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Bitcoin Meets Gresham’s Law

May 24, 2012 6 comments

If you’re a bitcoin user, you’re probably aware of the frailties the system has shown since the big bitcoin bubble of last year. There have been several huge bitcoin heists, a couple of exchanges have gone down, malware has stolen unencrypted wallets, and so on. Most of these issues have been fixed, or are being fixed. While the bitcoin bubble did, in fact burst—as all bubbles must—bitcoin’s trumpeted demise by so called economic experts not only seems to have been wrong, but in the after math of its publicity, the digital currency is actually gaining real traction.

Unfortunately, that real traction has exposed a very real problem with the digital currency that could end up killing it. Not quickly, mind you, but slowly, by a thousand cuts. Or maybe I should have said, a thousand fees.

Let us suppose I receive lots of small, ฿1 payments, and then wish to make a larger purchase. For example, let’s say I receive one hundred payments of ฿1 each, and then want to purchase something that costs seventy bitcoins. I could end up being forced to pay nearly ฿6 in processing fees—that’s an 8% surcharge!—for the transaction to go through. Failure to pay the fee cancels the transaction. This is exactly what happened to one bitcoin user last year. Just yesterday I wanted to test a new savings wallet on my system and was told I would have to pay a ฿0.0005 transaction fee, that’s 2.5%, to move ฿0.02 from my online wallet to my savings wallet. Why? Fragmentation. The bitcoin fragments in my wallet that make up the 2 bitcents are (apparently) very, very small indeed, which means that lots of transactions have to be processed by the miners—the volunteer computers who clear all bitcoin transactions. Apparently, the new bitcoin clients force users to pay fees when a transaction is comprised of a large number of small coins: a 70 bitcoin transaction comprised entirely of single coins, or a very small transaction, like my ฿0.02 transaction made up of even smaller bits of bitcoin.

Why is this problem appearing now? Well, I’m no bitcoin expert, but I suspect it’s because bitcoin has now been around for awhile and, given the very serious economic problems around the world, it’s growing in popularity. With greater use comes increased fragmentation, and there doesn’t seem to be a way to reassemble the fragments back into easily processable transactions. Let’s remember: bitcoin started as an experiment. I seriously doubt anyone believed it truly could become a global currency. Hence the relatively small cap on the number of bitcoins that will ever be created. Hence the complete lack of any mechanism to deal with attrition as wallets are lost (and so the bitcoins within them). Hence the complete lack of security in the original releases of the bitcoin client and the wallet.

The security issues are being fixed. Today, if you lose your bitcoins due to theft, it’s due to a lack of care on your part. Popularity has forced exchanges to ramp up their security to that of a bank. All of these measures are to the good.

But the fragmentation issue is another problem entirely. In the first place, bitcoin is supposed to be “cash.” Hard money that, like dollars or euros, can be handed to anybody else free of charge. While tipping the miners has always been considered the polite thing to do, it was never supposed to be compulsory. Nor was the amount to be “tipped” supposed to be a set fee. Yet slowly, the “tips” are becoming transaction fees that there’s no easy way for the average user to escape. John Doe may be paid his ฿5 in a single block, or his ฿5 may be made up of hundreds of coin fragments. He has no way to know until he tries to buy something with them and is hit with an 8% surcharge for using his money. Worse, unlike being handed 500 pennies, he can’t simply run down to the bank or local grocery and exchange his pennies for a $5 bill, free of charge. He’s literally stuck with five hundred pennies and the best he can hope for is that he might be able to make his purchase free if he breaks his ฿5 down into several smaller transactions.

Which leads us to the second issue, and the one that could end up killing bitcoin. If inflation heats up, sending the world economies into a second recession as many experts believe is likely, bitcoin will once again rise in value. That is only going to increase the rate of fragmentation which, in turn, could end up subjecting a greater percentage of bitcoin transactions to mandatory processing fees. This will set off a twenty first century version of Gresham’s Law. “Clean” bitcoins—those that are freshly minted and so not yet fragmented—will be horded because they’re not debased: There will be no transaction fees attached to using them. Whereas the “old” bitcoins that have been fragmented will be shunned because they’re no longer worth their “face value.” They’re worth their face value less the price of the mandatory transaction fee associated with their use.

And that could kill bitcoin!

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Throw The Book At Them!

April 12, 2012 Leave a comment

Ever noticed how, in this new era in which we live, that the Prison Industrial Complex just loves to “throw the book” at anyone who is found to not be “playing by the rules” as defined by our Government Overlords? It used to be that, if you were pulled over for speeding (shame on you!), Barney the cop might let you go with a warning, or s/he might give you a speeding ticket. That was it. No big deal.

But not today.

