Tuesday, January 23, 2018

And John Quiggin comes along to put the boots in....

John Quiggin - the quicker Bitcoin reaches its true value the better. You won't click on it, so I'll just give you this:
In the time since bitcoin was launched in 2009, it has become evident that design flaws make it useless as a medium of exchange. A design feature called the block size limit means that bitcoin can only handle around seven transactions per second. Under current rules, those who want their transactions handled rapidly (mostly speculative traders) must pay a premium to have this happen.

As a result, anyone wanting to use bitcoin for buying and selling faces lengthy delays and, currently, a cost of around US$20 per transaction. Obviously, no one will pay such a charge for day-to-day transactions. The handful of merchants who announced a willingness to accept bitcoin in the early days have since dropped it. Even a bitcoin conference was recently forced to announce that it would not accept bitcoin for registration fees.

For a while, bitcoin was favoured by users who wanted to transact anonymously, sometimes for legitimate reasons and sometimes illegally. But while bitcoin transactions are anonymous in the short run, they are anything but untraceable. The whole point of the bitcoin blockchain is that it is a complete ledger of all transactions. So, if someone else gains access to your bitcoins (for example, if a law enforcement agency compels you to hand over the keys), they have access to your entire transaction history.

Various means have been proposed for making cryptocurrencies untraceable. But all of them run up against the fact that the blockchain operates on the basis of contributions from a set of servers. If someone can get control of a majority of the servers, he or she controls the blockchain. Because the great majority of these servers are in China, the Chinese government is in a position to do this at any time it chooses. In fact, because mining is organised into relatively small “pools,” it would be sufficient to take control of four of them, something that could be done overnight.

Similarly, although various suggestions have been made for improving efficiency, there’s little to suggest that a decentralised blockchain can outperform a central intermediary like a bank or credit card company.

Even if blockchain technology turns out to be the basis of a new digital currency, it’s clear that bitcoin will not be that currency. What about the thousand or so other cryptocurrencies out there? The ease with which cryptocurrencies have proliferated supplies the answer.

Suppose that some government and its central bank decided to replace their existing currency with a digital system based on a blockchain. Adopting one of the existing currencies would involve a massive transfer of wealth to the owners of that currency. The obvious choice would be to start a new one and capture the value of issuing it (known as seigniorage).
And so on.

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