Bitcoin Cannot Be Only a Store of Value

In December I wrote an article, Can Bitcoin Exist Only as a Store of Value?, in response to what I perceived to be an increasing belligerence among some people in the Bitcoin community who argue that Bitcoin doesn’t need any actual use cases because “store of value” is the use case. In that article I attempted to show that there is no such thing as an asset that has no utility except as a store of value. A sentiment recently echoed by Rick Falkvinge on Twitter:

You cannot have something be a store of value, except as a _secondary_ function, where a primary function generates ongoing demand.

— Rick Falkvinge (@Falkvinge) June 7, 2017

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Sadly, the recent run up in the Bitcoin price has caused people to double down on the store of value argument, seriously jeopardizing Bitcoin’s future in my opinion.

So let’s revisit the Store of Value. Maybe I’ll do a better job explaining it this time.

On Craig Wright

I’m probably risking being run out of polite society with this post but I figured I would write up my thoughts on the Craig Wright saga. My purpose here isn’t to argue that Craig Wright is Satoshi Nakamoto, I don’t think anyone can say definitively one way or another, but rather to highlight what I view to be non-critical and/or biased thinking by most people who have commented on it.

Before we start let’s review some epistemology. Often times when we’re evaluating conspiracy theories, 9/11 was an inside job for example, we’re confronted with theories that are not falsifiable and thus we can not employ standard methods to determine truth or falsehood. In the case of 9/11, there is literally no evidence that can disprove or falsify the theory that the U.S. government was behind the terror attack. Any evidence that comes to light that seems to falsify the theory just ends up pushing the conspiracy back one layer. If someone were to testify that they watched Mohammad Atta plan and execute the attack from start to finish without outside influence, well that that guy must be lying! He’s in on the conspiracy too! And thus the conspiracy gets pushed back one layer deeper and can never be falsified.

The Prospects for a “Bitcoin Standard”

The current block size debate involves not only heated debates about how best to scale Bitcoin but, more fundamentally, what Bitcoin should be. There are a wide range of views on this topic. Some want Bitcoin to be a high speed payment system. Others, believe it or not, want Bitcoin to be nothing more than a speculative investment asset and tell people to just use dollars if they want to buy things. One view that is pretty widely held is that Bitcoin should be a “base layer” for higher level systems (such as banking or payment systems) built on top of it.

As Greg Maxwell, the primary champion of this view, put it:

A censorable or reversible base system is not very suitable to build powerful upper layer transaction processing on top of… and if the underlying asset isn’t sound, there is little point in transacting with it at all.

Can Bitcoin Exist Only as a Store of Value?

As the block size debate has raged on I’ve noticed more and more bitcoiners (usually on the small block side), argue that Bitcoin should first and foremost be a store of value with all other use cases being secondary at best. In this view, being able to use Bitcoin as money ― that is, exchanging it for goods and services ― is a nice-to-have feature but not a necessity. If we fast-forward 30 years into the future and find that Bitcoin is only used as a store of value, and nothing else, it will still be a success. This view seems to be, if only implicitly, guiding some of Bitcoin’s development efforts.

In this post I’m going to argue that Bitcoin cannot exist as a pure store of value with no other form of utility. Indeed I’m going to argue that there is no such thing a pure store of value ― an asset whose only demand stems from people looking to “store” value. And should Bitcoin go down the road where much of it’s useful attributes are either deprecated, limited in usefulness, or just too expensive for most use cases, then Bitcoin cannot function as a store of value and indeed will lose most of it’s value.

3 Common Sense Solutions for Ending Police Violence

I assume everyone reading this already knows that the United States has a major problem with police violence. In particular police wielding excessive force, up to and including killing people, on a semi-regular basis. The Black Lives Matter movement is a direct response to the seemingly unending stream of African Americans unjustly killed by police, but African Americans aren’t the only victims of the police. Other racial minorities as well as whites are also killed in large numbers. Killedbypolice.net has the current body count at 746 through mid-August 2016. That number is only deaths and does not include people who were unjustly shot, tased, beaten, or in some way victimized by the police.

Addressing the root causes of the problem likely requires radical changes that we aren’t likely to seen any time soon. So with this post I’m going to present several solutions to better align the incentives of the police with the needs of our communities and to reduce the instances of physical altercations between the police and members of the general public. While these proposals are a fairly dramatic departure from the way things are currently done, I hope that reasonable people would take them seriously.

To The Moon With Larger Blocks

I’ve written a number of articles as of late that are related to the bitcoin block size debate but have never really laid out my reasons for supporting an increase. This occurred to me while reading Greg Maxwell’s trip to the moon reddit post.

In that post Greg more or less gave his reasons for not supporting a block size increase. It comes down to:

1) Bitcoin can’t handle transaction volumes similar to credit card companies without payment systems layered on top of it.

2) Attempting to increase transaction volumes without using these layered solutions makes bitcoin less secure.

