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Economics of Bitcoin as a settlement network

The Saif House

As Bitcoin’s popularity continues to increase, its transaction fees rise as well, leading to the customary chorus of doom and gloom by those still stuck in stage 1 of dealing with Bitcoin grief. With average transaction fees exceeding $2, the doom-mongers assure us Bitcoin is doomed, because nobody wants to pay $2 to make a payment, when credit cards, paypal, and many other options charge far less transaction costs.

The problem here, as usual, is not with Bitcoin, but with people’s misunderstanding of Bitcoin, and the first clue to that can be found in the sky-rocketing price: if Bitcoin is so doomed, why are people still buying it? The answer is that Bitcoin’s value proposition is not in making the small consumer purchases, but in making large and important payments, particularly across borders. Payments in person, for small amounts, can be conducted in a wide variety of options: physical…

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Trustlessness as value

coinpit.io

The reason bitcoin is worth 600x the world reserve currency is because it has properties that satisfied a powerful economic need. These properties together we call trustless:

  • permissionless (you don’t need a bank or govt to approve your transaction)
  • private (if you take the right precautions)
  • predictable supply (secure from govt inflation)
  • provable cryptographic security (ownership and transactions are mathematically verifiable)

Other properties such as fungibility are essential for a currency but not novel to bitcoin and we won’t cover them here.

The main benefit of a trustless currency  is reduction of uncertainty and therefore increase the value of what you can do with it. It’s the same reason that currencies of stable democracies with healthy economies have a lot more value than unstable dictatorships embroiled in war.

Certainty increases risk tolerance because humans naturally will prefer to deal with systems where the risk is narrowly focused than one where many things are at risk.

As…

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So you want to use a blockchain for that?

Bits on blocks

There are good reasons and bad reasons to use blockchains. In conversations with people thinking about blockchain use cases, I have noticed common confusions and conflations arising from words initially used in a narrow context (usually to describe bitcoin’s blockchain) being understood more generically for blockchains. In this post I hope to untangle some of these common misconceptions.

Theme: Blockchains are secure

Writing data

Bitcoin has some specific security for writing data due to the burden of proof-of-work. That is, in order to add blocks of transactions, you have to validate all the transactions within the block (easy) and then perform repeated calculations (called hashing) to find a magic number that makes your block valid and acceptable to the other participants according to the rules of the network (easy, but computationally expensive, therefore energy intensive, therefore expensive). This proof-of-work burden combined with the longest chain rule makes it expensive to mine your own subversive chain.

Private chains on the other…

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No, “Blockchain” is not a solution looking for a problem

Bits on blocks

I have heard this pseudo-profound comment many times:

“Blockchain” is a solution looking for a problem.

Sorry, you are misinformed (ie, wrong). If you missed it the first time around, here’s the problem statement, articulated in 2008:
Bitcoin whitepaper

The problem statement, to paraphrase, is

How do people pay each other electronically without being at the behest of Financial Institutions?”

The proposed solution is:

“Bitcoin”

Bitcoin uses blockchain technology, right?  Yes, yes it does.  Of course you remember the 2015 rhetoric “I’m not sure about Bitcoin, but I’m interested in Blockchain, the underlying technology” – enthused by people who had read something on some website (or perhaps on a Dilbert) then stood on a stage and waved their hands?

Sorry: that was *so* last year.  This year, R3, arguably one of the world’s premier companies pitching “blockchain”/”distributed ledger”/”fabric of finance” (no one actually knows the difference) said on April 5 that they are not using blockchains

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From Bearer Bonds to the Blockchain: Artistic Perspectives on Digital Money

Bitcoin and the blockchain have generated an enormous amount of press, as well as investment by governments, banks and technology companies. Ruth Catlow of Furtherfield  and Ben Vickers of Serpentine Galleries, with the generous support of the Austrian Cultural Forum London organised a fantastic workshop attended by artists, representatives of public and commercial arts organisations, and technologists. The agenda was to consider what the blockchain, a poorly-understood yet politically-charged technology that means many things to many people, might mean for art and artists, and society-at-large.

Motivation

Although our audience had a specifically artistic interest, the discussion around blockchain intertwines economics, technology, and public policy, so I thought it might help to take a step back and start by thinking about money pre-bitcoin. Specifically, I wanted to un-entangle some of the philosophical and historical questions around money; not least because the nature of money itself, and long-standing assumptions in Western…

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Why AI development is going to get even faster. (Yes, really!)

