The known world is divided into three parts: if you say Fiat,
30% (estimate) will describe something like this red thing here: four wheels, metal, internal combustion engine. Italian. Depending, of course, a bit in which part of the world you live. In Europe, you’ll get >99.9%, in South-Korea probably <1%.
0.5% will talk about evil bankers issuing fiat currencies.
the rest will just say: huh? Whatever.
Brands are about relationship. When launching their cuddly 500, Fiat (the Italians), had to put a little bit more effort into that. In the US, just 8 percent had any brand recognition at all. Fiat did some nice things: they hired JayLo, had a nice viral video making inroads, and pushed themselves up to 30%. Still room to grow, but a nice base.
If you now think, that a brand is something you can create in a lab, or by hiring a branding agency, you are wrong. Brands are the collective public image of who or what you are, in the eyes of the consumer. You can try to nudge their perception into a certain direction (hiring Roseanne instead of JayLo might not have been that kind of perfect fit for the Italian accessoire-car for the generation Desperate Housewife). But that’s just about it. Your core values will still be represented in your product, you service quality, your tonalities.
Brands are about trust. And that’s were the importance for Bitcoin and all other crypto currencies begins. As crypto currencies are backed solely by trust, supply and demand, and a mutual understanding of the economic value this produces.
Growing the whole ecosystem from 0 to 10 bn USD was already an amazing feat. But where will the future growth will come from? A network needs a reason to join. Get rich quick A.K.A. speculation on growth works only, if the underlying message comes across to a growing user base (which finally might make the step from investment to every day use). 0 10 bn is fantastic. But 10 bn USD is just about doubling the M2 monetary supply of West Samoa. So there’s some need for growth, if one wants to become a global currency.
Now, how does Bitcoinese currently sound? I’m not talking about the misinformed media misconception of yeah sure, just good for buying drugs online, tulip bubble, yadda yadda. I’m talking about how the community talks itself. Brand-linguism (if such a crazy thing would exist) would probably dissect the language as having heavy influences of survivalist, fortified with some geekspeak, with a side serving of free market lingo.
The doges of Venice would have been proud to become a part of that. But as far as I know, crypto currencies are not about creating another financial playground for the 1%.
Now, please watch this video, about another doge:
Yes, it’s a stupid one trick pony taking over popular meme and exploiting. And, no, this is NOT Bitcoin 2.0 or the future of monetary transactions and whatever else is in the DNA of crypto currencies.
But reddit, as always representing the virtual finger on the geeky pulse of the times, shows something happening here.
Many large transnational corporations have turnovers bigger than many national economies. They have to deal with any currency they encounter (as long as the market it represents is big enough). So sooner or later some large entity might add Bitcoin to its already existing Forex headaches.
For retailers, the incentive to accept Bitcoin should be fairly huge: reducing the acceptance fees for a sale from let’s say 1.5 to 0.5 percent would almost double the margin of many a A&P, Walmart, Carrefour or BestBuy. This won’t happen too soon on a large-scale, as the investments involved would be quite sizeable and the whole Bitcoin economy is still too small and fringy to make a real bottom line impact.
The really fascinating use cases might even be a bit more spectacular. Running and controlling a large corporation is a highly complex and costly affair. They have to operate under Lenin’s advice: trust is good, control is better. By solving the Byzantine General Problem (how to trust the inherently untrustworthy), Bitcoin (and other crypto currencies) were able to build currencies without needing a centralized trust authority like a central bank at its core.
If you now apply a trustless system with its encrypted public ledgers to the operations of a large corporation (think: crypto SAP), the effect should be rather scary. Even if you just start by converting your internal financial system from multicurrency into GEcoins or DaimlerCoins or IBMcoins, wth each of them possibly representing a larger market cap then the “meager” 10 billion USD Bitcoin currently represents.
Seems like I almost missed the pink elephant in the room. The industry which could benefit the earliest the most from Bitcoin is of course the industry which currently has to feel threatened the most: finance. Antonis Polemitis brought it very much to the point in a nice well monied exchange between himself and Marc Andreesen.
closest analogy for me is voip. Derided, then adopted by telecoms. BTC/fin svc more complex tho
Of course we’re still in phase 1: derision. So it might take a while. Just listen to JP Morgan CEO Jamie Dimon on the matter of Bitocoin:
And honestly, a lot of it — what I’ve read from you guys — a lot of it is being used for illicit purposes.