Today if you get pulled over for a speeding ticket you’re also likely to get a fix it ticket for the window that the neighbor kid cracked with a rock, for being three days late on your auto insurance, for that low tire, and that break light that’s out. And on any whim what-so-ever, your car can be searched and if so much as an old dried pot leaf is found, it’s off to jail with you!

Just a month or so ago the local sheriffs showed up at a “domestic violence” scene (that’s cop talk for what used to be known as a lover’s quarrel) and found a small marijuana grow. They destroyed it, obviously, confiscated the grow equipment and $800 in cash. Pot and money in proximity, you see, is automatic proof that the couple had been growing “with intent to sell.”

Never mind that we live in a world where the working poor and poorly educated are growing in number and being more marginalized and cut off from financial services every day. Cash in proximity to pot is automatic “intent to sell.” Never mind that the girl had a minimum wage job but no bank account, that the house was run down, the car was twenty years old—it was as obvious as the nose on the cop’s face that these people weren’t exactly rolling in drug cartel money. Yeah. Never mind all that. Just take the money and throw the book at them!

And that’s what they did. Because they also cut the power, so the couple’s food would spoil, because they found “code violations” in the electrical wiring. (They always do unless you’ve got an old contract showing the wiring was done by a licensed electrician, and even then it’s chancy.) So add a fine for the automatic guilt of supposedly doing electrical work without a permit (no proof that they actually did the work is required). There were small children in the house. They, of course, were immediately taken away from their parents and handed over to Child Protective Services, adding the charge of “child endangerment” to the list, even though there was no evidence of mistreatment, abuse, malnutrition, or even tardiness in school. Doesn’t matter. Hall the kids off to CPS where they can be taught how to deal drugs for real! (The success rate for children turned over to CPS and then foster care is abysmally low.) We’re going to teach these miscreants a lesson so they never step out of line again. Throw the book at them!

Except, of course. It never works. In the long course of human history it never has worked. You’d think we’d finally evolve enough to learn.

Did continual persecution of Christians by Rome for two hundred years get rid of them? They were tortured, stuck in the arena and made fun of, fed to lions, crucified, and who knows what else.

Did it kill Christianity? Obviously not.

During the inquisition thousands were tortured into confession, some were burned, others were drowned. A lucky few were simply excommunicated, though that rather came to a stop when Rome discovered that excommunicating those who don’t like you anyway does more to hurt you (in the wallet) than it does them. (They get to keep their tithe money.)

Did all those atrocities prevent the growth of science over Church dogma and belief? Nope.

Did all those atrocities prevent England from splitting with Rome? Nope.

Did all those atrocities prevent the Protestant Reformation? Nope.

The Soviet Union spent seventy years trying to keep it’s people under control. It erected walls to pen them in. It brutalized those who dared speak the truth about the regime or the true state of things in the USSR. It hunted down dissidents and banished them to live in conditions under which civilized people wouldn’t keep their own dog.

Did it prevent the truth from spreading and the walls from coming down? Nope.

You’d think we’d learn: “Government, even in its best state, is but a necessary evil; in its worst state, an intolerable one,” Thomas Paine once said.

But then, I keep forgetting: We live in an age where the wisdom of our forefathers is now considered but a fad of college youth that most (real) adults soon grow out of. Then the sagacity of true tyranny teaches them the folly of Thomas Paine’s wisdom and they soon come to believe that those who rebel against reason are not the real rebels, as Paine claimed. But he that in defense of reason rebels against tyranny, he is the real rebel, and he must, at all costs, be stopped. Or so our Government Overlords would have us believe.

The Plundering Manipulators

July 4, 2011 Leave a comment

Ah yes, here we go again some more. The Minnesota State government is still shut down and the masses are whining that their government won’t plunder the ‘rich’ and give them their money, while the rich complain that they’re being unfairly targeted and should be allowed to go their way, protecting their monopolies so they can soak the masses unimpeded. Meanwhile, in an oh so typical move, New York City is actually rationing toilet paper, claiming it “is so hard up for cash that it’s rationing toilet paper in women’s public restrooms—to the point where bathroom attendants are doling out a few measly squares per patron—along the world-famous Coney Island boardwalk.”

Okay, so if I’ve got this straight, it’s cheaper to pay City employees to ration toilet paper than it is to buy the cheap, single ply crap, governments always buy?

The logic there kind of strains credulity, don’t you think? On the other hand, political analysts are well aware that women, as a group, are more liberal than men. So from that point of view, rationing toilet paper to women, and women only, makes a great deal of political sense even though it’s fiscally stupid. It’s guaranteed to put enormous pressure on those trying to deal seriously with New York City’s financial problems.

