Tuesday, 11 April 2017
Sunday, 9 April 2017
Do High Transaction Fees Give More Meaningful Transactions?
The block size debate is reaching a new higher level, we may never get over it. With the slow propagation of segregated witness and the heavy transaction load on the bitcoin network seen in the last months as the price retests $1200USD. The once simple debate, it has now become philosophical and expansive. It can be polarising, we now have bitcoin Unlimited being proposed rather than just 2mb blocks, but broad concepts need to be taken into account. It calls for a fresh morning mind I had. I had felt a little hazy on the subject until this morning. I think the debate is a challenge worth detailed discussion.
The heart of the debate is what you believe is the main purpose of the bitcoin blockchain. To me after allowing for transaction to occur in a decentralised way, providing transparent transaction information is its main purpose. This I think is an antidote to the problems of the 2008 financial crisis.
Transparency and publicly useful information sets bitcoin apart from the more anonymous altcoins (like Dash or Monero, some people would gladly drop public information for privacy). The bitcoin blockchain allows the public to track and analyse the flow of value in the world in real time in a way that was impossible in the past.
The problem now is that if someone wants to buy ice cream from the store and have the transaction be on the blockshain in ten minutes then they would need to pay a fee equivalent to 50c. Not really practical and not good for adoption, especially in the poorest countries that need bitcoin the most.
Segregated Witness, a technical bitcoin upgrade, is set to help with this by more than doubling the capacity of the bitcoin network and therefore reducing the amount competition in the elective fee market. But as "SegWit" comes in it also allows for sidechains and the lightning network. this is no small change, they effectively allow for infinite transactions. Though the block size easily becomes the focus, It is actually the auxiliary applications that are most significant and that may come at a higher cost. there are risks here to decentralisation, transparency and quality of information.
Sidechains can be centralised (owned by a company) which is very un bitcoin like. Though they might be seen as a poor substitute they do offer a good medium ground for people transitioning from banks. They are likely to have a real time record of transactions that is easily compatible with current block chain analysis software. Corporate governance lays a veil in front of transparency and allow government involvement. Side chains are also not required to publish their transactions. This means information on some ice cream transactions can be lost. Sidechains mirror the altcoin function and in my opinion erodes bitcoins point of difference.
The lightning network is in a way similar to sidechains in that it makes transactions off chain near unlimited, but it is different because it is not centralised. It does however potentially impact on transparency by adding a layer of complexity to the information that can be extracted from the blockchain. This is because transactions use smart contracts secured by the blockchain and are not accounted for in the standard transaction format. Lightning network, i think on the whole is a better system, as far as sticking to the original principles of bitcoin as digital cash, but it could compromise bitcoins point of difference as a transparent record as compared with more private crypto currencies.
Does bitcoin need all of its transactions to show up on the block chain? Many would argue that this currently doesn't happen anyway. Do we need a permanent publicly traceable record of transactions less than $5 in value? I argue that we can split transactions into multiple types and get better information, better privacy and better transparency all at once.
Already user are able to divide and manipulate transactions into larger and smaller parts on the blockchain. They may want to do this to hide the true purpose of the transaction ie: illegal stuff. At the moment this is expensive. These transactions will move to specific sidechains and networks because of the costs and this somewhat false coin mixing data will no longer muddle blockchain data. Transaction requiring low levels of trust will also move off of the blockchain, for example when people need to move funds from one personal wallet to another. the cup of coffee purchases will also begin to make more sense on the blockchain because they can all just be aggregated when merchants sell bitcoin. At present it is possible that merchant payments show up twice on the blockchain, as the item is purchased and again as the coins are sold. The better data differentiation and aggregation within bitcoin may actually give us a clearer view of what is going on in the bitcoin economy.
Big data is a complex issue. It may be that the NSA's "collect it all and get no distortion" philosophy is not ideal when looking specifically at financial data. A compromise may be needed to preserve decentralisation, transparency and maintain useful information on the blockchain. In a world where bitcoins transactions are ever increasing and altcoins are fast on its tail, something needs to be done. Bitcoin will become more complex but I think analytical systems will be able to handle it.
The heart of the debate is what you believe is the main purpose of the bitcoin blockchain. To me after allowing for transaction to occur in a decentralised way, providing transparent transaction information is its main purpose. This I think is an antidote to the problems of the 2008 financial crisis.
Transparency and publicly useful information sets bitcoin apart from the more anonymous altcoins (like Dash or Monero, some people would gladly drop public information for privacy). The bitcoin blockchain allows the public to track and analyse the flow of value in the world in real time in a way that was impossible in the past.
The problem now is that if someone wants to buy ice cream from the store and have the transaction be on the blockshain in ten minutes then they would need to pay a fee equivalent to 50c. Not really practical and not good for adoption, especially in the poorest countries that need bitcoin the most.
Segregated Witness, a technical bitcoin upgrade, is set to help with this by more than doubling the capacity of the bitcoin network and therefore reducing the amount competition in the elective fee market. But as "SegWit" comes in it also allows for sidechains and the lightning network. this is no small change, they effectively allow for infinite transactions. Though the block size easily becomes the focus, It is actually the auxiliary applications that are most significant and that may come at a higher cost. there are risks here to decentralisation, transparency and quality of information.
Sidechains can be centralised (owned by a company) which is very un bitcoin like. Though they might be seen as a poor substitute they do offer a good medium ground for people transitioning from banks. They are likely to have a real time record of transactions that is easily compatible with current block chain analysis software. Corporate governance lays a veil in front of transparency and allow government involvement. Side chains are also not required to publish their transactions. This means information on some ice cream transactions can be lost. Sidechains mirror the altcoin function and in my opinion erodes bitcoins point of difference.