Dimon surely knows what he’s talking about. Just last November, JP Morgan settled with the US Justice Department to pay a record $13 billion fine for its, hmm, questionable mortgage practices. On top of that come another $2 billion for serving for more than 20 years as Bernie Madoff’s primary bank. But wait, there’s more … nevermind. Last October, JP Morgan set aside a pot of $23 billion to pay all recent fines. Which is more than twice the current total market cap of Bitcoin, lingering currently just a bit north of $10 billion.
But no need to feel sorry for Jamie and JP, the gargantuan fines leave neither the bank nor its CEO impoverished. Last year, the bank still pocketed more than $5 bn, and Dimon got a 74% raise for this impeccable too big to fail, to big to jail-performance.
Sounds like a great opportunity for a disruptive technology like Bitcoin.
And some of the people involved in this short exchange are already putting their money where there tweets are :
Bitcoin sucks. No, seriously. Mining is so energy hungry, that the whole system has to have been conceived by a bunch of climate change deniers (which might even be true). The clients look like the wet dreams of calcified COBOL programmers. And even worse: voodoo chart analysts are already refocusing from NYSE data to MtGox exegesis.
Bitcoin is great. No, seriously. If you don’t believe me, ask Marc Andreesen (he who did put a nice face on the webs, so that everybody can use it). Now he thinks, that Bitcoin matters and wrote everything up in a must read New York Times OpEd (which true Bitcoin enthusiast are already nitpickingly try to dissect).
It matters, because …
… Bitcoin gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate.
This may sound a bit unwieldy. But, as he says: The consequences of this breakthrough are hard to overstate.
Let me repeat this one more time: The consequences of this breakthrough are hard to overstate.
This may sound a bit strange, if you look at the most popular crypto currency use cases of today, currency and asset. But, as stated before: there are so many more things you can do with a distributed crypto ledger.
Bitcoin is a lot of things. But definitely not perfect (see above). So how about looking for competing technologies? Depending on the use case, Litecoin seems to have some advantages over Bitcoin – and already a quite sizeable followership. nxt claims eco-friendly mining, because of its 100% proof of stake (PoS) mechanism versus the proof of work (PoW) mechanism other coins are based on. The upcoming Ethereum plans to overtake Bitcoin as a platform by offering a sufficiently powerful Turing-complete scripting language on top of all things crypto. Says Ethereum:
Up until this point, most innovation in advanced applications such as domain and identity registration, user-issued currencies, smart property, smart contracts, and decentralized exchange has been highly fragmented, and implementing any of these technologies has required creating an entire meta-protocol layer or even a specialized blockchain. Theoretically, however, each and every one of these innovations and more can potentially be made hundreds of times easier to implement, and easier to scale, if only there was a stronger foundational layer with a powerful scripting language for all of these protocols to build upon.
Of course, there are some strong arguments to build your application on top of the Bitcoin platform as well. The ColoredCoins guys explain:
An alternate cryptocurrency could be specifically designed to transport colored coin values. However, Bitcoin has the largest hashing pools, which means Bitcoin is more secure and reliable. An alternate cryptocurrency would have very hard time providing the secure and stable distributed computational network that Bitcoin provides.
So many pros and cons. What would Andreesen do? I asked him a slightly leading question.
And that’s his clear and concise answer:
The power of Bitcoin lies in the network. Not just the physical network (which is already pretty impressive by itself). But the network of people involved. It’s not the tech specs of Bitcoin you have to beat. It’s the mindshare, the user base, the developers working on new stuff, the entrepreneurs finding new use cases.
And looking at some of the newly minted altcoins, all scepsis seems mostly valid. Pump and dump scams trying to attract altcoin-forex investments into cloned currencies of rather dubious value compete against more serious contenders with silly names like Dogecoin and potential gamechangers like the aforementioned Ethereum.
