I am writing this post in response to comments I get from people when I try and explain what Bitcoin is. Uneducated people have told me countless times that bitcoins are only used by criminals. I want to debunk that myth and explain how the real potential for bitcoins is so much bigger than the black market can ever be.
Bitcoin is literally saving my family from hunger and giving them the financial freedom to immigrate in the near future. My parents and sister live in Venezuela. A lot of you might not know exactly what’s happening there so here are the cliff notes.
An incredibly incompetent socialist government took power.
They created strict currency controls that made it impossible for people to buy goods in anything other than their local currency. If you owned a business and needed to import something from overseas you needed the government’s approval to exchange the local currency to US dollars
This made running a business almost impossible. To operate you had to buy US dollars on a black market or bribe a government official to exchange currency.
When oil prices dropped the government quickly ran out of money causing an expected inflation of 1800% in 2017.
Things started to get really bad in Venezuela around 2014. My father owned at the time a successful air conditioning repair business but he knew things were about to take a turn for the worse. We came up with a plan to open a US bank account and convert bolívars (Venezuelan currency) into US dollars so we would be protected from inflation. We quickly ran into logistical problems, physically getting and safely transporting the money out of the country.
Caracas is one of the most violent cities in the world. Carjackings are common and people are killed for their cell phones. The airport police are corrupt and just as likely to rob you, and the money can’t be put in the local bank because you aren’t allowed to have dollars.
I’m 2014 Bitcoin was a new technology so we were very skeptical about it but we didn’t have any other options.
Fast forward to 2017. The economy is Venezuela is dead. My father lost his air conditioning business and people like our neighbors that were middle and upper class a few years ago can’t afford food. Thanks to the rising price of Bitcoin and its relative stability (to the Venezuelan economy), my family is part of a very small fortunate minority that can afford to help feed their community and also potentially immigrate to another country.
Now consider how big the Venezuelan economy is and that other countries like Brazil and Argentina are also experiencing similar problems. If citizens converted only a small amount of their savings into bitcoins this would represent an incredible amount of money.
Bitcoin can give anyone the ability to trade freely and protect themselves financially against corrupt and incompetent governments. In a world of 6 billion people, most of whom have no access or are ineligible for basic banking services, and an increasing number of governments opposing free speech and basic human rights, Bitcoin might not be the perfect hero we want but it’s what we need.
So in summary, Bitcoin is used by criminals the same way cash is used by criminals. If you take one step back you’ll realize that the possible legitimate uses for Bitcoin are far greater than the black market can ever be.
“Every device employed to bolster individual freedom must have as its chief purpose the impairment of the absoluteness of power.” — Eric Hoffer
In computer and communications networks, decentralization leads to faster innovation, greater openness, and lower cost. Decentralization creates the conditions for competition and diversity in the services the network provides.
But how can you tell if a network is decentralized, and what makes it more likely to be decentralized? Network “intelligence” is the characteristic that differentiates centralized from decentralized networks — but in a way that is surprising and counterintuitive.
Some networks are “smart.” They offer sophisticated services that can be delivered to very simple end-user devices on the “edge” of the network. Other networks are “dumb” — they offer only a very basic service and require that the end-user devices are intelligent. What’s smart about dumb networks is that they push innovation to the edge, giving end-users control over the pace and direction of innovation. Simplicity at the center allows for complexity at the edge, which fosters the vast decentralization of services.
Surprisingly, then, “dumb” networks are the smart choice for innovation and freedom.
The telephone network used to be a smart network supporting dumb devices (telephones). All the intelligence in the telephone network and all the services were contained in the phone company’s switching buildings. The telephone on the consumer’s kitchen table was little more than a speaker and a microphone. Even the most advanced touch-tone telephones were still pretty simple devices, depending entirely on the network services they could “request” through beeping the right tones.
In a smart network like that, there is no room for innovation at the edge. Sure, you can make a phone look like a cheeseburger or a banana, but you can’t change the services it offers. The services depend entirely on the central switches owned by the phone company. Centralized innovation means slow innovation. It also means innovation directed by the goals of a single company. As a result, anything that doesn’t seem to fit the vision of the company that owns the network is rejected or even actively fought.
