feel free to merely direct me to the applicable thread.  As an investor, one of the hurdles I am having a hard time getting over is the following:  What happens to the market for bitcoins when/if a vastly superior design is found? What is the probability of an unquestionably superior design being found?

The risk of a vastly superior design would be unlikely to collapse bitcoin, because stakeholders still likely consider their bitcoins to have value -- and that's the fundamental underpinnings of any currency including bitcoin, shared idea of value.

It is more likely that a sudden bitcoin collapse could be triggered by a software flaw that permits trivial minting / generating / copying of bitcoins.

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August 23, 2010, 09:51:01 PM
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What is the probability of an unquestionably superior design being found?


That would be impossible to quantify within a finite timeframe, but approaches 1 with infinite time.  A better question would certainly be, "what are the odds that Bitcoin survives for the 120 year inflationary period?"  I would, honestly, give Bitcoin some low odds at this point, for a number of reasons.  But that isn't really important for the adoption of Bitcoin in the present.  After all, the US FRN has not lasted 120 years yet.

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 Of course, I know this sounds ridiculous.


Indeed.  If a true "matter de/compiler" were ever developed, there would likely never again be a need for a currency as such.  The 'scarcity' aspect of products sold for such currencies would be forever destroyed, and limited only on the availability of energy.

Quote


So the question is this: if BitBox existed, would the market value of BitCoins literally drop to zero?  I tend to argue yes.  There would be a mass exodus from BitCoin over to BitBox (because BitBox has successfully bridged the virtual-to-real gap).  So, from an investing standpoint this is not good as the buyer's market for BitCoins would literally cease to exist, and anyone long BitCoins would be left with a very tired CPU and some worthless data.


I would say, no.  If only because the timeframe for the adoption of any widespread technology does not occur instantly or equally across an entire economy.  Bitcoins my suffer via irreversable decline, but there would not be a sudden, or mass, exodus if the value was already reflected within Bitcoin.

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Being an entrepreneur, I want to provide solutions.  Perhaps there will be a market for "design insurance."  This would be very similar to a Put Option.  What should the premium be for, say, a 10 year Put Option at the current exchange rate?


Again, an unquantifiable risk over any finite time frame.  This would be vastly more difficult than, say, earthquake insurance; considering that there is no comparable precedent to base any calculations off of.  I would seriously doubt that any costumers could be found, even if the risk could be defined.

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August 23, 2010, 09:55:38 PM
 #4

I was thinking about options, not for 10 years, but more like 10 days. Maybe moving longer out over time.

They could go both ways, people who want to lock in a row rate in case value skyrockets and people who need to hold a bunch for some reason mitigating their risk with a guaranteed floor. Ensuring the worthiness of counter-parties is probably the biggest issue.

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chaord
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August 23, 2010, 10:05:33 PM
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The risk of a vastly superior design would be unlikely to collapse bitcoin, because stakeholders still likely consider their bitcoins to have value -- and that's the fundamental underpinnings of any currency including bitcoin, shared idea of value.
I'm not sure I agree with this, unless you mean that the stakeholders will likely still consider their bitcoins to have value temporarily.  However, if it is well known, even amongst stakeholders, that a superior currency exists they will gradually migrate towards it (even if they tell each other otherwise).  Therefore, in the long run (could be days/weeks/years) bitcoins would become worthless, it might just be more orderly and gradual than instantaneous, but ultimately someone will be stuck with a bunch of worthless data (no offense to Satoshi and the devs).  And I'm just pointing out that this is not the case with a physical currency/commodity like gold.  Even if the entire world abandoned gold as a marketable commodity, the person left holding all the gold could still use the gold for something.  Gold still has a, albeit limited, use value even in the absence of an exchange value.  I can't come up with a use value for bitcoins if there is no exchange value.

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It is more likely that a sudden bitcoin collapse could be triggered by a software flaw that permits trivial minting / generating / copying of bitcoins.

I agree that this is the more likely scenario, at least in the short run.  So does this mean that by investing in bitcoins, we are basically betting on our collective ability to write bug and exploit free software? Wink
chaord
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August 23, 2010, 10:08:57 PM
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I was thinking about options, not for 10 years, but more like 10 days. Maybe moving longer out over time.

They could go both ways, people who want to lock in a row rate in case value skyrockets and people who need to hold a bunch for some reason mitigating their risk with a guaranteed floor. Ensuring the worthiness of counter-parties is probably the biggest issue.

Yeah.  I feel like every thread eventually devolves into something along the lines of "how do we trust others creditworthiness?"  With regard to the options, yes I agree that shorter time-frames make more sense.  Of course a full continuum would be ideal.
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August 23, 2010, 10:35:23 PM
 #7

I was thinking about options, not for 10 years, but more like 10 days. Maybe moving longer out over time.

They could go both ways, people who want to lock in a row rate in case value skyrockets and people who need to hold a bunch for some reason mitigating their risk with a guaranteed floor. Ensuring the worthiness of counter-parties is probably the biggest issue.