Of course Andreesen knows just too well, that sheer dumb numbers can easily kill any more aptly contender: the browser wars were decided by Internet Explorer’s preinstalled Windows masses, not Netscape’s superior technology. So he goes now by George Santayana Those who cannot remember the past are condemned to repeat it (and surfs the Bitcoin wave).
Not all metaphors are created Turing-complete. IE may have killed Netscape. But the three browser musketeers Firefox, Chrome, and Safari finally pruned the mighty Richelieu of HTML. And only if you’re a teensy weens altcoin, the mighty incumbent is BIG Bitcoin. For everything else, there’s VISA and MasterCard.
There’s a paper handed around between Bitcoin-friends which has the potential to scare the bejesus out of the cryptocurrency world. In June 2013, Newsdesk Media published a colorful magazine called G8 The UK Summit: Lough Erne. The esteemed list of authors include French president François Hollande, the president of the European Commission José Manuel Barroso, Barack Obama, and here we go, James Lyons, CEO of the International Cyber Security Protection Alliance (ICSPA). His rallying cry, allegedly to protect digital economies from cybercrime: ban alternative payment mechanisms, such as Bitcoin. Because they can enable criminal and terrorist groups to launder money and fund their operations.
As some people might remember, organized crime did not start with the Internet. Nor is money laundering a proprietary feature of crypto-currencies. Just ask your (un-)friendly neighborhood mobster. His family might be in the funds laundering business since some centuries and a half. And, especially regarding Bitcoin and its public ledger, large scale money laundering is not a built-in feature. To the contrary: larger transactions leave quite a footprint in the system.
The good thing about Lyon’s two page rant: despite the officially looking publication, policywise there’s nothing set as of so far:
If the leaders of the European Union and United States could be convinced to take a lead on this initiatives, … it would also strike a blow against those who would try to destroy the fabric of our world’s well-being, begs Lyons.
Of course, some of those world leaders might be inclined to remember the last time somebody almost succeeded in destroying not just the fabric of our world’s well-being. After all, bespoke leaders are still busy cleaning up the fallout from an almost final financial Armageddon (success not guaranteed). Alternative payment mechanisms, such as Bitcoin were definitely not at the root of this evil: They were not even around in 2007, but later on conceived as a potential remedy to skullduggeries inherent in the existing system, where the proliferation of weapons of financial mass destructions has reached the level of let’s say Brooklyn, Berlin-Kreuzberg, and Clacton-on-Sea having become rogue nuclear powers of their own.
So why is Lyons fighting so hard to ban these payment mechanisms? The ICSPA explicitly exists to fight against cyber frauds in electronic commerce, which mostly involves credit card technologies conceived for a non-digital non-networked world. Crypto currencies could be applied as a vaccine against those threats. OK, look no further than into the fairly short member list of his lobbying organization: a bunch of security services companies, a UK-based retailer, the global PR powerhouse Edelman, and, oh, woopsie: Visa Europe, the bank-owned credit card giant. Oh yes, alternative payment mechanisms could definitely become a threat to Visa’s well being: if they do not want to co-opt the remedy for the self-inflicted ills they’re suffering from (and which are the reason they finance a body like the ICSPA, whose executives not just do lunches with MPs, but are a liaison to law enforcement bodies like Europol as well).
The really bad thing is: Lyons knows his core audience pretty well. He and his ICSPA share table and bed with the powers that be on a fairly regular base. At theISSE 2013security conference in Brussels, Lyons explained how the world needs to reset the clock on trust after whistleblower Edward Snowden revealed the US Prism internet surveillance programme. Time to review cyber trust, says ICSPA, headlined Computer Weekly.
Lyons proposed course of actions: Governments need to do a better job to help citizens to understand the reasons for conducting internet surveillance. How would he achieve that? Combining international efforts to clamp down on child abuse pornography could help to rebuild relationships and trust between business, law enforcement and governments. Ah, got that.
And, not to forget, the Ceterum Censeo, asking for the tit for tat: an international collaboration in outlawing ignitable currencies such as Bitcoin.
How will (or should) the Bitcoin community react to such efforts?