In fact, until 1968, AT&T restricted the devices allowed on the network to a handful of approved devices. In 1968, in a landmark decision, the FCC ruled in favor of the Carterfone, an acoustic coupler device for connecting two-way radios to telephones, opening the door for any consumer device that didn’t “cause harm to the system.”
That ruling paved the way for the answering machine, the fax machine, and the modem. But even with the ability to connect smarter devices to the edge, it wasn’t until the modem that innovation really accelerated. The modem represented a complete inversion of the architecture: all the intelligence was moved to the edge, and the phone network was used only as an underlying “dumb” network to carry the data.
Did the telecommunications companies welcome this development? Of course not! They fought it for nearly a decade, using regulation, lobbying, and legal threats against the new competition. In some countries, modem calls across international lines were automatically disconnected to prevent competition in the lucrative long-distance market. In the end, the Internet won. Now, almost the entire phone network runs as an app on top of the Internet.
The Internet is a dumb network, which is its defining and most valuable feature. The Internet’s protocol (transmission control protocol/Internet protocol, or TCP/IP) doesn’t offer “services.” It doesn’t make decisions about content. It doesn’t distinguish between photos and text, video and audio. It doesn’t have a list of approved applications. It doesn’t even distinguish between client and server, user and host, or individual versus corporation. Every IP address is an equal peer.
TCP/IP acts as an efficient pipeline, moving data from one point to another. Over time, it has had some minor adjustments to offer some differentiated “quality of service” capabilities, but other than that, it remains, for the most part, a dumb data pipeline. Almost all the intelligence is on the edge — all the services, all the applications are created on the edge-devices. Creating a new application does not involve changing the network. The Web, voice, video, and social media were all created as applications on the edge without any need to modify the Internet protocol.
So the dumb network becomes a platform for independent innovation, without permission, at the edge. The result is an incredible range of innovations, carried out at an even more incredible pace. People interested in even the tiniest of niche applications can create them on the edge. Applications that only have two participants only need two devices to support them, and they can run on the Internet. Contrast that to the telephone network where a new “service,” like caller ID, had to be built and deployed on every company switch, incurring maintenance cost for every subscriber. So only the most popular, profitable, and widely used services got deployed.
The financial services industry is built on top of many highly specialized and service-specific networks. Most of these are layered atop the Internet, but they are architected as closed, centralized, and “smart” networks with limited intelligence on the edge.
Take, for example, the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the international wire transfer network. The consortium behind SWIFT has built a closed network of member banks that offers specific services: secure messages, mostly payment orders. Only banks can be members, and the network services are highly centralized.
The SWIFT network is just one of dozens of single-purpose, tightly controlled, and closed networks offered to financial services companies such as banks, brokerage firms, and exchanges. All these networks mediate the services by interposing the service provider between the “users,” and they allow minimal innovation or differentiation at the edge — that is, they are smart networks serving mostly dumb devices.
Bitcoin is the Internet of money. It offers a basic dumb network that connects peers from anywhere in the world. The bitcoin network itself does not define any financial services or applications. It doesn’t require membership registration or identification. It doesn’t control the types of devices or applications that can live on its edge. Bitcoin offers one service: securely time-stamped scripted transactions. Everything else is built on the edge-devices as an application. Bitcoin allows any application to be developed independently, without permission, on the edge of the network. A developer can create a new application using the transactional service as a platform and deploy it on any device. Even niche applications with few users — applications never envisioned by the bitcoin protocol creator — can be built and deployed.
Almost any network architecture can be inverted. You can build a closed network on top of an open network or vice versa, although it is easier to centralize than to decentralize. The modem inverted the phone network, giving us the Internet. The banks have built closed network systems on top of the decentralized Internet. Now bitcoin provides an open network platform for financial services on top of the open and decentralized Internet. The financial services built on top of bitcoin are themselves open because they are not “services” delivered by the network; they are “apps” running on top of the network. This arrangement opens a market for applications, putting the end user in a position of power to choose the right application without restrictions.
What happens when an industry transitions from using one or more “smart” and centralized networks to using a common, decentralized, open, and dumb network? A tsunami of innovation that was pent up for decades is suddenly released. All the applications that could never get permission in the closed network can now be developed and deployed without permission. At first, this change involves reinventing the previously centralized services with new and open decentralized alternatives. We saw that with the Internet, as traditional telecommunications services were reinvented with email, instant messaging, and video calls.
