>"To deliver a peer-to-peer alternative to cash that, through decentralization, did away with the need for trust in financial institutions, which the 2008 crisis showed to be unscrupulous, and often corrupt."
The sort of activity which led to the financial crisis would not be mitigated by the establishment of a decentralized currency. Decentralization would not do away with the need for financial institutions (or the toxic incentives that can drive them and the ecosystem in which they exist).
The USD is pretty decentralized already. Sure the money supply itself is centralized, but the USD is a functioning currency because all people who accept and deal in dollars accept the fact that the dollar is a currency. We're all decentralized nodes in the Fiat network.
(author here) I agree! I was calling out Bitcoin's initial goals in the article but don't 100% align with them myself. Financial institutions came to exist for a reason and I'm really not on board with everyone "being their own bank" as I feel it'd be a step backwards from what we have today.
What I do agree with is the need for more audit-able, accountable systems so the institutions we trust are less susceptible to corruption.
What I never understood with the blockchain is the idea that it would change the politics of finance in favour of the little guy.
As far as I can tell, financial institutions are exceedingly well practiced at co-opting new monetary systems, as they have been doing exactly that for a very long time, so I never thought that a new model of ledger was ever going to really faze them.
I don't think anyone wants unregulated markets for everyone, just like no one really wants anarchy. There are criminal, or rebellious elements in every group, but co-beneficial arbitrage is what we've evolved to.
Absolutely, and that's what is happening right now. I honestly don't have a solution for this problem... other than trying to make it as least appealing to these institutions are possible.
The only 'solution' I can see to this problem, is to develop an alternative to the floating monetary unit, of solving the calculation of exchanging goods and labour.
Money is useful, because it solves for the 'n' of a given trade by using all the pricing of transactions as a form of parallel computation, so the fact that it may often give sub-optimal results is outweighed by the fact that it has such a low overhead, compared to the traditional alternatives, such as planned resource based economies, which have historically been plagued by both sub-optimal results and a very high overhead.
The revolutionary work in economics isn't being done on the blockchain, or in any other new currencies for that matter. It is being done in the world of AI and big-data, when applied to logistics.
If you really want to revolutionise money, you have to try and make it obsolete.
edit: Also, seeking sources of funding may be problematic for such an enterprise - "Please can you invest in this plan to destroy capitalism." - being a particularly difficult sell.
Perhaps if it can be reframed as - "Please can you invest in this plan to destroy capitalism that also has excellent quarterly returns." - then it might get somewhere.
>The only 'solution' I can see to this problem, is to develop an alternative to the floating monetary unit, of solving the calculation of exchanging goods and labour.
That was an attempt at it, though one made in bad faith by many of the leading proponents. If you are genuinely making something obsolete, you don't usually need to go to the bother of banning it.
They are doing that now with Ripple/XRP but I don't see it as a threat but more as a welcome competitor to other crypto currencies. Not every coin needs to be decentralized and anonymous.
Are you sure that was Bitcoin's initial goal? Or just speculation from early adopters?
In the actual white paper, Satoshi does not mention any of this, although like you, I do remember these motivations being used very early on. I don't know their origin, but Satoshi simply talks about non reversible transactions, in the context of payments over the Internet.
>The root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micropayments impossible.
What's really fantastic, though, is that cryptocurrencies are currently in a large bubble themselves. Privacy of the exchanges is no better as you literally have to send them a picture of your ID. And several exchanges have been hacked with the money stolen. So far, I'd say cryptocurrencies (for the average joe/jane) are WORSE than regular banks. And, on the last point about micropayments, well Bitcoin now has such massive transaction fees and massive overhead that micropayments are even more impossible (without adding more layers).
The ideological/theoretical purity of cryptocurrencies is completely negated by using exchanges and by the perverse incentives of proof of work leading to enormous returns to scale for those who have developed custom ASICs.
Decentralization requires more effort than centralization, but something that requires effort doesn't generally grow very fast... And so we've centralized cryptocurrencies in a haphazard way, making them a lot easier for people to use--thus enabling cryptocurrencies to grow very fast--but also negating all the theoretical benefits.
Something useful will eventually come out of the current mess (and there are various initiatives that help address many of these flaws), but probably not before the Zeitgeist becomes disillusioned with cryptocurrencies.
If we went back, like 100 years...banks were not these secure, Federally-insured institutions with complex regulations, etc. Banks were robbed. There were runs on banks. They went out of business, people lost their deposits or their accounts. Just look at "It's a Wonderful Life" for a fictional example.
Everyone criticizing the current state of crypto as being worse than banks is missing the forest for the trees. These systems are early tech. Ethereum is barely 2 years old. It was easy to criticize dial-up internet, too. I'm sure Barnes & Nobles scoffed at Amazon at one point. Easy to do this, and assume this "dot-com" thing is just a bubble that's going away at some point.
Decentralization is ONE feature of crypto currency. One of several. It's not decentralization alone, but the combination of features that brings value to crypto, including programmable economic incentives (a powerful concept we're just learning the implications of).
To answer some of your other points: even exchanges are being built on the blockchain now. We have 0x, EtherDelta, etc, which allow you to trade tokens without revealing your identity. So, that problem is starting to resolve itself.
We have Proof-of-Stake coins like Qtum, which avoid the Proof-of-Work issues (Ethereum will be moving to PoS soon).