There are three main courses of action: ignorance may sometimes be bliss and is very much ingrained into the human nature (duh!), but can have some really bad side effects. So, what else? Following the lead of traditional lobbies like ICSPA and start talking to the government as well, negotiating with regulation bodies, and getting law makers up to speed. The US-based Bitcoin Foundation seems pretty active in this area. In Novemer 2013, General Counsel Parick Murg testified at a Senate Homeland Security and Governmental Affairs Committee hearing entitled, “Beyond Silk Road: Potential Risks, Threats, and Promises of Virtual Currencies.”
And yes, it’s really important: if you want to make real business, legal certainty is not a nice thing to have, but a precondition.
But not everybody is embracing this appeasement approach. Are nice talks enough, when the chain dogs of the incumbent competition have skipped the mere bite reflex and are openly out for a kill? Not to forget: Bitcoin is still a bit player in this lobbying arena. And let’s not forget: the dark forces of financial evil did not just survive their own suicidal attack on the global financial system. They got nicely remunerated for it as well, with all blessings of the system they almost destroyed. They achieved this with hardcore PR, well oiled lobbying, and being a fundamental building block of the current system.
No way, say the makers of the Dark Wallet: Many prominent Bitcoin developers are actively in collusion with members of law enforcement and seeking approval from government legislators. We believe this is not in Bitcoin user’s self-interest, and instead serves wealthy business interests that make up the self-titled Bitcoin Foundation.
Parts of the community feel the same and voted with their wallets for the Dark Wallet: via Indiegogo and direct Bitcoin contributions they collected fairly quickly more than a hundred thousand Dollars.
War! Schism! Whatever! We’re talking protocol here. The only relevant schism would be a nasty fork. At its current state, both parties may distrust each other. But on the other hand, it’s two approaches which are nicely complimentary. Talking to the government is not an inherently bad thing. Just remember: really successful pirates like Francis Drake had their letters of marque, thereby minimizing theirs risks and maximizing their profits. At the same time you should never stop working on strengthening your own superpowers. The power of Bitcoin lies in being a crypto currency, and not in becoming a complacency coin.
And, besides that: I’m pretty sure that Bitcoin as a protocol or an open platform will not necessarily wipe out all existing financial players. To the contrary: clever CIOs in modern banks will embrace crypto currencies. Why? Have a look at how the current system works. It’s pretty cumbersome at its core. So the next financial innovation may hopefully not be a new and improved weapon of financial mass destruction, but an improvement of the inner workings of an ancient machine.
Here we go. A single Bitcoin is now worth more than one thousand Dollars. Success, success. Well, kind of.
I don’t want to be a spoil sport, but let me dissect a bit what’s going on there. If you see Bitcoin as a currency to run your everyday business with, you run into some really crazy problems.
First thing, if you’re a mom and pop store, your accountant will have to introduce you into a multicurrency environment – which has to deal with a type of currency, which makes the volatility of old Italian Lira look like an easy thing to handle. All spikes and drops have to be accounted for for your taxes. And drops can have the unpleasant side effect that you finally make a loss on a deal, which was decently profitable when it took place.
The far more complicated part for Bitcoin as a currency (as in medium of exchange) is the built-in deflationary mechanism. The number of coins is finite (and even shrinking over time, as coins are misplaced, destroyed without a backup,…). So as long as there enough people buying, prices will go up driving more people into the system leading prices to go up and so on and so on.
Now, if inflation is bad and the opposite of deflation, deflation must be the opposite of bad? Unfortunately not. Deflation is bad as well.
A smoothly running economy is like stepping outside and it’s springtime, about 20°C (or 68°F for Americans or 293.15 Kelvin for all you mad scientists out there). Birds are tweeting. Bees and flowers everywhere. Everything is well and fine. But here it comes, the two endemic threats towards your monetary wellbeing:
Inflation superheats your environment to temperatures way above the boiling point. If it really gets going, there’s no real way to stop the heat until everything’s cooked way beyond well done. Wood incinerates. Metals evaporate. The end.
And, talking about inflation, economywise, your money (and all your debts, you lucky b*st*rd) evaporates as well.
Deflation cools everything down. 0 Kelvin (or -273.15°C) means: complete standstill. Hell freezes over. The end.
