Wednesday, 25 May 2011

Bitcoin: a designer's point of view

"Bitcoin: a designer's point of view" was first published in the May 2011 edition of Luxury Briefing, the luxury industry's trade magazine.


BITCOIN - A designer's point of view
by Alexander Gallé

Every now and then an idea comes online that you just know has all the potential to create a huge dent into the fabric of the universe.

Sometimes, the idea and its execution are so perfect that they propel themselves directly into the world, straight to the top. Such is the case of HTML itself, for example, or of hugely successful companies like Google and Facebook, which define new steps in how we interact with information and with each other.

Other times, the idea is there, but its initial form has a weak spot which later gets perfected by like-minded players coming further down the line. Napster was such an idea: it had some weak spots (which led to its downfall), but completely revolutionised the music industry by introducing peer-to-peer filesharing to its consumers, opening up the way for Gnutella, for example, which was already quite popular while the judges were still trying to figure out what Napster's weak spot actually was.

Bitcoin is such a big idea. The only thing we don't know yet, at this point, is whether it is big in its current execution, or whether it just sets the paradigm for other players to play within.

To give you an idea of just how big it is, I'll need to explain a little bit about monetary economics. Please note, no ideological point is made here, just an observation of how a system will exist simply because each individual user within it will see personal benefit in using it.

Now... The key difference between Milton Friedman and Friedrich Hayek - two free market economists - is that Friedman advocated that, in order to ensure the free market's stability and continuity, government should focus its efforts on the policy of dictating the quantity of money supplied to the market, and its price (i.e. the interest rate set by a central bank).

Hayek, on the other hand, argued that it is illogical to advocate the benefits of the free market but then advocate that the one product everyone sells and buys when they're buying and selling their own goods - i.e. money - should have its own supply and price dictated by a centralised bureau. This, in Hayek's view, was akin to saying that, just because everyone needs food to work, you can have a free market in labour but that you should "stabilise" it by controlling, Soviet politburo-style, the supply of food workers need to perform their labour. Central control of food led to huge famines in the Soviet Union, and central control of money leads to the economic woes we experience in the West. If money is a product like any other, it too should have its supply and prices dictated by the free market.

In other words, Hayek advocated the superiority of a money separated from sovereignty. He had a point: monetary policy is always being advocated to satisfy some other economic goal, rather than simply to ensure that the money itself be as good a product as possible. If money is a product like everything else, its evolution should follow the same evolution dictated by users' feedback and competitors' innovations, just like any other product. If a particular type of money is, as a product, superior to its competitors, it'll be in consumers interest to prefer it over others, until something better comes along. Such superiority can not be achieved if the quality of the product is always compromised by political goals, or by economics goals other than the quality of the product itself.

Enter Bitcoin, the world's first peer-to-peer online currency, which is only a couple of months old. Online currencies have been attempted before, of course: when Paypal started out, the goal was actually to create a private online currency people could use just to buy things online. It's only when site users started enquiring about this other thing - the online payment processing tool Paypal were promising would come soon on their website - that Peter Thiel and his partners decided to put their online currency ideas on the backburner and focus on this opportunity instead.

But nothing is as powerful as an idea whose time has come, and ten years later it is very clear that Paypal would have never been been as good an online currency as Bitcoin. This, for the simple reason that Bitcoin is decentralised: it's peer-to-peer. Transactions in Bitcoins are done entirely between buyers and sellers, just like cash, not relying on any third party to process the payment. In that sense, it's the closest thing to cash you can have in an online environment. Unlike cash, however, there isn't even a "central bank": the total quantity of Bitcoins is dictated by an algorithm that has nothing to do with a particular country's need to boost exports, support its mortgage-paying voters, or other factors that are nothing to do with the money's quality itself.

There was a time, centuries ago, when all money was peer-to-peer, a time when money's quality as a product wasn't dictated by anything other than the vast number of individual users preferring one type of medium of exchange and store of value over another: gold. Bitcoins are more akin to gold than anything else. The idea that the adoption of Bitcoins would lead to some kind of new gold standard is, however, entirely mistaken: a gold standard is about dictating and maintaining a fixed price between gold and one's currency (whichever one you think of as the numeraire), when the whole point of Bitcoins is that their price will simply be dictated by demand and supply, along with any other competing currencies. As for Bitcoin's security: the encryption systems used are the SHA-256 and ECDSA-256 algorithms, used by the majority of mainstream banks, which would require the invention of quantum computers to be unlocked within a human lifetime - at which point, of course, Bitcoin (or another company) could simply create a quantum encrypted currency.

What this means is that we now have a secure medium of exchange which is designed to be independent of economic motives other than its own quality (which can itself be improved like any software in v.2.0, v.3.0, etc.). It has the same potential to act as an international reference point as precious metals, but is entirely non-physical and usable in online trade. It is designed to be as easy to transfer accross the planet as sending an email, and without any mark-ups to distort its spot price.

Truly a design and technology breakthrough, then, a product in a class of its own. Like any design, however, the only really important measure is how people interact with it. Let's see how it catches on...