Still not sold on the idea that proof-of-work is inherently bad though. I consider that system very secure, as Bitcoin has proven. The blockchain itself has proven quite resilient to hackers, DDoS attacks, government intervention, etc.
I like your view as it's progressive. I think you're right to imply that the current state of crypto is a mere glimpse of better and more mainstream things to come.
+ the genesis block included the text "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks" (Source: https://en.bitcoin.it/wiki/Genesis_block)
As others are saying, Satoshi made some political-sounding statements about financial systems around the time of release, but the paper only refers to facets of traditional financial institutions in measured, objective terms.
Then again, given that Satoshi's true identity is unknown, a lot of this is necessarily speculation by interpreting a small set of clues.
Satoshi worked online with a group of developers for more than a year while keeping perfect operational security. Developed a solution to the byzantine generals problem, but has no published maths papers, otherwise something would have come up through text analysis. Designed bitcoin as a financial instrument, indicating inside knowledge of the banking industry. Has mined enough bitcoin to be on the list of the world's 100 richest people, but hasn't shifted them.
Satoshi is a team employed by something very rich, probably a government.
>Designed bitcoin as a financial instrument, indicating inside knowledge of the banking industry.
what
Bitcoin is just the clever but natural progression from previous cryptographic cash systems like b-money. The cypherpunks mailing list had long been interested in making more decentralized cryptographic cash systems along those lines. The fact that one of them finally combined the right cryptographic primitives in the right way to make such a system is hardly a sign of any insider knowledge or outside influence.
The creation of Bitcoin was by someone who had been following the cypherpunks' progress in the area for a long time, and finally noticed a clever way to combine standard tools to get the job done. There's certainly nothing superhuman about it. It hardly looks like a problem that was solved by a government throwing money and a team of pros from out of nowhere at it.
Governments are not superhuman either. I am not talking specifically about the difficulty of writing bitcoin, but the collection of circumstances along side that.
Governments undermining their own monetary systems is hardly novel, both for stupid reasons and occasionally for clever ones. Governments often implement new economic systems or currencies, with fairly mixed results.
Hey! I definitely agree that accountability is important. How do we improve accountability though? I'm skeptical about bitcoin or any other cryptocurrency doing so.
From what I know about the financial crisis, it wasn't the nature of fiat currencies that led to the crisis, but rather the complexity of financial instruments obscuring the weakness of underlying mortgage assets combined with incentives driving industry players that turned out to be toxic in the long term.
It doesn't seem to me that a distributed currency will eliminate financial complexity or perverse incentives.
But as an aside, I remember laughing about Dogecoin with friends back in 2014 when we first discovered it. It must feel awesome to have created something people around the world know about.
> From what I know about the financial crisis, it wasn't the nature of fiat currencies that led to the crisis, but rather the complexity of financial instruments obscuring the weakness of underlying mortgage assets combined with incentives driving industry players that turned out to be toxic in the long term.
Bitcoin wouldn't prevent the mortgage fraud, it would prevent the immoral bailouts that happened after that and that told the industry "don't worry, you're too big to fail, feel free to try harder next time".
They did come to exist for a reason: geography. Primarily, they served as a way to deposit money in one physical location and withdraw it at a different one at a different time. In the modern era, more and more of the economy as a whole flows through these institutions who do nothing more than shuffle numbers down a network link - and yet they charge a percentage cut of the transaction. It costs no more to transmit a larger number, yet they see fit to take more and more depending upon its size. Payment processors are taxing bodies. Mostly unregulated and entirely non-governmental bodies that have as much, if not more, control over the supply of money in the economy than the Federal Reserve.
If the Federal Reserve sought to increase the supply of money in the economy, but the payment processors disagreed, who would (or even could) stop them from raising their rates for payment processing to directly counteract the actions of the Fed? No one. They could do it, and they will do it eventually. How anyone could be comfortable with middlemen who provide nothing of significant value sitting in on almost every single transaction which occurs in the entire economy and skimming off the top I have no idea.
But also those large bodies provide a certain amount of safety when transferring money, so you can see where it went or if a transfer got lost. That's not true with crypto always, people are on their own. There are endless stories of big banks screwing customers over, often because of uncaring bureaucracy, but I do believe a giant bank will set things right, even if I had to complain - I've never had a problem really, but I have heard of people who do, and don't forget Wells Fargo.
On the surface that can be a beneficial exercise. 400+ years of financial dogma and cruft has accumulated in the world's financial system(s). If the sole eventuality of this period of cryptocurrency development is that some of the "sacred cows" stood up in the four centuries since are torn down, and outdated models are discovered and updated to better serve people of today, I consider it worthwhile progress.
Except that's not what's happening. What's happening is that some people are relearning the hard way why those "sacred cows" are so sacred. We've become so used to having them that some people take them for granted and forget why they exist, like the "raw water" people forgetting why municipal water systems exist.
e.g.
"Why do we need all these regulations anyway? It's just statist slavery!"
It is kind of funny, actually. Engineers rediscovering by doing, and wall street having these existential self-doubts about whether there is some hidden sophistication which is entirely absent.
> The sort of activity which led to the financial crisis would not be mitigated by the establishment of a decentralized currency.
It actually would deal with the issue that led to the GFC.
Remember --- the problem wasn't that there were fraudulent mortgages -- it is that these mortgages were packaged and repackaged in ways that deliberately obscured the risk involved so that people were buying stuff that had no underlying value. The lack of transparency is what encouraged the fraud and created the incentives for it, which is why the behaviour only stopped when there was a 65% fall in the value of pretty much all mortgage-backed-securities.
