Reason.tv: Bitcoin & The End of State-Controlled Money - Q&A with Jerry Brito

Bitcoin is the world's first fully decentralized, peer-to-peer (p2p) virtual currency. It allows users to make anonymous and untraceable cash transactions anywhere in the world without any sort of real-world intermediary. So unlike PayPal and other online services, it can't be squeezed in the same way by governments or other control agents.

Created in 2009 by a shadowy figure who goes by the name Satoshi Nakamoto, there are currently about 6 million bitcoins in circulation. That number will eventually rise, in regular intervals, to a total of 21 million by 2033. A money system without any sort of central bank? A currency whose supply increases at a steady and predictable rate according to a concept elucidated by the Nobel laureate economist Milton Friedman?

Just how revolutionary is Bitcoin?

Reason.tv sat down with Mercatus Senior Research Fellow Jerry Brito to learn how Bitcoin operates and what the implications are for traditional state-based fiat currencies. "Whether Bitcoin succeeds or fails is neither here nor there," says Brito, who predicts that currencies in the future will almost certainly be deregulated and decentralized - with or without governments' consent.

Read Brito on Bitcoin here and here. For responses to his critics and more info on Bitcoin, go here.

About 2.30 minutes.

Interview by Nick Gillespie; shot and edited by Joshua Swain.

Go to Reason.tv for downloadable versions, and subscribe to Reason.tv's YouTube Channel to receive automatic notifications when new material goes live.

Comments

[Name Nomad]

There's a chapter about this in David Friedman's book: http://www.daviddfriedman.com/.....pter6.html

(In case you're looking for a more general meditation on crypto-cash rather than any specific implementation of it).

[Cyto]

I don't know the truth of bitcoin, but the constant flogging on Slashdot gives it the feel of a pyramid scheme. A cool, self-limiting, math-heavy pyramid scheme that could also prove useful and disruptive.

The original bitcoins were (intentionally) easy to "mine". Over time they (intentionally) become more and more difficult to obtain. This is a design feature of the currency. What it also means is that if you were in on the ground floor you got lots of "free" currency. It is in your interest to hold that currency and hope that the currency becomes popular - sparking a deflationary run on the currency.

According to the article's I've seen, it currently costs more in electricity than a bitcoin is worth to "mine" it. This was not the case in the past, and theoretically this will drive the cost/benefit curve to make sure that bitcoins are not over-produced (along with inherent features of the bitcoin feedback process). Increased demand should continue drive the price of bitcoins up, making more money for those who bought in early, and making it economical to produce coins at some point in the future. But the actual rate of production is fixed by the algorithm as is the absolute number of coins available (theoretically limiting supply and creating a never-ending increase in the price of bitcoins - a nice hook for the pyramid).

[Mattrue]

I wouldn't call this a pyramid scheme, where claims on the scheme become less valuable over time; i.e. not sustainable. Bitcoin is as sustainable as any business offering a scarce resource.

If you want to draw comparisons, I believe it's pretty close to the lottery of life: your genetic makeup, what family and society you were born into, etc. The life lottery is like randomly distributed seed capital, only nature is the V.C. firm.

The bitcoin lottery is designed to slowly replace a defunct currency system, and that's where the seed capital will be derived. If you exchange dollars, or CPU time/electricity for bitcoins now, you'll have a better chance in the lottery, but the more you participate doesn't mean you'll end up with the most bitcoins. It will be some combination of luck and the value that you create/facilitate for others, just like life.

[mofo]

"It will be some combination of luck and the value that you create/facilitate for others, just like life."

But with bitcoins, thats not entirely true, you can 'mine' bitcoins by performing the mathmatical operation that the algorithim requires.

Bitcoin can still have inflation, it just spreads the effect over all the operators of the bitcoing network (who are not necessarily holders of the bitcoins themselves)

[Mattrue]

Are you not creating value if you successfully mine gold? Can't there be luck involved in discovering it? (before the other guy?)

I never denied that there would be inflation. I think there has to be with any new widely adopted currency, unless you distribute it all at once.

[mofo]

'Are you not creating value if you successfully mine gold?'

Gold, yes, bitcoin, no.

[Saro]

The act of mining the Bitcoins produces value: the accounting work that makes the system run.

[mofo]

The mining of bitcoins does not make the accounting system work, the accounting system rewards those who do it with occasional bitcoins.

