Thursday, July 14, 2016

It's Not About the Technology, It's About the Money

By Daniel Krawisz
Satoshi Nakamoto Institute
Wednesday, July 13, 2016

Blockchain Technology

The Bitcoin world is full of people who know nothing about economics or cryptography; they only know that they could have made millions if they had not sold at the bottom. These people tell themselves that they are redeemable, that Bitcoin is just the MySpace of cryptocurrencies, that they will have another opportunity to get in early on some other revolution. These people can be dangerous, but most of them are easily preyed upon.

I think this may explain the origin of “blockchain technology”. It lets people talk as if clones of Bitcoin are important without having to remind themselves of Bitcoin. If someone says “blockchain technology” to me I give him the benefit of the doubt and write him off as someone who doesn't know what he's talking about. If I find out that he's intelligent, then he's most likely a con artist.1

When people say “blockchain technology” to you, you can often replace it with “mana”, or “chakras”, or “quantum” and it makes sense the same way. “Blockchain technology” has evolved into a sound Bitcoiners use to extract money from venture capitalists and one another, similar to the way that male birds use a song to attract females. It's a phrase for people who know there is a lot of money around, but don't exactly know where it's coming from.

I don’t see that there is a lot of use for some kind of general “blockchain technology” outside of its application in Bitcoin. In Bitcoin, the blockchain is a way of solving the double-spending problem without privileging any party as to the creation of new units or of establishing a consistent history. This is an extremely costly and complicated way of maintaining an accounting ledger. How often do I really need to do my accountancy in this way? I would say that it is only a good idea when the game being played is so important that no one can safely be put in the position of referee. There are not a lot of things that I would really need that for, but I think there is a good argument to be made that a blockchain is a reasonable alternative to the monetary system under which the rest of the world is currently oppressed. Otherwise I'd really rather be able to keep my accounting records to myself rather than leaving them out in public.

There are no applications of blockchains which do not involve a double-spending problem. A blockchain that was used for an application with no double-spending problem is nothing more than a database, so you could just replace it with a distributed hash table. People have also used the blockchain for timestamping. This only works because Bitcoin has become well-known as a point of reference. If you had a need for timestamps, you certainly wouldn’t invent a blockchain to do it.
Yet people are running around everywhere in the Bitcoin world screaming “blockchain blockchain blockchain” for all kinds of non-intuitive purposes until they're buried under piles of money. I can't believe how long it's taking for people to get wise to this ruse, but I hope it won't last too much longer. A blockchain does not have a wide range of applications. However, there is one application2, namely that of being a currency, which is overwhelmingly important.

Money as a Hallucination

The foundational fallacy about money is to explain in physical terms what is really a sociological phenomenon.3 Gold is not valuable because it is durable, fungible, portable, and scarce; it is valuable because of a beneficial and self-sustaining tradition in which it has a special place. The physical properties of gold make such a tradition possible, but they do not determine that it will arise; other goods with similar properties may also become the traditionally established monetary good. Bitcoin is the same way, of course. It could not run without the technology behind it, but what makes it important is the fact that it is seen as having value, thus making it exchangable for goods and services. People who think "blockchain technology" is important are making the same kind of mistake as the people who think gold has intrinsic value.

What's weird to me is that I know I have heard many people express correct ideas about what money is and then look at me like I'm crazy when I seriously consider the implications of what they said. I have heard people say to me things like, “money is just a shared hallucination” or “the value of money is whatever we all agree it is”. Yes! That is correct. That's exactly what I'm saying. And if money is a shared hallucination, then you can’t replicate Bitcoin’s value by replicating the technology. You would have to also replicate the hallucination, which you can’t. You’ll have two blockchains, but only one of them has a shared hallucination. This makes one of them valuable, the other worthless.

If that seems like a strange claim, think about the alternative: it means that it should be possible to create value for essentially no work. Every new blockchain ever produced was built on the premise that you can create a valuable investment that offers no income for the fixed cost of copying Bitcoin with alterations.

There is nothing magic here. Human behaviors have real costs and benefits. Money may be little other than a bunch of people attributing value to something without much direct use. It doesn’t matter if this sounds ridiculous; if there is a behavior that corresponds to this belief which benefits people, then they will keep behaving that way. Other people had better understand what they’re doing or else they will become relatively poorer.

Money as a Behavior

The overwhelmingly most popular thing to do with gold is to store it away and leave it for long periods of time. Therefore, an explanation for the price of gold should mostly depend on the reasons someone would want something that is good for being stored away, with some minor additions due to gold’s use as jewelry and in industry. We can study money as behavior by abstracting away all the uses of money other than that of storing it. No matter how silly that sounds, we know that it must be good for something because people actually do it and have been for some time.

When I talk about money as a behavior what that means is that everybody has a socially established number that is objectively associated with them. They can show other people how much they have, and everyone will agree as to what the number is. People can do something which subtracts from this number and adds to another person’s number. Also, people demand to have higher numbers. This means that they are willing to give up other things in order to increase their number. If we know the costs and benefits of increasing the number, then we can understand the price of these numbers on the market.

There could be many reasons that people are able to behave in this way. The numbers could correspond to amounts of a physical good, like gold or wampum, which people physically pass among one another. They could correspond to numbers which are managed and guaranteed by an institution, like dollars or World of Warcraft gold; or it could be numbers that are stored in a blockchain as in Bitcoin; or maybe we all just use the honor system and keep track of our own balances and don't cheat.