A mortgage CDO built on something like Ethereum would be programmatically transparent and anyone could look in real-time to see the value of their tranche. It would be trivial to distinguish between good and bad investments. And while there's still the potential for people to purchase things that do not have value, it becomes pretty much impossible for 2008 to happen again in a financial system run on crypto fintech -- intermediaries in the financial system would simply not be able to deliberately obscure transparency into which assets were owned and covered by which securities: if you wanted to check repayment rates you could script something to do the work in real-time by simply monitoring the blockchain.
This seems to me to be naive at best. Risks were obscured due to the mathematical structure of CDOs, not by hiding money transactions.
You could spend all day real time looking at the fact that few of the mortgages in your CDO are failing, and then when they fail systemically, you could watch in real time that a lot of assets that were thought to be pretty robust are not.
Your argument seems to be simply that radically more data would enable better predictors. Whether that is true or not, it's unclear whether bitcoin et.al. could help much with delivering that data. If we agree to a contract that I will pay you 5 bitcoin tomorrow in return for 4.9 bitcoin today, that contract is not publically available on bitcoin. Nor is, the fact that a certain money stream is part of a mortgage.
So unless you force every contract to be public, blockchain technology will not help you that much. And if you force every contract to be public, then you don't need a blockchain.
> Your argument seems to be simply that radically more data would enable better predictors.
The point is that transparency enables markets to accurately price risk and prevents the sort of market paralysis that caused the liquidity crunch.
Yes, it's true that people COULD have spent weeks figuring out the status of at least some of the CDOs on the market. But in reality no-one was reading 200 page long prospects that listed the exact mortgage originators and housing complexes of their CDOs. Buyers and sellers did not necessarily even have this data in peer-to-peer marketplaces. Financial institutions and their brokers bought securities based on their ratings, and dumped them ASAP once it became clear the entire sector was poisoned and they were doubtless overvalued.
> unless you force every contract to be public, blockchain technology will not help you that much
Smart contracts are public BECAUSE blockchains are open access. All parties can see the transfer of tokens on the network for the contracts that matter to them. No-one in the public necessarily knows what any contract represents, but if I am sold one I can monitor it in real-time. That was not possible with mortgage backed securities in 2007.
The problem with this is that overall losses were nowhere near 65 cents on the dollar -- only 20 percent of US mortgages were subprime at the peak of the GFC.
If the market was rational and had full insight into the performance of its securities, losses would have been no more than 20-35 cents on the dollar. That is enough to cause a major crisis, but it wouldn't trigger the paralysis of the global financial system.
Bitcoin would prevent the immoral bailouts that happened after the burst and that told the industry "don't worry, you're too big to fail, feel free to try harder next time".
Real-time (compared to equities) pricing as you know it does not exist in mortgages and would not be enabled by what you're describing. Transparency in something like this also does not help in the case of massive gaps downward in price which happened with a lot of these instruments and in fact would probably accelerate sell-offs. Transparency of the underlying was not the issue. Anyone investing in this stuff could have figured it out if they wanted to.
Transparency was absolutely the underlying issue. Read "Too Big To Fail" or "The Great Short" or any of the other histories of the Financial Crisis. The way CDOs were bundled and tranched made it effectively impossible for purchasers or banks to know which properties were actually covered by any CDO.
No-one knew what was in them -- the value was asserted by the ratings agencies and they were purchased based on expected rate-of-return. Even the people who went short on the market ended up using heuristics: there is a wonderful passage in The Great Short which describes a character who tells his broker that he will short anything bought by one of the people he has just met.
Once the extent of fraud became clear the entire market dumped down to 35 cents on the dollar. The fact that transparency was an issue is also apparent right here, since nowhere near 65% of consumer mortgages failed. But no-one would buy because no-one could tell if any particular CDO was backed by anyone who was still capable of making payments.
With Ethereum and smart-contract based mortgage systems this completely disappears, since the blockchain broadcasts every single payment made in real-time and it is possible for anyone to simply look and see if whether defaults are rising or falling among the mortgages that underpin their collateralized securities.
The fact that CDOs were trading 35cents on the dollar is largely a part of default EXPECTATIONS resetting up. Smart contracts cannot expedite this process of resetting expectations. Ethereum (which, by the way, is too slow to run CDO pricing models) can only broadcast what the latest market price is. Ethereum helps price dissemination no more than a Bloomberg terminal can.
> is largely a part of default EXPECTATIONS resetting up
Yes, exactly! But take the next step and ask what sets EXPECTATIONS about the worth of a security in a smart-contract environment? It stops being generalized market fear and it starts being actual DATA about performance.
> Ethereum (which, by the way, is too slow to run CDO pricing models)
You don't run the monitoring software ON the blockchain (you could but it would be inefficient). You run that off-chain using blockchain analysis software.
You're right that it was possible for people to consult the original (think, paper-based prospecti) in at least some cases, but most people relied on the ratings agencies and they claim to have essentially greenlit their ratings on what the Black–Scholes equation told them, using assumptions that were convenient but untrue (i.e. Gaussian cupola -- that defaults would not be correlated).
> it is not possible even in principle to tell if the ibank has rigged a CDO to have more than it's share of lemons!