Rejoinder: Soft Forks Are Safer Than Hard Forks

This is a bit of a rejoinder to Peter Todd’s blog post, Soft Forks Are Safer Than Hard Forks, which I assume was a response to my previous post on soft forks.

I’m happy that the issue is being discussed more and it seems more people are questioning the appropriateness of softforks. Or at least enough people are questioning them to provoke a response from supporters. I’m open to changing my mind. Bitcoin development isn’t (and has no reason to be) as partisan as, say, political ideology, but Peter’s blog post didn’t convince me.

If you recall from my original post I stated that the primary reason why we are told softforks should be preferred over hardforks is because with softforks the chain converges while with hardforks it forks.

I proceeded to give several reason why I believe that conventional wisdom is wrong:

Against Softforks

The Bitcoin protocol is in constant need of upgrade. Either to add new features, fix critical bugs, or improve scalability. The question is how best to upgrade the protocol of an already-deployed multi-billion dollar currency/payment system without disrupting everything. To do so we really only have two options ― softforks and hardforks. We’ll get into the difference between the two in a moment. To date, all planned protocol upgrades have been done via softfork and none via hardfork. Naturally, as with all things in Bitcoin, this has become a point of contention.

Up until recently I was firmly in the softfork camp. If we can upgrade the protocol rather seamlessly without causing any noticeable disruption, then why not do all upgrades as a softfork? Looking back on it, this was a rather naive view to have. I never really thought through the consequences of both types of forks and just sort of went along with what everyone else was telling me. I will get to my criticisms of softforks in a moment, but first a refresher.

Lightning Network Skepticism

I like the idea of the lightning network. I think the developers behind it are very smart and it’s a very clever use of Bitcoin contracts. I’m sure that whatever comes from it will be useful to some parts of the Bitcoin ecosystem at a minimum. What I’m not for, however, is prematurely deprecating critical parts of bitcoin (zeroconf transactions and low transaction fees) when it’s not yet clear that the lightning network will be a viable replacement for them. Yet that’s what the core developers seems bent on doing.

We know that lightning is at least technically feasible. We don’t know if it’s economically feasible or even a desirable alternative. Will it be a decentralized peer-to-peer payment layer or will it end up as a quasi-centralized payment network similar modern banking? We don’t know the answer to this question and probably wont know until we see it in action. Which is why it comes across as irresponsible to go “all-in” on lightning at this point.

My main concern from the beginning was that, as a hub-and-spoke payment layer, there would be very few hubs and the network would be quasi-centralized and a regulatory sitting duck. It seems I wasn’t the only one with this concern as there’s been a fairly recent pivot away from the hub-and-spoke network topology to a more organic, wallet-to-wallet routing. The network is now envisioned as a more pure p2p payment layer without those large scale payment hubs.

Certainly this has to be viewed as a promising development as it begins to address my primary concern. Unfortunately, I find this view of the lightning network overly optimistic. In what follows I will give a lightning network overview and some reasons why I think it’s likely the network will end up with the hub-and-spoke topology anyway.

On Zero Confirmation Transactions

This article is a response to a growing meme in the Bitcoin community that ‘zero confirmation transactions were never safe’ and therefore the core developers should change the code to make zero confirmation transactions totally unusable. Not only is this meme false, but the proposed code changes substantially reduce the utility of Bitcoin in the short run, and possibly the long run as well.

What are zero confirmation transactions?

Here’s a little refresher for those unfamiliar with how Bitcoin works. When someone sends you bitcoins, the transaction is broadcast to all the nodes in the Bitcoin network. The mining pools collect these new transactions and temporarily hold them in memory. At this point we say that transactions are “unconfirmed” or “pending” inclusion in Bitcoin’s ledger ― the blockchain. Approximately once every 10 minutes a mining pool collects these transactions from memory, organizes them into a block, and adds that block of transactions to the blockchain. This process repeats every 10 minutes on average.

We sometimes hear people say that Bitcoin transactions are irreversible. That’s not technically true, or at least not true of transactions that have been made recently. In the first number of minutes after a transaction is made, it can theoretically be reversed (or ‘double spent’) by the sender, assuming he has some technical ability. This means someone could pay you for some merchandise, then steal back the coins afterwards. The more time that passes, however, the more difficult it becomes to reverse a transaction. Typically we say that “unconfirmed” transactions are the easiest to reverse, while the deeper a transaction is in the blockchain, the more difficult it is to reverse. After a transaction is buried six or so blocks deep in the blockchain (about an hour), the probability of a successful double spend drops close to zero.

But why all the fuss about about unconfirmed transactions? While most Bitcoin users can afford to wait an hour for their payments to confirm, there are some business models which cannot. Retail is the most obvious example. Customers need to be able to pay the cashier and leave the store instantly. They can’t be required to wait around for 10 minutes or longer for their transaction to confirm. If retailers are unable to mitigate the risk of fraud when accepting unconfirmed transactions, then they simply wont accept Bitcoin.