Often, economists define money in a way that makes money a unique good in an economy. I do not define money this way. There could be more than one good which acts like money. Instead, I will show that in the long term I would expect a single money to dominate.

The Risk of Money

Money is often explained in terms of the inconvenience of trading in a barter system.4 While bartering might well be inconvenient, that alone is not enough to explain the existence of money. It would certainly be nice if we could all settle on a good to use as money. However, there is no guarantee that everyone will be nice enough to do that. It is possible to imagine a tribe of people who are all very good economists and who all understand and like the idea of money, without having enough confidence in one another as to get it working for real. The first person among them would be taking a risk because he would have to work or sell his property in exchange for something that's good for not much other than being stored. His risk would only pay off if everyone else was willing to follow suit, and how could they possibly guarantee to him that they really would do so?

For almost a year, this was what it was like in Bitcoin. Although Bitcoiners suspected that Bitcoin could be money some day, its price was zero. Consequently, it was completely useless as a form of money. For a long time, Bitcoiners wanted the price to be higher than zero, but they could not make it so just by wanting it. Bitcoin did not fundamentally change as a piece of software when it first developed a price; the only thing that changed was people's’ willingness to trade dollars for it.

In general, there is always an individual cost to accepting money, even when the use of money is very widespread. If I work in exchange for money, how do I know that money will still be valuable by the time work is out and I am ready to do my shopping? If I work for something I can directly consume then at least I can get some utility out of it no matter what. But if I accept something whose main use is as a medium of exchange, then I am depending on there being future people willing to accept that money later.

This is why people can't just will money into existence and why the inconvenience of a barter system cannot explain the existence of money. There's a risk. In order to explain why people would use money, we need an individual benefit to match with the individual cost; otherwise people would never prefer to use money no matter how socially beneficial it was.

The Utility of Money

There is an individual benefit to using money, and it’s very simple. The person who accepts money gets to defer his decisions about what to buy to a later time. Someone who does not want to use money must have a better idea about what he is going to do with the goods he receives in payment than the person who accepts money. When one has money, then one is not committed. If I am the first person to accept money in payment and my bet on it pays off, then I have the option to choose what I want later, and I do not have to choose based on the limited information I have now. This benefit explains why someone would want something that is good for keeping in storage. If he wants to keep his options open, then he can open his vault the moment that the right opportunity comes along.

I have now provided a trade-off which, I contend, explains the value of money. I have not proved that there are no other costs and benefits to using money, but I don't know of any others. If someone can show me that there is another reason to hold money, please do. Now I'll talk about what this tradeoff implies for the value of money.

The Value of Money

In this article, I mean value in the investment sense. So the value of money is the purpose it serves in your portfolio and how much you would want. For the investor, the value of money is determined by the tradeoff of commitment versus optionality. If he wants more deferred choices, then he needs more cash. If he wants more income, then he should get stocks or bonds.

The reason someone might want to defer his choices is because there are limited periods of time in which investments go on sale. A difficult thing about business is that it is easy to make mistakes whose consequences are not evident until long after they are unavoidable. When that happens a business needs cash in order to survive long enough correct itself. During these times, good businesses can be bought cheaply for limited periods of time. This is why an investor wants a cash balance ready to spend. You never know what is coming, but if you have cash you are prepared for whatever it is. Holding a stock is a commitment to a particular enterprise, whereas cash keeps your options open.

The reason that buying an investment is a commitment is that you cannot always sell an investment easily for cash. It might go on sale, just as in the previous paragraph, and then the investor cannot get the same amount of cash back that he put into it. If there is a crash, the investor might not be able to follow through on his commitment and must sell at a loss. On the other hand, an investor who can realistically make the commitment won't care so much if there is a recession because he is prepared to weather safely through any bad times.

The interesting thing about the tradeoff of optionality versus commitment is that changes in the overall use of money in an economy can change the nature of that tradeoff for an individual person. The more demand for money there is, the less risky it is for an individual person to hold money. If you were the first person to sell goods or labor for money, then you would probably look insane or immensely stupid to bet that other people would want this stuff in the future. On the other hand, if many people are using money, then you are merely depending on there not being a hyperinflationary event in the immediate future. In that case, you might look insane or stupid for worrying about such a remote possibility at all.

In short, money becomes more useful the more people use it. This may seem like a very obvious conclusion given how many words I took to arrive at it, but it has some funny implications that are hard for a lot of people in Bitcoin to accept because they have money riding on a presumption that the opposite is true. As more people begin to hold money, the rational response of everyone else is to try to hold more than they already have. Everyone, therefore, will try to increase his cash balance at the same time, and they will do this by bidding larger amounts of other goods in exchange for it. In other words, all prices tend to go down, and money becomes more valuable. Effectively, everyone ends up with more money, except that they end up with more valuable units of money rather than higher sums of it; and furthermore they end up with larger fractions of their portfolio in money as well.

The Network Effect

This is the opposite of how most investments work. If the price of a stock goes up, then the value decreases because its dividend yield is smaller in proportion to its price. If the price goes up too much, an investor would eventually want to sell for something cheaper. By contrast, $100 worth of bitcoins today has a better value than $100 worth several years ago, even though the price of bitcoin is much greater. The value is better because there are more opportunities to unload the bitcoins at the owner's discretion.