Yes, you can purchase a bad CDO on a blockchain just as easily as you can purchase bad real estate in real life. Nothing prevents humans from misrepresenting data. But that isn't the point of the blockchain.
The point is that the transparency of the blockchain lets you (and others) know when you're holding a lemon, because you can see in real-time that no-one is paying off the mortgages in your CDO. What you do when that happens is a good question and the blockchain can't help [1], but it doesn't crash the entire market because people can tell the difference between your CDO and the quality ones that are still 100% good.
[1] it actually can help in one important way -- it provides an indisputable record of contract execution and payments that is not contained within the computer system of your counterparts (the bank). So if there is fraud it will be much easier to prove it to the courts than if you need to subpoena records out of the bowels of a corporate banking system.
It actually would deal with the issue that led to the GFC.
It really wouldn't. The decisions that led to this were made by people who had access to all the data they needed to achieve better understanding, but that didn't help.
The idea that it would become trivial to distinguish between good and bad investments seems to me to be incredibly naive.
> The idea that it would become trivial to distinguish between good and bad investments seems to me to be incredibly naive.
It is not naive. It is exactly how smart contracts work.
If you purchase a CDO on a blockchain, you are purchasing a share of whatever revenue paid into another contract. You can monitor those contracts, and the ones that are programmed to pay into THEM, and the ones that are programmed to pay into THEM ad infinitum.
That's a fantasy. The problem with 2008 for example wasn't the inability to make simple algorithmic decisions based on metric, it was that the fundamental risk was obscured (intentionally). Smart people mis-analyzed this and made poor decisions, because to some degree the instruments were designed for that purpose. Smart contracts do nearly nothing to mitigate this problem.
> The problem with 2008 ... was that the fundamental risk was obscured
Yes. And this is impossible with smart contracts. You can commit fraud by pricing the asset, but you can't prevent the market from demonstrating its quality in real-time.
With smart contracts there would have been a housing bubble, but there would also have been an inflow of capital when the market-value of the majority of CDOs crashed below about 80 cents on the dollar.
Bitcoin wouldn't prevent the GFC, it would prevent the immoral bailouts that happened after that and that told the industry "don't worry, you're too big to fail, feel free to try harder next time".
Bitcoin - Because the problem with global finance is too much regulation.
It baffles me how seemingly capable people have had the idea that a cryptocurrency would counter 2008 style stuff. It seems like a reasoning short circuit: Big institutions failed us, so something without big institutions must be immune.
The big institutions failed us exactly by allowing each other to do too much. By not regulating (which is by definition centrally imposed).
> It baffles me how seemingly capable people have had the idea that a cryptocurrency would counter 2008 style stuff. It seems like a reasoning short circuit: Big institutions failed us, so something without big institutions must be immune.
I think you misunderstood what people mean by saying "counter 2008 style stuff".
The aim isn't to prevent 2008 from happening again, but if 2008 were to happen again, then be in a safe situation.
Also you're taking the input from your opponents, but plugging that input into your own model, without realizing that bitcoin proponents do not share your model.
Your model is: "Lack of regulation caused 2008 to happen", but not everybody agrees with that model.
There are multiple models, but the most common model is that central bank inflating the money supply, and manipulating interest rates caused 2003-2007 to happen. 2008 was merely the well desired correction.
Same model applied to today, it means that we are currently in a major bubble and this bubble will pop in the coming years. Alternate financial systems such as bitcoin and smart contracts, are 'customizable' enough (For lack of a better term) that they give people a fighting chance.
1. Capital controls can't be imposed
2. Bank accounts can't be confiscated
3. If regulations have to be bypassed to make trade happen, then they should be more easily bypassed (for instance minimum wage laws).
So when the next crises happens, people are able to flee nations with their capital, their bank accounts will not be able to confiscated, and they will side step any regulation which screws people over. This is the aim of cryptocurrency proponents, irrespective of what is being said.
What you outline is the libertarian/neoliberal case for crypto, and while more coherent (and is built into the currency with the whole "fixed total supply" structure) it seems to me no less of a fantasy.
The state can damn well impose capital controls and confiscate accounts. You transfer the money elsewhere continue to use it? The state now has perfect transparency to see that. Did you own any assets in the country you're fleeing? They're confiscated. Does the state you're fleeing to have an extradition treaty with the state you're coming from? To bad. You refuse to hand over the account that has been confiscate? You go to jail until you do.
Just carrying gold seems a better choice if that's your game plan.
However, I haven't heard that case that much (and never as explicitly as you put it here).
There are multiple models, but the most common model is that central bank inflating the money supply, and manipulating interest rates caused 2003-2007 to happen. 2008 was merely the well desired correction
Regardless of it's truth value, that is not clearly the most common model.
FWIW, there's a plausible argument to be made that the 2008 crisis was aided (although not fundamentally caused) by excessively loose monetary policy in the mid/early-2000s, followed by sharp tightening.
That isn't to say the mortgage industry wasn't propped up on fraud, etc. But it wasn't irrelevant.
It wasn't "The sort of activity which led to the financial crisis" that inspired bitcoin.
After the crisis happened the US government funded the massive bailout by printing more money. It turned out to be a "good" decision since it prevented a catastrophic economic failure but it did cause more inflation and some people weren't happy that a government can just print more money on a whim.
So that's how the bitcoin came about to make a currency where there are no central governing body that can just print more whenever it wants.
