Neha Narula - May 30, 2016, 3:52p
I'm still digesting what you wrote, but I think you are missing a few things.

Bitcoin is the first cryptocurrency, not the last, and as such, it's not a good idea to ask the question of whether it *as it exists right now* will be successful, but, whether a later iteration (potentially based on bitcoin, potentially not) will be successful. So, really, we want to know two things 1) are there fundamental problems in cryptocurrency design that cannot be fixed and 2) once its fixable problems are fixed, will it be useful?

- #6: Have you heard of Zcash? An anonymous cryptocurrency.

- #5: I think part of the reason cryptocurrencies have the potential to drastically lower transaction costs is exactly because there is no recourse. This increases confidence that a transaction cannot be reversed. An example: let's say I buy a very fancy ming vase from you, and then break it. Now let's say the government decides that the money I used to buy that vase was stolen. Can they reclaim it from you? Who gets made whole, and who doesn't? If there's a risk that a payment won't be final, then that risk will be reflected in the price of the item.

I think their advantage is that cryptocurrencies will enable software-defined payments, without an intermediary. At the moment, all digital money transfer is owned by a private institution (bank, paypal, credit card company, etc). There is no open platform for the transfer of digital money.


nikhil - Jun 1, 2016, 4:39p
Hi Neha,

I agree that Bitcoin can be improved on. Part of the point of my analysis was to identify areas that should be addressed, *if* someone wants to make a cryptocurrency that displaces a national currency. There certainly can be other utility asides from usage as a national money, but this is the use case I chose to focus on here.

I think despite the potentially addressable issues with privacy (thanks for the pointer to Zcash) and recourse (perhaps through insurance?), the property of stable value seems hard, in the current speculative climate. Perhaps more importantly, I think more compelling advantages of a distributed, non-sovereign digital currency over a sovereign currency need to be clearly articulated or discovered before non-sovereign currency can displace an established sovereign currency.

You seem to think that a lack of recourse is a good thing. While your specific scenario of stolen money is one case, I think a more common case is buying something and discovering that it is not as you expected, so you want to get your money back. eBay and Amazon implement recourse in these circumstances. If a product is not as described, then they will cover the cost, even if the seller does not accept returns. People clearly prefer this kind of guarantee over the no-recourse approach you seem to favor, even if it does increase costs somewhat.

Another use case for recourse that seems to be a more common occurrence with Bitcoin is straight up wallet theft, due to a thief stealing someone's private key. Imagine if you came home one day to discover that your savings had disappeared, and there was no one to call who could investigate the theft and return the money. At the very least there needs to be something like FDIC insurance for Bitcoin addresses, and it would be even better if there was a specific process to investigate such theft, outside of reporting it to the local police.

Why is it valuable to have "software-defined payments"? What does that even mean? What is the real value in having an open platform for digital money? Just because something is open doesn't mean it will inherently succeed in the market (e.g. Microsoft and Apple OS' are closed systems that dominate the consumer PC market).


Neha Narula - Jun 5, 2016, 8:13p
This is a good debate!

Yeah, I don't think I care that much about Bitcoin displacing a national currency. I'm just more interested in what a widely-used digital currency can enable.

By programmable currency, here's what I mean: There's no ubiquitous, common API for money. We have tons of digital money (credit cards, paypal, venmo, ACH), but none of it works together, or if it does, exchange between different forms is slow or incurs high fees. For example, within Europe digital payments work very well, but how hard is it to open a European bank account as an American? Why doesn't my bank work with venmo?

Because there is no cheap, common payments platform, I think there are a lot of applications that have not been built. For example, check out some of the stuff that 21.co is pushing, like renting out your dormant resources. We still don't have micropayments. What if I could do things like easily charge people to use my open wifi network by the byte?

You misunderstand me about recourse -- recourse is incredibly valuable, but the question is at what layer in the money stack does it occur. Ebay and Visa and whatnot make me whole again without necessarily stopping payment or recovering payment from the wrong-doing party -- it's built into their cost structure for them to just occasionally eat these kinds of things. That makes a lot of sense! But if I buy something from a stranger off craigslist with cash and it turns out it wasn't what it seems, I can't go to the federal reserve and demand that they stop the dollar bills I used to pay from circulating. Even if millions of dollars of my cash was stolen I can't do that. Bitcoin seems the same to me -- why should Bitcoin wallets be FDIC insured? Especially if there is no company/bank acting as the entity to be insured? Perhaps we could have individual FDIC insurance but what does that look like?


nikhil - Jun 17, 2016, 10:38a
You are making 2 points. The first argues for the value of programmable currency, which can sit on top of any currency, either fiat or crypto. The second argues that recourse isn't always necessary with any currency, as demonstrated when you pay for something using cash and don't receive what you expect to. I will address both points separately (though they are interconnected).

