[Cryptography] Digital currencies

Ray Dillinger bear at sonic.net
Thu Jun 23 19:29:08 EDT 2016

On 06/20/2016 06:33 AM, Phillip Hallam-Baker wrote:

> Harber Stornetta hash chain notaries are inherently stable. Using as much
> electricity as the island of Malta does to distribute the ledger is an
> abomination. Ultimately BitCoin is betting on the ultimate dotcom bubble,
> the only value in the currency is that people want the currency.

Ultimately the efficiency (and expense) of any payment system must
be measured by the resources it uses to conduct each transaction.

Block chain based currencies have high expenses in the 'salary'
paid to miners, most of which is inevitably passed on to electric
utilities for power that could have been used for more obviously
valuable purposes.  And although it's mostly 'donated' at this
point, the bandwidth, computing, and storage costs are fairly
substantial. Other cryptocurrency schemes could possibly reduce
the mining expenses substantially, but the bandwidth and storage
costs will always be orders of magnitude greater than those paid
by conventional payment systems.

Conventional currencies, on the other hand, bear a different but
not inconsequential set of expenses.  Conventional payment systems
have to measure the salaries and maintenance costs of people and
institutions whose function is to keep track of transactions and
prevent deception and fraud.  Also, they must measure the expense
of wholesale deception and fraud that they pay (the 'bezzle' that
drops out of the system whenever large-scale fraud and unsound
practices are corrected, whether by collapse or regulative action).
Wholesale fraud and deception can be terrifyingly expensive.  When
regulators have been on the take, hobbled by unbelievably stupid
laws or lack of laws passed or not passed by bought-and-paid-for
legislators, incompetent, or otherwise spectacularly ineffective,
as in the 2008 crisis, the bezzle dropped due to wholesale fraud
can be measured in hundreds of billions, or globally trillions,
of dollars.

Both systems, unfortunately, are subject to retail fraud and
deception - the activities of individual criminals, which
amount to a more or less constant drag on both systems. But
that amounts to a fairly small expense, and for conventional
payment systems it is still shrinking as financial security
gets harder to penetrate.  For block chain based systems, I
don't see it dropping much - people are not getting much harder
to phish, their passwords are only marginally better than fifteen
years ago, home computer security isn't getting (much) better
anytime quickly, and smartphone app security is laughable at
this point.

The ability to levy fines, reverse transactions, and/or seize
assets is a huge reduction of the expense of retail fraud on
conventional systems - but to some extent it only transfers the
expense to the wholesale fraud that occurs when these powers
are abused for that purpose.

If that were the full basis of comparison, it might very well
be hard to pick which system is more efficient.

Unfortunately, as far as I can see, in any universe where the
block chain based solution scales, transactions actually on
the block chain become so expensive that they are limited to
very large transactions.  Smaller transactions would have to
be handled "off-chain," which ultimately opens up the system
to the traditional model of banking - lending at fractional
reserve, closed ledgers, individual transactions not recorded
anywhere they can be checked or proven immutable, etc.

In short, you cannot scale the block chain solution without
reenabling wholesale fraud and deception, and the expense it


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