The banks seem to have won the propaganda war about bailouts preventing economic collapse pretty well. I guess once the government makes the bailout and the banks accept the bailout, both parties are pretty committed to ensuring the public thinks that the bailouts were required.
What we really got was a tacit approval for bankers that they could make highly leveraged bets in the 7 years that the markets were going up, make shitloads of money, feel like geniuses, and then when it all inevitably explodes the government would bail them out and then QE like crazy to pick up the pieces. The QE would be given not to citizens, but to banks to inflate equity markets, and start the whole cycle again.
Now we have a whole new generation of financial "geniuses" overhyping every asset class, making shitloads of money off it all, thinking they are geniuses, and when it all collapses again they think the same thing will happen. It may do, but this time I don't have to be involved in that bullshit. My money is now unprintable. They can devalue the USD shitcoin all they want, but there are still only 21 million possible bitcoins and that's all I care about.
> After the crisis happened the US government funded the massive bailout by printing more money. It turned out to be a "good" decision since it prevented a catastrophic economic failure but it did cause more inflation
Inflation was near zero for the whole time.
Also, Bitcoin was released in January 2009, before anything but the very earliest trivial reactions to the collapse, it absolutely was not inspired by the much later criticisms of the reactions that largely hadn't yet occurred when it was released, no matter how amusing your theory is that the motivation for Bitcoin was literally people pissed off that an entity existed which had power to act to prevent a catastrophic economic collapse.
The government didn't actually print any money, the central banks just acted as a "lender of last resort," which works just as well in Bitcoin as it does in cash.
Isn't it already a common knowledge when someone says "the Fed prints money", they're flipping digits in their computers and not actually printing paper bills?
The Fed doesn't print the paper bills anyways. The Treasury does it.
But the point is that they could still do this with bitcoin. Even if they don't have the ability to create a bunch of bitcoins out of thin air, they do have the ability to credit their accounts. As you said, "So that's how the bitcoin came about to make a currency where there are no central governing body that can just print more whenever it wants," but the bailouts absolutely could still occur, because you don't have to directly control the money supply to be able to act as a lender of last resort.
What do you mean by "they do have the ability to credit their accounts"? So the Fed will print more dollars and buy bitcoin? The total number of Bitcoin still doesn't change and it will raise the value of Bitcoin while devaluing dollars.
The bailouts can still occur but it will occur in dollars since that's the only currency the Fed can print. If the Fed prints more dollars, it will devalue the dollar and everyone who holds dollar will have less purchasing power while if you had Bitcoin (or gold or any other currency), you're purchasing power won't be affected.
The decentralized aspect of using dollars in cash form(!), is something I would rather call permissionless. And that is exactly what Bitcoin set out to approximate for the Internet age.
(Indeed the "cash" reference in the whitepaper title refers to fungibility and permissionlessness, not tangibility or pictures of old presidents. This idea is much older than Bitcoin.)
> The sort of activity which led to the financial crisis would not be mitigated by the establishment of a decentralized currency.
I can't speak for every ideological bitcoin supporter, but you and I may differ on what constituted the "crisis". I agree that it would not deal with the activity which led to the financial crisis. But to many, the crisis was not that the banks all failed, but that they were not allowed to fail, and were bailed out instead. The genesis block doesn't say anything about addressing irresponsible behavior on the part of the banks. It says "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks"
People can do stupid and irresponsible things, and they can do stupid things with other people's money, but they have to bear the consequences.
Sure, if the government in question has the funds on hand or can borrow them. But they can't just literally increase the number of Bitcoin by a factor of 5 [1] in order to give trillions of dollars to people who have demonstrated their incompetence at handling that money.
> But they can't just literally increase the number of Bitcoin by a factor of 5 [1] in order to give trillions of dollars to people who have demonstrated their incompetence at handling that money.
Sure you can. It's code, why wouldn't you be able to change it?
There is no reason that cryptocurrency has to be inherently deflationary, rewards can easily be issued at a constant rate or any other rate. You are mixing up Bitcoin, the libertarian implementation, with the abstract cryptocurrency in general. This is an implementation detail.
In fact, there is actually already a rather storied history of centralized interventions to bail out failing institutions. See: the DAO hack and the subsequent rollback...
Could Vitalik just as easily have said "JP Morgan now has +5 million Eth?" Absolutely.
Nobody else necessarily needs to accept that version of the blockchain (see: Ethereum Classic) but there is a network effect here: if everyone else agrees to accept that version of history then sucks to be you, everyone wants to deal with Eth not PaulCoins. And people tend not to be willing to accept calamity when offered an alternative. Ethereum Classic is the version of history which best upholds those high-minded libertarian ideals, but it's also the version of history where a single attacker has 15% of all the ether.
> Sure you can. It's code, why wouldn't you be able to change it?
Fair enough. I'd expand that to say "code + consensus", which is what the rest of your post expands on. If the Bitcoin (for example) community really buys into the idea that we need to bail out some set of organizations, it's possible to execute a fork to do that. And the number of validating bitcoin clients out there is pretty large, so it would require a lot of buy-in.
It would have to be a hard fork (it would be possible as a soft fork, segwith-style, but the new coins issued would not be able to mix with pre-bailout coins unless clients updated).
To be honest, though, you're probably right. In my mind, depressingly so. The biggest takeaway from "too big to fail", even amongst progressives, seems to be that we have to shrink or break up the organizations that are too big to fail, rather than letting them fail -- only diehard libertarians and outcast Austrian economists believe that. The next time we hit this, we'll give the money to AIG to give to Goldman and buy Chris Dodd another house and move on with our lives while we get busy creating the next bubble (I think retail this time; that seems to be where the easy credit has relocated).
