Hearn: The resolution of the Bitcoin experiment [LWN.net]

Hearn: The resolution of the Bitcoin experiment

Posted Jan 19, 2016 21:34 UTC (Tue) by drag (guest, #31333)
In reply to: Hearn: The resolution of the Bitcoin experiment by Cyberax
Parent article: Hearn: The resolution of the Bitcoin experiment

Value is not derived from 'work'. The whole 'labor theory of value' _should be_ thoroughly debunked right now if it wasn't for the fact that it's been institutionalized into academic and policy organizations (which itself leads to whole bunch of really poor policy decisions on the part of governments. Sort of like putting a creationist in charge of MIT)

Value is derived from each individual's perspective. Something is valuable if the 'end user' or 'consumer' finds use in it. The fact that you can do something useful financially with bitcoin is the source of the value. What makes bitcoin useful to individuals (and thus the source of it's value) is because it's a limited set of verifiable numbers and that those numbers can be transferred around in what is supposed to be a secure and verifiable manner and thus can be used in financial transactions.

Typically other forms of money originate from commodities.. ie: gold, silver, wheat, tobacco leaves, shells, etc. etc. So they already had market value that served as a 'security' for their use as money. They get elevated to the status of money once people more-or-less accept them universally in any trade.

Bitcoin 'kilowatt hours' doesn't work like that. With gold-based currency it was still gold... it was still it's original commodity. Obvious bitcoin is not a form of battery so you can't input the numbers into your computer and get back those electronic force.

So-called fiat 'government money' usually is derived from money that was once based on commodities, but has long since been divorced from it's original meaning... ie: the dollar (being the 'international standard'. Dollar originally was just a specific measurement of weight of gold or silver, but it threw off it's shackles and went off the gold standard in the late 1970's). Bitcoin is more like that, although without the force backing it and the fact that it's based a finite set of numbers you are not dependent on the USA Federal government to behave itself.

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Hearn: The resolution of the Bitcoin experiment

Posted Jan 19, 2016 22:47 UTC (Tue) by nybble41 (subscriber, #55106) [Link] (6 responses)

> Value is not derived from 'work'. The whole 'labor theory of value' _should be_ thoroughly debunked right now ...

Agreed, but that isn't the point. The work (and thus energy cost) required to mine each block contributes not only to ensuring scarcity, but also to providing for a reasonably fair initial distribution and a predictable average inter-block interval, all of which are essential to the Bitcoin system. It isn't sufficient to ensure that there will *be* value, of course, but without that energy cost bitcoins would have no value to anyone.

> Typically other forms of money originate from commodities.... So they already had market value that served as a 'security' for their use as money. They get elevated to the status of money once people more-or-less accept them universally in any trade. ... Bitcoin 'kilowatt hours' doesn't work like that. With gold-based currency it was still gold... it was still it's original commodity. Obvious bitcoin is not a form of battery so you can't input the numbers into your computer and get back those electronic force.

You're comparing apples and oranges here. Bitcoin is not equivalent to kilowatt-hours in exactly the same way that gold is not equivalent to the energy and other resources which required for gold-mining. However, the market value of those kilowatt-hours act as a price floor below which additional bitcoin mining is no longer profitable, just as the cost of gold-mining determines the lowest price you'll be able to pay for newly mined gold.

The difference is that in the case of Bitcoin, the rate of new supply is fixed by the algorithms that automatically adjust the mining difficulty. More competition in mining just means a higher energy cost for all miners, and no additional bitcoins. The demand for gold-mining is limited by the rate of increase in the demand for gold; over-supply drives prices down and makes mining uneconomical. However, since it has no long-term effect on the supply, the demand for bitcoin mining is limited only by the associated energy cost. A fixed difficulty would have been more realistic, and probably cheaper and less volatile, but under such a system it would be hard to account for improvements in computing capabilities. It would also be less secure against attempts to run a 51% attack, where the cost of the attack is the only viable deterrent and the attacker is unlikely to be deterred by a drop in market value due to over-supply.

Hearn: The resolution of the Bitcoin experiment

Posted Jan 19, 2016 23:34 UTC (Tue) by jhhaller (guest, #56103) [Link] (5 responses)

And this suffers from the same problem which caused the US depression in the late 1800s - there was insufficient fiat currency because it was based on gold/silver, and there wasn't enough for the economy, causing trade to collapse. To be a valuable currency, rareness is much less important than stability. Stability requires a certain amount of rarity, but not to any particular absolute level. Only speculators win when a currency is volatile. Inflation (when currencies become less valuable) is a problem to lenders, while deflation is a problem for borrowers. Bitcoin doesn't suffer from this yet, because no one is borrowing or lending to any great degree, and probably won't with a volatile currency. But, one can't build an economy with borrowing and lending. One could index the loans according to bitcoin value, but to what end as long as there are real currencies which are relatively stable. One also loses the anonymity of bitcoin with borrowing and lending, as no lender in their right mind would lend bitcoin when they didn't know who was supposed to pay back the loan, and if they were likely to do so.