And it really isnt the accounting work that qualifies you for 'free' bitcoins, its that plus completing an arbitrarily hard math problem that does it.

It doesnt change my original point, you can have inflation in a bitcoin system, the printing of money is just distributed over all the people who run the network.

I have a question, tho, what happens when the system hits the 21 million coin limit? Do coins ever get destroyed? If so, how, if not, when we reach the limit, what is the incentive to continue to operate the network?

[Saro]

1. Temporary inflation that lessens until it completely goes away at 21 million BTC.
2. Bitcoins can be destroyed if the wallet file containing them is destroyed and no backup exists.
3. The incentive changes from the lottery to transaction fees that people pay to have their transactions processed quicker.

[mofo]

Yea, i figured the lottery system is either a) a source of continuous inflation, or b) only a temporary part of the system.

So i have to ask, when the system changes to one where people pay for a fast transaction, what is the advantage over cash? Why would i want to use a system that is either slow or costs money to not be slow?

And, does this thing really scale? If Wal-mart decided to use nothing but bitcoin, could your desktop keep up with the millions of transactions per hour that Wal-mart does 24 hours a day? And what happens if there is a big spike in transactions? If wal-mart hands your bitcoin server 1 TB worth of transactions and it takes you an hour to process, what happens when you come back after processing that and wal mart says 'sorry you must have missed the last million transactions while you were downloading the last 1 TB worth of data?'

I think this scheme is even less practical than gold (and im no gold bug)

[El Duderino]

The "math problems" you are solving are not arbitrary, they support the trasnaction validation system by processing the ever growing hash that represents the time stamps, public keys and signatures that represent each transaction a bit coin undertakes. Every time there is a transaction involving a bit coin, that transaction is imprinted into its hash. Think of it as an ever expanding DNA sequence that identifies each bit coin as a unique item. The hash is the coin, therefore, to ensure people do not try to cheat the system the processing of these hash values has to be done to maintain its overall stability, otherwise I could pay you with a bit coin and then turn around and use that very same bit coin elsewhere and double spend the coin. This process is fundamental to the process, because rather than rely on a centralized third party transaction processor like Visa, it relies on a Peer to Peer process where the anonymous register of every transaction every coin has ever participated in is held by the public. The fact that the system makes the "work" harder over time is partly a factor of the size of the hash, and also so that the initial currency rollout does not effectivly dump every possible bit coin into the market at once.

As far as the cost of mining bit coins, at some point, this will be offset, or replaced by transaction fees that bit coin miners collect for validating the hash that ensured your transaction was done fairly.

[yonemoto]

actually eventually it will become deflationary.

[yonemoto]

actually eventually it will become deflationary.

[Cyto]

That's the "selling point" that makes me suspect there's something of a pyramid scheme angle to the whole thing. Except when the pyramid is built, it actually can be a useful building instead of collapsing and destroying all of the late-joiners.

I guess you could also look at it as a way to prime the pump and reward the creators of the currency and early adopters.

[Saro]

"This is a design feature of the currency. What it also means is that if you were in on the ground floor you got lots of "free" currency."

As opposed to a traditional government currency, where they can print it in any quantity they like and get to keep all of it themselves? Any currency has to have a method for initial distribution. Bitcoins spreads that initial distribution to people doing accounting work for the system. It's designed to get harder as more people pile on so that a single major player (e.g. a government) can't pile on with a supercomputer and claim every distribution, thereby shutting out everyone else. And early adopters don't enjoy their gains forever. Once they spend their coins, their advantage is gone. Can you say the same about the government?

[Saro]

Also, my back-of-a-napkin calculation tells me my current return for bitcoin mining is approximately $5 a day. Not a great return, to be sure, but it is greater than 0.

[Cyto]

Cool, an actual participant! So, have you spent any bitcoins, or are you just holding until later?

[Saro]

I've donated some but haven't purchased anything (haven't seen anything I need yet for sale). The conversion rate for USD to BTC is still pretty volatile without widely available goods to peg it at a reasonable number.

For some numbers: When I started "mining" just over a month ago, my average time to generate a block was 15 days, and a Bitcoin was worth about 90 cents. My average time to generate now is approximately 80 days, and each Bitcoin is worth about $9. Lots of speculation going on.