Then you are just moving towards a trusted third party model.  Is suspect that all such models will be represented within Bitcoin by the time the Bitcoin economy is as large as half that of Paypal or the online segment of the credit card companies.

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank...sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

- Carroll Quigley, CFR member, mentor to Bill Clinton, from 'Tragedy And Hope'
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August 23, 2010, 10:42:39 PM
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I'm not sure I agree with this, unless you mean that the stakeholders will likely still consider their bitcoins to have value temporarily.  


All valuations are temporal.

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And I'm just pointing out that this is not the case with a physical currency/commodity like gold.  Even if the entire world abandoned gold as a marketable commodity, the person left holding all the gold could still use the gold for something.  Gold still has a, albeit limited, use value even in the absence of an exchange value.  I can't come up with a use value for bitcoins if there is no exchange value.


This is one of the best descriptions of intrinsic value that I have ever seen outside of academia, and by far the most susinct even within academia.

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So does this mean that by investing in bitcoins, we are basically betting on our collective ability to write bug and exploit free software? Wink

No.  As evidenced in the recent transaction overflow attack that required the upgrade to .3.10, the system is designed to be as secure and autonomous as is reasonably possible, but there is always someone watching the flow of funds.  There is always the human element.  If that human element is ever completely removed, *then* we will be betting on a collective ability to write exploit free software.

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank...sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

- Carroll Quigley, CFR member, mentor to Bill Clinton, from 'Tragedy And Hope'
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August 23, 2010, 11:38:40 PM
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No.  As evidenced in the recent transaction overflow attack that required the upgrade to .3.10, the system is designed to be as secure and autonomous as is reasonably possible, but there is always someone watching the flow of funds.  There is always the human element.  If that human element is ever completely removed, *then* we will be betting on a collective ability to write exploit free software.

Yeah. During the overflow crisis I was thinking how there are two separate parts to Bitcoin. There is the "community agreement" on the rules and such and there is the software that we expect to enforce them for us. As long as the agreement part is strong we can handle temporary coding problems. And I have every reason to think that it will stay strong since a change without near consensus wrecks the thing for nearly everyone which makes getting any kind of support for a fundamental change that isn't super obviously best nearly impossible (I'm talking about like changing the coin value of a generate or something).

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August 24, 2010, 12:28:21 AM
 #10

I apologize if this has been brought up before.  If it has, please feel free to merely direct me to the applicable thread.  As an investor, one of the hurdles I am having a hard time getting over is the following:  What happens to the market for bitcoins when/if a vastly superior design is found? What is the probability of an unquestionably superior design being found?

There are things vastly superior to gold bullion or even ebay, but the two are still going stronger than ever.  The thing that will make bitcoin valuable is not a superior design but how widely it is accepted as a currency or commodity.

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August 24, 2010, 12:42:50 AM
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The risk of a vastly superior design would be unlikely to collapse bitcoin, because stakeholders still likely consider their bitcoins to have value -- and that's the fundamental underpinnings of any currency including bitcoin, shared idea of value.
I'm not sure I agree with this, unless you mean that the stakeholders will likely still consider their bitcoins to have value temporarily.  However, if it is well known, even amongst stakeholders, that a superior currency exists they will gradually migrate towards it (even if they tell each other otherwise).  

There are many things vastly superior to gold, but it continues to go up in value.  When people are looking for a safe place to store their wealth they are not analyzing technical merits.  They instead look at the historical value, which is exactly why we are having this conversation right now.  Bitcoin is new and people are concerned about its future value since it has no history.
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August 24, 2010, 03:35:42 AM
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There are many things vastly superior to gold, but it continues to go up in value.  When people are looking for a safe place to store their wealth they are not analyzing technical merits.  They instead look at the historical value, which is exactly why we are having this conversation right now.  Bitcoin is new and people are concerned about its future value since it has no history.


Well said!  That is precisely one of the reasons why we are having this conversation.  However, I'm still having trouble getting over the fact that even if paper USD completely loses all exchange value, it still has at least the intrinsic value of the paper it is printed on.  Granted, this would be a near zero value.  It could, for example, be burned to provide heat/warmth.  Now that's what I call going up in smoke!  Wink

On the contrary, I can't seem to find any intrinsic value for bitcoins whatsoever.  Is this correct?  Historically all monies have started first as some commodity/good with at least some intrinsic value.  Are bitcoins, however, the very first money with purely extrinsic initial value?
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August 24, 2010, 04:07:29 AM
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On the contrary, I can't seem to find any intrinsic value for bitcoins whatsoever.  Is this correct?  Historically all monies have started first as some commodity/good with at least some intrinsic value.  Are bitcoins, however, the very first money with purely extrinsic initial value?

Using your example of "intrinsic value", what sort of intrinsic value do you feel gold bullion has?  I've never seen a gold coin do anything other than sit in a safe.
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August 24, 2010, 04:29:11 AM
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There are many things vastly superior to gold, but it continues to go up in value.  When people are looking for a safe place to store their wealth they are not analyzing technical merits.  They instead look at the historical value, which is exactly why we are having this conversation right now.  Bitcoin is new and people are concerned about its future value since it has no history.
This seems like a point today, but 2.5 years ago I heard people making the same argument in favor of investing in California real estate.
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August 24, 2010, 04:42:40 AM
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The premise of this thread is spot on, even if the examples are slightly weak.

