The true calling of Bitcoin

Here we go. A single Bitcoin is now worth more than one thousand Dollars. Success, success. Well, kind of.

Scary currency or great investment? Deflationary and highly volatile.
Scary currency or great investment? Highly volatile, but going up up up.

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

and

  • 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.

Mastercoin is to bitcoin as HTTP is to TCP/IP.
Mastercoin is to bitcoin as HTTP is to TCP/IP.

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 QuoraWe’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. 

The Colored Coin: exchanging value over the Internet.
Colored Coins: exchanging value over the net.

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.

  1. Bitcoin is a protocol
  2. One possible use case is holding BTC (A.K.A. Bitcoins) in this system
  3. But wait: there’s so much more.

The state of the cryptocurrency

bitcoineurope
Back to the roots.

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).
Bitcoin in Amsterdam.
Bitcoining in Amsterdam.

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.

Digital Citizenship and Social Network Feudalism

In the real world, we abhor censorship, take many civil rights for granted. But as digital citizens, we happily click ourselves back into the 17th century.

Facebookistan has the 3rd largest population on the globe, just behind China and India. Google+, the new kid on the block, already surpassed Switzerland (big deal), Senegal, and even Australia. Which puts its current rank somewhere between Canada (population of 34.5 million, rank 35) and China (Republic of Taiwan that is, 23.2 millions, rank 50).

Mark Zuckerberg in the 17th century.

Now, those numbers do not make Facebook into a sovereign state, at least not in the traditional sense. Sovereign states are defined by territory. But the Googleplex is not like the Vatican a sovereign enclave in a larger territory. It’s still just a piece of real estate located in the US. And “Business is War” doesn’t mean Google war droids attacking the design soldiers of Jobs.

No land, no armies. The differences between Facebook (more than 10 times the population) and France (real nukes, real food) or Google (credit rating of AA+, just like the US) and Greece (CC, just like me) are obvious.

But so are the similarities. Sovereign nations are defined by their people, otherwise the Antarctica would be a superpower. And it’s we, the digital people, forming those digital Leviathans of the 21st century, which provide us with our digital IDs and currencies. They handle our communications, they might even tax us or control, what’s to be published or not (on their our Kindles and iPads).

350 years ago, Thomas Hobbes’ concluded, that an absolute monarchy be the best way to govern any sovereign. This would be a fringe opinion nowadays, at least in the western part of the real world. Our ancestors fought pretty hard to get us, where we are now: nobody should stay above the law, censorship is bad, sovereignty belongs to the people.

But a look at the digital domain might make Hobbes a happy man. The digital sovereign is not the people, but a corporation.

  • Post your artwork on Facebook, which might offense some bible belters? You’ll get evicted (as it happened to my friend Thomas). Eventually you might be allowed to return (as it happened to my friend Thomas). But no legal recourse here. It’s a little bit like GDR light.
  • Use a pseudonym on Google+? Say good-bye to your Google account.

In a heavily distributed digital universe, this wouldn’t be a big deal at all. Don’t like this bar? There are plenty next door. But Facebook isn’t your neighborhood Hooters, and Larry Page definitely not the soup nazi. There are not even a handful of Digital Sovereigns aspiring to become the operating systems of our digital lives.

The preamble to the United States Constitution starts like this: “We the People of the United States, … secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.

Our digital selves do not enjoy a constitution or according rights. We the users, have to accept some Terms of Service. And as most of you never really read what you OKed with a single mouse click, we hand now over to Richard Dreyfuss declaiming some parts of the Apple iTunes EULA.

The price of cotton, the cost of jeans, the value of digital media

Please strike the one word which does not fit here:

  • cotton
  • jeans
  • digital media

Right. Jeans is the wrong one. Because cotton and digital media are commodities, but the jeans a value added product.

Exhibit 1

As Joe Weisenthal insightful question in Business Insider: Guess What Surging Cotton Prices Do To The Cost Of Blue Jeans. In the last year, cotton prices almost doubled. As jeans are (or: should be) mostly cotton, what would be the effect on the retail prices of let’s say a Levi’s Ex-Girlfriend Jean (no kiddin’).

The effect is actually: zilch.
Levi’s bill of material rose from $1.41 to $2.53 – the final product cost $65.

Exhibit 2

Remember this infographic?

It tell’s you one thing: musician’s are cultural cotton pickers. Under current conditions, the (monetary) value is created elsewhere. And there’s not even a commodity bubble for music in sight.

Long Tail = Dead End?

I ran into Will Page a couple of weeks ago at FutureMusicCamp. Will’s not just the chief economist of PRS (and a really nice DJ). Actually, he more or less singlehandedly convinced me, that collecting societies don’t necessarily look and act like grumpy relics from the shellac age, but that their people can vividly think outside the box.

Especially one part of his keynote got me thinking. After some extensive numbers crunching, Will declared Chris Andersons Long Tail as wishful thinking. According to his numbers, the idea of the Internet opening the floodgates for a huge diversity of content to make it on the market is just wishful thinking, a mere virtual myth.

What Will did, was analyzing We7 and Spotify in the UK – and comparing this data with a Long Tail curve. Have a look at his April interview in TechDirt. There’s a nice graph right in the middle, and some good explanation on the how’s and why’s.

