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Tuesday
Mar182014

New paper: "Revisiting conceptions of commodity and scarcity in light of Bitcoin"

I have written a paper on Bitcoin in relation to fundamental theoretical concepts from economic theory, particularly “commodity,” as in the category of “commodity money,” the multiple meanings of “scarcity,” and “goods.” “Revisiting conceptions of commodity and scarcity in light of Bitcoin” (17 March 2014) [PDF] [ePub] is 21 pages of text, plus references.

This is a completely revised, updated, and reformatted version of an extended post that appeared almost exactly one year ago on 19 March 2013, entitled, “The sound of one Bitcoin.” That post was more in the style of a detective story, cataloging my personal step-by-step process in my first weeks of initially trying to make sense out of Bitcoin in terms of the economic theory that I had long studied.

A friend who knew I have been working on this revision asked recently if it was was mainly a refinement or if there were drastic changes from the original. I replied that while the basic ideas were the same, there were…drastic refinements. There are also connections to work that I have done in the intervening year since the original version came out.

Download here: [PDF] [ePub].

Wednesday
Mar122014

Another layer of distinction behind Tucker’s humanitarians and brutalists 

Jeffrey Tucker’s article “Against Libertarian Brutalism” (12 March 2014) describes two broadly drawn ideal types within the libertarian movement. After briefly presenting and discussing these, I will suggest what I think is a more fundamental distinction that might help illuminate the background to the perception of these proposed ideal types.

Tucker’s “humanitarians” are said to be drawn to and consider liberty in a positive context of its role in promoting individual and social flourishing and prosperity. This is above all a constructive and forward-looking appeal to the best of human social possibilities, promoting creative cooperation over both ad-hoc violence and systematic control.

The “brutalists,” in contrast, are said to emphasize a strict application of a few core principles and self-consciously eschew nuances of context, application, and image marketing. Moreover, brutalists are said to not only support, but even proudly embrace, the rights of persons to engage in what are today broadly considered negative and even reprehensible pursuits, such as for example, refusing to associate with certain types or classes of persons based on various demographic characteristics. The brutalist, in this view, not only embraces individual rights because they promote positive social values, but because they can be used to defend the rights of individuals to make what are today generally considered highly backward social choices.

With this stylized typology in mind, it is first of all fascinating to observe that the general public perception and straw-man concept of libertarianism is precisely this “brutalist” picture. In this popular image of libertarianism, it is a position that promotes a few simplistic and unrealistic ideas over any and all other competing values, perhaps due to some mysterious sociopathic refusal to integrate with ordinary society. And yet, it is also true that certain ways of presenting and discussing libertarian positions do help contribute heartily to this “brutalist” image in the popular imagination. Some statements in this genre are positively cringe-worthy by almost any standard.

While the humanitarian versus brutalist model may be of some help in advancing this conversation, I think another way of framing the background could bring additional clarity. I have come to believe that a great weakness in the heart of libertarianism has been the failure to differentiate legal from ethical issues with sufficient and systematic clarity. What are actually strictly legal-theory questions have been at times vaguely identified as “moral” or “ethical” questions when they are nothing of the kind. One origin of this has been the desire to distinguish “ethical” matters of ought from strictly economic-theory treatments of social issues. Yet not all that is non-economic is necessarily ethical in nature. In fact, much of the non-economic in social discourse is specifically legal rather than “ethical.”

The core of the libertarian position on political philosophy is a position on property theory, a topic belonging squarely within the domain of legal theory. Those who have sought to defend libertarian positions on property theory have at times seemingly fallen into the trap of downplaying the importance of authentically moral and ethical issues. The trap is sprung because proponents of alternative positions on property theory (various forms of forced redistribution) often use ethical rhetoric in their attempts to justify their various proposals for institutionalized takings.

In a developing body of work beginning in 2011 that I have labeled under the heading of action-based jurisprudence, I have sought to more carefully differentiate the realms of legal theory and legal practice both from each other and from the realms of ethical and moral theory and practice. One of the simplest ways to get across the kinds of distinctions proposed is to say that legal theory defines what “theft,” for example, is, whereas ethical theory provides advice on, among many other things, whether or not one ought to steal. That is, legal theory is fundamentally a cognitive discipline, whereas it is ethical theory (and aspects of legal practice; what should be done?) that are disciplines properly dealing with oughts and shoulds.

