[size=8pt]This first post is subject to change. It will be edited time and time again, to reflect the overall theme and conclusions I arrive at when scribbling my ideas down. The goal is to formulate a vision of what the future could be like.[/size]
EDIT: Sorry for the poorly written text. I got sinusitis, it hurts like h3ll & I have a hard time focusing. Will clean it up l873r.
User story: The Decentralized Trustless Financial Network
Go downtown, for a cup of coffee. Happen to walk by one of those amazing ATM’s based on open source software and off the shelf hardware.
Decide to buy some crypto currency. Put a dollar in the slot and select Peercoins from the menu. The ATM scan the QR code on my cellphone Peercoin wallet and just a moment later I receive my coins.
I sit down with my cup of coffee. Little to do I pull out my phone and launch the Bazaar [1] app. I’ve heard great things about PizzaCorp and decide to see if I can find some PizzaCorp Peershares on the bazaar. Sure enough. I decide to exchange my newly bought peercoins for some PizzaCorp Peershares.
I’m really pleased. Now I will be receiving dividends in a currency which I then can use to stake mine with and earn some interest. The perfect way of allocating capital.
Everyone can do this, because it is an opt-in ecosystem that everyone can use and there is not a single point of centralization anywhere in this ecosystem so it can not be shut down.
[1] http://www.cryptocoinsnews.com/2014/02/05/open-transactions-bazaar-real-silk-road-2-0/
Speculations about the future of crypto finance: Peershares
When Peershares gain market share, entrepreneurs will realize that its an excellent way to finance their projects at a low cost. To lower the barrier of entry, hosting sites will mushroom and they will offer more or less “one click Peershares launch”. In time this new industry will mature and the hosting sites will develop into full fledged companies that not only hosts the Peershares client but also take care of marketing the IPOs and helping out with the regulatory issues. They will do this for a fee and will be a cheap option, since they will be experts in this field (whereas the simple entrepreneurs are not).
The regulatory government bodies will embrace this kind of industry, since it will create an interface to an otherwise difficult area to penetrate. Some peer-people will in dismay proclaim the failure of decentralization, the third party risk and what not. The industry in return, will argue that they serve an important role, sorting out the weeds. They will point to early peershares project where the entrepreneurs used the new technology to trick unsuspected investors of their hard earn money. Peer-people true to the cause of decentralization will not accept these arguments and true to the crypto anarchic heritage they will instead create computer programs that solves the problem.
Speculations about the future of crypto finance: Person-to-person-to-machine
If not earlier, by now sites similar to LocalBitcoin, will have emerged on TOR and other decentralized systems. This will be places where people can exchange fiat for coins back and forth, meet physically or make other arrangements. These systems, extremely difficult to shut down due to their decentralized nature, will deal with trust by federated escrow and user rating systems. Perhaps the importance reputation based trust attached user identities will be used to establish confidence. Who knows what the market will come up with?!
Anyway, the new Peershares IPOs could easily be published via hidden services on TOR (or other decentralized systems) and as easy to use as those created by “the industry”. These would then offer the feature of “undocking” the newly created Peershares networks to the wild. However, just as with the ones created by the industry we will always find that companies that fail to deliver on their promises and don’t pay out the expected dividend or suddenly vaporizes.
To this problem there will be no fix, because there is no way to protect against businesses failing nor should anyone even want that kind of protection. The next best thing will be demanded by the public, which is transparency in regards company reserves, company money flow and so forth and so on, something realizable due to the nature of the traceability that the public ledger lends itself to. For sure crooks and criminals will be doing trix and fool people, so the natural response to this will be decentralized execution of smart contracts to pay out the dividends. Such dividend payout triggering contracts will be easy to analyze and the companies will be as trustworthy as the contract requirements being met.
Demand for such contracts will also come from another group as well; the original stake holders in the company. These entities will not necessarily resides in the same juridical jurisdiction and might even consist of separate decentralized and autonomous financial entities coming together to form new working groups, issuing IPOs. Getting rid of trust and lawyers and instead relying on smart contracts and/or multi-sig for dividend payouts etc, will make them either create those themselves or they will be able to buy them of the shelf, download from the public domain or have them handcrafted by new companies specialized in the field of smart contracts that will service this need.