Import AI

blogpic1 Artist’s depiction of the surprising popularity of deep learning techniques across a variety of disciplines.

The pace of development of artificial intelligence is going to get faster. And not for the typical reasons — More money, interest from megacompanies, faster computers, cheap&huge data, and so on. Now it’s about to accelerate because other fields are starting to mesh with it, letting insights from one feed into the other, and vice versa.

That’s the gist of a new book by David Beyer, which sees him interview 10 experts about artificial intelligence. It’s free. READ IT. The main takeaway is that neural networks are drawing sustained attention from researchers across the academic spectrum.  “Pretty much any researcher who has been to the NIPS Conference [a big AI conference] is beginning to evaluate neural networks for their application,” says Reza Zadeh, a consulting professor at Stanford. That’s going to have a number of weird effects.

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Towards an Open Banking API Standard

Disclaimer: I am a member of the Open Banking Working Group (OBWG) and was involved in drafting the OBWG report. However, the thoughts and opinions presented here are strictly my own.

The OBWG’s report was published yesterday with the somewhat misleading title The Open Banking Standard. We’re a long way from a standard but this report is a significant step along that path. Its purpose is to lay out a roadmap for defining an Open Banking API standard that can achieve widespread adoption, and to put forward some strawman proposals, intended to generate discussion of their merits and weaknesses, with the objective of generating new and better proposals.

The OBWG’s work follows on from the Fingleton report, which looked at the potential benefits of banking APIs and open data, and HM Treasury’s public consultation on data sharing and open data in banking.

The OBWG was convened with three core…

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5 Challenges Facing Your Smart Contract Project

Make Bitcoin Great Again

From vending machines to complex algorithms which have driven humans off the trading floor of the New York Stock Exchange, business logic codified in software has been automating and transforming the world around us, long before the emergence of cryptocurrencies.  In essence, smart contracts are already here.

The question now is can smart contracts operate outside a private system and free of central authority? If yes, what can decentralized smart contracts offer us which centralized logic cannot?  Are new business models possible?

Bitcoin is proof that smart contracts can function in a public environment.  Bitcoin’s simple scripting language based around cryptographic primitives enables the currency itself to exist.  It would be quite reasonable then to expect Ethereum and its fully-fledged programming language (Turing-complete) to open up a world of possibilities.

However, I believe there are fundamental challenges facing smart contracts on public blockchains.  Until these hurdles are overcome, don’t…

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A gentle introduction to bitcoin

Bits on blocks

This article is a gentle introduction to bitcoin and assumes minimal technical knowledge.

In the popular media, you will often read comments like “Bitcoins are stored in a digital wallet”, or “You can send money using blockchain technology”.  These comments can be misleading and can confuse.  By the end of this you should understand enough to participate in a dinnertime conversation about bitcoin, and not be mystified by the topic.

Bitcoin

Although people refer to bitcoin as a decentralised digital currency, I prefer to think of it as an electronic asset, to sidestep questions around which government backs it and who sets the interest rate, which are often a mental block in understanding bitcoin.

As an electronic asset, you can buy bitcoins, own them, and send them to someone else.  Currently there are around 14 million bitcoins that have been created, increasing by 25 bitcoins every 10 minutes or so…

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A gentle introduction to blockchain technology

Bits on blocks

This article is a gentle introduction to blockchain technology and assumes minimal technical knowledge.  It attempts to describe what it is rather than why should I care, which is something for a future post.


PART 1 – EXECUTIVE SUMMARY


People use the term ‘blockchain technology’ to mean different things, and it can be confusing.  Sometimes they are talking about The Bitcoin Blockchain, sometimes it’s other virtual currencies, sometimes it’s smart contracts (to be discussed in another post).  Most of the time though, they are talking about distributed ledgers, i.e. a list of transactions that is shared among a number of computers, rather than being stored on a central server.

The common themes seem to be a data store which:

  • usually contains financial transactions
  • is replicated across a number of systems in almost real-time
  • usually exists over a peer-to-peer network
  • uses cryptography and digital signatures to prove identity, authenticity and enforce…

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