Hearn: The resolution of the Bitcoin experiment

Posted Jan 20, 2016 15:29 UTC (Wed) by nybble41 (subscriber, #55106) [Link] (4 responses)

> ... there was insufficient fiat currency because it was based on gold/silver, and there wasn't enough for the economy, causing trade to collapse.

That is simply nonsense. The problem wasn't the amount of gold or silver. In the absence of fixed exchange rates, the prices of the metals will simply adjust to accommodate the current supply and demand. (Short of the price becoming so high or low that the amounts required become inconvenient to deal with, at any rate, but gold and silver have never reached that point.)

The real problem was that the U.S. government issued notes for more gold and silver than it actually had, and eventually went bankrupt (in effect, though they didn't use that term) and refused to honor its banknotes according to the original terms. First they restricted the exchange of notes for gold by individuals, then they repeatedly redefined the notes as smaller and smaller amounts of gold, partially repudiating their debt. In the end they stopped honoring the exchange value of the notes altogether.

There have been many issues with the use of precious metals as currency in the United States (bimetallism and the over-issue of banknotes beyond what the government could repay being two obvious examples), but an insufficient supply of precious metals for use in trade was never one of them.

> To be a valuable currency, rareness is much less important than stability.

I agree about the need for stability, but volatility is not an inherent part of Bitcoin. It's volatile now because it's still new, and growing rapidly. Like any new currency, the rate of inflation is very high, outstripped thus far only by the rate of increase in demand. Over time the rate of inflation will decrease, eventually to zero, and demand will stabilize.

Hearn: The resolution of the Bitcoin experiment

Posted Jan 20, 2016 19:01 UTC (Wed) by Cyberax (✭ supporter ✭, #52523) [Link] (3 responses)

> That is simply nonsense. The problem wasn't the amount of gold or silver. In the absence of fixed exchange rates, the prices of the metals will simply adjust to accommodate the current supply and demand.
Yes. For example, by causing deflation.

Just ask Hitler about it - it helped him a lot.

> The real problem was that the U.S. government issued notes for more gold and silver than it actually had, and eventually went bankrupt (in effect, though they didn't use that term) and refused to honor its banknotes according to the original terms.
During which of about 10 crises that happened before the Gold standard?

Hearn: The resolution of the Bitcoin experiment

Posted Jan 20, 2016 19:22 UTC (Wed) by corbet (editor, #1) [Link] (2 responses)

Perhaps this suggests we're getting close to the Godwin point in this particular thread?

Hearn: The resolution of the Bitcoin experiment

Posted Jan 20, 2016 19:36 UTC (Wed) by nybble41 (subscriber, #55106) [Link] (1 responses)

It's not Godwin unless someone makes a comparison between their opponent(s) and the Nazis; simply discussing the conditions in Nazi Germany doesn't count. Just the same, any time someone complains about the supposed dangers of deflation it's probably time to wrap up the thread. Deflation doesn't cause economic problems. There are studies showing that there is no consistent correlation between instances of deflation and economic difficulties. It can sometimes be a *symptom* of deeper issues, like in the case of the American Great Depression, where the deflation followed a period of significant inflation and was accompanied by a major credit contraction which also wiped out a significant fraction of everyone's savings.

Hearn: The resolution of the Bitcoin experiment

Posted Jan 20, 2016 19:41 UTC (Wed) by Cyberax (✭ supporter ✭, #52523) [Link]

> Deflation doesn't cause economic problems. There are studies showing that there is no consistent correlation between instances of deflation and economic difficulties.
[citation needed]

Hearn: The resolution of the Bitcoin experiment

Posted Jan 19, 2016 23:49 UTC (Tue) by Cyberax (✭ supporter ✭, #52523) [Link] (1 responses)

Here's a "1" for you! I value it at $100000. Would you agree to buy it from me for that sum?

I don't think so. In reality, it's scarcity that drives the price. The labor/work required to produce an item might be one reason for the scarcity, but it's certainly one of them. Note, that scarcity alone does not determine the value - it's a necessary but not a sufficient condition.

In case of Bitcoins the only way to guarantee scarcity is to make it hard to mine new coins. It's a distributed system, there's no other way.

Hearn: The resolution of the Bitcoin experiment

Posted Jan 20, 2016 0:19 UTC (Wed) by karath (subscriber, #19025) [Link]

"In case of Bitcoins the only way to guarantee scarcity is to make it hard to mine new coins. It's a distributed system, there's no other way."

Mostly I agree with this but there is one key bit that I think is over-simplified. It's called mining but the activity is not actually creating Bitcoins. The miners are calculating signatures for the blockchain, so that the transactions are publicly logged and irrefutable. As a reward for this activity, the miners are awarded newly created Bitcoins. These Bitcoins are literally created from 'nothing' at a consensually agreed rate. Once all possible Bitcoins are created, the same 'mining' activity will take place but the miners will be awarded Bitcoins from the fees charged to the transactions.

And I hope that I won't be embarrassed by having got this wrong :D