Economywise what’s happening is that nobody want to invest into anything anymore – besides the deflationary currency. Buying is postponed indefinitely, as prices are in a free fall. The beers I paid for with Bitcoins just a year ago (no, I didn’t; it’s a metaphor!) are now worth an iPad Air with 64GB. An exchange rate of 1 BTC = 10.000 USD doesn’t look to farfetched. And we’re not talking really longterm here: the last tenfold increase took about a year. Do you really want to buy a beer right now – or save this BTC for now and buy yourself a Ferrari the day after tomorrow?
Which just translates into: in its current state, BTC is a really crappy medium of exchange. But an interesting money store. Highly speculative, with really interesting and not as common risk factors involved. But, hey: as long as it works, it works.
For some people it already worked pretty well. A friend of mine told me about a developer he met. He literally had found on his hard disk a stash of 40 BTC he had bought way back then and completely had forgotten about. The windfall buys him a brand new car – if he’s cashing in now.
It’s stories like this driving the BTC universe. And rightly so. Because investing in BTC isn’t any more esoteric than buying synthetic ETFs, investing in a growth stock (meaning: a company which is not making any money in the foreseeable future, but grows at a maddening speed, while nurturing the promise of phenomenal future riches wich are priced into their stock price as of today), buying yourself some rare stamps, or spending all your disposable EUR and USD and whatevers on fine arts or collectibles like signed baseball trading cards.
It’s fun, it’s risky, it’s exciting, and there might be a monetary benefit coming out of your actions (or inactions, see above).
But wait. The really good about Bitcoin is not just enabling you to make a quick buck (or loosing as quickly).
The really good about Bitcoin is about being what it technically is: a cryptocurrency, which at the same time is a rather volatile (meaning: still crappy) medium of exchange, a quite exciting value store (meaning: of highly speculative interest) – and a software platform for trustless transactions.
The equation goes a bit like this, with
A being the great growth in exchange value driving people and monies into platform development
B to be defined as the possibilities coming with the promise of becoming a universal medium of exchange, which keeps people and monies in the game.
And now, tadah:
A + B = C
And C stand for:
the resulting Bitcoin-related cryptocurrency software and platforms exceeding by far the effects of Bitcoin as a currency.
Trustless transactions is one of the major keywords here.
If you look at any kind of transaction between parties, basically we’re looking at a construct of a trustworthy contract between trusted parties using a trusted system. If you buy some real estate, you do want to know that you really bought yourself the Eiffel Tower from this trustworthy seller, when the trusted notary signed off the deal.
Trustless systems take most of this load off you. Because you do not have to trust all participants in the transaction. The model established by Bitcoin works pretty well for currency-type transactions. But there are already system out there using the infrastructure for something quite different. Since a couple of months, a group of students around Cornell’s Emin Gün Sirer is running the Virtual Notary.
With the following caveat:
It is not an official, legally-recognized notary, whose definition is provided by law, whose statements are court-recognized, and whose procedures are regulated. For operations that require legal standing, you should seek the help and services of an official, state-recognized notary. Please do not use Virtual Notary for something critical, like your will — you should enlist the services of a lawyer and a certified notary public.
The Virtual Notary does some nice and fancy things by itself. But finally leaves some code in the Bitcoin blockchain, using it as a public ledger, which cannot be altered.
In the same area, but pretty new around the block is Proof Of Existence. The service allows you to anonymously and securely store an online distributed proof of existence for any document and looks amazingly easy to use, with Argentine developer Manuel Aráoz suddenly finding itself at the center of interest of some quite interesting folks.
The real fun starts with two different approaches. Both are not just about leveraging the existing Bitcoin infrastructure, but by enhancing it by establishing new protocols on top of the Bitcoin protocol. That’s why J.R. Willett, masterbrain behind the Mastercoin project, claims for himself to be the author of The Second Bitcoin Whitepaper (with the legendary inventor of Bitcoin, Satoshi Nakamoto, who more or less singlehandedly started the whole craze, being the author of whitepaper No. 1).