This first wave is also characterized by disintermediation — the removal of entire layers of intermediaries who are no longer necessary. With the Internet, this meant replacing brokers, classified ads publishers, real estate agents, car salespeople, and many others with search engines and online direct markets. In the financial industry, bitcoin will create a similar wave of disintermediation by making clearinghouses, exchanges, and wire transfer services obsolete. The big difference is that some of these disintermediated layers are multibillion dollar industries that are no longer needed.
Beyond the first wave of innovation, which simply replaces existing services, is another wave that begins to build the applications that were impossible with the previous centralized network. The second wave doesn’t just create applications that compare to existing services; it spawns new industries on the basis of applications that were previously too expensive or too difficult to scale. By eliminating friction in payments, bitcoin doesn’t just make better payments; it introduces market mechanisms and price discovery to economic activities that were too small or inefficient under the previous cost structure.
We used to think “smart” networks would deliver the most value, but making the network “dumb” enabled a massive wave of innovation. Intelligence at the edge brings choice, freedom, and experimentation without permission. In networks, “dumb” is better.
Andreas M. Antonopoulos is a technologist and serial entrepreneur who advises companies on the use of technology and decentralized digital currencies such as bitcoin.
I am pleased to announce that The Rational Argumentator now accepts Litecoin donations, in addition to the previously accepted Bitcoin and Dogecoin donations. This development is in accord with TRA’s welcoming stance toward all cryptocurrencies and support for innovative approaches to creating truly decentralized media of exchange and stores of value.
You can donate Litecoin to The Rational Argumentator using the following donation address (also found in the “Cryptocurrency Donations” section of the sidebar of TRA’s interface): LbmbsP92kruVoAEcWD29PL1cQUnNdjhqzR
Interview with Chuck Grimmett on Dogecoin – Video by Jeffrey A. Tucker and Chuck Grimmett
Commentary by Gennady Stolyarov II, Editor-in-Chief, The Rational Argumentator:
Jeffrey Tucker interviews Chuck Grimmett on Dogecoin and emerging cryptocurrencies.
They engage in a fascinating discussion on the 2-month-old cryptocurrency Dogecoin. Some excellent points include the following:
(1) It is pronounced “doge” as in “Venetian doge”.
(2) This conversation would have seemed ridiculous 1 year ago and unimaginable 5 years ago, yet it reflects reality today. (Even I, upon initially finding out about Dogecoin, had the thought that truth is stranger than fiction recurring in my mind for an entire day without pause.)
(3) Dogecoin offers an excellent opportunity for testing Milton Friedman’s monetarist rule of building a predictable rate of inflation into the money supply.
Chuck Grimmett is the Foundation for Economic Education’s Director of Web Media. Get in touch with him on Twitter: @cagrimmett
Jeffrey Tucker is a distinguished fellow at the Foundation for Economic Education (FEE), CEO of the startup Liberty.me, and publisher at Laissez Faire Books.
I’ll admit, I was skeptical when I first heard about dogecoin. I even wrote it off. Part of my living comes from running various social media profiles, so I recognized the doge meme from having seen it at least 30 times a day since the beginning of 2013. “A bunch of redditors are, once again, taking things too far,” I told myself. A cryptocurrency based on a meme? Yeah, okay.
Boy, was I wrong. Dogecoin has proven itself to be money. Here’s why.
First, what is money? The short answer is that money is as money does. More specifically, money is a medium of exchange, unit of account, and store of value that helps people trade for goods and services.
Now, before you go yelling that no one actually accepts dogecoin in your town or even in your state, let’s dig a little deeper. For any money, it is important to define exactly where it is a medium of exchange. My Turkish lira have little value outside of sentiment for me here in Irvington, N.Y. But in Turkey, I can exchange those pieces of paper for nearly anything.
So, where is dogecoin money? Right here on the Internet. DOGE (shorthand symbol for dogecoin) has spontaneously emerged as the Internet’s tipping currency. All across the Internet, folks are tipping fellow Internet-goers who create or share good content. From dogecoin.com, “Think of it as a more meaningful ‘like’ or upvote, with real value that can be used all across the Internet.” What I totally missed about DOGE in the beginning is that being based on a meme provided an instant bridge for the community that already existed to be introduced to cryptocurrency. Those people embraced it quickly and it took off. The small individual value relative to the US dollar or bitcoin means that people regularly send 10 or even 100 DOGE when they like a piece, which adds to the currency’s popularity and widespread use.