Again, these entities will also demand the “undocking” feature since they can not possibly trust the networks if its not living in the wild. Something that will be clear after bad acting hosting sites will have subverted protocols they are hosting because they have been forced to do so either by armed forces or because being paid to do so. Only that which is truly decentralized, efficient and open will stand the test of time.
Speculations about the future of crypto finance: Meta(managed) multi wallets
For the average user, things will soon get super messy. A coin here, a share there and a token everywhere… this mess will also be sorted out by computation and automation. Multi wallets will mushroom, with features such as wallet matching (where to wallets can communicate with each other and automatically come to an agreement which types of coins should be exchanged between the two wallets fort a transaction to be fully realized). Naturally mismatching wallets will create a demand for autoselling and autobuying of coins on the open market, for the wallet to match and make exchange.
At first these multi wallets will be configurable by the users but soon competing businesses will try to beat the competition by offering insights into what kind of diversification a well performing wallet should have (a pinch of the stable one, for the risk taker a spoon of that new exiting one coin and so on). The companies offering these meta multi wallets will soon create derivatives on top of the whole thing, so that they will be able to offer hedging opportunities and different kind of insurances. Having learned from the early day of crypto coin exchanges, these companies will be able to offer cold storage options and/or shared secrets. To the dismay of peer-people, some of these companies will be able to offer interest on the coins, because they can cycle through proof-of-stake coins and always have old enough coins at hand for minting purposes.
Some will love it, some will be looking at big “google sized” meta multi wallets amassing huge number of coins and talk about the dangers of network attacks. Most people will not give a fck, because most people never do until it all blows up in their face.
Speculations about the future of crypto finance: Governmental response
These things will not transpire in a vacuum. The big states of the world, like US, Russia and China will be waging their currency wars and escalating conflicts will ramp up the financial weapon artillery. What “saves us” in the end is the mutual destruction financial wars inflicts. When it finally breaks down, IMF steps in and issues SDRs but Russia and China will not agree to it if not gold it included in the basket of currencies. They want to ensure that US influence on IMF wont create a repeat of the petro dollar hegemony and hence all states must put up a stake in gold. For US that isn’t a problem because they have so much of it and the other big players are also ok with this.
Actually they are all perfectly fine with this, because they know that it would cost them to much to war on each other and it will make much more financial sense for them to put the burden on the developing nations, that will be footing the bill for everything because they have no gold. What they have is workers and work they will.
They will work and they will sell their natural resources for cheap. Being fckd , once again, by the big boys they will reach out to the ruined middle class in the west. These poor people will have seen their pension plans blow up, while their debt just being recalculated to match that of the inflation, i.e. they will not get the benefit from a plunging dollar because their debt will simply be converted to the new money. They will look at the whole mess and they will realize that their real friends are to be found in the developing nations.
Hyper fueled by information sharing on the internet (education, wikipedia, open source software, hardware, etc) people growing up in these developed nations will be empowered in a way not seen before and they will use the tech to create a tighter bond with the disillusioned middle class. For sure it will not matter that there is land and water between, because the decentralized financial crypto finance tools will make it possible for them to cooperate, pool resources and make it possible for them to work efficiently together.
Powerful entities will start to emerge and the traditional state power to be, will be terrified and cooperate with each other to meet this new threat: decentralized companies that is governed by no one. Monopolized internet service providers already super subverted by state agencies will monitor the information flow and do their best to keep things as they always have been.
But the needs of the developed nations and the cutting edge network technology will bring about open source, open hardware off the shelf meshnets facilitating flow of information which will be very difficult to shut down. Things like this will put pressure on blockchain based coins to patch the protocols to allow for subtree merging (where part of the blockchain can go live outside the main trunk only to be relinked again, as long as there is no merge conflicts) and god knows what (I am not Satoshi so I don’t know how to fix these things).
But again, nothing ever happens by itself. By this time regulatory government bodies will have realized that decentralized crypto finance is extremely expensive to subvert if playing by the rules. So they wont do that. Companies such as BitPay will serve as excellent central points of control, where money flows can be easily monitored and its users mapped out. If needed be, these companies could also be forced to shut down. Bitcoin, with its super big mining pools, will not be seen as a threat because armed forces could at any point just enter the physical farms where the hashers are working and pretty much do what ever they want.