I think if cryptocurrency were ever "officially" adopted it would be a centralized model anyway. Something like Ripple or that proposed Canadian cryptocurrency.
With a centralized model, there's no need for miners or mining, because you trust the system that you run. And transactions could be extremely fast.
Basically, it would look a lot like a bank with an API and public/private key signatures, running on a regular old database. Governments would probably love this, in fact, since it would prevent the cash economy from stealing their tax revenue.
You may or may not consider this "cryptocurrency", but then again most "blockchain" companies these days are just using it as a fancy database. Why do IOT devices monitoring production of $PRODUCT need to sync a blockchain? Why not just have them hit a REST API that is controlled by the client? Again, you can presumably always trust yourself/your company, so the trustless part doesn't add much value, and for a lot of this stuff there is no real need for consensus-resolution type functionality that the Bitcoin part provides.
If all you need is Merkle trees... those have been around for what, 40 years now? Bitcoin didn't invent them, Ralph Merkle did.
> If the Bitcoin (for example) community really buys into the idea that we need to bail out some set of organizations, it's possible to execute a fork to do that. And the number of validating bitcoin clients out there is pretty large, so it would require a lot of buy-in.
With crypto, you are essentially switching the authority figure from an elected government to a bunch of faceless miners forming an oligarchy.
I don't think you understand how that works. The government didn't literally print more money, they bought securities from the banks in exchange for credit in the central bank's account. No actual money was printed. The increase in the BASE is because the Fed was reducing its reserves.
This is entirely possible to do in Bitcoin, you can still have a "lender of last resort".
Not "credit" in the sense of a "line of credit", but "credit" in the sense of "increased the amount held in their account" -- the banks, if they so desired, could ask the Fed to deliver, as cash, the money held in reserves, so long as they upheld their reserve requirements at the same time, and the Fed would have, by law, been forced to instruct the Treasury to deliver the specie.
Of course, the plan was that the troubled assets would be purchased by the Fed, an sold in a non-firesale fashion, and cancelled against the increase in the money used to cancel that out, to return the held reserves back to the trendline that predated 2008.
Congress had instructed, through TARP, the Fed to purchase "troubled assets" and had authorized amounts, but the Fed ignored those instructions and restrictions entirely and purchased none of the troubled assets, instead bolstering the reserves through the standard open market operations, and later, through quantitative easing, which is just an acceleration of the standard open market operations, with the purpose of creating enough inflation to allow the economy to recover. But that inflation didn't happen (still hasn't happened) for reasons that literally no person on earth can explain. Then the Fed did some balance sheet gymnastics (mark-to-market is a glorious thing) to show that all the TARP funds had been repaid (with interest!).
Yes, but it could remove the need to bail out the banks, which is really the crux of the issue when you get down to it. As it stands today, _not_ bailing out the banks would have crippled or destroyed the world economy (at least, that's my understanding). The banks are, literally, too big to [be allowed to] fail.
Cryptocurrencies could eventually remove enough power from banks to render their failure absorbable by the global economy.
Granted, I find it very unlikely that any cryptocurrency could remove the need for banks in general - they fill too many roles in the financial system - but it could reduce the market's reliance on them in general.
There's a lot of "could"s in all of this and I'm not an economist myself, so, grain of salt and all that. I will say that this is all based on things I've read from people that are, to the best of my knowledge, actual economists, but you should do your own research if such a thing interests you.
If a tbtf bank algo went haywire when trading with the intent to maintain some position in cryptocurrencies because of some market spike/error/or w/e over an exchange and lost alot of money, yet others who were on the other side of the trade safely moved their gains to private wallets, the exchange wouldnt be able to negate those trades and claw back funds (like they did during the gfc) and those tbtf banks will be out of their desired positions; such that even if they were bailed out by some CB QE program, they'd still have to spend those bailed out funds to re-enter their previous positions.
Meanwhile those who came out on the otherside of the trade with their desired positions will still have more resources to allocate at their disposal than had they been clawed back/reveresed.
My assumptions about being bailed out are that it comes down to CB's inflating the currency supply to aquire assets that burden some privileged actors balance sheets.
And what it means to not be bailed out means to pay more on ones mortgage than market value of such asset.
To take the biggest example, AIG's owners did bear the consequences. Their equity was wiped out in the bailout. Do you believe individuals who did business with AIG are the ones who should have born the consequences for bad decisions made by the owners of AIG?
Well, first of all, yes, 100% certainly -- if you try to buy insurance for uninsurable things, then you are taking a risk, and risks can have downsides.
And as for bearing the consequences, we simply do not have the capacity within the rule of law to make them bear the consequences. The people who made the decisions were extremely well compensated even outside of equity up until the moment when the house of cards came crashing down, and those people have now moved on to equally lucrative jobs -- hell, they can probably put on their resume that they managed to convince the government to give them billions of dollars to cover their asses, which is more than anyone else gets when their bad decisions come home to roost.
Without the bailouts there would at least be grounds to sue the individuals who created the situation when things unwound, because there would have been consequences.
