I just found this piece I wrote over a year ago but never posted, and I figured it was worth posting now, since it's just as relevant.The Bitcoin Economy
Bitcoin is the opening shot in a new jurisdiction. The Bitcoin Economy is thriving in a jurisdiction outside that of any government. The jurisdiction of the Bitcoin Economy is ruled by math and not by violent force. The rules are set by competing software projects, and evolve based on what works. Bitcoin says “thou shalt not double spend.” And what happens if you double spend? Nothing. You can’t. The rules are akin to the rules of physics, not the rule of kings.
Today, the Bitcoin jurisdiction is a small island. There are few inhabitants, and we must leave the jurisdiction frequently and submit to governmental jurisdiction. As more of the economy is subsumed into the Bitcoin jurisdiction, it becomes a more powerful force, and government becomes weaker. For the Bitcoin project to succeed, we must find ways to move economies into this jurisdiction. We must also explore strategies to make the interface between the two jurisdictions safe and porous.Prediction markets
can furnish the Bitcoin Economy with many of the functions of finance, without requiring an interface to the government jurisdiction. This greatly expands the scope of the Bitcoin Economy, and provides an essential infrastructure for the rest of the economy.
The beauty of the prediction market, is that it confers almost all of the functions of finance to the Bitcoin economy, without requiring a departure from the Bitcoin jurisdiction.
Gold prices can be tracked on a prediction market. This means that one can essentially trade gold without having to purchase gold. Gold is a physical substance that must be under government jurisdiction, and so purchasing gold would require crossing over to that jurisdiction. Betting on gold lets one stay safely within the Bitcoin jurisdiction, while accomplishing the same goal. This discovery of the market exchange rate is the hard part; the ownership transfer of BTC for gold is an easy problem and involves only two casual individuals in many cases.
i2i (individual-to-individual, as opposed to business-to-business or business-to-consumer) describes the situation wherein large swaths of the economy are carried out by individuals trading with other individuals, rather than via large companies, corporations, and governments. The low transaction costs of the unregulated Bitcoin Economy make this more attainable, and it's an ideal interface between the Bitcoin jurisdiction and government jurisdictions.
Individuals carrying out small, ad hoc trades make onerous targets for government crackdown. They are hard to find in time and space, are low profile even if caught, and each crackdown has almost zero effect on the system as a whole. Even making an example of such a transaction with disproportional punishment would carry large public relations risks, since the crime would be a non-violent, low value, and fairly obscure transgression. The defendant would also likely be sympathetic, with no criminal record, and with a large, upstanding support network to defend him and raise awareness.
As large chunks of the economy migrate to i2i, governments lose control over those chunks, and it becomes difficult for them to enforce regulations and taxes on those chunks. This weakens governments further, making it increasingly difficult to maintain control while more and more of the economy migrates out of their jurisdictions. This is perhaps the greatest threat to authoritarian government that has ever materialized, and that's a pretty exciting thing to be a part of.