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Author Topic: The Bitcoin Economy  (Read 802 times)
ben-abuya
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July 24, 2012, 10:45:33 PM
 #1

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.

http://lamassubtc.com/
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TheBitcoinChemist
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July 24, 2012, 10:54:36 PM
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While this is generally a good piece, your claim that wagers on the future price of gold is equal to that of actually owning gold is false both in fact (obviously) and in practice.  Although this is economicly similar to a futures market, owning physical gold has no counterparty risk, while futures in general and wagers on the gold price most certainly do have counterparty risks involved.
ben-abuya
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July 25, 2012, 02:26:54 AM
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While this is generally a good piece, your claim that wagers on the future price of gold is equal to that of actually owning gold is false both in fact (obviously) and in practice.  Although this is economicly similar to a futures market, owning physical gold has no counterparty risk, while futures in general and wagers on the gold price most certainly do have counterparty risks involved.

You bring up an interesting point. Betting on gold is not the same as having gold. In the case of gold, that might not be such a big deal, unless you're worried that the prediction market might fail and gold would remain. But if you're betting on oil, you might actually need the physical properties of the oil. That's why I brought up i2i markets. Maybe instead of buying oil from a huge company, you could buy it from a neighbor in small quantities, based on the prediction market price. Or maybe you could buy an ounce of gold from a neighbor, or someone across the country who mails it to you, all based on the prediction market price.

There wouldn't be any counter-party risk in the prediction market I described, because both sides would be putting up collateral in bitcoins as part of the market.

http://lamassubtc.com/
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July 25, 2012, 03:32:52 AM
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There wouldn't be any counter-party risk in the prediction market I described, because both sides would be putting up collateral in bitcoins as part of the market.

Hmmm, interesting.  This certainly wouldn't work once Bitcoin was larger than the island economy you described, but it certainly could help to bootstrap bitcoin closer to that goal.
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July 25, 2012, 04:23:25 AM
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There wouldn't be any counter-party risk in the prediction market I described, because both sides would be putting up collateral in bitcoins as part of the market.

Hmmm, interesting.  This certainly wouldn't work once Bitcoin was larger than the island economy you described, but it certainly could help to bootstrap bitcoin closer to that goal.

Well, the collateral doesn't have to be dead weight, you could get pretty creative with it. For instance, if both parties to the trade agreed to invest it, say in a 5% bond, they could both sign-off on that. Or they could put it on another bet they agree on. I imagine things will work differently than they do today, if the whole system is based on low trust and no legal mechanisms, but it might be workable on a grand scale.

http://lamassubtc.com/
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