A positive feedback between price and value implies that the growth or shrinkage of money can be self-sustaining. One might well find this conclusion hard to accept. Afterall, value in a business is built by hard work and careful strategy, whereas money can somehow drive its own value according to me. I would invite anyone to explain Bitcoin’s value any other way. And saying “bubble” doesn’t count because that’s virtually the same thing. Money is basically a self-sustaining bubble. We don’t yet know if Bitcoin will arrive at a self-sustaining state, and even if it doesn’t the “blockchain tech” people are still wrong because in that case there would be no good blockchains rather than one.

What would a self-sustaining bubble look like? Naturally, there must be a limit to the growth of money. As the value of money increases, eventually the individual benefits of holding more of it will go down. This happens as the market cap of currency becomes a larger and larger fraction of the whole economy. There are only so many errors that the economy produces for a cash-holder to take advantage of. The economy becomes saturated with money once there are enough investors sitting around with piles of money such that they are able to catch all the errors that are worthwhile. At that point it is no longer individually beneficial to hold more money even if the value of money has gone up. This prevents the value of money from going up further until more people or businesses are added to the economy.

This limit is independent of the underlying technology of the money. If people were sufficiently honest, it could run on nothing but the honor system. Thus, the value of money is a macroeconomic phenomenon, even for a tiny, quirky cryptocurrency like Bitcoin. This is the reason why Bitcoin can be worthless one year and valuable the next without a fundamental change to the software or protocol, and why it can range in price by enormous margins over short periods of time for reasons that seem inscrutable. It's because the value of money is a shared hallucination, and the price is caused by the vividness of that hallucination.

How Bitcoin’s Value Was Created

For a year after Bitcoin was first released, it had no price and was quite worthless. Therefore, the value was not created when the software was originally developed. It was caused by step-by-step investments that came later. Since it first gained a price, Bitcoin has had periods of rapid price increases. There can be events which are set off for no apparent reason in which Bitcoin’s price drives itself rapidly up or down. A small price increase is interpreted as an increase in demand. An increase in demand would mean that bitcoin is becoming more useful and therefore more valuable. Hence, more people buy in and cause another price increase. These manias make people outside wonder if Bitcoin is for real. They make people who previously thought that Bitcoin was stupid to think that they should maybe buy a little bit just in case there could actually be something to it. In other words, they are starting to think that Bitcoin is good for the only thing that money is actually good for, which is to be kept just in case.

Above I wrote about the hypothetical idea of a tribe of economists who all wanted to develop a money economy but could not because each felt the investment to be too risky. Here is how they could solve that problem. They could go around in a circle and take turns investing tiny amounts. Then none of them has to take a big risk. Their economy would not be monetized after one round, but they could see who among them was willing to take a small risk. If they had all shown themselves willing to invest a little bit, then many of them would be willing to risk a second round. If the game should proceed well, the economists would start to think about how wealthy each would be if they managed to get more than the rest. Soon the game would cease to be orderly as they all tried to sell as much as possible in order to buy the new money while it was cheap.

Bitcoin did not arise out of a barter system. The dollar and the other state-managed currencies had long since subsumed nearly all trade. However the calculation of the initial investors to Bitcoin was very similar to that which faced the economist tribesmen. It was clear to many that Bitcoin would be cool if you could actually buy things with it. However you can’t buy anything with it and its investment prospects depend on the presumption that it somehow one day will be demanded in exchange for goods. How could one even estimate the risk of such a possibility? The fact that other currencies already existed does not change the problem. From the perspective of a Bitcoin investor, Bitcoin might well have existed in a barter system in which Dollars, Yuan, Euro, Pound, and Yen were traded rather than tea, silk, salt, and flint. The only difference is that the national currencies are better competitors than tea or salt, so the risk is greater than if Bitcoin had arose in a real barter system.

Competing Currencies

I'm not against competing currencies in the sense of thinking people should be physically prevented from creating them. I am against competing currencies in the sense that I think currency competition is inherently monopolistic and that it is extremely dishonest or stupid to promote a new currency as an investment without taking this reality into account. So I am against competing currencies in the sense that someone who creates a new currency had better be able to present a case that his idea is capable of replacing the current system, and should be treated as a con artist otherwise.

The fact that money has a positive feedback between demand and value implies that there cannot normally be a stable equilibrium between two moneys. Any initial imbalance between them would tend to expand. If one currency was slightly more preferred than the other, people would react to this by demanding slightly more. This makes the preferred even more preferable than before. Any two moneys will interact in this way, thus leaving one to dominate the rest.

Many people get fooled upon first entering Bitcoin because they think diversification is important. The problem with diversification is that it is possible to create an infinite amount of bullshit at no cost, and if you diversify into that you lose everything. Diversification only makes sense among investments which are not bullshit. If we were looking at a bunch of stocks that all already paid dividends, then diversification would make sense. On the other hand, there are potentially an infinite number of scamcoins. During late 2013 and early 2014, new ones were being produced and hawked every day. They can be produced at this rate until everyone who thinks diversification is a good idea goes broke. Now that all the dumbest people have gone broke, the focus has shifted to using “blockchain tech” to exploit ignorant venture capitalists.