On this basis, the following picture emerges in terms of Tucker’s ideal types: the “humanitarian” libertarians are not willing to neglect or play down the legitimate importance of complex moral questions next to (fundamentally property-theory based) libertarianism. The “brutalists,” meanwhile, on a favorable interpretation, are concerned that misplaced attention to moral and ethical concerns could be used (and very often is used) to justify systematic violations of legal principles, principles that are among the defining characteristics of civilization as such.

My suggested path toward a resolution of this dichotomy has several steps. First, all parties should seek to clearly differentiate a separate scope for legal theory and for ethical theory. They are two quite distinct fields, the confusion of which has led to unending injustice and immorality on a society-wide basis. Second, embrace the insights that are to be gained from each of these quite distinct fields, and apply them each in suitable ways. Either/or must give way to yes/and when it comes to working with multiple fields, each one of which has valuable and distinct insights on offer.

Legal theory provides the definitions of property boundaries, the outermost boundaries within which ethical social action can possibly take place without becoming legal infringement in the process. Within this widest scope for possibly ethical actions, various specific ethical conceptions then seek to inform and advise actors as to which among the many possible ways to live within the sphere of the legal are also morally desirable and laudable in addition to merely not being acts of aggression in the property-theory sense.

Thursday
Mar062014

Newsweek uncovers its own lack of integrity in alleged “Satoshi Nakamoto” discovery reporting

Newsweek just released a story, “The Face Behind Bitcoin” (6 March 2014), claiming to have found Satoshi Nakamoto, the creator of Bitcoin. I remain doubtful. Whether they have or not, though, I think their story reflects a lack of professional integrity, which is why I am not personally even including a link to it.

The person they targeted clearly did not want to be identified, but the magazine nevertheless published photographs not only of the person, but also of where he lives, along with the identities and locations of his major family members. The same story could have been published with less identifying and location information out of respect for the obvious wishes of the primary person involved (as in: he called the police when the reporter showed up uninvited at his house).

Now as to whether this story is to be believed, the article does come off as convincing at first read, but on reflection, here are some reasons I have doubts.

Many of the points made about the person targeted in the article do match up to elements of what is known about Satoshi Nakamoto, the creator of Bitcoin. There is, however, one very large problem. Given all of the alleged sophistication and use of untraceable emails, why would such a person use a real name? It is possible, but would be a spectacular contradiction to everything else that is known about Bitcoin’s Nakamoto, and for that matter, the person targeted in the article.

The article is a collection of circumstantial evidence, an ex post effort to line up characteristics and dates. However, one should ask: Which characteristics and dates that did not match the story’s objective were omitted or went unnoticed? What is the total statistical set of persons in the world who would match up on characteristics and dates in a similar way?

Meanwhile, zero direct evidence of this man’s involvement in Bitcoin was presented, only multiple coincidences of interests and skills. Nevertheless, the article is written and titled as an unqualified direct truth claim: “this is.”

So far as I can see, every piece of evidence presented also matches the thesis that this is not the creator of Bitcoin. Moreover, the real-name relationship to the person targeted in the article tends to support the thesis that this is not him, rather than that it is him. Are we to believe that “the” Satoshi Nakamoto, out of an unending list of possible pseudonyms, would have instead used a real name right along with the rest of his consistently tight operational anonymity?

Either way, what there is overwhelming evidence for is that those responsible for this article, in pursuit of traffic and their print magazine relaunch, have displayed abysmal judgment and a lack of professional integrity by giving away specific location and identifying photographic information about this man, regardless of whether he was the inventor of Bitcoin or not.

Thursday
Feb272014

MtGox fiasco highlights advantages of Bitcoin and damage from regulation

The bankruptcy of a centralized Bitcoin exchange, such as the MtGox collapse, is a prime example of the type of “trusted third party” risk to which Bitcoin itself was designed to provide an alternative. Although the original Bitcoin white paper particularly pointed out problems with people having to trust some third party to conduct financial transfers, an exchange facilitating impersonal market trading is also a type of trusted third party.

Customers of such exchanges do not maintain direct control of their bitcoins, but instead exchange these for entries in a customer account on an internal corporate system. Customers then rely on the particular quality and reliability of the internal management, data, and auditing systems of their chosen exchange to the extent and duration to which they leave balances there.