And of course, neither the finger pointing in Minnesota nor the toilet paper rationing in New York City has or does diddly to address the real problem: When everybody plunders everybody else, only the politicians win—and then only for a short time. Because plunder adds no value to an economy, no matter where the money was plundered from. You, me, the rich—it doesn’t matter. No redistribution of wealth, no government project creates real wealth. Until the masses understand that basic fact (and don’t hold your breath) there is little hope for New York City, Minnesota, America, or the European Union.

LP Press Release: The War On Drugs

June 17, 2011 Leave a comment

WASHINGTON – June 17, 2011 is the 40th anniversary of America’s War on Drugs. Libertarian Party Chair Mark Hinkle issued the following statement today:

“On June 17, 1971, President Richard Nixon declared a ‘War on Drugs,’ which has become a relentless violation of the lives and property of Americans, including many who have never taken illegal drugs. These violations continue under President Barack Obama, an admitted former cocaine user who has shown no hesitation in throwing people into prison — a punishment he might have suffered had he been caught. Moreover, although promising to respect medical marijuana use in states where voters have approved it, the Obama administration has already conducted close to 100 raids on patients, growers, and compassion centers in those states.

“America’s first experiment in prohibition involved alcohol, and is widely recognized as a failure. Approved in 1919, Prohibition I led to a steady rise in both alcohol usage and violent crime. The murder rate rose 50% between 1919 and 1933, peaking at 9.7 murders per 100,000 population in 1933, when the country finally decided enough was enough. Immediately after the repeal of Prohibition I, gangsterism went into a swift decline, with all of the major gangs disappearing within 18 months, and the murder rate dropping every single year for more than a decade.

“Prohibition II — the War on Drugs — has been another tragedy. We applaud the efforts of Law Enforcement Against Prohibition (LEAP), an organization of current and former police, prosecutors, judges, DEA agents, and others, which issued a 20-page report this month detailing the tragic results of this misguided crusade, entitled ‘Ending the Drug War: a Dream Deferred.’

“In their report, LEAP documented some of the measurable costs: over a million people arrested each year, a trillion dollars spent, and drug gangsterism at a level that dwarfs its alcohol equivalent and which has led to a bloodbath in Mexico that is spilling over into the United States. Not because of drugs, but because of drug laws. And over 120 million Americans have used illicit drugs: only the most deluded observer believes the laws have curbed drug abuse, and only the cruelest believes that 40% of the American population belongs in prison. No wonder 67% of police chiefs say the War on Drugs is a failure.

“Ultimately, of course, this tragedy is the result of our government’s refusal to allow people to engage in peaceful choices as to what they consume. Even if drug use were to rise upon a return to the American tradition of tolerance that existed before the 1914 Harrison Narcotics Act, our streets would be safer, innocent people would not have their homes raided and pets killed by narcotics agents entering the wrong house, victims of asset forfeiture laws wouldn’t have their houses and other assets seized without due process, and resources would be freed to spend on improving peoples’ lives instead of destroying them.

“Ten years ago, Portugal decriminalized all drug use, including substances classified as hard drugs. As a Cato Report entitled ‘Drug Decriminalization in Portugal: Lessons for Creating Fair and Successful Drug Policies’ showed, drug use dropped over the next several years and the Portuguese now use marijuana at lower levels than Americans use cocaine.

“It only took Americans 14 years to realize the insanity of Prohibition I. Both practical considerations and simple human decency demand that our government end Prohibition II now.”

The World’s First Global Currency

June 9, 2011 2 comments

bitcoin logo

It actually started back in 2008 when a hacker named Satoshi Nakamoto (which is believed to be a pseudonym) got a crazy idea. Given the success and complete inability of the world’s governments to make a dent in bit torrent file sharing, why not have a bit coin: A digital currency that, like bit torrent, is traded peer to peer, buyer to seller, exactly like you trade paper money today. It became known as Bitcoin, an anonymous digital currency that is securely exchanged using encrypted keys. No third parties are involved: No banks or credit card companies taking their cut and recording your deposits and withdrawals, no “Fed” manipulating the money supply; just the “currency” that two parties agree to use as compensation for the exchange of goods and services.

The number of Bitcoins in circulation is always known, and following the Austrian School of economic thought, and the work of famed economist Milton Friedman, will slowly increase to some 21 million, where it will be capped. A fact that, as Bitcoin has increased in popularity, has led to its rise against all the major currencies.

Until recently, the only form of the e-currency was virtual. Your Bitcoins were kept in your “ewallet” on your computer, or in a third party ewallet, or both. But there was nothing physical to hold on to. No handbills were available that you could walk into a store with. But in mid 2011 a new site launched offering BitBills. “With Bitbills,” the site claims, “you can transfer bitcoins in person, just like cash!” As of this writing, the site was taking preorders for the bills.