I currently own ~160 BTC (I bought 10 coins off the market just to dink around with, and have generated 3 blocks since then).

[Joshua Corning]

So how did you even get your bitcoin client to connect in the first place?

[M Bay]

But how am I gonna make heist movies about stealing bits?

[sage]

Just make the car chase scenes longer.

[M Bay]

We'll just store all the bit coins in the world in a single glowing glass jar. It doesn't really matter what the MacGuffin is so long as there's lots and lots of sssssplosions!!!!!!!

[El Duderino]

film them in the matrix...

[John]

Lets get ready for QE3.

http://www.cnbc.com/id/43233866

What is that old Einstein quote about insanity?

[Fist of Etiquette]

YOU ARE VIOLATING THE COPYRIGHT THE STATE HOLDS ON MONEY. Do not trade on the bitcoin network because doing so is infringing upon the intellectual property rights of government. Also, you will get viruses.

[TraderTimm]

You've got to be kiddding me. Just in case you weren't - you don't "get viruses" as this peer-to-peer network has nothing to do with distributing binary files executed on local machines. As for infringement, there isn't any. Unless the government has secretly been working on their own duplicate peer-to-peer system, there's no possible way for this to overlap. At all.

[Spoonman.]

It's like there's a whole world out there that isn't aware of sarcasm.

[El Duderino]

I seriously doubt there is an entire world of people that do not understand sarcasm, that is just not very probable at all.

[Fiscal Meth]

What an exciting idea.

[John]

I am not a rivate money guy. The case of the vapors liberals are getting over this is pretty damned funny. Did you know these things could just be inflated to the point of worthlessness? Good thing that never happens with government money.

[Saro]

And it's wrong besides: Bitcoins can't be artificially inflated, since there is a well-known (and diminishing) production rate. 21 million is the upper limit for the number of Bitcoins that can ever exist.

[New World Dan]

And I assure you that's wrong. The bitcoin system can be manipulated and abused. It works by consensus and there's really nothing to prevent a bot-net operator from putting enough clients into play to sabatage the bitcoin network. There is also the issue of fragementation. Anyone could start a rival bitcoin network. There could be thousands of independant bitcoin exchanges. And those are the most obvious problems. If bitcoins became valuable enough, someone far smarter than me would find a way to scam the system.

The security claims made by bitcoin are so far fetched, that no one who has ever had to deal with real world security issues would believe them.

[Saro]

It's not quite true to say that it works on consensus. The computers don't take a poll and then decide who is correct. Each computer individually validates that a transaction is correct. To the extent that a computer is playing by the rules (e.g. "you can claim 50 BTC when you generate a block"), all other computer playing by those rules will validate transactions. To the extent that shady computers attempt to play by different rules (e.g. "I award myself a billion bitcoins"), only other computers playing by those different rules will validate those transactions. Worse case, the botnet bitcoin clients end up fragmenting the network into two groups: the normal bitcoin clients, and the botnet bitcoin clients. The two will be unable to interact, due to their different ruleset. Sure, the botnet bitcoin network can inflate their currency all they want, but what is that to me? The rest of us are operating on the original ruleset and aren't affected.

As to "legitimate" fragmentation by competing crypto-currency systems, that's possible. But if they don't bring anything new to the table over Bitcoin (that already has an established user base), their usage is going to be extremely low. And if they do bring something new, then what's the problem? I say bring 'em on. Competition is a good thing.

[yonemoto]

"Bitcoin is a prediction market for valuating the security of SHA-256."

[TraderTimm]

As far as 'sabatage', the only benefit gained temporarily by someone with more than 50% of the total network computing power is reversing their own transactions and possibly double-spending their coins. If you've read the whitepaper, and I'm sure you haven't - the problem is rather exponential in difficulty and results in far more cost than what is worth to 'take over' the system.

As it is, if you have that much hashing power (computational proof-of-work ability), it serves you better to play along than to try disrupting the network.

The security in bitcoin is the same that guards your 'real' bank account and other digital transactions. Any flaw in bitcoin can be addressed and fixed rapidly, while your bank flounders and admits nothing as the crisis unfolds.

Good luck with that.

[Doc S.]

Does that guy have any idea what his eyebrow looks like?

[robc]

My problem with bitcoin is that I prefer my money to be backed with something.

I dont really care what, precious metals work nicely but I would be fine with a SPYder backed currency too.