They wont be afraid of that kind of technology. Instead they will encourage regulated exchanges, regulated financial institutions with cold storage of great depth. They will say big reserves is needed for the safety of the public, but what they really want it to be able to create derivatives on top of these coins, so that they can do open market interventions. By doing so they might assert some degree of control also over the price. And the crypto community will embrace this development out of greed. Institutional traditional money will continue to flow into the market and along with that well spoken people in suits will push regulation throughout the industry. Some of them will think they are honestly doing a good thing and some will simply not give a fck because they are just doing their job and making some money on top of it.
But things are not as easy as just controlling Bitcoin and powering a few mining pools. No the big deal is that shares in companies bounded by smart dividend contracts will be just as much as tokens as coins and these instruments will be much more difficult to control but will compete very well with coins because they offer not only something backing the token but also offers interest in the shape of any coin or share you might like due to the automated decentralized exchanges that we now will have (only going from fiat to crypto will be a slow and inefficient thing, but still be possible due to the flourishing federated escrow services tending to this particular need). Performing open market operations on all of these assets will be super difficult. I have no idea what will happen.
Now in this haze and daze of assets, the only way to price all the tokens properly will be through looking at the shared consensus i.e. the market doing its pricing thing. For sure, the market will get it wrong and some assets will crash and other sky rocket. It will be just like it has always been, but it will also be different. To survive, one will have to buy low, sell high and keep some real physical silver coins buried in the garden.
You know… just in case…
Economic bugs: What they are and why they matter
A compiler compile human readable computer code and produces machine readable computer code. If there is something wrong with the human readable computer code, the compiler can not compile. We say that there is a bug in the code. If there is no bugs, the compiler produces machine readable computer code that can be executed by machines. This code may also contain bugs and when it does, the computer program does not do what it was intended to do by the programmer. We say that there is a runtime bug in the code.
All programmers have created and will create human readable computer code with bugs. All programmers will create programs that when compiled, does not behave as intended and causes runtime bugs. This is also the case with Bitcoin which have had one then one runtime bugs. Since Bitcoin can be used to move money (the money in Bitcoin is called bitcoins), Bitcoin produces an economy. This economy consists of, but is not limited to, Bitcoin miners, money exchanges and stores accepting bitcoins. All of this is by design. The idea was that it should be possible to build an economy on top of Bitcoin.
Since the economy running on top of Bitcoin, the economy does not work if Bitcoin does not work. If there is a runtime bug in Bitcoin and bitcoins can not be moved, the economy will not function. Also the economy is based upon how Bitcoin works and therefor shaped by it. For instance, we have Bitcoin miners because the protocol requires it. If something in the protocol changes, these financial entities might have to adopt and change with it.
You can view the imagination of the programmer as the seed which brought you the human readable computer code, this code was the seed to the machine readable computer code and when executed this was the seed to the protocol that allows machines to speak Bitcoin with one another. This protocol in return, is the seed of the Bitcoin based economy.
I propose that it is not unlikely that just as their might be bugs in the human readable computer code, or bugs that makes it all the way into the machine readable computer code, the protocol itself might produce an economy that also have these kinds of bugs built into it.
Since programmers creates these bugs all of the time, it is not far fetched to think that there might be something that I call “economic bugs”. These economy bugs could, just as with runtime bugs, might manifest themselves after a year, five years or millions of years. We simply just don’t know if they are there and what might trigger them.
From this argument above we learn that, even if the Bitcoin protocol performs perfectly from a technical standpoint, there might be bugs in the system that eventually makes the economy built on top of the protocol stop functioning as intended. Just as runtime bugs might crash your computer, these economic bugs might be so severe that they crash the economy.
Though I’ve not read anyone describing it exactly like this, these ideas are not new. Several people before me have argued that there are economic bugs built into Bitcoin. Since they are economic bugs, they can even be referred to economic theories.
Tragedy of the commons[1] is an economic bug that have been discussed on the forums and there might be other ones.
