[Cryptography] On Security Architecture, The Panopticon, And "The Law"

[ianG]

As I've mentioned in the past, Bitcoin is the bleeding edge of 
cryptography.  That's because it is successfully launching crypto on a 
wide scale (like skype or ssl) and it is related strongly to money (so 
the theft / arbitrage activity gives us a strong indicator of strength).

It's therefore one of the small handful of important crypto projects to 
study -- at all levels.  So we're likely to drift from crypto to some 
extent...  but it is important to understand what the business does to 
crypto, in order to understand what crypto can do for a business.


On 31/12/13 00:45 AM, John Kelsey wrote:
> Distinguish the different uses of bitcoins.  For buying things online, yeah, there's a demand for bitcoins based on wanting to be able to do online transactions.  To the extent there are transactions that lots of people prefer to do in bitcoins (whether legal or illegal), there will be a certain amount of demand for bitcoins based simply on how many bitcoins are either involved in a transaction right now, or are being held ready to be used for a transaction soon.  But bitcoins are online, and their volatility makes them an awful store of value.  (They can be a speculative investment, but they aren't where you'd want to park your retirement fund on your 60th birthday.) They're too volatile to be a good unit to price things in, too.


Demand is almost entirely speculative as far as I can see.  It may move 
across to retail trading, but I suspect that's in the future.  We're 
still at the point where one retailer == news == hype, which means there 
is almost zero retail possibility.

The next signal to watch for is whether a retailer's stock price jumps 
on the news...  Does anyone remember the mid 90s, when a company's price 
would bounce when they announced a website?  If that starts to happen, 
we have a mass movement, but I think we're a long way from that.


> If bitcoins become a very important way to conduct business online, and they remain as volatile as they are now, I expect people will buy bitcoins only when they need to do an online transaction.  Their actual wealth will be kept in dollars or euros or something.  The inherent traceabiliity of Bitcoin probably creates more demand for holding bitcoins, as well, oddly enough. (You need to go through a laundry or something to get any decent anonymity, which means more latency in your purchases, which means more demand for bitcoins.)

The volatility is a function of how there are a few traders with large 
hordes and how there are few newcomers buying tiny amounts.  When that 
smooths out -- either by disbursement of the large hordes so the price 
pushing disappears, or by larger numbers of small traders -- then the 
volatility will lower.


> I am pretty skeptical that much of the economic theory around monetary inflation or deflation applies very cleanly to bitcoins, given that it's all online, with very low transaction costs, and is likely used only to do specific transactions.


The transaction costs of Bitcoin are actually surprisingly high, around 
the $50 mark.  This is mostly (99%) picked up in the miners' rewards at 
the moment, and direct transaction fees are low or zero.  But as the 
miners' rewards for blockchain calculation slow down (halving every 
period) there will be more incentive for higher fees.  The higher fees 
will then start to feel like direct transaction costs.

 From the history of e-gold, transaction fees being somewhat lower than 
say mainstream payment systems, gave about a 10 times 'velocity' 
advantage.  Cash at bank is typically measured at around a 50 days 
velocity, the period over which transactions equal the entire stock of 
money, whereas e-gold was doing 4-8 days, sometimes peaking at 2.

But e-gold's fees were a lot lower, 0.5% capped at 50c.

Inflation / deflation at the moment will be swamped by newcomers into 
the market.  This is the reason why nobody notices the transaction 
costs, newcomers are driving the price up.  In a state-based economy, 
newcomers typically are limited to immigration, birth/death increases 
which is 0-3% in most cases.  Tiny, not noticed.  And, GDP growth of 
1-3% is typically snaffled by government.

In contrast, Bitcoin is all over the map, there isn't a lot of point in 
trying out inflation theories :)



iang