You propose that some one comes up with a "better" bitcoin. However, that is not required. They need only come up with a "more accepted/useful" bitcoin. That is not so far fetched as the forum consensus would point out.

For example, the current bitcoin implementation is very popular among Crypto-Anarchists and libertarian revolutionaries. As an investor you are betting that this community can sway the masses to support "their idea" of better money.

A few days ago there was someone of a more liberal bent that proposed some monetary policy changes that were "fairer" from a liberal perspective.

Others have proposed changes that seem better if you prefer the idea of a zero inflation/deflation money.

All could be implemented with minor changes to the bitcoin code base. (I am a coder by trade.) So as an investor you would be betting on which group is more likely to build the most valuable consensus.

Unless you buy into the idea that there is a build in demand for bitcoins just because they exist as a limited commodity. In that case, I've got some things I think you'll be interested in... 
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August 24, 2010, 04:43:56 AM
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On the contrary, I can't seem to find any intrinsic value for bitcoins whatsoever.  Is this correct?  Historically all monies have started first as some commodity/good with at least some intrinsic value.  Are bitcoins, however, the very first money with purely extrinsic initial value?

Using your example of "intrinsic value", what sort of intrinsic value do you feel gold bullion has?  I've never seen a gold coin do anything other than sit in a safe.


By intrinsic value, I mean that gold can be used for something other than coins or currency (decoration, electronics, etc).  Even currency printed on paper, the paper itself could be burned for heat or to make a giant papier mache house (lol).  In both of these situations, obviously, the use value of the currency is nearly negligible compared to the exchange value.  But the point is that there is a use value, however small.  So before a "medium" can be elevated to a "medium of exchange" history has required that medium to have at least one use.  What I'm wondering is whether this requirement is law or merely a historical suggestion?

Of course, if we can find a non-exchange use for the Bitcoin data, my question would be quite irrelevant.  For example, (i'm speculating) in the industry of data destruction (analogous to the paper-shredding industry), maybe bitcoin hashes are superior to seed data for permanently deleting valuable information?  I'm reaching here...but I hope my point is clear.  
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August 24, 2010, 04:53:24 AM
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The premise of this thread is spot on, even if the examples are slightly weak.

Haha, good examples are not my forte.  Perhaps ridiculous examples are. Smiley

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All could be implemented with minor changes to the bitcoin code base. (I am a coder by trade.) So as an investor you would be betting on which group is more likely to build the most valuable consensus.
You are spot on with investor sentiment here.  Well said.

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Unless you buy into the idea that there is a build in demand for bitcoins just because they exist as a limited commodity. In that case, I've got some things I think you'll be interested in...  
I definitely would be interested, as long as there is a use value for which bitcoin data is superior to any other string of seemingly random 1's and 0's Wink. Edit: Actually, I'm interested either way.  Let's hear it.
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August 24, 2010, 07:36:52 AM
 #18

I didn't read all answers, so sorry if I'm being repetitive, but...

So the question is this: if BitBox existed, would the market value of BitCoins literally drop to zero?  I tend to argue yes.

I tend to argue no. I find bitcoins better than gold, even if gold could be made "digital". That's because one day bitcoin inflation rate will be lower than gold.
I read somewhere that gold inflation rate is around 2% a year. I don't know when bitcoin inflation will decrease to such rate, but one day it will.

Something better than bitcoins, however, could come out, yes. Then people would slowly migrate, I suppose.

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August 24, 2010, 08:16:14 AM
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chaord, have you read the Bitcoin does NOT violate Mises' Regression Theorem thread?

So the question is this: if BitBox existed, would the market value of BitCoins literally drop to zero? 
It depends on how many people are using Bitcoins. If millions of people are still using Bitcoins, I doubt it.

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Being an entrepreneur, I want to provide solutions.  Perhaps there will be a market for "design insurance."  This would be very similar to a Put Option.  What should the premium be for, say, a 10 year Put Option at the current exchange rate?
Whatever the market will pay?
What is the premium on whether you'll be around in 10 years for us to exercise the option?
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August 24, 2010, 01:24:41 PM
 #20

I didn't read all answers, so sorry if I'm being repetitive, but...

So the question is this: if BitBox existed, would the market value of BitCoins literally drop to zero?  I tend to argue yes.

I tend to argue no. I find bitcoins better than gold, even if gold could be made "digital". That's because one day bitcoin inflation rate will be lower than gold.
I read somewhere that gold inflation rate is around 2% a year. I don't know when bitcoin inflation will decrease to such rate, but one day it will.

Something better than bitcoins, however, could come out, yes. Then people would slowly migrate, I suppose.

I think bitcoin once widely adopted would be the absolute best currency ever. And if someone invents a way to transmit physical gold through the internet I will sell all bitcoins immediately. Gold would then be such an insanely good currency, it just blows my mind.

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