A very frightening development is Bitcoin mining pools and perhaps even worse, cloud mining. The economic incentive here is clear. The user rent some hashing power, earn an interest and the cloud mining operator doesn’t have to take on the whole risk of developing and running the operation. Total risk is shared among all of the participants and since it makes perfect sense for everybody and the technology works better the bigger it grows, they can leverage up and become even bigger. All of this makes perfect economic sense and that is why it is happening. But, there is a cost and the cost is the centralization of the Bitcoin network.
Bitcoin proponents argue that it is almost impossible to subvert Bitcoin or take it down using technology. They also claim that cloud mining operators have nothing to gain from destroying Bitcoin because that would force themselves out of business. This might be true. However, the more centralized the network becomes the greater the risk is concentrated. Here are some questions that you can ask yourself:
What happens if we have only 3 pools and 2 of them are shutdown?
Is it more likely that 3 pools collude, then 1000000 miners colluding?
If it is enough to control the network if 3 pools are subverted (as it is today), what stops armed forces to attack these facilities and take control over them physically?
There can only be an economy built on top of Bitcoin, if there is a value. If either of these things were to happen or enough people would be afraid that it would happen, this could crash the sentiment and price would drop and if severe enough the whole economy built on top of Bitcoin could crash.
To make matters worse, new technology layers are built on top of Bitcoin. There are new technologies creating unique tokens, coins, that are again used to create new coins and all is built on top of Bitcoin. If Bitcoin does not function, all of these technologies will be brought down because they depend on it.
To make matters even more confused, if the financial incentives in the Bitcoin protocol does not match those of the technologies built in top of Bitcoin, the economy built on top of all of that could fail. What is not economic bugs in the Bitcoin protocol, but features, could emerge as economic bugs in these new systems resting on top of it. Even so, there is almost no discussion about these things.
Picture yourself a pyramid, at the top you have Bitcoin. Below you have all the technologies depending on Bitcoin and at the base of the pyramid you have the entire economy. Now turn the pyramid up side down. This is an unstable structure. If Bitcoin fails, the pyramid tips over and everything comes crashing down.
This is not a joke. The bigger the economy, the bigger the crash. Again, programmers always creates bugs. It is fair to suspect that there are economic bugs as well.
[1] http://en.wikipedia.org/wiki/Tragedy_of_the_commons
Economic bugs: What happens if the Bitcoin economy implodes?
I believe it is fair to say that if the Bitcoin economy would crash today because of an economic bug (or actually any other bug) then all of the other coins would crash in terms of fiat money as well. Why? Because when you look at the price discovery process, basically all coins tend to rise and fall against BTC as BTC rise and fall against fiat money.
The idea of economic bugs in blockchain based coins is not wide spread. Rarely you read anything about it. Some that are aware of the concept refutes that they are really that dangerous and focus on what they believe to be more urgent issues. Basically what we got here, I think, is the same old story of pushing problems that needs to be solved sometime, but not necessarily right now, onto the future. It seems to be human nature. When governments do this, it is called kicking the can down the road.
However, if the notion of economic bugs becomes wide spread and there is a lot of talk about it. Then we could see the market start to price coins in terms of how the market appreciate these risks. This process requires that the market participants understands these things.
Is there enough awareness about this? Are people skilled enough to do this evaluation? Could the adoption of coins that do not have economic bugs be gradual? How can we be certain that other coins, do not have other economic bugs?
Economic bugs: “Just patching” Bitcoin?
I often here that if there is an issue with the Bitcoin protocols that needs fixing, you can “just patch it”. For sure, simple bugs you can fix like that. But it is definitely not certain that you can change core functionality of the protocol. The technical risks aside, there might not be an incentive for the network to adapt the changes. Let us say that the protocol needs to be changed, so that miners will no longer be necessary but in order for the change to take affect the miners need to agree to that. What economic incentive do they have to basically kill of themselves?
I could go on and on about this, but actually there is already a real world case study. Head over to their forum and there you can read about real world issues that developers have to deal with when changing core functionality[1] such as the hasing algorithm. When reading about “ASIC resistance code” bare in min that if there is an economic bug in the Bitcoin protocol, Litecoin most likely got it too. If Bitcoin has the tragedy of the commons bug, then Litecoin has it in spades because its hashing algorithm requires even more energy.