Now, the interesting part is this: why differ the curves of We7 and Spotify?

… We7 has a strong editorial with excellent artist promotional campaigns, whereas Spotify is editorial free and allows the consumer to graze the field at their leisure. Consequently, you can see that We7 (blue line) is more hit centric with a 90/5 rule and Spotify (green line) is more democratic with an 80/5 rule which, when you step back, is common sense made complicated but it’s nice to see the math adds up!

Right. And this most likely explains the not so long tail of the curves. It’s mostly a matter of user interfaces. Compared to any physical store, all net-based services share one thing: the depth of their catalog. Just imagine your local music dealer (if he still exists), blown up to the size of an IKEA warehouse. Anything, which can be licensed, can be bought.

The problem is: we’re not IKEA talking here, where you stroll through nicely decorated storage areas. A typical media store on the net is more the equivalent of a 20 square meter booth. Yes, there’s this giant warehouse attached. But the shelfspace is rather limited. Look at iTunes: either you know, what you are looking for, and you directly search for it. Or you rely on the best sellers and recommendations.

To unleash the long tail, you would either need a user interface, which IKEA-like unlocks the secrets of your warehouse. Or you find an affiliation model with the original rights holders, which offers curators and resellers some bit of a better cut than relying on a retailer sharing a bit of their slice with you.

Coming back to Benjamin

Did you know that? Almost a hundred years ago, Paul Valéry invented the remote control: Just as water, gas, and electricity are brought into our houses from far off to satisfy our needs in response to a minimal effort, so we shall be supplied with visual or auditory images, which will appear and disappear at a simple movement of the hand, hardly more than a sign. As a reminder for the historically challenged: back then, “tele vision” was a weirdo futurist phantasy involving a Nipkow disk, placing a phone call started with cranking a bit of electricity out of a Bakelite contraption, and any HTML would have qualified as a typo.

Of course, some things didn’t change at all. Except for the pope, even back then most western men have been wearing (mostly) trousers, cars ran (mostly) on distilled dinosaur juice, and Valéry already had described the future cable ops as utilities.

Walter Benjamin With Valéry, that’s more or less how Walter Benjamin starts his essay The Work of Art in the Age of Mechanical Reproduction. In some parts, it got a bit dusty. The Frankfurt School has seen some better days. But in very many parts, Benjamin got hyper-accelerated:
Mechanical reproduction is so 20th century, and a bit lame.
But digital reproduction unleashes the powers Benjamin describes, just as the web brings Valéry’s science fictionesque image utility to an ultimate conclusion.
Digital is merciless in its binary absolutism:
0 vs. 1, off vs. on, dead or alive.

But other things have changed, too. Benjamin lived in the magic triangle of a world between capitalism, communism, and fascism. This world was a real mess: weirdo dictators ousting weirdo kings and dapper dukes and crazy czars out of their weirdo fiefdoms (the continental breakfast), megalomanic monopolists/monarchists squeezing out the continents (the anglos saxon model), with hyper-capitalists acting as stateless dictators and crowned heads running commercial empires.

We left at least some of that behind, and good riddance. But our globalized economy, our fully commercialized western life style comes with its own pitfalls. And, coming back to Benjamin and his theme: The most important thing which happenend to The Work of Art in the Age of Digital Reproduction is not a scratch in its aura, but the economic damage towards its creator.

You still could put your hands on Benjamin’s mechanically reproduced piece. The medium was a thingy, a tradable good. But on its way into the networked Nirvana, the work lost this handle to the commercial world. A file is a file is a file. And an unlimited supply of any good means usually bad business. Selling sand in the Sahara. Ice cubes on the north pole. You name it.

Can we change that? Sure we can. We already started to melt the poles (which, for various reasons, is not an advisable approach). We tried some crazy DRM-schemes (ankle-high dikes vs. terrible tsunami). We’re messing around with civil liberties (protecting a Lady Gaga recording’s right vs. everybody else’s rights).
Again: can we really solve that conundrum? Most likely not, if we just pretend, that everything has just to stay the same. Mind you, the medium isn’t dead. But it has lost some of its commercial magic. So if you think you might need some new fairy dust pretty soonish, please crank up your Bakelite contraption and buzz me. Otherwise, you might just have to wait a bit for ionicc’s ideas on how to hedge against billions of bad boys copying your creative goods.

The iPhone of iTV

We’ve seen the future of iTV. And it’s purple. Seriously. Yahoo’s Intel-based Widget Channel might become the iPhone of interactive TV. Not because both are based upon a expensive platforms. But because the Widget Channel leverages formatted internet data onto a TV screen. Web surfing on a tv set is just a poor experience. Visualizing targeted data is something completely different.

It’s just like on the iPhone. I don’t browse the NY Times web site in Safari, but I read Paul Krugman on the iPhone app. Same with the Widget Channel. Mostly, I don’t want to search weather.com. I just need my local forecast now.

Chumby hooking up with Samsung leads into the same direction. Grabbing existing data and displaying them on consumer devices (digital picture frames are just bonsai-sized video displays anyway).