There is always some risk in accepting money in payment, even something very well-established like dollars. If everyone settles on the same money, then they have coordinated so as to reduce that risk as much as possible. If you expect people to use two currencies, you have to have some reason that both would offset risk in different ways. I have never seen an altcoiner or “blockchain tech” enthusiast come anywhere near to addressing this issue. Clearly, if two currencies are virtually identical, such as Bitcoin and Litecoin, then whichever currency is bigger has the advantage. Recently, Litecoin’s price has decoupled from Bitcoin’s somewhat, so maybe people have finally figured this out. Once Litecoin loses its shared hallucination, no amount of sloganeering will bring it back.

Litecoin prices, all-time (via CoinMarketCap)

But what about something more elaborate? Let’s pretend for a moment that Ethereum actually worked and was actually something that competed with Bitcoin on some level. Do its smart contracts give it a serious advantage over Bitcoin? I don’t see how Ethereum’s smart contract system would tend to bring in opportunities to unload ethers which are superior to the opportunities provided by Bitcoin. No matter how cool smart contracts sound, they make Ethereum just another appcoin, and as with other appcoins, people will reduce the risk of holding them by not holding them, or holding them for as short a time as possible. This will drive the price down until they are useless in trade.

By the way, I would prefer to be called a “Bitcoin minimalist” rather than a “Bitcoin maximalist” because the other blockchains appear useless and are easliy eliminated.

Bitcoin Versus the Dollar

On the other hand, Bitcoin improves over the dollar (and other fiat currencies) where it actually counts. The dollar is not very good for storing “just in case”. Over long periods, it loses value due to inflation. You can’t carry cash around or the police will take it, and if you leave it in a bank, you can have your account frozen and the money drained if you use it for purposes deemed unacceptable. You cannot own dollars the way that you can own bitcoins. It is not that Bitcoin comes at no risk; it is rather that you can always expect to have the same fraction of the total later on, if you secure them properly.

The national currencies are affected by forces which are beyond your knowledge or control. They are managed by committees serving the governments issuing them. The people on these committees speak in a jargon that is not only incomprehensible to most people, but unbearably dull even to those who do understand it. Everyone is affected by them, but most people will not bother to learn to understand them. They manage the currency in the national interest, which is not always the same thing as your interest. They can change the rules about how the currency can be spent you can use them or increase the government’s supply. 5 It is usually not possible to predict what they will do, at least over long time spans.

This is not possible under Bitcoin’s current rules, and it would be difficult to change them in ways that might eventually enable anything similar. Although many new bitcoins will be created in the future, the release schedule is publicly known, and is therefore already priced into current Bitcoins. Therefore Bitcoin will not lose value as a result of inflation. It might lose value as a result of losing popularity, and this risk is greater than that of the dollar’s (at the moment).

Thus there is a genuine qualitative difference between Bitcoin and the dollar, from an investment standpoint. It doesn’t mean that Bitcoin will necessarily defeat the dollar. It just means that Bitcoin has a relevant competitive edge. There are still significant disadvantages to Bitcoin; it is slow to confirm and difficult to maintain anonymity. However, Bitcoin has done well against the dollar so far and there is real-world commerce that has grown to rely on it. In addition, every time bitcoin grows, its risks decline relative to the dollar’s.

Final Thoughts

The reason, therefore, that the monetary aspects of Bitcoin are particularly interesting is the possibility that Bitcoin could become the preferred good for being stored away. If it did, then its value would grow until it was a significant part of the world economy. That would be a significant change for the world and for Bitcoin’s early adopters. Call me crazy, but I think that possibility has more portent than the possibility of applications of blockchains outside of Bitcoin, and is a lot more likely, too.

Bitcoin the protocol is like a great work of engineering. Its pieces are all adapted to its function. It is not the technology, but what the technology enables, that is most interesting. The blockchain as a concept had no reason to escape the esoteric circles of developers and engineers. Yet when people looked at Bitcoin, the only terms by which they knew how to understand it was as a new technology. But Bitcoin is more like a new tradition than a new technology. It is as if a small section of the crowd in a packed stadium has started to do the wave, and you can bet on whether the wave will eventually fill up the entire stadium.

If someone says “blockchain tech” to you, you might as well walk away right there.6 They’re just trying to sell you on their new decentralized crowdfunded blockchain tech internet of bitthings appscam. You know that they’re lying because everyone who acts like them is a liar and someone who was not a liar would actually do something to distinguish himself from them. Someone who knew what he was talking about would know that you can’t just string a bunch of buzzwords together in order to generate an idea that makes sense. Unfortunately, if a lack of basic critical thought is widespread, and if everyone becomes invested in everyone else’s stupidity, then nobody wants to know either, at least not before they’ve found a favorable time to exit their position. This will probably never happen because although they may think they’re preying on other people’s stupidity, they are more likely being preyed upon instead.

  1. On the other hand, just because someone is dumb does not mean that he is not a con artist. Based on my experience in Bitcoin, I think that many con artists have an instinct to remain as stupid as possible about how they get money so that they can keep believing that they are brilliant entrepreneurs. 
  2. do one thing and do it well” 
  3. The theory I am presenting in this article is the Austrian theory of money. To learn more about this idea, consult any standard Austrian tome, such as Murary Rothbard's Man, Economy, and State or Mises's Human Action.  
  4. When Austrian economists say barter system all they mean is an economy in which no good is used as money, even though the term has much more specific connotations for many people. 
  5. In the US, it is really congress and the executive branch changing the rules, and the Federal Reserve changing the supply. This distinction doesn’t really matter for the purposes of this article, but some people think it’s important because the federal reserve is designated as a private institution, whereas congress is composed of elected representatives. 
  6. This includes Hillary Clinton

Monday, May 2, 2016

How I Met Satoshi

By Jon Matonis
Monday, May 2, 2016

My relationship with the individual known as Satoshi Nakamoto started in early March 2010 when I received an email from Satoshi pointing me to the published Bitcoin white paper and encouraging me to investigate the system and to begin promoting the network by transacting and mining. At the time, I managed a digital currency blog and this was an email relationship with some brief correspondence.