[1] https://litecointalk.org/index.php?topic=18166.0
Economic bugs: What Peercoin and Peershares brings to the table
Bitcoin has this built in incentive to cause harm to itself, whereas Peercoin does not. The laws of thermodynamic laws tells us that everything comes at a cost; increased entropy. Hence its only natural for self-organizing system to search for (local) efficiency. I believe that financial systems that are not economical will self terminate and expensive systems will detract usage. If you are looking for a store of value (and not short term speculation) you want a something that survives as long as possible.
I propose that Proof-of-Stake (Peercoin use this) solves some of the issues we have with Bitcoin miners centralizing in pools. Since Proof-of-Stake requires very little energy to perform its function, people could be running mining nodes on their laptops performing the equivalent work of football fields of Bitcoin miners immersed in cooling liquids, the R&D that goes with it and all the maintenance involved. Where Bitcoin becomes cost efficient by means of centralization and at the cost of centralization, Peercoin is already cost efficient and therefor it can remain much more decentralized.
Trustless, decentralized stakes in corporations is a hot subject right now. Some solutions are built on top of Bitcoin. Now, if the financial incentives in the Bitcoin protocol does not match those of the technologies built in top of Bitcoin, the economy built on top of all of this could fail. As an example you will need Mastercoins, whenever you do work in the economy built upon Mastercoins. Since Peershares isn’t running on top of any other protocol (its only a fork), its different. If people do what is efficient to them, they will go with Peershares because that option will cost very little. Peershares wont need big proof-of-work farms, hence they can focus on usability, financial diligence and those things instead. If one hosting site or blockchain goes down or is attacked, the others will be unaffected but can learn from what happens to the targeted one.
Instead of building a super pyramid with a coin at the bottom that everything is resting upon, one could instead build an ecosystem where the participants are independent, compete with each other in some respect and lives in symbioses in other instances.
As an example Open Transactions (OT) could facilitate sharing and discovering of different types of Peershares. The Peershares will pay out dividends in Peercoins that can either be reinvested in new Peershares or be used for minting. It makes economic sense to pay the OT fee, because you pay for using a trustless system and by buying Peershares with Peercoin, you transform your peercoins to an interest baring instrument and by doing so you create an interest-on-interest mechanism, which creates exponential return. All in a decentralized ecosystem that has no single point of failure and where different functions in the ecosystem can be replaced, without the rest of the system being affected.
Well known economic issues, that are false: Volatility
If transacting with a coin instead of fiat saves the business money, then save some of that money in the coin. If the coin loose value, there is only smaller profit and no loss. If coin increases in value, a re-balancing of the wallet will allow for profit taking and remove downside risk. IF everyone would do this, the supply and demand would be continuous smoothing out the volatility. If one few does this and the volatility is greater, the incentive to do as suggested above is even greater because it will be even more profitable. No volatility, no issue with it. If there if volatility, you can make money on it. Volatility basically isn’t a problem for those who know how to deal with it.
That said, what I don’t want is derivatives piling up on top of the coins. Derivatives creates systemic risk and from complexity theory we learn that this kind of risk can be devastating to the overall economy. The core issue with derivatives is that they promise offsetting risk, but in reality they introduce third-party liability. Derivatives will be pushed be financial institutions as a fix (because they can extract wealth from it), but they will in themselves introduce new problems.
Well known economic issues, that are false: Deflation
I’ll be brief because it is not really that hard to see what the solution is. The solution is simple, just realize that it isn’t an issue. Instead of fighting the market, trying to outsmart it with computer code, just don’t do anything at all. One is more likely to introduce new economic bugs, then fixing the problem by tinkering with protocols. Instead just do nothing. If the supply of coins dry up, the market will solve this itself and introduce new coins. As long as new AltCoins can be introduced to the market (and there will always be an economic incentive to do this), the supply of tokens to transact with will not run out. If one focuses on the whole of the ecosystem, one will very quickly realize that deflation is not an issue. Hyper inflation is not an issue either, because the market will not hyper inflate itself. If it could, it would already have because we have enough AltCoins that has enough coins that together is enough to create hyperinflation. It won’t because it is an opt-in system and people will only use it if it has value.