I'm getting a little up in arms here because nothing triggers me more than the idea that macroeconomics is a science -- all the actions around the bailouts, and this narrative of "economic collapse" and "too big to fail" -- the same people who disastrously failed to predict the future before we're now trusting to predict the future. Einstein said in response to the fact that hundreds of scientists thought his theory was wrong by saying "if I were wrong, one would be enough". In economics, nobody would even consider their models to be incorrect, no matter how much they have been falsified.
The vast majority of people who did business with AIG had nothing to do with subprime. Your whole answer seems to assume that the consequences of AIG going bankrupt could have been neatly contained the subset of their business that caused the problem.
No, it would not have been neat. It would have been incredibly messy. Their life insurance in particular, was mostly shielded by statute, but the remainder of their business would have been fair game -- that would have had wide-reaching implications, both in and out of the financial sector. The collapse of major investment banks that would have inevitably followed would result in many companies not being able to make payroll. That would have exacerbated the already existing problems with the real estate market collapsing, as meeting payment obligations would be more difficult for people, further depressing the values of mortgage-backed securities, as financial companies would have sought to mitigate their losses and cover their reserve and capitalization requirements by selling things at firesale prices.
It would have been a disaster of epic proportions. Would it have been worse than what happened? I don't know -- and neither do the economists who insisted on action. As it was, innumerable businesses not at the scale of AIG were left in the cold to collapse without billions of dollars of free money, and, more significantly in my view, institutions and well-capitalized individuals who correctly predicted the collapse of the market would have been well-positioned to use their assets to buy up undervalued assets (including home mortgages, which, if purchased at fire sale prices, would have made decisions about de-valuing the loans easy, because the effective yields would have been so much higher).
You are correct that the activity that led to all financial crises will not be mitigated in the domain of national currencies. It will be avoided in decentralized money that is uncorrelated, like gold.
Your concept of decentralization is off. The purpose of it is this: How many points of failure are there? How many of these points can break before the cards all fall? If this happens, who pays for it?
This illustrates that the USD is not decentralized.
Cryptocurrency is an exit from this, much like gold or real estate or other investment vehicles. Cryptocurrency is available to anyone with a phone and internet access -- that cannot be said for any other investment vehicle.
This will take the wind out of the sails of financial institutions as there is another option for people.
Switching to cryptocurrency actually makes the problems worse, because instead of regulated entities calling the shots, we have an oligarchy of ASIC-armed miners calling the shots.
Between the two evils, any sane person would rather trust a regulated business than some folks who prefer to hide in the shadows.
Possibly, but the space requirements for crypto shouldn't be underestimated. I think Satoshi kept 1MB blocks because he realized it would quickly become untenable for most people to run full nodes. ETH has similar problems.
What does the end game for this situation look like? Will people just create Bitcoin Zero, which is identical to Bitcoin but preallocates the existing coins starting from the genesis block? (A manual GC, as it were.)
Otherwise it seems like crypto will be around 100 years from now, but probably not BTC. At least not in a form where non-miners can participate.
Bullshit. Have you ever done wire transfer ? Every SWIFT transaction goes through US. Let’s say you want to transfer USD from one Vietnamase bank to another Vietnamase bank; even local USD transfers has to go through US and people get charged a lot for that. Just for transferring 25k USD between two local banks, I got charged $150. It’s ridiculous to claim “USD is decentralized” in a world where developing countries can not even trade with eachother without paying US a cut.
>”The sort of activity which led to the financial crisis would not be mitigated by the establishment of a decentralized currency.”
Indeed, the ‘sort of activity’ which led to crisi is simply called greed. As far as I can tell, crypto currencies have simply become new fuel for greed thus far, and the result will likely be the same.
A cure for centralized currency != a cure for greed.
The USD is one of the most centralized currencies in the world. Just because everyone has some does not mean its decentralized. It is still minted and distributed through centralized silos owned by the government, and policy enacted by the government ON the currency is still effective.
> it is still minted and distributed through centralized silos owned by the government
Money can be created by privately-owned banks, which adds a significant decentralized element to the mix. Cash settlement is also, if done physically, a totally de-centralised transaction mode.
In modern systems money can be created by banks lending money. That's an interesting property as money creation is tied to the course of the economy. However, this can lead to inflation if the amount of money created actually exceeds the growth in economic activity.
In the gold standard model where the amount of money is completely uncorrelated with economic activity, you have inherent deflation. Deflation is a serious threat, as it pushed people to hold onto their currency (as the real value automatically rises) instead of spending or investing it.
Bitcoin is really a digital gold standard. There is no way that a gold standard currency can support a growing economy efficiently.
> Deflation is a serious threat, as it pushed people to hold onto their currency (as the real value automatically rises) instead of spending or investing it.
Why would people not invest (or spend for that matter)?
It's not like people wouldn't take deflation into account the same way they do with inflation today. If you loan out a dollar today and at the end of the loan its worth $1.03 then you simply adjust the interest rate to reflect this difference. Not like its some complicated formula that starts off with "thar be dragons."
Same can also be said about spending. As a contemporary example why would anyone buy a computer today when they know that in the near future they can get a better model for less? The whole computer industry thrives in a price deflationary sector of the economy.
Whenever someone is trying to push one economic theory over another the key question you need to ask is cui bono.
> Why would people not invest (or spend for that matter)?
People will still invest, but risk tolerance goes way down and ROI expectations go way up.
