[cryptography] bitcoin scalability to high transaction rates

Ian G iang at iang.org
Wed Jul 20 09:03:54 EDT 2011


On 20/07/11 9:08 PM, Eugen Leitl wrote:
> On Wed, Jul 20, 2011 at 11:56:06AM +0200, Alfonso De Gregorio wrote:
>
>> I'd better rephrase it in: expectation to have "money backed by
>> bitcoins" exhibiting all the desirable properties of a perfect
>> currency (ie, stable money) are greatly exaggerated.
>
> The question is not whether it's perfect, but whether it's good enough.

The question is whether it is even close.  It's pretty clear it can 
never be stable enough to be a currency.  Pretty much all currencies 
lean on some form of stability;  BitCoin does not, and suggests "when 
it's big enough, supply v. demand will stabilise it..."

Only gold/silver has ever pulled off that trick, and emulating gold is 
not what you'd call a winning strategy.  Actually there's a name for it: 
  alchemy.  BitCoin is cryptographic alchemy.


> BTC is basically a global version of http://en.wikipedia.org/wiki/Local_currency
> or http://en.wikipedia.org/wiki/Alternative_currency and hence
> isn't something completely new.


Sure, and those things have rules too.  Local currency is local; 
BitCoin is not.  The difference is that in local currencies we can rely 
on the trust and reputation networks to stop people stealing.  In 
BitCoin, we can't.  In local currencies, when the currency moves outside 
the very tight trust circle where everyone knows each other, they fail, 
because someone moves into the currency who has no reputation to lose.

(Alternative currency is just a term used by the regulated currency 
people, it doesn't really tell us anything.)

> It would be intesting to see whether BTC's successors
> could improve the scheme, by allowing a (subexponential)
> growth, built-in devaluation to encourage circulation and
> discourage hoarding (this would be probably hard to
> do), and so on.

Not really.  It's problem isn't its mathematics or its release rate, but 
that it has no ground to stand on.  Which is to say, if people want to 
bid it to the sky, they can.  If people want to dump it to the bottom of 
the ocean, they can too...

With a currency that is backed on something stable, the stable commodity 
forms an anchor around which value gyrates.  So, it is worth holding if 
the price goes up too low, because you can always use it for its stable 
thing.  E.g., in US of A, the american people are quite happy to hold 
$$$ because they can pay their taxes with it.  They really don't care 
that much what the exchange rate is doing, up or down.  This anchor 
means USD is a good currency.

Possibly what people don't realise is that it is very easy to corner a 
market.  However, the fundamental value of the unit (the commodity) will 
stabilise and punish the speculator who corners the market.  With 
BitCoin there is no underlying anchor to punish the person cornering the 
market, so the games will be excessive, and volatility will be too high 
to be "current."



iang

PS: having said all that negative stuff, I quite like BitCoin.  If it 
got the econ right, we'd be having different conversations :)



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