Then, on June 4th 2015 during a conference, I arranged to meet fellow Bitcoin advocate, Craig Steven Wright, for a cup of coffee at the top floor of the AMP headquarters building in Sydney, Australia. After discussing many technical and economic aspects of the current Bitcoin protocol debates, I returned to my hotel room after an exhausting day. I remember saying to my wife that I had this weird feeling of having just met Satoshi. Of course, I continued the dialogue with Craig in the months after returning from Sydney and leading up to a private proof session in late March 2016.

The reality of an extraordinary event is rarely what you imagine and I am now pleased to know the creator of the Bitcoin protocol and the author of the Bitcoin white paper, Craig Steven Wright. Bitcoin in itself is a brilliant accomplishment. Dr Wright's substantial academic works merit further attention. I believe that the scale of his achievement, especially the original design of chaining blocks to achieve Nakamoto consensus, has far-reaching implications for our world beyond just a single vertical industry.

During the London proof sessions, I had the opportunity to review the relevant data along three distinct lines: cryptographic, social, and technical. Based on what I witnessed, it is my firm belief that Craig Steven Wright satisfies all three categories. For cryptographic proof in my presence, Craig signed and verified a message using the private key from block #1 newly-generated coins and from block #9 newly-generated coins (the first transaction to Hal Finney). The social evidence, including his unique personality, early emails that I received, and early drafts of the Bitcoin white paper, points to Craig as the creator. I also received satisfactory explanations to my questions about registering the domain and the various time-of-day postings to the BitcoinTalk forum. Additionally, Craig's technical working knowledge of public key cryptography, Bitcoin's addressing system, and proof-of-work consensus in a distributed peer-to-peer environment is very strong.

According to me, the proof is conclusive and I have no doubt that Craig Steven Wright is the person behind the Bitcoin technology, Nakamoto consensus, and the Satoshi Nakamoto name.

This story and its work are far from over. 

Directly or indirectly, the work of Satoshi has already provided employment opportunities for tens of thousands of people around the globe and created over $7 billion of new blockchain wealth. The forthcoming research work from Dr Craig Wright can only be described as voluminous and highly technical.

At its essence, Bitcoin displaces the intermediary, or trusted third party, and there will be no sacred cows along the way. It will be methodical, scientific, and unforgiving in its ascent.

Going forward from here, Bitcoin-company board rooms and others throughout the financial ecosystem will be recalibrating business models as these applied developments realign the prevailing orthodoxy. Expect radically-new solutions that address specialized nodes and on-chain scalability, smart contracts that exploit a Turing complete Bitcoin, the impotence of tokenless blockchains, and a systematic decline in the quantity and value of alt-coins.

Of course, overall scalability of the Bitcoin network will continue to evolve and improve, with a decided bias towards efficient on-chain scaling as further advancements in mining and node specialisation are realized. Moreover, this will be possible without compromising or degrading the current optimal levels for mining decentralisation or node decentralisation.

Programmable transactions, or smart contracts, will emerge for various suitable use cases. Much of the proposed functionality in Ethereum-like scripting solutions can be accomplished with the existing Bitcoin network through the use of multiple digital signatures and metadata storage techniques.

Computational power and security of the distributed network will continue to increase beyond the exahash per second rates achieved to date since proof-of-work mining is a zero-sum game. The "second" strongest distributed blockchain will always be less secure than a centralised data center.

Indeed, hashrate matters and will continue to matter.

Technological advances in user-friendly privacy and coin fungibility will progress to maturity for the average user and outpace competing efforts to thwart financial privacy. Bitcoin's built-in consumer protections include protection from financial surveillance, protection from confiscation, protection from government-sponsored inflation, protection from payment blockades, and protection from identity theft.

As the separation of money and State accelerates in real time, Bitcoin will continue to keep the monetary revolution peaceful. Coins in large volume will not be dropped onto the market, thereby strengthening bitcoin's essential store-of-value element and ultimately benefitting its medium-of-exchange and unit-of-account properties.

We must remember that bitcoin is not the byproduct of a blockchain -- the blockchain is the byproduct of bitcoin. Private, permissioned blockchains and distributed ledgers serve only to erect barriers and advance the interests of restrictive cartels whereas the public Bitcoin blockchain works to disrupt, not enable, financial incumbents.

In this new post-legal tender era, it is the central banks not the commercial banks that have the most to lose. We don't need kings to coin our money and Bitcoin will outlive political institutions. It already has. Consequently, this will have severe transformative implications for governments' fiscal policy and monetary policy.

I believe that the massive tidal wave of decentralisation and future Bitcoin advancements will start to occur more rapidly now, setting the stage for society to realize the plethora of currently imagined innovations. However, at the center of all of this incredible progress will be the unwavering and critical value of the humble digital bearer token known as bitcoin.

Follow Jon Matonis on Twitter.

