Educational, academic, theoretical articles and papers

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Not media sensationalism or news, but rather articles that are intellectual or research-based and attempt to bestow some sort of insight or understanding.

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http://www.forbes.com/sites/timothylee/2013/04/17/why-programmers-are-excited-about-bitcoin/
Check out the bolded part below.


Why Programmers Are Excited About Bitcoin

I’ve noticed a contrast in the way programmers and non-programmers react when they first hear about Bitcoin. And I think an analogy to cryptography helps explain it.

Cryptography has been around for centuries, but until recently all the practical encryption systems people knew about were symmetrical. The encryption key could be derived from the decryption key as easily as vice versa.

That was inconvenient because it meant that before you could communicate with someone securely, you had to exchange keys over a secure channel like a face-to-face meeting. Since arranging for secure key distribution was a logistical hassle, cryptography was mostly limited to military applications where secrecy was of the utmost importance.

There’s another type of cryptography called asymmetric or public key cryptography. It involves a “public key” and a “private key.” It’s easy to derive the public key from the private key. But it’s practically impossible to derive the private key from the public key.

Until the 1970s, public key cryptography was just an intriguing theoretical idea. But then the first public key cryptosystems were created. (http://en.wikipedia.org/wiki/Public-key_cryptography#History) Suddenly people could do something that had previously been impossible: you could broadcast your public key to the world, allowing anyone to send you messages that only you could read.

The development of practical public key systems also made possible other innovations. For example, encrypting data with the private key creates, a file that can be decrypted by anyone with the public key but that could only have been made by the private key holder. Such a file acts as a “digital signature,” electronic proof that the holder of the private key “signed” the file. This technique has many uses today. For example, Microsoft and Apple digitally sign software updates with their private keys. Our computers have Microsoft and Apple’s public keys baked into them, allowing them to cryptographically confirm that software updates really came from the OS vendor. The modern Internet would be dramatically different, and much less secure, without asymmetric encryption.

This kind of fundamental breakthrough is extremely rare in computer science. Computers have been getting faster, smaller, and cheaper for decades, making practical applications that would have been prohibitively expensive a few decades ago. But very little of what modern computers do would have been considered impossible, given enough computing power, a half-century ago.

Public key cryptography is a rare exception. Programmers in the 1960s wouldn’t have known how to write software to do what modern cryptosystems do no matter how much computing power they had at their disposal.

I think Bitcoin is in this same category. Cryptographically secure digital cash isn’t a new idea; it’s a straightforward application of public key cryptography. But until Bitcoin, all digital cash schemes were hobbled by a reliance on an intermediary to handle the double spending problem. (http://en.wikipedia.org/wiki/Double-spending)

Before 2009, truly decentralized digital cash was in the same intellectual category as public key cryptography was in before 1976. Programmers knew that it was a theoretical possibility, and that it would have revolutionary implications if it could be made to work. But no one had figured out how to build a practical system.

I think this explains a difference I’ve noticed in the way programmers and non-programmers react when they first learn about Bitcoin. Many people in both categories initially greet it with skepticism—certainly I did. (http://timothyblee.com/2011/04/18/the-bitcoin-bubble/) But the nature of their skepticism is different. Non-programmers simply don’t see what the fuss is about. They see little difference between Bitcoin and conventional payment systems like PayPal. Programmers, on the other hand, immediately see that Bitcoin would have have revolutionary implications. It just takes time to convince them that Bitcoin lives up to the hype.

Like public key cryptography, Bitcoin is a fundamental new building block for building digital systems. It allows wealth to be reduced to pure information and transmitted costlessly around the world—something nobody knew how to do before 2009. Its applications won’t be immediately obvious, especially to ordinary users. But like public key cryptography, it’s likely to prove an important building block for a variety of applications for years to come.

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The Mises Institute is clueless about Bitcoin


The Ludwig von Mises Institute (the one behind mises.org (http://mises.org/), located in Auburn, Alabama) posted several articles over the last week or so about Bitcoin:


http://mises.org/daily/6399/The-Moneyness-of-Bitcoins (Nikolay Gertchev)
http://mises.org/daily/6401/Bitcoin-Money-of-the-Future-or-OldFashioned-Bubble (Patrik Korda)
http://mises.org/daily/6411/The-Bitcoin-Money-Myth (Frank Shostak)

Prior to that, they posted about it during June 2011, by Justin Ptak:


http://archive.mises.org/17249/ideological-and-irrational-exuberance/
http://archive.mises.org/17294/a-clear-concise-look-at-bitcoin/
http://archive.mises.org/17356/another-bitcoin-crash/

And one in October 2011, by Jeffrey Tucker:


http://archive.mises.org/18767/bitcoin-implodes/

In the meantime, Jeffrey Tucker became a Bitcoin enthusiast (disclaimer: I've been interviewed by Jeffrey and Laissez-Faire Books is publishing my book about Bitcoin, so I might be biased). Justin Ptak appears now to be friends (on Facebook) with Bitcoin fans. This may or may not imply his change of opinion, but it doesn't look like he published anything more about Bitcoin at least.

