[cryptography] Bitcoin observation

Alfonso De Gregorio adg at crypto.lo.gy
Fri Jul 8 13:06:29 EDT 2011


On Thu, Jul 7, 2011 at 11:43 PM, Jon Callas <jon at callas.org> wrote:

> Consider a participant who is also a payment processor, similar to a credit card, etc. They're a financial institution, so they're certainly interested in assets and commodities, but they also receive money on normal transactions and do not get this when bitcoins are directly transferred. (Obviously, they could bill transactions in bitcoins just as easily as dollars or euros or sterling, too.)
>
> Assume they get 2% of a transaction. This means that (hand wave) their Highlander Function is proportional to 50. In other words, if assassinating a bitcoin causes 50 transactions to move to traditional currencies, then the cost of killing it is zero.

Very good point.

> But this institution also profits by instability. If the price of a bitcoin fluctuates wildly, then they are less attractive as a currency to small holders.
>
> For example, let's assume 5% wild fluctuation. I'll put this in mathematical terms as saying that if its nominal price is 100, then the actual price is a random function between 95 and 105. If I am a receiver of bitcoins, I deal with this simply. I just say that the value of a bitcoin is 95. I push the cost of fluctuation to the payer. I'm not interested in anything else -- after all, I have the supply and if the supply is of something that is attractive for you to use a bitcoin for, I just make you eat the fluctuation. Note that the manipulator can also use the fluctuation as a lever to get bitcoins cheaper. They keep querying the price of a bitcoin and buy it if it's (e.g.) 98 or less, thus getting 2% profit on them.

The Forex market, a true highlander :-)

> It is my intuition that nation states of all stripes aren't going to like them. Some set of them would be happy to let the banks and speculators take care of it. Some of them would engage in actual hacking to hurt the currency, and the interesting property that destroying a bitcoin is a worthwhile attack makes it even more interesting.

Yes, Bitcoin may find itself in an uncomfortable position.

With its decentralized money issuing protocol and a built in mechanism
to increase the money supply at a predetermined rate (aimed at
controlling the inflation), Bitcoin does not provide a mechanism able
to promote stable money.

The peer-to-peer architecture sidesteps financial institutions and
central authorities, who in turn might become interested in eroding
the Bitcoin market share -- though tiny it is today.

At the same time, the lack of mechanisms able to give stability
exposes Bitcoin to manipulation attacks, exploiting its inherent
volatility.

This has an impact at least on Bitcoin purchasing power. As a matter
of fact, the Bitcoin exchange rate with conventional currencies can
swing wildly, as Bitcoin value in the future is speculative (and it
can't be determined by past paid prices). What drives is price is
demand and, as long as Bitcoin is not wildly adopted, the demand can
drop eventually to zero (i.e., no nation state asks to pay taxes in
Bitcoin, no merchant is required to trade in Bitcoin -- though if they
will do is going to be interesting).


> What if the Western governments gave Lulzsec letters of marque and told them they'd pay them by the lul? This would make a great movie plot. The merry hackers get caught and then turned loose on the (according to that plot) bad guys.

Definitely!


>        Jon
>



Alfonso

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