BitBrief #4: 2014 reviewed, 2015 trends to watch

We here at Brick & Crypto have helped our family, friends, and brick & mortar businesses better understand Bitcoin this year. To inform them, we mastered the basics by understanding their significance:

How Transaction Fees work and what they accomplish

  • “The fees go to the miners to incentivise them to keep mining, which in turn keeps the Bitcoin network secure.”

Namecoin and Bitcoin – respectively the first nonmoney and money applications of Blockchains

  • With the newest takedown of the Pirate Bay, and net neutrality bills being pushed through Congress this year, re-decentralizing the internet has again become a hot topic.
  • It is based on exactly the same code as Bitcoin. In fact, the two currencies are almost identical. However, in the same way that Bitcoin is a decentralised currency that cannot be shut down; Namecoin is the basis for a decentralized domain name system (DNS), i.e. web URLs, which could put a stop to Internet censorship.

Some people had more trouble grasping the basics of what Bitcoin is, though:

Skeptics part I: Whether or not Bitcoin is money.
  • Every year, there are many articles published on the origins of Bitcoin, and whether or not Bitcoin is or could ever be considered ‘money’. In this 2014 BitBrief, we will be bringing you our year-end conclusion on the matter.
  • A famous free-market economist, Ludwig von Mises, created the regression theorem, which is at the core of this debate. One of my favorite pieces on this topic is written by Jeffrey Tucker, who argues Bitcoin does fit the regression theorem and thus, is indeed money.
    • “The initial value of money, before it becomes widely traded as money, originates in its direct utility. It’s an explanation that is demonstrated through historical reconstruction. That’s Mises’ regression theorem.”
    • “Bitcoin is both a payment system and a money. The payment system is the source of value, while the accounting unit merely expresses that value in terms of price. The unity of money and payment is its most unusual feature, and […]  The two are utterly interlinked in the structure of the code itself.”
    • “On the day of its release (January 9, 2009), the value of bitcoin was exactly zero. And so it remained for 10 months after its release. All the while, transactions were taking place, but it had no posted value above zero for this entire time.” That day, as Peter Surda eloquently states: “the rational expectations of the potential utility of Bitcoin for the potential buyers exceeded the price demanded by the producers, and trade emerged”. This indeed confirms that Bitcoin’s direct utility was the Blockchain, because “traders, enthusiasts, entrepreneurs, and others were trying out the blockchain. They wanted to know if it worked. Did it transfer the units without double-spending? Did a system that depended on voluntary CPU power actually suffice to verify and confirm transactions? Do the rewarded bitcoins land in the right spot as payment for verification services? Most of all, did this new system actually work to do the seemingly impossible—that is, to move secure bits of title-based information through geographic space, not by using on some third party but rather peer-to-peer?” And of course, it did and still does.
  • Jeffrey Tucker article:
  • Other articles on this topic mentioned by Jeffrey Tucker:
  • From more theoretical articles like the aforementioned and this one, we learned how Bitcoin as a whole works, and that “combining the unit/system duality and economic/technological duality approaches can lead to additional insights about the way people value Bitcoin/bitcoin. The network is only in a loose metaphorical sense valued “as a whole.” The principle practical way for users to value it is via their own possession of and ability to transfer specific tradable units. Such units are an integral characteristic of the system. Viewed together as a social phenomenon, this could suggest the superficial appearance of a mass user valuation of the system in general. However, an idealistic “in general” valuation or mere widespread sentiments of technological appreciation could not support a functioning monetary system; only individual user valuations of discrete units can do that, and it is from there no surprise that this is precisely what Bitcoin “the system” enables.”
Then we have some people think Bitcoin’s growing pains will cause its demise, while others see this as an opportunity:
  • Centralization concerns are occurring around mining & the Bitcoin foundation (essentially a group of talented and well-informed members of the Bitcoin community who are the “face” of Bitcoin and therefore can speak to regulators about issues, questions, concerns they have)
  • People like Cody Wilson, creator of Defense Distributed, the first 3D gun printing project, are attempting to be voted into the Bitcoin Foundation in order to destroy it, citing their hidden and visible cooperation with authorities and media outlets and monopolization of the voice of Bitcoin as the reason.
    • Bruce Fenton, another talented, anti Bitcoin regulation individual who is running for a seat on the board of the Bitcoin Foundation, mentioned in his Reddit Ask Me Anything:
      • “This space is very new, the Foundation is also very new. There is not much centralized power in the board– heck the entire budget of the foundation is less than the high school I served on the board of. What are the main problems? As I see it: transparency and growing pains. Under growing pains we can also include bad press etc.”
  • There are also concerns about the number of full Bitcoin nodes (mostly miners) dropping off, now at less than 7000.
  • As Bitcoin scales up, the Bitcoin foundation should not co-opt Bitcoin’s mission, although there are certainly internal issues to be faced (as Bruce Fenton mentions). The centralization concerns of full nodes is inherent as the network becomes larger, as Gregory Maxwell, Bitcoin core developer states:  “You’d need a lot of bandwidth, on the order of a gigabit connection. It would work. The problem is that it wouldn’t be very decentralized, because who is going to run a node?”, but “The tradeoff isn’t a constant. We can do some things where you can get some scale without hurting decentralization. But that requires some experimentation,” he said.
  • So my view on all of this is that it is a bit of a politics-as-usual situation, with Bitcoin skeptics attempting to cite these centralization concerns as reasons why Bitcoin won’t last, but the reality is that Bitcoin has a strong community that will not give up on this so easily. I hope we will see more talented programmers jump on board as core developers, which is something Gregory Maxwell also explains Bitcoin needs. Regardless though, we should continue to see the code and Foundation evolve (for the better) as the network itself continues to grow and scale up.
Almost everyone agrees that cryptocurrencies will be king of money in the future, but because of the huge potential of Blockchain technology to disrupt legacy industries, some skeptics have also questioned whether Bitcoin will continue to be the top currency, while others have firmly stated this to be the case:
Skeptics part II: Whether or not Bitcoin will be “the one”.
  • They kick off the podcast by reiterating their position: one cryptocurrency will rule them all.
  • Krawisz starts by explaining why investments have value. Stocks pay dividends and bonds pay interest. There’s an “opportunity cost” to investing, because investors could always buy something else, so for people to invest, they must have a reason to hold it over time. But Bitcoin is more like money, they argue, which obtains value from knowing that it can be used broadly to take advantage of future opportunities. Therefore, a single broadly-used currency makes the most sense. If you had one among many currencies, “You’ll only be able to seize opportunities that accept that cash,” Goldstein said.
  • Krawisz summed up their position: “There’s always a tendency moving us towards one universal cash.”
  • Opportunity cost tends to be an incentivizing factor. In the case of Bitcoin, this means people are financially incentivized to stick to one coin. This is powerful, because the opportunity cost is large and can actually be quantified, unlike in many other cases.