The lightning network is in a way similar to sidechains in that it makes transactions off chain near unlimited, but it is different because it is not centralised. It does however potentially impact on transparency by adding a layer of complexity to the information that can be extracted from the blockchain. This is because transactions use smart contracts secured by the blockchain and are not accounted for in the standard transaction format. Lightning network, i think on the whole is a better system, as far as sticking to the original principles of bitcoin as digital cash, but it could compromise bitcoins point of difference as a transparent record as compared with more private crypto currencies.
Does bitcoin need all of its transactions to show up on the block chain? Many would argue that this currently doesn't happen anyway. Do we need a permanent publicly traceable record of transactions less than $5 in value? I argue that we can split transactions into multiple types and get better information, better privacy and better transparency all at once.
Already user are able to divide and manipulate transactions into larger and smaller parts on the blockchain. They may want to do this to hide the true purpose of the transaction ie: illegal stuff. At the moment this is expensive. These transactions will move to specific sidechains and networks because of the costs and this somewhat false coin mixing data will no longer muddle blockchain data. Transaction requiring low levels of trust will also move off of the blockchain, for example when people need to move funds from one personal wallet to another. the cup of coffee purchases will also begin to make more sense on the blockchain because they can all just be aggregated when merchants sell bitcoin. At present it is possible that merchant payments show up twice on the blockchain, as the item is purchased and again as the coins are sold. The better data differentiation and aggregation within bitcoin may actually give us a clearer view of what is going on in the bitcoin economy.
Big data is a complex issue. It may be that the NSA's "collect it all and get no distortion" philosophy is not ideal when looking specifically at financial data. A compromise may be needed to preserve decentralisation, transparency and maintain useful information on the blockchain. In a world where bitcoins transactions are ever increasing and altcoins are fast on its tail, something needs to be done. Bitcoin will become more complex but I think analytical systems will be able to handle it.
Saturday, 8 April 2017
Bitcoin Inflation Convergence
A few months ago bitcoins "inflation" rate was effectively halved from 8% to 4%. This happens through a process called the halving, where the supply of new bitcoins is reduced every 210,000 blocks (or approximately every four years). We have seen demand for the currency growing faster than this creation rate which theoretically leads to bitcoins price increase. Since the last halving we have seen the price of bitcoin go up around 80% to date.
National price inflation rates, the ones people used to talk about in the 80's and 90's are rising reported at around 2% in the USA. What happens when bitcoins reducing inflation rate and increasing headline inflation rates converge? Could there be a relationship between interest rates, national inflation and bitcoins increasing value. Could this changing environment put cash "behind the curve" in a whole new way?
Though these are not calculated in quite the same way for bitcoin, at its next halving it's inflation rate (1.73%) will match the 2% target or ceiling that many countries now use. At this point, we could assume that the bitcoin price should be theoretically stable against the dollar if all other factors stayed the same and volatility is put aside. This halving is due to happen in 2020 with another in 2024 and again until eventually, the rate becomes zero. At this point, we could expect the bitcoin price go up, all things equal again, by the same rate as the national inflation of that year. If countries hold a 2% inflation rate this means the older bitcoin gets the more upward pressure there is on its price and the more attractive it is a store of value as compared with cash. In other words, bitcoin users automatically earn interest on all their bitcoin accounts.
You can see in this situation why more and more people would prefer to be involved in the bitcoin economy and want to move all their finances into this space. The math that once had the effect on average of slightly dampening bitcoins price growth will start to provide an increasing boost. There comes a point where if you are a large investor and have cash you will want to move it all over to bitcoin. Further to this, the curve can become moon like when it gets to a point where it will be worthwhile for a company, able to take out a fiat loan at a low rate, to hold bitcoin with that money rather than pay down debt. Because you can deduct the inflation rate from the interest and then add the expected gains from holding the asset,
A key to the situation is the level of integration in the economy and digitisation. Where the cost of goods in bitcoin can be updated in real time, the cost of goods in your store with stickers on them are not changed as easily. The inflation convergence concept is strengthened when bitcoin prices for goods become more sticky. Without this bitcoin doesn't counter inflation as directly. online goods purchased with bitcoin simply have prices to mirror those of goods in fiat on a day to day basis. The fiat inflation is masked in the volatility of the bitcoin price. Often high bitcoin prices lead to higher levels of bitcoin spending and stores often sell their bitcoin straight away leading the bitcoin price to fall. Many of the technical advantages of the international cryptocurrency are lost. If bitcoin is not economically integrated price movement simply interpreted as "a bubble" and that inhibits real uptake and removes any sticky prices altogether.
Everything of course is comparative. In Venezuela, for example, quoting a bitcoin price is better than using your own currency, where in the USA digitally converting to USD prices is favoured. The inflation rate is also much higher there, so run away inflation could be a major to bitcoin utility and price increase. Which comes first is hard to tell. With bitcoins current adoption level, new tools could be developed to measure bitcoin inflation in the same way countries do. This would help. With fiat inflation increasing some people may start wanting to use bitcoin as a checking account and not just as savings. It is a slow process in different pockets of the world but it is proving to be sustained. It could be exponential.
Mathematically bitcoin is transitioning into deflationary bitcoin environment, and that means the value of bitcoin should continue to go up should it prove to be a truly hard currency. The only way for Janet Yellen to get behind the bitcoin curve is to put interest rates up fast and try to induce some fiat deflation... And that I think is unlikely.
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