Bitcoin was designed to be a new type of solution to the kind of counterparty trust/risk problem that the MtGox news brings to light, although the same issues are all too familiar to students of the long history of fractional-reserve bank runs and systemic financial crises (importantly, this one is not systemic, but company specific). One objective of Bitcoin’s design was to reduce or eliminate the need for end users to rely on any such centrally managed (or mismanaged) credits—whether centrally issued monetary units themselves (first from banks of issue and later from central banks) or the particular internal accounting entries of specific service providers.

Users who directly control the keys to their own bitcoins, such as by using paper wallets, client software, and to a large degree also legitimately client-side encrypted web wallets, carry no trusted-counterparty risk (but still risk of user error and theft). However, if users do not hold bitcoins in some such direct way, they do not hold them at all. Rather, they hold a claim on a specific exchange company or secure-storage service.

MtGox customers were holding what were essentially Goxcoins, that is, MtGox-brand bitcoin credits (and/or MtGox-brand fiat account credits). They were not holding bitcoins. Such services can and should be sound of practice and strong of reputation, as appears to be the case with a number of other existing services. For example, Bitstamp-brand bitcoin account credits and Coinbase-brand bitcoin account credits have attracted none of the fear and discounting of MtGox-brand bitcoin account credits. All of them have the same status from a purely economic-theory point of view and none of them equate to the direct holding of bitcoin itself. However, their qualitative differences, from brand to brand, on the market have become increasingly vast.

One key innovation of Bitcoin was eliminating from within its own design any single point of failure from centralization in the core protocol and network. This has eliminated for users the need to rely on what I call a “trusted fourth party” that is, a centralized currency-unit issuer. However, next to broad Bitcoin-community enthusiasm about the potentials for decentralized designs, this does not necessarily imply a need to eliminate any and all points of centralization, such as the ordinary business design of competitive third-party services, whether centralized or decentralized. (De)centralization is negative when misapplied and (de)centralization is positive when well applied.

That said, Bitcoin does raise the competitive bar for financial service providers in original ways. It gives users an unprecedented opt-out path from the third-party financial services market as a whole. From a user standpoint, Bitcoin eliminates the need to necessarily rely on any third party whatsoever to aid in conducting one’s financial affairs. One who does not find some third-party service helpful can choose instead be one’s “own bank.”

I contrast, the traditional banking system’s only true opt-out path for end users is to be “unbanked” and thereby excluded from significant opportunities to engage with extended commercial society. With no true opt-out path for customers, but only a choice of fundamentally similar Bank A and Bank B, banking systems became increasingly cartelized over the course of centuries in the pursuit of coordinated inflation at the long-term expense of end users. Bitcoin has now provided end users exactly such an alternative to the familiar array of cartelized non-choices in financial services. It has also provided an opt-out path from the need to use reliably value-losing fourth-party-issued currency units.

A cause of certain irregularities

As MtGox has shown (to varying degrees for years and only now to its clearest extreme), particular third-party service providers can be unsound in their business practices. What is somewhat more mysterious is that such entities could continue to exist despite a long-standing negative business reputation, as well as the parallel presence of at least some apparently sounder alternatives.

One major factor in this is the high degree of regulatory risk and uncertainty in financial services in many countries. This has held back—by years—the entry of additional and higher-grade competitors, including not only start-ups, but potential new service offerings from existing firms. Many firms that could have easily started offering more professional Bitcoin services much sooner, did not do so due to risk avoidance in the face of a pervasive climate of regulatory fear and uncertainty.

Such companies—the market entry of which no one ever witnessed because it did not happen (Bastiat: “that which is not seen”)—had an abundance of just that expertise in systems, internal controls, and financial management in which MtGox seems to have been painfully deficient. In any less hampered market than financial services, such a company as MtGox should have easily been outcompeted and/or acquired by superior entrants long before reaching such a significant scale and being in a position to be a conduit for as much damage to its customers as it has.

“Regulation,” far from being a comfortable universal-savior solution, is in this way squarely to blame as a major factor in setting up the competitively hobbled business climate that helped enable such a weak firm to remain in business far past its expiration date. That stronger firms are now growing and new ones appearing is a positive development for the Bitcoin ecosystem. That more and stronger new entrants were missing in action starting at least two years ago owes a great deal to the artificial ex ante political blockades to social progress collectively known as “regulation.” The up and down tides of market sentiment regarding the range of potential regulatory actions have also played a major role in amplifying bitcoin price volatility. This component of volatility is then naively blamed on “bitcoin” instead of on the irrational and unpredictable regulatory climate, market expectations about which shift with every passing “official” mumbling, musing, or rumor from anywhere in the world (though much less now than in the past).