The lawmakers have been up to no good this year as we’ve reported in past BitBriefs, and this trend should be closely watched in 2015. For example, certain geopolitical areas becoming less comfortable for Bitcoin businesses and favorable regulations are often coupled almost inextricably with non-anonymity:
Changing regulatory landscape – Russian reconsideration, Coinbase transaction tracking, Australia VAT on BTC transactions
    • The Ministry of Finance (MinFin), Russia’s Central Bank and the Media Ministry began to implement the suggestions immediately by banning the “creation,” “distribution of software” and “deliberate dissemination” of “surrogate currencies.” They imposed fines of between 5,000 and 1 million rubles (US$125–US$25,035) on these activities when committed by lay persons, officials and businesses.
    • The Ministry of Economic Development took more time to actually study the potential effects of the proposal and released a statement warning that it would have an extremely negative effect on banks, retailers and telecom operators.
      • The problem with the law, according to the Ministry’s statement, is not that it bans Bitcoin. The problem is that it can be interpreted to include all ‘quasi-money’ or cash equivalents. This means that programs such as gift cards, certificates and reward points would also be effectively banned, and because these programs are designed to attract new customers and retain older customers the effects could be devastating.
    • “Coinbase explains that the company is only trying to stay in compliance with federal anti-money laundering regulations and drug laws. We understand that any company has a fiduciary responsibility to protect the company for its shareholders. But it appears that Coinbase has crossed the line by not only tracking coins purchased through its service, but also tracking how users spend their Bitcoins after withdrawing them from their Coinbase wallets.
    • These types of practices are the very antithesis of Bitcoin and virtual currencies, and they are the main reasons why most Bitcoin users fear regulation. It is often used to regulate taste rather than safety, and it can also be used by a company to suppress the business of its competitors. These are arbitrary overreactions by a company that fears the laws that they claim to respect.”
      • I’ve heard about this happening to multiple people this year. Expect no legal/regulatory changes ameliorating this situation in 2015.

There is so much more that can be said about how clearly biased and centralized the current regulatory framework around Bitcoin is. Opportunist politicians like Ben Lawsky who clearly don’t understand the technology are creating regulation with many conflicting, purported goals (Surda). There are also actual victims who committed non-violent crimes: Charlie Schrem and Ross Ulbricht come to mind. Also Microsoft waiting on more regulation for expansion and Australia (potentially) driving away Bitcoin companies due to their VAT.

