Bitcoin book draft: first unlicked lump of words sent to betas.

[reddragdiva]

Went down pub last night with a laptop with a book on it. Much help right there and then. I can see people getting into this.

I have the unlicked lump of words ready to send out to beta readers. If you would like to participate, please email me, dgerard@gmail.com, and I’ll send you a link to the .odt and .docx of the rough drafts.

(This is not the prerelease review version, it's the "how am I doing" version ... we'll see how it goes.)

There's more excerpts up if you want tasters: http://davidgerard.co.uk/blockchain/

Comments

[hairyears]

[needed: short bit of “what even is money?” without inserting an entire economics text]

See what you can pick out of this:

Money is two things: a medium of exchange, and a measure of value.


The 'medium of exchange' part is easy: you could trade entirely on favours and networks of personal relationships, without any money changing hands, and people did exactly that before there was coinage or tally-tokens or records of tithes at the temples.

Note that this isn't barter: there's no money, but there is a medium of exchange. The medium's an interlocking web of personal relationships and promises and favours; but there's no common token, nothing you can count or weigh out, and no records.

Easy in a village, where everyone knows you, but hard to do in a city where you have to deal with strangers - and in an urban life, where you're not self-sufficient and everything's a transaction - so you need some kind of token.

This token needs to be widely accepted: you take someone's money in the certainty that someone else will accept it and, bar a certain amount of haggling, you're confident that you gave a fair price and you'll get a fair price.

You don't want to discover that there are only two people on the island who use conch shells as tokens: you, and the guy who bought your boat and is now visible as a sail on the horizon.

You also don't want to discover that you're in the USA in the middle of the 19th century, and the Dollar Bills you brought in from Maine aren't accepted at face value here in Louisiana.

Or maybe they're not accepted at all: look up the 'Free Banking Era' in the USA for a lesson in how badly this can go wrong, and discover that the USA didn't really have a 'Dollar Bill' until the Civil War.

In theory, the medium or currency's usefulness in getting a fair price - the measure of value - is a decentralised consensus arising in the collective decision-making process of thousands or millions of daily transactions.

In practice, the measure of value is stabilised by the concept of 'Legal Tender', in which the law insists that there are classes of transaction which are definitively settled by these tokens: temple offerings, legally-enforceable debts, taxes, payments and bond redemptions by the State.

It isn't 'pinned' or even stabilised by reference to a gold standard or a silver percentage in coinage: coinage is often debased, and trust in the issuing authority even more so.

This mistrust of a central monetary authority is central to the existence of alternative currencies: but the alternatives rely on confidence and a stable consensus about value among a massive user base, engaged in millions of transparent transactions every day.

I say 'stabilised', but not 'stable'.

The value consensus reponds badly to external shocks and internal crises. The obvious examples of internal crises are a liquidity crunch following the collapse of a major bank, which requires a 'lender of last resort'; or, conversely, an imbalance in the economy creating inflationary pressures - these can only be resolved by recession, political intervention, or by an authority with the ability to restrict the money supply.

The market may have intrinsic corrective mechanisms that provide stability against day-to-day fluctuations in supply and demand: or it may not; but it definitely doesn't for larger shocks, which can and do induce deflationary or inflationary spirals - and these can kick an economy back into the trust and personal relationship transactions of the pre-monetary era.

Or, in an economy where there are competing currencies, we can see participants losing the value they had stored in Reichmarks, or Roubles, or Continental Dollars; and there are no winners, merely those who have avoided losses on their 'real' dollars and now must trade in a shrunken economy where the value held by the losers has been destroyed.


So 'money' is more than a token agreed between a buyer and a seller: it's a widespread agreement among a large number of buyers and sellers that they will respect that token and use it in fair trades that are a fair approximation to a consensus of value; and it's a collective confidence in the existence of corrective mechanisms to prevent wild swings in this value.


There is nothing requiring correction or expansion in your chapter on Blockchain technologies in the world of finance: but I will look out for more recent examples, with particular reference to egregious stupidity.

[reddragdiva]

Fabulous, fabulous!

There's also bits where I talk about trading as if I have any idea what I'm on about. Also, I'd be interested what you think of the smart contracts and business blockchain chapters in convincing people these things are fucking terrible ideas.

(I realise as I type these words that (a) we have something very like smart contracts in high-frequency trading - that is, rogue AIs barely under human supervision (2) this is where flash crashes come from.)

[hairyears]

Where did you talk about trading? I missed that.

There's no analogy to be found for Smart Contracts in 'Flash Crash' events in the markets.

Smart contracts are irrelevant to algorithmic trading, even if you're only interested in finding cautionary examples from the cases where automated trading goes horribly wrong. Interacting algos are entertaining - look for cases on Amazon of bots bidding each other up - but you'll need to find your own examples of this happening with 'Smart Contracts': the world of banking steers well clear of this particular technology, for reasons you have pointed out quite well.

Blockchain technologies *will* get used in trading systems, although your point about open chains allowing full visibility of the transaction history is, as you point out, a major drawback.

Nevertheless, there are applications where transparency is advantageous, and many use-cases where a hash-verifiable (but not readable) history in a private chain is *exactly* what we need.

These cases are roll-backs and trade fails, and regulatory investigations of fraud and money laundering.

"No laundry tag, no trade" may well be the killer application. This is, of course, antithetical to the principles and purposes of a cryptocurrency.

It is immensely useful to have all the records to hand - or better still, intrinsic to the trade itself - if it is ever necessary to roll back ownership (or recall a pledged asset) when the settlement process fails - or when a counterparty defaults, and all their option trades are immediately closed out. This is going to make stock-lending and repo trades much, much more reliable and efficient.

If it actually works, and this hasn't yet been demonstrated.

You have pointed out that roll-backs are not supported by BitCoin.


So Blockchains have a use in Banking: but fewer uses than are being advertised, and very different uses to those of a cryptocurrency.

[reddragdiva]

That's more uses than I thought blockchains had.

I rambled a bit about wtf Bitfinex was doing, but if nothing triggered your Gladwell detector, I'll count it as a win :-D