First, I think the reason we don't have general programmable money is not because of an absence of tech, but because of a rejection of risk. So far, banks and governments (and individuals?) have aired on the side of relatively slow money transfer services which allow time for human intervention. This slowness lets banks satisfy anti-laundering and other regulations meant to reduce criminal activity. Additionally, it lets individuals call their bank to report a theft or accidental transfer, enabling the bank to block pending transactions that would have cleared in 2-3 days.

In fact, at the central banking level there is programmable money in the form of the SWIFT system. There, significant thefts have already been demonstrated. Most recently, the SWIFT system was hacked at Bangladesh Bank to authorize $1B in unauthorized transactions from the Bank. The theft was limited to $81M because most of the orders were blocked, supposedly because they misspelled the word "Foundation" in the recipient's name. The orders were (likely) intentionally issued at times when Bangladesh Bank was closed for the weekend, while the Fed was still open to effect the transaction. The Fed even tried to contact the Bank on the phone, but since they were closed, they could not be reached and they authorized some of the transfers nonetheless.

So programmable transfer of fiat currency already exists at the largest scale and carries very high risk, so I suspect that the system will undergo some improvements to reduce that risk, which will invariably cause the slowing of transactions. Cryptocurrencies do not implement any such anti-theft measures, either human review or automated, and I think these would be important to reduce theft and support adoption.

Furthermore, in addition to monitoring for theft, there is monitoring of money transfers for regulatory reasons, including anti-terrorism and anti-laundering. These probably require review of some transactions, further slowing transfer rates. Cryptocurrencies might legally be required to implement these regulations as well, if they became more widely used. This seems difficult, and perhaps even against the anti-government spirit at the source of cryprocurrencies.

To conclude, I don't think general programmable money, on fiat or cryptocurrency, without human approval, stands a chance for 2 reasons. First, there is too much risk of unintentional transfer, including theft and accident. Second, and related, there is a significant amount of regulation that money transfer services must comply with.

To your second point on recourse: if you buy something on craigslist and pay cash, you assume the risk that you may not get what you expect. You can just as easily offer to pay with a credit card via paypal/venmo, and have someone else assume the risk for a fee (aka insurance). The point is that you have flexibility as a user of dollars. With cryptocurrency, you don't yet have that flexibility. And I think this flexibility is yet another feature necessary for wider adoption of cryptocurrency.

It seems that there might be the hope of recourse with cryptocurrency after all. I'm sure you've seen that the DAO was hacked, after raising the equivalent of $150M in ether. WSJ has a brief article about it here: http://on.wsj.com/28Kmatj. I thought all was lost, but interestingly the Ethereum Foundation froze the thieving account and is forking the codebase to restore the stolen ether. I'm surprised that they think they can do this, because it means that they can control the distributed network of miners. Perhaps this is true because the network remains small with limited mixing services. I doubt this could be achieved by Bitcoin, which must have many more miners, many of whom are in China and may not care about theft.

********
To summarize, I think a single additional feature might be necessary for wider adoption of cryptocurrency. Cryptocurrencies may benefit from a second, "slow" coin transfer process which would occur if the transaction must undergo additional review because it triggers (a) concern of theft or (b) regulatory review. For example, transactions above a certain value would be subject to "slow" transfer, or transactions in which the sender wants a slower transaction, which might be a requirement for insurance.


nikhil - Oct 22, 2018, 5:07p
An article on WSJ asking the question, "Can Bitcoin become a dominant currency?"

https://www.wsj.com/articles/can-bitcoin-become-a-dominant-currency-1540174021?mod=hp_major_pos18


Jennifer S - Oct 7, 2022, 6:41a
Hey Nikhil
I was led into your blog randomly reminded on LinkedIn. And reading your latest post the blind spot experience, and several pieces of article several years back.
Really enjoyed your writing! No matter what topics (varying from science to personal/spiritual experience/ finance), you always put in lots of background and critical thoughts lol :)
Wishing you all the best with the research and hoping you at some time invested in the bitcoin ;p

Cheers





Kirk - Aug 17, 2023, 2:01p
So much information. I learned a lot. Gained a understanding that I didn't have before.

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