Theme: Incentives

BITCOIN IN STANDARD FINANCIAL TERMINOLOGY AND WITHOUT THE SPIN

Bitcoin is a novel monetary technology because it combines the properties of various other financial instruments to create a uniquely self financing substitute for money.

Those instruments are:

1) Token Money (like when you buy tickets at an amusement park)

2) Stock Certificate (like when you buy a public company)

3) Title Registry (like when you research to title to your house, or register the title to your car)

(You can use wikipedia if you need to learn more about each term.)

THE BLOCKCHAIN SHARES THE PROPERTIES OF A TITLE REGISTRY, NOT A LEDGER.

Financial ledgers pool quantities – they ‘roll up transactions’. The Blockchain does not pool quantities. When you pool quantities into aggregates, you launder causality from the data. BTC are not laundered at all by aggregation. Just the opposite. They are anonymous, or at least marginally so, but the are not laundered into aggregates.

A title registry contains records of the transfer of ownership, so that your ownership is verifiable in the event of a transaction. No history is laundered through aggregation. Each change in fractional ownership is recored.

The block chain does not perform as a financial ‘ledger’ as much as it functions as a title registry – registration of changes in ownership: like when you buy a home, you buy insurance that the title is clear, and the government owns the title registry (but is unreliable) so you have to get insurance that the seller actually owns the thing before you buy it. A ledger records transactions. A registry records transactions and ownership. The block chain maintains ownership.

The difference between BTC Shares and ordinary shares, is that while you can’t infinitely divide your home, you CAN to some degree divide up your farmland. BTC title registry operates just like a land registry. Each time you divide your land into smaller plots you register the title of the new plot with the local registry of titles.

The block chain is a very simple title registry for an almost infinitely divisible bit of property: the Bitcoin share – out to eight decimal places.

It is a title registry for shares of Bitcoin stock. A Bitcoin entry in the blockchan represents a change in ownership of a share of stock in the Bitcoin Network. Every BTC owner, does own a fraction of the Bitcoin network. When that share is issued it is placed on the title registry. All transactions related to that title are recorded in the registry. Unlike shares of stock which are indivisible, Bitcoins are divisible – out to eight decimal places.

The Bitcoin registry is public and because of encryption, trustworthy, so we don’t need to pay for INSURANCE when we conduct exchanges.

MONTARY FACTS

1) BTC are NOT classifiable as Money Proper (commodity money, backed by natural universal demand)

2) BTC are NOT classifiable as Fiat Money Proper (backed by a corporation called the state)

3) BTC are NOT classifiable as a money substitute (backed by a deposit of money, a physical commodity, or a government monopoly.)

4) BTC ARE classifiable as Fiduciary media (claims not backed by a deposit of money.)

5) BTC ARE classifiable as Token Money because they are limited in acceptance to other BTC network shareholders where they function as an intermediary money substitute between Fiat Money Proper, Commodity Money Proper, Fiduciary Media, and other Money Substitutes.

6) BTC ARE classifiable as claims of ownership of shares of stock in the BTC network. They are issued in exchange for computational work. The appreciation of these shares provides the incentive for network members to construct the network and advance the networks interests.

7) The financial innovations BTC provides, besides the obvious use of public infrastructure to eliminate costs (the internet);

(a) the use of token money as shares with which to finance the construction of the network.

(b) extraordinary divisibility of shares of stock into new tokens.

(c) the use of a nearly inviolable title registry for the ownership of those tokens.

(d) the near absence of transaction costs.

MICRO ECONOMIC BENEFITS OF BITCOIN

(1) If Bitcoin becomes both popular enough to produce a stable price, then it it will function as a store of value. It is not stable enough now. If it was stable enough there would be no incentive for miners. And no value in speculatively purchasing them. So BTC is financed as a share stock in the BTC network, purchased by earning those shares using computing power. By the time BTC becomes stable the value of BTC in the network is so high, that self interest drives perpetuation of the network.

(2) If Bitcoin evolves such that they’re widely accepted, it will not lose its status as token money. Token money is something you buy to use to purchase something else, but is externally dependent upon some association (the BTC network). Just like tickets at an amusement park. Some of the value of your purchase is captured by the amusement park. Some of the value of your purchase of btc is captured by others as both appreciation and fees for mining coins.

(3) As long as the current incentives for miners remain such that no one can monopolize the mining process or alter the chance of creating BTC, then no one can cheat the purchasing power of BTC without a self harm.

(4) Fees are not currently necessary because it is unnecessary to finance the float needed to manage currency exchanges (although you must inventory BTC by pre-purchasing them in addition to your other currencies which may or may not eradicate most of the advantage of not paying interest.)

(5) Unless regulated by threats from government, no one can impose unnecessary transaction costs on any of your transactions. And competition guarantees at least some access to transaction approvals. (History suggests that eventually, fees will be small but universal.)

So far, no other medium has effectively free transaction costs, because every other medium IS somehow backed, even if only vaguely, and therefore the transaction must compete against other uses of money in the form of fees that compete with interest rates.

MACRO ECONOMIC, POLITICAL AND SOCIAL BENEFITS OF BTC

1) Ease and speed in reconciliation of the exchange different currencies encourages free trade, especially for information and entertainment media.

2) Restoration of our power to save, since the government cannot dilute the value of BTC, by constantly redistributing from savers to spenders.

3) Disempowerment of the privileged, gate keeping, financial system from extracting fees. In effect BTC eliminates upward redistribution.

4) Disempowerment of the government to tax or charge fees. In effect depriving the state of the ability to govern us using money.

5) Disempowerment of the government to inventory our wealth, and the restoration of financial privacy.

6) Disempowerment of the government to seize our assets.

WEAKNESSES OF THE CURRENT GENERATION OF BTC

1) It is very hard to understand how BTC can function as a common medium of exchange if it takes more than 10- seconds to process a common retail transaction, and 30 seconds to process less common transactions.

2) It is very hard to understand how BTC will not become regulated and ‘taxed’, since it remains necessary to purchase BTC using the existing financial system.

3) It is very hard to understand how BTC will not be abused by major miners once the initial wave of appreciation is over.

4) It is hard to predict what transaction costs will be charged in the future – and I cannot understand why they wouldn’t be charged.

5) It is very hard to understand how BTC will function at scale without the ability to federate (split up) the block chain, and archive portions of it.

6) It seems that there is no way of consolidating BTC fragments, and it’s unclear if that would be necessary or beneficial. But without doing so it seems that we cannot maintain the long term viability of the block chain.

Hopefully this frame of reference will be useful to someone. 🙂 Writing it has been useful for me.

Curt Doolittle

The Propertarian Institute

Kiev Ukraine