Most of the article thus far has been a retrospective look supporting our belief that Bitcoin will stick around for the foreseeable future. For example, the frequency, amount and size of Bitcoin events, meetups, and conferences have all increased. In fact, we closed out 2014 with a Bitcoin-sponsored college post-season football game at the St. Petersburg Bitcoin Bowl (check out BitBrief #5 for more information about this event). In addition, this year has seen a lot of adoption by larger companies, with several big names coming on board, notably Microsoft. Unfortunately, the “adoption” of Bitcoin by these companies does not directly affect the price of Bitcoin, since the bitcoins are immediately cashed out into federal reserve notes (US Dollars) through payment processors such as BitPay.
All in all, though, Bitcoin’s future remains paved with practical growth, improvements to the code, and advanced decentralized applications of Blockchain technology (Blockchain 2.0). This, along with the demise of state-issued fiat currencies, is the path to hyperbitcoinization

Many people have been asking us what to expect from a purely price-action perspective, and here is one of the best blurbs we have read on the subject:
…And here is an interesting flow chart explaining the wider growth path of both the Bitcoin network and price:
Feedback Loops
…And here is a short explanation on how some of these things might play out for Bitcoin:
  • Prominent venture capital investor Keith Gilabert has stated his belief in the “sharp” rise in the value of Bitcoin in the near future. 
    • “Bitcoin could rise significantly as currencies around the world and oil prices continue to weaken,” he said, adding that in his opinion Bitcoin “is the new gold.”
    • “I expect to see hedge funds moving into Bitcoin first since they are the most fluid and proactive investors,” he continued.
    • “[…] The negative momentum will be very difficult for oil to reverse and this will cause more pressure globally. The U.S. is not immune to this global crisis but its economy is more diversified and because the dollar is currently backing Bitcoin, this digital currency will be stable and it will cost less for an individual to trade in and out of.”  

With the growth of the network, many are looking to the code to improve security, scaleability, and innovative revenue solutions:

  • 2-of-3 security for Bitcoin is increasing in usage: The idea is that 2 of 3 signatures must be used to spend money so this is a way to increase security for individuals & businesses, add escrow, execute contracts, etc…

  • Adding to the infographic’s expectations for 2015, Peter Todd, another Bitcoin developer, sees a code functionality, CHECKLOCKTIMEVERIFY, as helping improve Bitcoin’s scaleability:

  • “While the easiest to understand use-cases [of CHECKLOCKTIMEVERIFY] for the “layman” are things like “lock a child’s university funds until they’re 18” what’s actually really exciting is the “under the hood” applications for financial protocols. Micropayment channels are a great example. Basically they let you send small amounts of money to another party repeatedly over a period of time, turning what would be hundreds, even thousands, of tiny transactions into one.
  • Where this gets really exciting is the hub-and-spoke model: If Alice, Bob, and Charlie all have micropayment channels with a shared hub, they can effectively send money to each other instantly and trustlessly by sending a small amount to the hub; and having the hub in-turn resend it to the final destination. This enormously increases the scalability of Bitcoin as all these transactions happen off the blockchain, yet the hub never actually has control of the money.
  • The model also is similar to Blocknet, whose next milestone is to “achieve the ability to initiate transactions on one blockchain from a node on a different chain. This will enable distributed exchange of currencies and, ultimately, open-ended inter-chain functionality.” Other Blockchain 2.0 models are also working on this, and this will again help achieve massive decentralization in different areas. With Blocknet, the practical applications seem to be limited at the moment, though, and the best use currently is probably business-to-business (B2B) communications/transactions.
  • There is also the idea of sidechains, which accomplish a similar goal. Here is a diagram of how a bitcoin would be “locked” into a sidechain:

So there are a lot of ways this space could develop, but it’s interesting and will help Bitcoin scale.

We talked about various groups using the Blockchain as the basic technology behind decentralized applications in the BitBrief #3, but here are a few prominent examples we’ve read about recently:

  • Voluntary basic income is now being tested as one of Bitnation’s first decentralized applications. will run on the Bitnation protocol as an opt-in application for users.
  • Cryptocurrencies will improve, decentralize, and incentivize P2P filesharing and storage further. We’ve heard of incentivized P2P file sharing all year, having spoken to the people at Blocktech (decentralized, incentivized information scraping) and also seen donation links for torrent uploaders.
  • Technology like this will help in the ongoing decentralization of everything. This TEDx talk titled “the future will be decentralized” (linked again for posterity), is the note I wish to end this last 2014 BitBrief on. I mentioned it in the last BitBrief and am mentioning it again now because it is an excellent, broad talk on many of the topics discussed in this BitBrief. It helps expound the point of just how much can be improved in the world via decentralized solutions, and I would highly recommend watching it ASAP. You can also find it in the Genesis BitBrief.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s