Tuesday, April 02, 2013

Bitcoin: passing fad or the end of the world as we know it?

Bitcoin is suddenly getting a lot of attention.  As I write this, BTC is trading at $118USD, up from $30 in the last two months.  That's a nice rate of return.  But is it a bubble, or the start of a revolution?

For those of you who have been living in a cave, Bitcoin is a fully decentralized anonymous digital currency.  It is based, like so many cool things are, on an algorithm rather than government fiat.  Its anonymity makes it attractive to criminals, and its algorithmic basis makes it attractive to libertarians and people who have been screwed by central banks.

Some people think the recent price run up is a bubble, and that the whole bitcoin thing is a passing fad.  Others think it's the beginning of a revolution and lifting the Rothschilds boot from the neck of the People once and for all.

I think it could go either way.

On the one hand, Bitcoin really is new and revolutionary.  There has never been anything like it in the history of the world.  It is a tradable commodity whose supply is limited by mathematics, and is therefore guaranteed to remain scarce.  On the other hand, its intrinsic value is zero, so its actual value depends entirely on whether or not people choose to use it.

Right now, they're choosing to use it.  And the problem with that is that it poses an existential threat to the current social order, but very few people have realized it yet.  I think even Bitcoin's advocates don't fully appreciate the genie that they have unleashed.

Here's the problem: life is a prisoner's dilemma, a game in which mutual cooperation is an evolutionarily stable strategy, but only under the condition that the game is iterated.  Only if you play multiple rounds with the same players is it rational to cooperate.  Otherwise, the rational strategy is to defect, and civilization collapses.

Bitcoin, by providing anonymity, undermines the iterative aspect of most social interactions.  The social fabric is held together by the possibility that if you try to screw someone, they (or people acting on their behalf) can screw you back.  But that only works if they know who you are.

Bitcoin replaces the social impediments to defection with technological ones.  There is, essentially, no possible punishment for stealing bitcoins, since all bitcoin transactions are anonymous.  Instead, stealing coins is simply hard to do.  That difficulty is enforced by cryptographic algorithms.  These algorithms work very well, but -- and this is a big, big BUT -- only if they are used properly.  And using cryptographic algorithms properly is really, really hard, particularly in the face of active attack.  The more Bitcoin is adopted, the more lucrative, and hence the more likely, such attacks become.

Case in point: I just downloaded the latest bitcoin client from sourceforge.  Those files are served over an HTTP link.  So how can I know that the file I got is really an honest bitcoin client and not some backdoored version served to me by a Bulgarian hacker?  The answer is: I can't know.

I'm sure the Bitcoin community will eventually batten down the hatches and close such obvious security holes as the non-secure client downloads, but the point is that unless you write your own client from scratch (and your own compiler and your own operating system, and maybe even your own BIOS and CPU) you can't be sure if the client you're using is trustworthy.  And if you're not sure, you could wake up one day and find that all your bitcoins are gone.

When that day comes, you will have no recourse.  Zero.  None.

Worse, you don't even have to be the victim of malice, or even technical incompetence to irretrievably lose bitcoins.  Simple carelessness will suffice.  Today I lost some bitcoins because I accidentally entered the wrong account number into a transaction.  I was trying to transfer some bitcoins that someone had given me on Reddit into my main account (which in bitcoin parlance is called a "wallet").  Instead of cutting-and-pasting my own wallet identifier, I accidentally pasted in someone else's.  I have no idea how that happened (or even if -- it's possible that Reddit screwed this up, though I think that's unlikely).  But my bitcoins are gone.  I don't even have any idea who I sent them to.  Whoever you are, use them in good health.

I think that what will ultimately doom bitcoin is that people will come to realize that civilization does actually offer some benefits that they are loath to give up once they realize what the price of freedom really is.  The amount I lost today was trivial, but bitcoin doesn't care about that.  It will just as happily dispense with a large amount as a small one.  The lack of recourse will be the same either way.  I think people will ultimately decide that the risk of losing your life savings to a typographical error is too big a price to pay for anonymity.

Or maybe they won't.  Maybe a generation will grow up on bitcoin, fully aware of its risks and potential benefits, and will have devised ways to mitigate the risks to the point where they are willing to accept them.  But (and this is really my point) if this happens, it will be a big, big change.  It will be a fundamental change to the way humans have organized themselves since the dawn of civilization.  Bitcoin could very easily be the end of the world as we know it.  But (and here's another important caveat) that might not be a bad thing if it's a choice that humanity makes with its eyes open.

It's not a slam-dunk either way.

In the meantime, I have never tried to monetize Rondam Ramblings in any way, but I've decided to start accepting bitcoin tips just so I can have a few more to play around with now that the ones I had are gone.  My wallet ID (and let's hope I get it right this time) is 13Yz6GvDGKVfYp21xK6p9xcGFBKQc5VJU9.


Anonymous said...

Ironically your wallet ID is served by HTTP here.

Ron said...