One of the great things about cryptocurrencies is that they provide a low cost way to have real currency competition. Each competes on different margins like security, number of coins to be produced, transaction times, and so on. Another major debate in the DOGE world right now is whether having a steady inflation rate in perpetuity with the number of coins is a good idea. Would DOGE be Milton Friedman’s cryptocurrency of choice to maintain stable prices into the foreseeable future?
I don’t know the answer to that, but I am so very glad that we finally have a mechanism by which to test theories like that in real time. Some currencies will win over their respective markets and some will fall into obscurity, and I’m ready for the ride.
Let a thousand currencies bloom!
Like this piece? You can tip Chuck in DOGE:
Chuck Grimmett is the Foundation for Economic Education’s Director of Web Media. Get in touch with him on Twitter: @cagrimmett
Mr. Stolyarov offers economic thoughts as to the purchasing power of decentralized electronic currencies, such as Bitcoin, Litecoin, and Dogecoin.
When considering the real purchasing power of the new cryptocurrencies, we should be looking not at Bitcoin in isolation, but at the combined pool of all cryptocurrencies in existence. In a world of many cryptocurrencies and the possibility of the creation of new cryptocurrencies, a single Bitcoin will purchase less than it could have purchased in a world where Bitcoin was the only possible cryptocurrency.
I am pleased to announce that, in addition to accepting Bitcoin donations, The Rational Argumentator now also accepts donations in Dogecoin, the world’s first meme-based cryptocurrency. This broadening of donation options is motivated by the desire to encourage the further evolution of decentralized media of exchange, and also by the fact that Dogecoin is presently easier to mine than Bitcoin, thereby facilitating easier entry into the cryptocurrency arena for those who wish to mine rather than purchase cryptocurrencies. Besides, as I pointed out in my recent and fast-spreading article, “Cryptocurrencies as a Single Pool of Wealth”, the purchasing power of Bitcoin and all other similar cryptocurrencies is closely connected, as long as there is free exchange among the cryptocurrencies.
You can donate using the code on the sidebar widget. Here are the donation codes for both Bitcoin and Dogecoin, for your convenience.
Much cryptocurrency of either kind will be appreciated.
Cryptocurrencies as a Single Pool of Wealth: Thoughts on the Purchasing Power of Decentralized Electronic Money – Article by G. Stolyarov II
The recent meteoric rise in the dollar price of Bitcoin – from around $12 at the beginning of 2013 to several peaks above $1000 at the end – has brought widespread attention to the prospects for and future of cryptocurrencies. I have no material stake in Bitcoin (although I do accept donations), and this article will not attempt to predict whether the current price of Bitcoin signifies mostly lasting value or a bubble akin to the Dutch tulip mania of the 1630s. Instead of speculation about any particular price level, I hope here to establish a principle pertaining to the purchasing power of cryptocurrencies in general, since Bitcoin is no longer the only one.
Although Bitcoin, developed in 2009 by the pseudonymous Satoshi Namakoto, has the distinction and advantage of having been the first cryptocurrency to gain widespread adoption, others, such as Litecoin (2011), Namecoin (2011), Peercoin (2012), and even Dogecoin (2013) – the first cryptocurrency based on an Internet meme – have followed suit. Many of these cryptocurrencies’ fundamental elements are similar. Litecoin’s algorithm is nearly identical to Bitcoin (with the major difference being the fourfold increase in the rate of block processing and transaction confirmation), and the Dogecoin algorithm is the same as that of Litecoin. The premise behind each cryptocurrency is a built-in deflation; the rate of production slows with time, and only 21 million Bitcoins could ever be “mined” electronically. The limit for the total pool of Litecoins is 84 million, whereas the total Dogecoins in circulation will approach an asymptote of 100 billion.