[TraderTimm]

The US Dollar is only backed by the 'guarantee' that the US Government won't back out on its debts. It is a web of trust, not based on anything physical. The irony here is your acceptance of SPY-contract backed currency, which means you believe in a recursive loop of paper backed by other paper. (Since SPY trades are settled in cash, not in physical goods.)

[Cyto]

Yeah, the "something" behind any currency is just the confidence that you'll be able to exchange it for the desired goods and services. This is obvious for fiat currencies, but it still holds true for gold-backed currencies (or any other commodity). The whole thing is just a confidence game.

Of course, a commodity backed currency has the added security of some physical good - the likelihood of that becoming unwanted are much less than simple pictures on paper.

I will offer a counter example though: "They aren't making any more land". I heard that over and over in the south Florida real estate market. Well, that didn't stop the market from correcting below baseline.

[robc]

SPY isnt just paper, its equity in certain companies (500 certain companies, in fact).

[BigBob]

Is this stuff backed by WWII gold found buried in a Philippine jungle?

[robc]

The Avi jokes related to bitcoin are stale by now, arent they?

[BigBob]

There are only 2 rules to comedy:

1. Nothing is sacred

2. If it's funny the first time, it's funny every time.

Besides, not everyone arrived at this party simultaneously, so what's stale to some is not so to others.

[robc]

Rule #2 is wrong. Its actually, "if it stops begin funny, keep doing it, it will be even funnier later one".

See The Simpsons and Rakes.

[robc]

typing hard

begin -> being
one -> on

[Cyto]

See also: David Letterman - The Man Under the Stairs.

[mofo]

Maybe that joke is stale, but I dont even get it.

[SugarFree]

Reference

[robc]

Cryptonomicon by Neal Stephenson.

[Dudebro]

Cool story, bropheus.

[r_r]

Government money is backed by force of law, which ensures it will have some value. Currency neither backed by material resources nor force can only exist in the same precarious manner cults do.

[yonemoto]

the worship of material resources is pretty cultish too - witness the collapse of aluminium upon the invention of the wohler process.

[yonemoto]

not to mention cratotheism

[Cytotoxic]

So...why is a bitcoin worth anything?

[robc]

Because someone will accept it as payment.

[0x90]

Why is a gold coin worth anything?

[robc]

Because gold gets you laid. Bitcoin doesnt have that going for it.

[yonemoto]

I assure you during the ten months I owned gold, I did not get laid.

[GSL]

No opinion on this yet. I'm intrigued by all the press bitcoin has been getting, but I'll wait until I see wider adoption before I get very excited. To me, that's really the key: you can debate all you want about bitcoin's suitability as a real currency, but it's a moot point until large numbers of people are willing to trade with it. In other words, if a lot of people treat it like it's money, then it's money; if not, then not.

[Bee Tagger]

I'll be awaiting the future episode of Futurama where Nixon's head pulls the plug on this virtual currency.

[Bee Tagger]

It's decentralized, so I supposed he'll have to pull multiple plugs.

[Irresponsible Hater]

I don't understand why the supply of bitcoins needs to grow.

Why not just create an initial world-wide supply of, say, 10 trillion bitcoins, and never increase it?

Because it's fungible, there's no risk of running up against the traditional reason to increase supply: the money is finitely divisible and fungible. No need to mint new coins so the butcher can pay the blacksmith, etc...

Give the initial inventory out to people as they hook up their computers as an incentive to add computing resources to the network. Yes, that would create a rush and reward early adopters, but that's the point, no?

It need not be inflationary or undermine the value of the (set) stock of coins.

Why does the supply need to grow?

[Irresponsible Hater]

"INfinitely divisible"

[Saro]

The current system is not merely a handout; "miners" are actually doing work for the system. If no one was mining, the system wouldn't function.

The current system is set up to transition from the current lottery-style reward to a transaction fee reward. Simply handing out bitcoins may be more expedient than making people compute hashes for a lottery ticket, but to make the coins function, someone has to be doing the accounting.

This way, there's a pool of people already accustomed to doing said accounting, and the system can be shifted slowly from the temporary reward model to the permanent one. A handout? That would be tough.

[Irresponsible Hater]

OK, no problem with earning the coins vs. a handout. Not really my point though.

Why does the supply need to grow?