Now, there is nothing wrong with criticism. And Bitcoin can be criticised, there are many legitimate objections to it. But to criticise something merely because someone feels a pressure to criticise, and then rushes to hastily print something quickly is not scholarly work. It is symptomatic that the institute didn't publish anything in between. They are under pressure to publish something when there is a media interest in Bitcoin, and hence hastily rush to assemble something. But actual academic research appears to be absent.

The main issue appears to be the conflation of money, unit of account and a medium of exchange. Unit of account is not a necessary function of either money or a medium of exchange. It is merely a possible byproduct of it.

A further issue is the "self-reinforcing monetary spiral" (i.e. which mainstream economists call the network effect), in which one medium of exchange emerges victorious and beats all other media of exchange and that we call money. But this is merely a hypothetical model that is furthermore prone to misinterpretation. First of all, transaction costs can prevent this spiral to escalate to its final stage. Currently, we have hundred something currencies all over the world. Legal restrictions prevent this spiral from playing out. But this is merely an empirical factor, rather than a rule that gives legal restrictions magical powers. Even without legal restrictions, we can't be entirely sure that the transaction costs won't hinder a full monetisation.

The second issue is the neglect of other media of exchange, those that are not money. Mises calls them "secondary media of exchange", and Rothbard calls them "quasi-monies". These goods are liquid, and a part of their demand is due to their liquidity. They are not liquid enough to be money, but nevertheless they serve, not only through their other uses, but also through their liquidity, a valuable purpose. This is what Bitcoin is. This is what gold is too. And this is also the pool for potential candidates for money. Before something can be money, it must be a medium of exchange.

Bitcoin is somewhat liquid, and it has a very important advantage against extant money: it reduces transaction costs. It reduces transaction costs even further than existing payment mechanisms, so that even a fluctuating price is not enough to offset this reduction. We can therefore expect Bitcoin to be used as a payment mechanism in those areas where it can substitute for other payment mechanisms. This is also a type of network effect. Once they use it as a payment mechanism, people may decide that they do not actually need to fully convert it to/from fiat, and use Bitcoin as a store of value as well. Indeed, Tony Gallippi from BitPay reported (can't find the link now) that their customers are increasingly opting to keep a larger proportion of the payment in Bitcoin, whereas at the beginning they just converted the whole sum to fiat money.

Yet again I have to quote White (http://www.jstor.org/discover/10.2307/1805134) in his brilliant insight, which has not yet been processed by other Austrians:
"Coinage reduces transaction costs compared to simple exchange, because of authentication and weighing. Bank liabilities also reduce transaction costs. But these are empirical factors, and not something inherent in all possible monetary systems."
Rather, other Austrians make empirical (!!!) statements like this (Salerno (http://mises.org/document/5827)):
"With the use of clearing systems, money substitutes are virtually costless to transfer."
An adoption as a payment mechanism, and expansion into a store of value are the early stages of monetisation. This is the same mechanism as the Austrians hypothesised occurred during pre-monetary times, only we now already have a different money. But already existing money is not a showstopper for this mechanism to work. Liquidity is just not the only factor influencing the choice of media of exchange. The argument of Hoppe (http://mises.org/journals/rae/pdf/RAE4_1_3.pdf) that
"Driven by no more than narrow self-interest, man will always prefer a more general, and if possible, a universal medium of exchange to a less general or non-universal one."
is therefore false. It is only apodictically true in a world without transaction costs. It still may happen in a world with transaction costs, we merely can't be sure about it. And Bitcoin is a hint that empirical factors can't be dismissed entirely. EDIT: If the statement of Hoppe was true, once money exists, it could never have been replaced by a new money, and we clearly know from history that that's not the case.

Will Bitcoin ever become money? That's an empirical issue and we can't know this in advance. But equally we cannot dismiss it, unless we find a competitor to Bitcoin based on fiat money (or precious metals like gold) that is able to mitigate the transaction cost advantage of Bitcoin. And that would be very difficult to pull off. One of the reasons is the transaction costs associated with the boundary between money in the narrower sense and money substitutes (such as redemption, settlement, and so on), which Bitcoin does not need. Bitcoin is form-invariant and can exist in practically any imaginable (and unimaginable) form. The second one is regulation (management of money and money substitutes is strictly regulated and burdened by many restrictions which have nothing to do with monetary policy, such as anti-money-laundering, capital controls, war on drugs and so on). Even if regulation affects Bitcoin, unless there is an alternative that isn't affected by regulation, there is still no reason for Bitcoin users to switch to something else.


Continue reading here:
http://www.economicsofbitcoin.com/2013/04/the-mises-institute-is-clueless-about.html