Saturday, September 26, 2015

Jon Matonis: "Banking cartels could use private blockchains as blockades"

By Ian Allison
International Business Times
Monday, September 21, 2015

Bitcoin has boldly blazed a trail for a seamless global financial system, open to anyone on the planet. But this is not a proposition that banks are naturally disposed to.

Some people may say Bitcoin has solved a particular value transfer problem and this should not be conflated with what banks are planning to do with blockchain technology.

However, it could be argued that the highly regulated and exclusive nature of banking has allowed this industry (for the time being) the luxury of analysing its own disruption and formulating ways to manage this, in a manner not afforded to taxi drivers or hotels and B&Bs.

The economist Jon Matonis, the former executive director of the Bitcoin Foundation, believes banking cartels obsessing about private blockchains must answer a fundamental question: "Are these private blockchains going to be able to be used against smaller financial institutions or weaker nations to institute a blockade, just as SWIFT and CHAPS are able to do today?"

As the only global payments settlement network, Swift has blocked Iran from participating; Russia was threatened with being blocked; and Israel was also threatened with a block.

"If countries can be blocked out of the payments system because they are in a politically incorrect part of the world, then they would also be able to be blocked out of something that's a permissioned blockchain.

"We haven't really changed anything then if it's not open access, if all they have done is recreated the cartel.

"They cannot answer that a permissioned blockchain won't be used against smaller financial institutions for purposes of a blockade. The primary Bitcoin blockchain would route around that."

Matonis pointed out that this has prompted both Russia and China to construct their own Asian version of Swift over the past three years. Apparently, the China International Payment System (CIPS) is slated for roll out in 2016.

"They recognise the power that Swift holds. Led by Russia and China, they are building their own consortia to rival Swift, so that they will have a parallel alternative in case Swift decides to block access."

Disruption management

"The banking industry, the financial institutions, they have the luxury of sitting around today and actually analysing their own disruption," noted Matonis.

"This is what this Bitcoin/blockchain stuff is – 'look, we are analysing our own disruption. Now how do we want to be disrupted? Bring it in-house?

"Disruption doesn't work that way. It comes from the outside not the inside. If you look at Airbnb and Uber - Airbnb is the largest lodging company in the world and they don't own a single property. Uber is the largest taxi service in the world and they don't own a single car.

"Uber came up with the underlying technology to attack from another vector and it's the same thing that is going to happen with the banking industry, the banks just haven't accepted it yet.

"They will be disrupted in the same way by an outside technology and they are not going to be able to usurp the underlying technology and disrupt themselves from within because it will completely change what they are.

"In the future, the largest financial network may not be bank-owned at all and the most circulated currency may not be government issued."

Blockchain made the mainstream financial press last week with the announcement that the R3 initiative had nine big banks onside to create common standards for distributed ledger build out.

Matonis said: "Evolving towards a bank-wide standard for blockchain appears to be a replication of how Swift came into being; Visa did the same thing on the retail payments and was originally a bank-owned network.

He said: "If they are going to experiment on this stuff it makes sense for each one of the banks to pay one ninth of the cost instead of the full cost. That's where the true cost savings are?"

Some critics take an extreme view that all private blockchains are creating is another MySQL or shared database.

"Many fintech executives mistakenly view private blockchains as off-the-shelf products whereas they are rather 'byproducts' of a highly-valued native token with massive network effect - bitcoin. Bitcoin is not created to get more chain. The blockchain is created to get more coin."

However, Matonis does see value in the experimentation: "I think that they can achieve some cost savings. And actually I think that there is some benefit for banks doing these blockchain experiments because it prepares them for the future.

"They will already be orientated towards blockchains, they will be able then to eventually leverage what is the strongest most secure decentralised network - that of Bitcoin, where they could actually have value reside on it, and we end up in a world where there is a hybrid approach of private blockchains and the public global Bitcoin Blockchain."

Matonis favours a future state in which Bitcoin works as a settlement network at a higher level, implying that the primary blockchain would not handle every small transaction.

Digital gold

In this respect Bitcoin could be treated more as a reserve asset the way that gold is treated among nations today. Gold eliminates counterparty risk and as such is the ultimate settlement. A lot of countries, such as Germany for example, are repatriating their gold because they don't want it all to be in New York, Matonis pointed out.

"Bitcoin would take on a reserve asset role similar to gold. It would be a reserve currency asset class that countries would have on their balance sheets. It's digital gold; gold is analogue Bitcoin because gold can't be stuffed through a wire."

He said smaller transactions can be handled by a system like the Lightning Network. "Coinbase is already settling transactions between members, so every single thing doesn't have to be on the primary Bitcoin blockchain, because it's not always going to be free.

"The people who want these bigger blocks like the XT people, they want to extend the subsidy for free transactions longer by putting many, many micro-transactions on there even like for pennies.

"All that is a subsidy - it's not actually free. It's just that it's being subsidised by the larger blocks which are paid for ultimately by the transaction validators in the form of increased capacity, increased storage, increased bandwidth."

Matonis said people see the need to extend this "subsidy" for free transactions because Bitcoin has not reached critical mass.

"They look at it as a PayPal, Facebook thing where the end result is to get every single person in the world using it for their daily transactions.

"But it could be behind the scenes at a large scale settlement level. Individual people may not even need to know that they're using it but ultimately it's been settled that way."