Concretely, your business plan has to compete with "I can get an x% return by putting my money under my pillow", and x becomes very large in a highly deflationary economy. Place yourself in the shoes of a person seeking investment in a productive business, and the problems with a deflationary economy become obvious. Being good isn't enough. You have to be better than "sit on my ass and get rich doing nothing".
In other words, the primary concern in a deflationary economy is discouraging value-producing economic activity.
Also, all of this is wrt deflation in general. Notice that a fiat currency can easily be deflationary. The deflationary nature of gold standards is a major component of the criticism of gold standards, but there are also other reasons that people oppose gold standards.
> Same can also be said about spending. As a contemporary example why would anyone buy a computer today when they know that in the near future they can get a better model for less? The whole computer industry thrives in a price deflationary sector of the economy.
People still buy computers because having a computer today helps capture value that you can't capture by having a better computer tomorrow. For consumers, entertainment tonight. For businesses, automating processes today.
> Whenever someone is trying to push one economic theory over another the key question you need to ask is cui bono.
That's not quite fair. There are people motivated by truth and there are also people motivated by ideology.
You buy the computer when you need the computer. No one buys (or no one with any sense) a computer today if they won't be turning it on for a year.
In an inflationary economy you are motivated to spend the money early, rather than late. And as buyers predominantly drive the economy and not sellers, this keeps things moving at a reasonable tempo (barring extreme inflation).
In a deflationary economy you are motivated to spend the money later. And, again, as buyers drive the economy more than sellers, this slows the pace of the economy. [0]
Right now it is to my benefit to buy a house for $200k and secure a $180k loan at 3% interest because with inflation the real interest rate is actually more like 1% (assuming the target of about 2% inflation per year).
In a deflationary economy that $180k loan at 3% would have a real interest rate closer to 5%.
The lender comes out great, they still get their 3% interest and the effect of deflation. The borrower gets shafted, they're paying back much more than the property is worth by the end of the loan (even worse than under inflation).
However, while buyers get to drive much of the economy compared to sellers, lenders have control of the capital and are in a better position to set the terms than borrowers. So under deflation buyers are doing fine, lenders are doing better than now, sellers are meh, and borrowers are screwed.
[0] Why I say buyers drive an economy more: It is very difficult for seller to force a sale. The buyer almost always has a choice. Now, the seller can set the price but as they want to remain profitable they can only push it so high before they lose sales to competitors who recognize the opportunity to undercut and remain profitable.
> You buy the computer when you need the computer.
But this isn't a general rule for other goods and services so they have to devalue the currency to encourage people to not save? Because monetary inflation is basically a tax on savers.
> In a deflationary economy that $180k loan at 3% would have a real interest rate closer to 5%.
Which is why they would adjust the interest rate to take deflation into account.
I can see this argument in today's economy since inflation is built into everyone's calculations and borrowers would be hurt if they couldn't rely on inflationary pressure to adjust the interest rate downward but that doesn't prove that deflation is inherently bad, only that people are capable of long-term economic calculation.
Lending dynamics are different in a gold standard economy, with a fixed amount of currency, because banks do not have leverage on lending.
Today, banks need only have ~10% of the money they lend in deposits. The rest is new money. With a fixed money supply, banks can't do that. You divide by 10 the amount of money available to lend. In a gold standard economy, money supply available for financing is much, much more restricted.
The modern economy is a constant bet on future economic growth. Failed bets translate into inflation on a macro-scale, and painful leveraged losses for banks on a micro-scale. With fixed money supply, you cannot bet at all and potential growth is, by definition, much slower.
It's always surprising to me when (not-already-on-the-top-f-the-world) software types see virtue in gold standards. The fact that our work -- moving bits around -- produces so much economic value is an epitome of everything that's wrong with a gold standard.
> P2P transactions are accepted with almost anyone in the world
For a startling Exhibit A, consider that North Korea [1] and Iran [2] hold and transact with large quantities of U.S. dollars (in physical cash) despite American sanctions.
Kind of, though in some sense the value of a dollar is a matter of consensus, relative to the consensus value of other currencies and assets, as determined by exchanges. Modifying interest rate and money supply try to change the denominator, but value is technically preserved.
It really depends what you mean by that. If you compare it to currency in a game which can be removed with a bug that sets a few bits then USD it's quite decentralized in some respects.
I disagree, I think that the federal reserve's artificially low interest rates and essentially unlimited supply of money for the banks to loan out at these interest rates were at the heart of the most recent financial crisis in the US. A decentralized currency would certainly mitigate that.
No. The heart of the crisis is people believing they can easily make money by investing in a product they don't understand.
I can sell a CDO on CDS in Bitcoin, and make a lot of money while the buyers are all getting screwed. And they will be even more screwed as nobody will print cash to cover or limit their losses.
What you are describing is a moral hazard. A situation where people will take risks they wouldn't normally take because they know they will be bailed out if they lose money.
What exactly do you mean by 'artificially low'? All short term rates are just a function of central bank policy. The bank will raise or lower rates in an attempt to control inflation (and any other mandate). 'Abnormal' I'd grant you, but not artificial.
The sort of activity which led to the financial crisis would not be mitigated by the establishment of a decentralized currency. Decentralization would not do away with the need for financial institutions (or the toxic incentives that can drive them and the ecosystem in which they exist).
The USD is pretty decentralized already. Sure the money supply itself is centralized, but the USD is a functioning currency because all people who accept and deal in dollars accept the fact that the dollar is a currency. We're all decentralized nodes in the Fiat network.