Constructive work is underway to apply the conceptual and technical solutions that Bitcoin has brought into the world to the specific business of exchanging global bitcoin for various local monies. These include a range of decentralized exchange protocols, and methods of using the blockchain to confirm customer reserves. Contracting for independent third-party audits would also seem a reasonable business measure for participants in a competitive exchange landscape. Offering such audits could be another un- or under-tapped potential business opportunity. Once again in this case, progress has been impeded by regulatory fears that have helped prevent relevant established professionals from getting involved much sooner just where most needed—in an entirely new world-changing start-up industry.

As the less content-oriented among media participants scramble to conflate as thoroughly as possible the emerging disasters of the MtGox company with their own vaguely formed fantasy images to which they attach the word “Bitcoin,” I take note that the really existing Bitcoin was designed as an innovative solution to the centuries-long institutional problems of users having little choice but to trust some “trusted third party” in their financial affairs. What has been dubbed “Empty Gox” is only the latest particular manifestation of this long-running problem, to which Bitcoin itself has arrived on the historical scene as a significant new class of solution.

 

Suggested reading: “Bitcoin: A Peer-to-Peer Electronic Cash System,” Satoshi Nakamoto (Oct. 31, 2008) [PDF]

Friday
Feb142014

Summary update on Bitcoin transaction malleability adjustments

Here is a quick summary of the current state of the response to transaction-malleability attacks on some exchanges, based on what I have gathered mainly from Github, Reddit, and Twitter discussions. One note on terminology at the outset, transaction-ID malleability would probably make this easier to understand for the general public at first glance—the substantive content of transactions cannot be alterned at all through this issue.

The MtGox exchange was still hardest hit in its particular implementation, but more importantly, it is mainly suffering in addition due to a general lack of market confidence in its business and solvency, which has built up over a very long period. The “price” it currently displays is not really a “Bitcoin price,” but mainly a market risk assessment of the likely state of the exchange’s own solvency. The current issue and MtGox’s response have come as a “last straw” for the market’s view of this company. This business-specific factor has also amplified the wider public impression of how significant the actual general technical issue itself is (this is typical for Bitcoin news, but still).

That said, MtGox’s infamous Monday press release blaming the Bitcoin protocol for its own woes was not entirely fanciful after all, and some wider adjustments are being made to tighten up this issue at some other exchanges and even in the reference implementation itself. These code adjustments in response to transaction ID malliators (those taking advantage of the situation to reissue transactions with altered transaction IDs) are taking shape and are in the process of being approved and implemented.

What we are apparently getting is a new “normalized transaction ID” field in transactions. This reflects the substantive content of the transaction itself and is therefore immune to the malliation to which the standard ID is subject prior to confirmation. To clarify for those who have not followed this closely, this issue has never had any direct effect on the content of transactions, that is, on who gets what. The exploit is only a way to fool some wallets into not seeing that a confirmed transaction has in fact been confirmed.

The work underway is precisely to fix these particular implementations so that they correctly perceive that confirmed transactions actually have appeared on the blockchain. These implementations had been relying on the initial standard transaction ID for this function. Not everyone understood that during a window after initial submission to the network and before confirmation, a transaction could be copied and the copy reissued with an altered transaction ID by changing the format of the signature.

Reference wallet features to make use of this new normalised ID are well in process. These include detecting copies of the “same” (in terms of hard content) transactions with differing standard transaction IDs. This is called “Walletconflict detection.” “Conflicted” transactions, that is, versions of a transaction that did not confirm due to ID malleation, are to be reported as “confirmations: -1 and category: ‘conflicted.’” This status is based on detection of multiple transactions with the same (new) normalised transaction ID as one another (only one such transaction can ever be confirmed, but this new feature brings any ID-malleation attempts to the ‘attention’ of the wallet software by showing all malleated and non-malleated versions that carry the same content).

The Bitstamp exchange announced Friday morning (in Europe) that its system adjustment, built with support from core developers, had passed internal testing and that it is likely to resume withdrawals later in the day.

There is more to be done to support more complex and as yet rarely used Bitcoin features in terms of the standard transaction ID issue, as this ID is what is used in inputs to future transactions. This is complex, because the malleability of the standard ID could also have positive uses in the future in facilitating certain types of complex transactions. The current adjustments with the addition of the normalized transaction ID and related code should be a sufficient immediate adaptation to the issue.