Mastercoin is to Bitcoin as HTTP is to TCP/IP, Willett writes on Quora. We’re building a new protocol layer on top of Bitcoin with a dizzying array of cool features that have never even been done before anywhere. Things like distributed exchange, distributed betting, distributed e-commerce, and coins which can track external values like gold or U.S. Dollars without trusting a human being to back them.
Maybe even more exciting are the possibilities of Colored Coins, as it seems, well, a bit more open than the fairly closely held Mastercoin-project. Colored Coins is an open standard protocol, just like http and bittorrent, to exchange value over the internet, as they state rather matter of factly. Today there is no such standard for an exchange of value on the internet … Today Bitcoin is an amazing protocol, but the only asset you can hold on Bitcoin is the BTC.
The last sentence is probably core to understand all things Bitcoin.
Bitcoin is a protocol
One possible use case is holding BTC (A.K.A. Bitcoins) in this system
Full disclosure: I am not a Bitcoin-afficionado or enthusiast. I am not a Bitcoin-speculator or have any other financial interest in Bitcoin as of so far. I do not even own an Android phone, which would out me at once as an outsider, if I hadn’t disguised my iPhone with Sennheiser headphones and a bulky black Lifeproof case (but still: no Bitcoin wallet on my phone, due to the app store ToS).
I have been a sceptic. To quote myself from June 2011 on Quora:
“Bitcoin is a lot of things:
a fascinating proof of concept for a p2p cryptocurrency
a virtual value store with a highly irresponsible carbon footprint
an exercise in mass-psychology, illustrating that any perception of value is based upon mutual understanding, not some inherent natural qualities …”
Guess what. I still think this is a valid analysis. In hindsight to be amended by an appreciation of the ingenuity of coupling a complex cryptocurrency system with sassy speculation as an adoption booster.
OK, so, what am I doing on a Bitcoin conference, between wild eyed neo-neo liberals, post-Austrian libertarian economists, rags to riches full time traders, gnomish core developers, gold digging VCs, crypto-artists and software jockeys, infighting factions and secret forkers of code behind all this?
Mostly, I was enjoying myself. “This is just like in the first years of the Internet”, told me a fellow veteran of the dot-com-days. And yes, it’s true, for a variety of reasons, from potential social impact to entrepreneurial incentives to a positivistic anarcho-technological believe system like a WIRED-issue from 1993.
But, besides, net-nostalgia, Bitcoin offers much more.
“It’s a settlement system, which in the last four years has never failed”, says Tamás Blummer of Bits of Proof. His company is looking into Bitcoin-Enterprise application.
“Whole national economies might switch over to Bitcoin”, declared a whole set of panelists.
“A single coin might reach valuations up to a 100.000 or a Million US-Dollars”, predicted a more speculative mind (but hey, who am I to argue with any many-thousand-fold increase in exchange value).
But the real value of Bitcoin for the further developments of the Internets might even be more arcane. Most successful web service of nowadays share on principle: Twitter, Facebook, Soundcloud, Instagram, you name it are private ventures operating huge black boxes, which can be accessed over the Internet. The underlying protocols are private property. And, looking at Twitter, it might be easy to explain where the problem sits.
Twitter is basically a very simple messaging protocol, which (for whatever strange reasons) took the Internet by storm. Thousands of companies contributed into an API-fostered ecosystem based upon 140 characters and a central server. But with ever increasing VC investments into the monolithic service, the need for a cash out became so urgent, that it finally began to shape the service. Applications, which were to close to Twitter’s future money flows got the boot. With Twitter’s IPO becoming somewhat inevitable, what’s mostly left of the ecosystem is a 15 billion US Dollar media giant, which dabbles in some ad revenues and sells consumer intelligence to broadcasters.
Now try to imagine how the world would look like, if basic concepts like email or SMS would have taken the same path.
From this perspective, Bitcoin is a healthy step back into a direction of the Interwebs. Technically it’s a protocol, a reference implementation, and some forks of the reference. In technical reality, it’s a very stable crypto-based transactional infrastructure with many different potential uses. Economically, Bitcoin related companies are already attracting serious financing. And Bitcoin-assets seem to be in the 1bn USD range. Not a lot for a currency. But quite a lot of money for being real values stored in still kind of clunky software applications.
It’s the power of open.
And I think I’m going to make use of it.