So, just how important is Bitcoin? What difference does/can it make in our increasingly well policed and regulated world? Up until this week most people would have probably said very little. As MIT’s Technology Today put it back in May:

“It might have a niche as a way to pay for certain technical services,” says Roberts, adding that even limited success could allow Bitcoin to change the fate of more established currencies. “Competition is good, even between currencies—perhaps the example of Bitcoin could influence the behavior of the Federal Reserve.”  —Technology Today, May 25, 2011

Others have larger visions of what the digital currency is capable of:

The governments of the world are on the brink of losing the ability to look into the economy of their citizens. They stand to lose the ability to seize assets, they stand to lose the ability to collect debts. No application of force in the world is going to help: everything is encrypted, and destroying a computer with any amount of police firepower will accomplish zilch.

All the world’s weapons in all the world’s police hands are useless against the public’s ability to keep their cryptographic economy to themselves. Won’t make a scratch.

If you thought the wars over knowledge and culture were intense, I believe we’ll see much more interesting events unfold in the coming decade. The decentralized, uncontrollable economy where one lifetime employment is no longer central to every human being is something I’ve called the swarm economy, and I predict it will redefine society to an immensely larger extent than the ability to get rap music for free.  Pirate Party founder Rick Falkvinge calls e-currency “the Napster of Banking” (May 11, 2011)

Tech guru Jason Calacanis at LAUNCH recently claimed:

  1. Bitcoin is a technologically sound project.
  2. Bitcoin is unstoppable without end-user prosecution.
  3. Bitcoin is the most dangerous open-source project ever created.
  4. Bitcoin may be the most dangerous technological project since the internet itself.
  5. Bitcoin is a political statement by technotarians (technological libertarians).
  6. Bitcoins will change the world unless governments ban them with harsh penalties.

He goes on to point out the benefits. Benefits governments fear:

  • Your coins can’t be frozen (like a Paypal account can be)
  • Your coins can’t be tracked
  • Your coins can’t be taxed
  • Transaction costs are extremely low (sorry credit card companies)

Others disagree, and claim Bitcoin is nothing more than an empty box (rather like all Fed driven currencies?):

A BitCoin is a highly trustworthy certificate—or at least it would be, if there were any commodity to certify. A BitCoin is a little like a very well sealed, very well documented box with nothing inside. Now, if there were a way to put something in the box, BitCoins could become a very good currency, but the current incarnation of the technology does not allow for this to occur. A good analogy for a marketplace using BitCoins would be to imagine a group that plays “catch” with an imaginary “ball” (a game I remember playing a few times back in elementary school), except that instead of playacting, the group actually believes they are playing catch.  — Grant Babcock, OpenMarket.Org, June 3, 2011

Detractors not withstanding, the e-currency is starting to move in some pretty high circles. “The thing to note is that Bitcoin has real, and actual, value. Currently a Bitcoin (BTC) is trading at around $15,” Wall Street Journal blogger Ben Rooney recently wrote. “One other way you can tell that it is getting traction,” he goes on to say. ”is when politicians start to take note and then inevitably try to ban it.” Indeed, The Chicago Tribune reported this morning that “Two senators are pressing federal authorities to crack down on an online black market and ‘untraceable’ digital currency known as Bitcoins after reports that they are used to buy illegal drugs anonymously.” And the DEA, according to the same article, “is ‘absolutely” concerned about Bitcoins and other anonymous digital currencies, agency spokeswoman Dawn Dearden said when asked for a response to the senators’ concerns.” So, though at the moment it’s only a small contingent in the U.S. Government that is exorcised about “anonymous digital currencies,” it would appear that Falkvinge’s prophecies may, at least in part, come true. And, as Rooney rightly observes, there probably is something to anything a government fears.

Because even our right to buy and sell anonymously with cash has been restricted by the government. Deposit more than a few thousand dollars in cash into your bank account and it triggers red flags at the bank, who then reports the transaction, electronically, to federal authorities which, in turn, triggers an audit of all your accounts for “suspicious activity”. Proudly take those savings of yours down to the car dealer to buy a car in cash (a once proud American tradition) and the dealership, like the bank, must report you. Legal tender is, in our post 9/11 police state, only mostly legal.

So it should come as a surprise to no one that Big Brother takes a dim view of anything that might allow the masses to conduct their own lives in their own way without constant surveillance and supervision—all in the name of our “protection,” of course. True, all such unsupervised activity means, by definition, that there will be illegal activity. But it is worth noting that even after trashing our Constitution, spying on our own people, searching their cars, homes, and cell phones without warrants, and putting more people in jail than any other country on earth, little has been accomplished other than an exponential increase in government power and a massive shift in wealth to a very few, very powerful people. It has made no difference in the amount of crime.

Bitcoin may or may not be the end all and be all global currency of the future. But it is certainly easy to understand why it is finally gaining traction amongst those who believe that their right to run their own lives as they see fit, without Big Brother watching their every move.