[Saro]

Well, handout also implies a central authority to hand them out. That opens up the door for abuses ("As the creator, I hand myself all the rest!"). Currently, each miner awards himself the coins, and as long as he did the work he said he did, all the other computers will agree that he has those coins. The creator designed it to be decentralized so as to prevent abuse, even by himself.

[yonemoto]

bingo. This was the smartest way to build a reliable user base.

[Irresponsible Hater]

One more time: regardless of how people acquire the initial supply of coins - why does the supply need to be unlimited, as in, no upper limit.

Wouldn't an algorithimically-hard-coded upper limit avoid some inflationary risks?

As in, "start mining bitcoins: there are only 10 trillion of them to be had"

[Saro]

It isn't unlimited. The payout for generating blocks declines as the system ages. The upper limit is 21 million BTC.

[yonemoto]

I think IH forgot that you can have a monotonically increasing sequence whose series converges to a finite number.

[yonemoto]

PS, eventually the system will become deflationary (it may already have) as the cost of mining a coin is exceeded by the cost of earning a coin.

[gerio]

this is untrue. don't repeat something if you don't know the true answer.

[Saro]

He's right about the deflationary part. Only 21 million Bitcoins (each one able to be divided to the 8th decimal place) will ever exist. Once it hits that point, deflation is guaranteed.

[yonemoto]

not guaranteed. Someone could crack SHA-256.

[yonemoto]

Also, there could become a robust market for fractional lending of bitcoins (no idea how to do it but it could be done) that results in inflationary/deflationary cycles.

[Saro]

If someone manages that, it's not so much "inflation" as it is "the end of Bitcoins entirely".

[yonemoto]

well if the value goes to zero... Haha, if I cracked SHA-256, I would take out a put on all bank stocks, and take out a bunch of shorts on bitcoins like no one's business, and THEN go public with my algorithm.

[Slippery Slope]

This is going to lead people to start trading anything they find value for other things they need.

Just think about it: peoplf paying doctors for treatment with a live chicken. Humans can't live like this!!!1!1

[Invisible Finger]

Is anyone loaning bitcoins in anything other than micro amounts?

[Saro]

Real loans and such are problematic with a currency as anonymous as Bitcoins (basically, it would be like loaning someone money by putting it in a sack and then leaving it in an agreed upon location for them to come and claim when you weren't around).

To make it work, someone would have to set up an actual bank with validation of the people behind each account address so they'd know whose head to bust when you don't pay up. I don't think anyone has done this yet.

[yonemoto]

sounds like a ripe market.

[Saro]

Indeed, though setting up such a system securely (wouldn't you need a physical presence somewhere?) and having the money to loan in the first place (no Fed here to borrow money from for your fractional reserve scheme) would take some not-insignificant capital.

[Mike Laursen]

Just after I finished reading this article, I finally got my hands on an Arizona quarter, completing my nerdy quarter collection.

Makes me wonder if bitcoin digital ID info could be packaged up with artwork, so we could preserve the practice of putting pictures of dead people and stuff on our currency.

[C. Santiago]

Should Bitcoin ever be as successful as its developers hope, ultimately governments would do what they have always done: they would adapt and find ways to regulate and tax it.

I've posted some thoughts on the matter, along with some estimates of potential long-term demand for Bitcoin, at this link:

http://cs702.wordpress.com/201.....-long-run/

[David Richards]

If you want to mine for Bitcoins using your GPU (Video Card) (currently the only effective way, CPU based mining will be disabled in the next version of bitcoin) after you get the bitcoin program going, go over to: http://kradminer.com (Firefox 4 is required)

[Existential Crisis]

Do what now?

[homeless_unemployed]

129YpUXry4w6kQPHgEQgyzhjeUn5ZMbvNW

[homeless_unemployed]

spare some change, anyone?
129YpUXry4w6kQPHgEQgyzhjeUn5ZMbvNW

[tip o.neill]

gd site. see "A m e r o" coin
is hoax. but Nuet Haus faces
doing time for selling real AU
coins (not faked lead) that
too much looked like...am. gold
eagles...

[jim wright]

gd site. "Amero coin hoax,"
+ baron Neut Haus faces doing time
for selling real AU coins (not faked,
not lead) that looked to much
like AU gov. eagles."

[nike basketball]

is good

[goallen]

ty rights, etc. seem like a more accurate measure of freedom than democracy.