The deflationary mechanism of each cryptocurrency is admirable; it is an attempt to preserve real purchasing power. With fiat paper money printed by an out-of-control central bank, an increase in the number and denomination of papers (or their electronic equivalents) circulating in the economy will not increase material prosperity or the abundance of real goods; it will only raise the prices of goods in terms of fiat-money quantities. Ludwig von Mises, in his 1912 Theory of Money and Credit, outlined the redistributive effects of inflation; those who get the new money first (typically politically connected cronies and the institutions they control) will gain in real purchasing power, while those to whom the new money spreads last will lose. Cryptocurrencies are independent of any central issuer (although different organizations administer the technical protocols of each cryptocurrency) and so are not vulnerable to such redistributive inflationary pressures induced by political considerations. This is the principal advantage of cryptocurrencies over any fiat currency issued by a governmental or quasi-governmental central bank. Moreover, the real expenditure of resources (computer hardware and electricity) for mining cryptocurrencies provides a built-in scarcity that further restricts the possibility of inflation.
Yet there is another element to consider. Virtually any major cryptocurrency can be exchanged freely for any other (with some inevitable but minor transaction costs and spreads) as well as for national fiat currencies (with higher transaction costs in both time and money). For instance, on January 12, 2014, one Bitcoin could trade for approximately $850, while one Litecoin could trade for approximately $25, implying an exchange rate of 34 Litecoins per Bitcoin. Due to the similarity in the technical specifications of each cryptocurrency (similar algorithms, similar built-in scarcity, ability to be mined by the same computer hardware, and similar decentralized, distributed generation), any cryptocurrency could theoretically serve an identical function to any other. (The one caveat to this principle is that any future cryptocurrency algorithm that offers increased security from theft could crowd out the others if enough market participants come to recognize it as offering more reliable protection against hackers and fraudsters than the current Bitcoin algorithm and Bitcoin-oriented services do.) Moreover, any individual or organization with sufficient resources and determination could initiate a new cryptocurrency, much as Billy Markus initiated Dogecoin in part with the intent to provide an amusing reaction to the Bitcoin price crash in early December 2013.
This free entry into the cryptocurrency-creation market, combined with the essential similarity of all cryptocurrencies to date and the ability to readily exchange any one for any other, suggests that we should not be considering the purchasing power of Bitcoin in isolation. Rather, we should view all cryptocurrencies combined as a single pool of wealth. The total purchasing power of this pool of cryptocurrencies in general would depend on a multitude of real factors, including the demand among the general public for an alternative to governmental fiat currencies and the ease with which cryptocurrencies facilitate otherwise cumbersome or infeasible financial transactions. In other words, the properties of cryptocurrencies as stores of value and media of exchange would ultimately determine how much they could purchase, and the activities of arbitrageurs among the cryptocurrencies would tend to produce exchange rates that mirror the relative volumes of each cryptocurrency in existence. For instance, if we make the simplifying assumption that the functional properties of Bitcoin and Litecoin are identical for the practical purposes of users, then the exchange rate between Bitcoins and Litecoins should asymptotically approach 1 Bitcoin to 4 Litecoins, since this will be the ultimate ratio of the number of units of these cryptocurrencies. Of course, at any given time, the true ratio will vary, because each cryptocurrency was initiated at a different time, each has a different amount of computer hardware devoted to mining it, and none has come close to approaching its asymptotic volume.
What implication does this insight have for the purchasing power of Bitcoin? In a world of many cryptocurrencies and the possibility of the creation of new cryptocurrencies, a single Bitcoin will purchase less than it could have purchased in a world where Bitcoin was the only possible cryptocurrency. The degree of this effect depends on how many cryptocurrencies are in existence. This, in turn, depends on how many new cryptocurrency models or creative tweaks to existing cryptocurrency models are originated – since it is reasonable to posit that users will have little motive to switch from a more established cryptocurrency to a completely identical but less established cryptocurrency, all other things being equal. If new cryptocurrencies are originated with greater rapidity than the increase in the real purchasing power of cryptocurrencies in total, inflation may become a problem in the cryptocurrency world. The real bulwark against cryptocurrency inflation, then, is not the theoretical upper limit on any particular cryptocurrency’s volume, but rather the practical limitations on the amount of hardware that can be devoted to mining all cryptocurrencies combined. Will the scarcity of mining effort, in spite of future exponential advances in computer processing power in accordance with Moore’s Law, sufficiently restrain the inflationary pressures arising from human creativity in the cryptocurrency arena? Only time will tell.