Returning to the question of permissioned blockchain hype, Matonis concluded: "The cynical side of me would say that we should call private blockchains what they really are - wealth transfer mechanisms from banks to fintech consultants."

Saturday, August 1, 2015

Bitcoin is Not Compatible With the State

By Oleg Andreev
Monday, August 4, 2014

Bitcoin and State do not go together at all. Neither logically, nor economically.

Logically, if you think that the state is a useful and viable institution and Bitcoin is a useful and viable technology, you are lying to yourself. State is a hierarchical construction of “trusted third parties” (TTPs). In theory, some social interactions may involve a conflict that may be resolved by a trusted third party (arbiter). In a nation state it is ultimately some government agency (e.g. a cop). In case there’s a conflict between a citizen and a government agency, there is another government agency to watch over it. Thus, a cop is watched by his chief, a chief is watched by a court, court is watched by a parliament or a president, and those are being overthrown by an angry mob from time to time. The theory goes that every single conflict can be justly resolved by the state if parties cannot resolve it by themselves.

Bitcoin is an attempt to remove some trusted third parties from equation. That is all sorts of financial institutions including government regulators. From the Bitcoin perspective, it is a moral hazard to enable control over money supply and monetary flows to a hierarchy of trusted third parties. History is full of examples when private banks and government agencies could manipulate and destroy entire economies by being able to produce money without limits or censor its use. Bitcoin is strange and a bit complicated way to protect all users of money. Users can transact without need for any third party to record and acknowledge their transactions, and what’s more, no one can even become a third party by hijacking the system and imposing controls and rules on its usage. The former is not possible without the latter.

Wednesday, July 15, 2015

Bitcoin Is Sedition

By Justus Ranvier
Wednesday, June 11, 2014

The Reaction

Ever since the venture capital scene started talking about Bitcoin back in 2013, one of the most frequently cited comments from them is that Bitcoin is interesting for the technology, not the currency. In fact, this  mantra has become so common that it almost sounds… scripted.

The Problem

What’s going on here?

Apparently millions of Bitcoin users around the globe never got the word that Bitcoin isn’t interesting as a currency.   If Bitcoin wasn’t interesting as a currency, then why would the banking system need to go to such lengths to slow down the capital flight from the Dollar to Bitcoin by enacting restrictive Choke Point restrictions on both regular businesses and P2P trading?

The answer lies with the fate of the US Dollar. All government currencies have a finite life cycle, with an average lifespan of 27 years.  The USD has lasted longer than most, but it will not be an exception. However, whether you’re talking about the Weimar Germany, or Argentina, or the USSR, or the USA, the death of a currency follows an known script. The most important part of this script is that the connected elites get out first and leave the rest of the population to be the bagholders.

The problem with Bitcoin is that goes off-script. The hoi polloi got into Bitcoin before the elites got into it, and Bitcoin contains none of the mechanisms via which they normally arbitrarily inflate the currency to enrich themselves. This is a problem if you’re part of the modern financial aristocracy. Something Must Be Done.

Tuesday, April 14, 2015

Former Bitcoin Foundation Director Joins Board of First Global Credit

By Christie Harkin
Bitcoin Magazine
Tuesday, April 14, 2015

Jon Matonis has joined First Global Credit Board as a non-executive director where he will play an advisory role related to strategic direction, security, due diligence and other matters.

First Global Credit is a finance company that focuses exclusively on digital currency products. Its aim is to bridge the gap between bitcoin and fiat currencies through trading services, debt instruments, merchant services and other strategies.

In a press statement, Gavin Smith, chief executive and founding director of First Global Credit said, “We are delighted to welcome Jon to the board; we have found we share a mutual vision for both the future of bitcoin and how First Global Credit will fit into that ecosystem. Jon’s comprehensive knowledge and connections within the Bitcoin community will be extremely beneficial to the growth and development of the business.”

Matonis, a founding board member and former executive director of the Bitcoin Foundation, has an extensive career in finance and Bitcoin. His resume includes prior positions as CEO of HushMail and Director of Financial Services at VeriSign. A high-profile figure and thought leader in the digital currency community, he also serves on the boards or advisory boards of several other companies in the space, including BitGame Labs, BitPay, GoCoin and CoinDesk.

“There are a lot of companies that maintain bitcoin on their books,” Matonis said in an interview with Bitcoin Magazine. “Those bitcoins usually sit there dormant or even depreciating in value. What First Global does is offer to collateralize those bitcoins so that they can actually get a return.”

Matonis gave the example of online gaming. Traditional casino operators are able to get a return on their floats. But up until now, bitcoin casinos have not been able to do this. First Global offers them an opportunity to generate a yield, said Matonis.

“I’m also excited by the ability to use bitcoin assets as collateral for trading in the futures and options markets,” Matonis added. “Currently, T-bills can be used as collateral on various exchanges, but no one has structured it with bitcoin. First Global Credit plans to add futures markets as one of the markets available via their program.”

“Jon has the big picture,” said Marcie Terman, communications director for First Global. “He has the Bitcoin background and the financial background. He can look at our systems and make sure they are as robust as possible. It will be great to have him as a resource to speak on our behalf with government bodies.

Matonis has presented at conferences across the world on bitcoin and its disruptive economic implications to a wide variety of audiences, including members of the Federal Reserve, Bank of England, European Central Bank, SWIFT, IRS, DHS, payment networks, major financial institutions,, hedge funds and family offices.

