Friday, September 29, 2017

Bitcoin's Paradox of Scarcity

For a medium of exchange scarcity is essential: There have to be meaningful limits on its supply (or on the growth in its supply) and it has to be impossible to spend one and the same unit of the medium of exchange in more than one place simultaneously.

In the case of a commodity money such as gold these requirements are satisfied as a result of the physical nature of the commodity: the potential supply of gold is limited by the total amount of mined or mineable gold in existence and by the cost of mining gold; moreover, if you give a gold coin to one person you cannot simultaneously give it to another person.

In the case of fiat money governments typically have a monopoly on its creation (although in the exercise of this monopoly they partner with and/or can delegate some of this creative power to central banks and commercial banks) so that everybody else can't go around creating new units of the fiat money at will.

And the problem of double spending is taken care of by either banks (if you use your bank account to pay somebody the bank makes sure that you don't spend the same money somewhere else at the same time) or the physical good itself (you can't give a coin or a bank note to one person and to another person at the same time).

Bitcoins, on the other hand, are wholly virtual and immaterial. Moreover, the bitcoin network is maintained in a decentralized way. So how can bitcoins still be scarce and rivalrous goods?

Wednesday, September 20, 2017

Bitcoin's First Use as a Medium of Exchange?

Every May 22 bitcoin enthusiasts celebrate Bitcoin Pizza Day. In 2010, back when hardly anyone had heard of bitcoin, Laszlo Hanyecz used his bitcoins to buy two Papa John's pizzas. Hanyecz sent 10,000 BTC to a fellow BitcoinTalk forum user, jercos [sic], who bought the two pizzas from Papa John's using his credit card and had them delivered to Hanyecz's house. 

This Bitcoins-for-Pizzas transaction is often regarded as the first real-world bitcoin transaction or purchase, the first transaction in which bitcoin was actually used as a medium of exchange. Wired wrote:
Laszlo Hanyecz, a Florida programmer, conducted what bitcoiners think of as the first real-world bitcoin transaction
 And economic researcher Peter Surda had this to say:
This example of a trade of Bitcoins for a pizza is indirect exchange and therefore, from that time on, Bitcoin has been a medium of exchange.
The odd thing, however, is that even though bitcoin is currently a medium of exchange and even though the Bitcoins-for-Pizzas transaction was an example of indirect exchange, in the transaction bitcoin was not actually used as the medium of exchange.

Saturday, September 9, 2017

Toward a Fairer, More Transparent and Less Wasteful ICO Model

Initial Coin Offerings are all the rage these days. Projects in the cryptofinance space offer tokens for sale that will have to be used to buy goods or services in the application once it launches. Investors buy these tokens because they think they will increase in value in the future.

ICOs allow projects to raise money for development & marketing, to reward creators, and they are a way of distributing the tokens among future users of the app that also incentivizes these users to promote the app: the more users there are in the future the more the tokens will be worth, after all.

As Reuben Bramanathan and Vitalik Buterin have described, there are several forms these ICOs can take, each with their own advantages and disadvantages. In this post I first describe how introducing two elements – a lottery & a refund – may offer a solution to one of the problems they both discuss. Then I explain objections to that solution and a way of addressing these objections.