On Bubbles and Architecture… or the importance of the letter ‘s’

I was amused by the juxtaposition of two tweets in my timeline this morning.

Ron Tolido, Cap Gemini’s CTO for Application Services, implied that Bitcoin is a bubble:

Right below him was a series of comments by Andreas Antonopoulos, of which this is typical:

They can’t both be right.   Or can they?

My take is that yes they can.  And the reason is because Bitcoins are not the same as Bitcoin.

Bitcoins are currency units that can be owned and transferred using the Bitcoin network. Today, they trade for, say, $600 and their exchange rate with other currencies is, currently, very volatile.   Ron is quite right to imply that we have no idea what one Bitcoin is worth and, regardless of what a “fair” value might be, one can expect a violently random walk on the path to that value.    Frankly, it’s a mug’s game trying to predict it and it is my intent never to comment, speculate or otherwise comment on this side of things.  It simply isn’t all that interesting.  And I think Ron is right to inject some calm into the debate (this post is not a criticism of him!)

But I think that he may also have rather missed the point.  The innovation of Bitcoin isn’t the creation of a new asset class or a get-rich-quick scheme – Bitcoins as a currency are just one application for the core technology of the Bitcoin network.

And as an architect, it is this underlying architecture that I am focussed on: the underlying genius of Bitcoin is the invention of a globally distributed and decentralised digital asset register, enabled through a stunning breakthrough in computer science: distributed consensus.  It is an open platform for money, if you like.

And I think that is the key insight:  in public debate, we need to distinguish between a particular application of the Bitcoin network and the network itself.

In other words, think of Bitcoins – the Bitcoin currency – as like a dotcom stock.   Perhaps it is amazon.com.  But it could also be pets.com.  Who knows.  Frankly, who cares?

But the Bitcoin network, should be thought of as analogous to the world-wide web itself:  the enabling technology.

The lesson I take from history is that it was the platform that changed the world – and that’s why my focus is on the bitcoin network, not the random gyrations of the bitcoin currency.

(Disclosure:  I never thought I’d have to write this but the recent price moves mean that, notwithstanding all the discussion above, I feel honour bound to disclose that I own a very small number of bitcoins.)

5 thoughts on “On Bubbles and Architecture… or the importance of the letter ‘s’

  1. Pingback: Information and choice: nine reasons our future is in the balance | The Urban Technologist
  2. Good one. Except that for the platform to succeed the currency must hold value, and rise in value in the long term. Without that the platform is dead.

    Why? Low value of currency implies low total mining rewards which implies low network security which implies higher risk of a confidence destroying attack.

    Currency and Platform is not so easily divorced. If you would like to see a method to divorce both, and get all applications that Vitalik talks about operating on the US dollar, I invite you to read: http://forum.hyperledger.com/t/an-architecture-for-the-internet-of-money/157

  3. Hi Meher,

    Thanks for the comment…. very good points.

    Jon Matonis made a similar comment over twitter in response to my post. I could be taking a too optimistic view but my sense is that incentives seem to run in the right direction here…. i.e. to the extent that products+services drive adoption, that will 1) drive demand for the underlying currency unit and 2) create a demand for network security. 1) is directly helpful for security (raises price) and 2) creates an incentive for participants to contribute security services in advance of what would be economically rational if only looking at the value of the underlying currency unit. But I acknowledge I could be completely wrong!

    I’ve spoken to a few of the hyperledger team – and will now read that link too 🙂

  4. Thanks for the reply Richard. In my opinion, bitcoin has 2 attractor states:

    1. State 1: The feedback loop outlined in your reply: Platform works, creates demand for currency, raises price of currency and enough mining takes place. Bitcoin successful.

    2. State 2: For some reason, the demand for currency is not created. A negative feedback loop happens leading to an attack.

    Can state 2 really happen? I see 3 reasons why it can:

    A. Volatility of bitcoin does drives away real usage. I got friends to buy coins, they could not stomach the volatility and sold off. After a point, the libertarian appeal does not find new users; we may already be there.

    B. There is a timeline for currency demand to take off due to block reward halving. Too late, and its dead. Mike Hearn once said he thinks the timeline Satoshi chose is too ambitious; I can’t find that quote again.

    C. Some platform uses can be cheaply replicated using other technologies. Example is decentralized exchange. What happens when Hyperledger implements decentralized exchange? Being token agnostic, US dollar vs Apple shares decentralized exchange with 500 fold faster confirmation time, and infinitely more scalability is possible. No proof of work, hence lower transaction fees as well.

    It is becoming an article of faith that Bitcoin is anti-fragile. Debt makes a government fragile and similarly need for Proof of Work expenses (~500 million per year?) makes Bitcoin fragile. I hope Proof of Stake matures somewhat; at-least there is a backup of grafting a new body to the currency.

  5. @meher – thanks for the comments… very thought-provoking. My thinking has developed somewhat in recent weeks… hopefully reflected in my pieces 1) on how new products/services could drive demand for the currency and 2) on how a continuum of decentralisation is a useful way to think about things. I guess the key question I’m still undecided on is: if you’re representing real-world assets on a system like this, is there a meaningful difference between “idealised bitcoin-as-envisaged decentralised consensus” and “curated consensus” a la ripple or hyperledger? I guess you’d argue “no”, right? (or argue that “curated consensus” (my made-up phrase) is superior?

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