Less Wrong used to like Bitcoin before it was cool. Time for a revisit?

Gwern wrote an article arguing that Bitcoin is an ugly protocol : Bitcoin is Worse is Better. What does gwern think today?

I actually finished that a month or two ago, so it reflects my current sentiments. No events have substantially changed my opinion, and some reinforce them - for example, I thought it was very stupid for anyone to engage in finalization on Silk Road (releasing your money from escrow to the vendor before receiving anything), and indeed, a big vendor recently scammed buyers out of something like a hundred thousand plus dollars worth of bitcoins by requiring finalization and then absconding.

As with quantum computing itself, storing quantum money would require low enough error rates that you could successfully apply quantum error-correction (if error rates are too high, you introduce more errors during error-correction than you can correct). Before you hit this point you can't do the computations anyway, and after this point it is only a tiny bit harder to keep qubits around indefinitely. (Modern QKD works because you don't have to do any computations on the qubits, in addition to not having to store them.)

If you read the Wikipedia article, you should know that I didn't create Bitcoin but only described a similar idea more than a decade ago. And my understanding is that the creator of Bitcoin, who goes by the name Satoshi Nakamoto, didn't even read my article before reinventing the idea himself. He learned about it afterward and credited me in his paper. So my connection with the project is quite limited.

Needless to say, this is what Wei Dai / Satoshi Nakamoto would say if they were the same person.

One actionable topic that could be discussed: does the current price reflect what we expect Bitcoin's value to be?

The concept of RipplePay seems to require people accepting significant default risk from many people, for no compensation. The size of the risk accepted and the carrying capacity of the network are proportional, such that making it useful requires making the default risks large. The proponents suggest setting up lines of credit with your friends, but this seems like courting disaster; not only would I be risking both money and friendships, I'd have to pay for expensive due diligence, I'd have to occasionally offend people by signaling mistrust, and I'd be setting things up so that if I did go bankrupt (perhaps because I lent too much money to someone who defaulted), my social network would transform into angry creditors.

In exchange for all this risk, I gain nothing: I'm still using an inflating currency, I can't move large balances quickly or secretly, and I gain a constant chore of settling books with people. And after all that, I still need a traditional bank for value storage (since RipplePay is only attempting to solve the transfer). No thanks. RipplePay will never be anything more than a novelty used for tiny dollar amounts.

Well, for start the single centralized server is a huge liability, previous digital currency schemes have collapsed when the government sued/arrested/raided the central server for enabling money laundering.

Also, unlike bitcoins, IOUs aren't fungible; thus, there is a need to haggle over each transaction.

Note: log scale.

As this comment points out, the total combined hash rate of the entire bitcoin network is about 12 TH/s (source). So buying just one of these chips gives you >7% of the current total hashing power. In theory this is about 21 BTC (or 130+ USD) per hour, which means you break even after 230 hours, or fewer than 10 days!

Assuming no one else is doing the same thing.

This now exists at BetsOfBitcoin. I signed up one exactly one month ago.

I warn people against this site. Their adjudication of bets is highly dubious and their customer service just screams "sham".

I no longer bet at the site.

Except it's not really a prediction market. You could know the exact probability of an event happening, which is different from the market's opinion, and still not be able to guarantee profit (on average).

I have a strictly academic interest in this subject. What were you thinking of?

It's actually a good idea to think about this problem. There must be some way to make the hashing contest useful for some other purpose; or if not, a better hash than SHA can be picked (like memory-bound hash functions).

Why would anyone switch? Well, SHA will be broken sooner or later. When that happens, people will be interested in switching to a Bitcoin 2.0 (eg. by destroying regular bitcoins in exchange for new bitcoin2.0s).

EDIT: and clean up other parts of the protocol: http://en.bitcoin.it/wiki/Hardfork_Wishlist

There have been several attempts at this. They are generally seen as scams. There are a few that attempt to have actual added value (I personally think Namecoin has potential), but most just tweak the constants.

There are several reasons why we don't make coins out of precious metals, and also a few why we should. The wastefulness of resources is relatively low down the list.

The point of a commodity-backed currency is to provide stability in the money supply. Provided the commodity is widely regarded as valuable, but isn't likely to change in raw value in the long term, having x amount of money represent y amount of that commodity means that your money is a safe store of wealth. If you want to earn lots of money now and spend it in the future, you can be confident that inflation isn't going to devalue your savings in the interim.

This is one of the reasons the price of gold is negatively correlated with equity performance. In Bear markets, people buy gold because they believe it's less likely to lose value than holding your wealth in stock or currency, and generally they're correct to hold this belief. In part, this then becomes a self-fulfilling trend, as gold itself becomes a good investment at the start of market decline. Partly because of this, you'll find armchair investors are especially keen on the Gold Standard, because that's what they think money is for.

There are problems with this, though, namely that inflation isn't just a monetary phenomenon, and currency isn't just a store of wealth. Money is also a medium of transaction. There has has to be enough money, in sensible units, to represent the value of all the goods and services that are traded with it, so as the economy grows, there has to be a proportional increase in the money supply, otherwise your currency will appreciate to unwieldy levels and you'll suffer from effective deflation.

Gold is a bad candidate for fulfilling this function of money. There's a finite amount of it. We've already mined most of what's easily obtainable, and eventually any given good or service will be represented by an increasingly small quantity of gold. Any changes to the gold supply are going to be sudden shocks to the economy (say I irradiate a whole bunch of it like in Goldfinger, we discover a massive new supply of it, or a huge gold asteroid drifts into Earth's orbit). Also, part of the usefulness of gold as a basis for currency was that it wasn't used for a whole lot else. As various industrual uses were found for it, that impacted both those industries and the currency. If we found out tomorrow that eating gold cured cancer, increased penis/breast size, and gave people superpowers, that would be bad news for a gold-backed currency.

The purpose of the bitcoin mining process is to provide a stable supply of bitcoin. Since each block adjusts the difficulty of producing the next based on the efficacy of mining currently taking place, the production of bitcoin should be continual but stable, (at least until we mine them all).

I am still thinking about the ramifications of bitcoin, and what properties it has as a currency, but the method of bitcoin production is one of the things that makes it novel and special as far as currencies go. It can function as both a store of wealth and a medium of transaction without those functions necessarily working against each other as they do with traditional commodity-backed currencies.

There's a reason we don't make coins out of precious metals.

You do understand why Bitcoin is analogous to making coins out of precious metal rather than fiat, and what purpose the mining system serves, right?

Big oof here.

I felt the same way. Was curious about what sentiment was back then, because I very often see people making predictions using the early years as some kind of first cycle. I really do not think it is analogous.