Terman also expressed a hope that Matonis would be helpful in bringing in outside financing as the company starts to look outward for equity participation.

“The Bitcoin market is at a pivotal stage in its development,” Matonis said "Having been adopted as a transaction currency by many, the next necessary step in bitcoin’s evolution is to prove itself as a true investment vehicle, an instrument with a fully functioning capital market."

Other announcements:

Thursday, March 19, 2015

Bitcoin and iGaming: Disruption Comes From Your Blind Spot

By Jon Matonis
Saturday, March 14, 2015

It has often been said that bitcoin is the ideal digital casino chip. But what does that really mean?

For starters, it means that online gaming, more than anything else, is all about the customer experience.

Whether it's a land-based casino or an online casino, gamblers want a seamless experience with immediacy and privacy, and operators want an irreversible payment method. Bitcoin provides all three.

I recently made the prediction that within five years, half of the top 10 iGaming operators will be bitcoin-only.

Of course, the mainstream online casino operators don't see it that way and I wouldn't expect them to. They have a profitable and expanding business model with national fiat currencies. Why would they want to disrupt that revenue stream?

Funny thing about disruption though is that it rarely comes from within. Disruption comes from your blind spot.

While major iGaming and industry gambling conferences in the west have paid lip service to bitcoin and cryptocurrencies as alternative payment methods, they have simultaneously relegated it to a niche solution where presentations are neatly tucked away in a side corner. Kodak did the same thing after surprisingly inventing the first digital camera in 1975.

Reshaping the iGaming market

The grand opportunity with bitcoin is not with the major operators, which is exactly why I predict that half of the top 10 iGaming operators will soon be bitcoin-only.

New bitcoin gambling operations will evolve in that way organically – they will not be the major operators of today shedding their national fiat currency businesses. It will occur more along the lines of how Sony and Canon exploited Kodak's weak spot.

The major differences between bitcoin-only operators and the majors are a stark reminder of how complacency for something unusual and new can threaten an entire business model. The differences are revolutionizing the playing field.

For instance, bitcoin operators do not need to maintain a bank account anywhere in the world. If structured carefully, operating expenses can be covered entirely in bitcoin, including salaries and even real-time payouts to the all-important affiliates.

Provably fair cryptographic techniques for casinos, like those deployed at SatoshiDice, eliminate the need for eCOGRA-type bodies to provide legitimacy and credibility.

And probably most important, solving the payment dilemma in parts of the world under-served by banks or restricted by traditional payment networks opens up the world's vast unregulated gambling markets.

While some licensed and national currency gambling sites attempt to push funding compliance to bitcoin wallet providers, other gambling sites are moving forward now by accepting bitcoin directly from customers. Indeed, bitcoin's strengths and speed-to-market play very well in this fertile and untapped ground.

These startling innovations will likely reshape the market for iGaming around the world, creating a new set of skills required for the industry, but that is not yet realized by today's mainstream market leaders.

The management team decisions that bitcoin operators need to be focused on include:
  • In-house vs outsourced payment processing
  • Hot wallet/cold wallet ratios to balance customer service and ultimate security
  • Providing direct or indirect methods for customers to acquire bitcoin
  • The percentage of operational assets held in bitcoin vs national currency
  • Hedging and float yield strategies for bitcoin company assets

Blockchain tech is the cutting edge

With the bitcoin network just a little over six years old, the current statistics related specifically to bitcoin and gaming are impressive.

One hundred percent of the world's countries can be reached via the bitcoin payment option and no other payment method can make that claim. It has been estimated by Coinometrics and others that approximately 40% of bitcoin network transaction volume is related to payments for online gaming. Bitcoin-only casino operators lead the field for the bitcoin-related web advertising market. And, there are over 150 bitcoin-only casinos and gambling sites operating today.

AnoniBet claims to be the "first bitcoin sportsbook and casino" operating since 2011 and the original SatoshiDice pioneered the field of blockchain betting.

Since the field is moving so rapidly, bitcoin gambling directories and lists have sprung up, with sites like my favorite Bitcoin Gambling Sites and the more objective Bitcoin Gambling Wiki. Some bitcoin gambling sites are simply too new to be listed, such as BurnTurn poker and the promising Augur project for a decentralized prediction market.

If you want to see where the innovation in gaming occurs today, the bitcoin and blockchain sector is the place to look.

Taking the lead

My advice to bitcoin gaming businesses? Ignore the regulators.

By that I mean the gaming commission regulators at least while the industry is in a grey area. They don't know what they are doing with respect to bitcoin and, out of apathy, they frequently push the opportunity to the financial regulators who end up delaying implementation.

Bitcoin suffers from an outright usage ban or threatened ban in only three countries: Bolivia, Ecuador and Russia, which is still considering the final ban legislation, but blocks access to bitcoin-related websites in the meantime.

Regulators are not leaders, they are followers. Don't count on them to be insightful and innovative. Their primary job is to slow you down.

Do what you do best and build lasting and profitable businesses. Maybe even launch a skunkworks business within your organization. Failing that, perhaps acquire one of many bitcoin-only gambling operators from the industry lists above. Ultimately, it may assist in the upcoming drive to remain relevant.

Jon Matonis recently presented at a bitcoin seminar and a cryptocurrency regulatory compliance panel both for ICE. He is scheduled to make a presentation called "State of the Market for Bitcoin in Gambling" at his first iGaming conference in Asia on 19th March 2015.