Nick Szabo's Thoughts on Bitcoin: "If you're right on this critique Bitcoin may be destined to become a high-powered money rather than a day-to-day payment system for the masses."


#1

A few weeks ago, I posted my thoughts to Reddit that I thought that Bitcoin would one day become the digital currency for high-ticket items: expensive cars, boats, homes, etc. The reason for this is that if 1 Bitcoin is worth say $10,000 or more, it makes less sense to use it to buy items in the $1 to $100 range. So I think that NuBits will one day become the default crypto-currency for day-to-day transactions, while Bitcoin (or unfortunately maybe Ripple) will become the default currency of very large transactions.

Given that thought, I was blown away by Nick Szabo’s response to a comment on his blog. Some suspect that Szabo might actually be Satoshi Nakamoto: http://www.quora.com/Is-Satoshi-Nakamoto-now-with-about-1B-in-Bitcoins-really-Nick-Szabo

The paraphrased exchange is below. You can read the full exchange in the comments section here: http://unenumerated.blogspot.ch/2011/05/bitcoin-what-took-ye-so-long.html

Critique:

The transaction protocol does not scale beyond small transaction
volumes, making it unsuitable for direct use as payment by many users.
Another problem is the 10 minute confirmation time for transactions.
This makes it also vulnerable to DoS attacks.

Szabo’s response:

As for the long transaction delay and poor scalability, I long
considered bit gold as a design for “high-powered money” that like gold
could be used as an investment vehicle, a medium for large transactions,
and a reserve currency against which digital notes could be issued. It
would be however be far more securely auditable than remote gold vaults.

If you’re right on this critique Bitcoin may be destined to become a
high-powered money rather than a day-to-day payment system for the
masses.


#2

I frequently see variations of this idea, and I admit it doesn’t make sense to me. Currencies are not stratified into different tiers of effectiveness depending on value; the most stable, liquid option always wins. Your analogy would be similar to saying that USD is suitable for purchasing cars and houses, but Zimbabwe Dollars are better for buying a carton of milk because they are worth less.

If I was going to buy a $1,000,000 US home, and was given the option between using NuBits and Bitcoin, I would choose NuBits every time. The potential for purchaser loss is much greater with volatile cryptoassets such as Bitcoin when purchasing items of greater value. I’d hate to buy $1,000,000 US worth of Bitcoin only to find out that it was worth $650,000 US when I went to purchase the home.


#3

Unless, and here’s one of the only ways that I see @rodchi’s hypothesis coming true, the range of potential volatility for Bitcoin at that very high value (say, $100,000 USD per BTC) has effectively gone to zero.

I’m not sure how this quite works. Gold is not a very stable store of value (at least over the last few years – and I count cost increase or decrease as equally “bad” in relation to stability), and that is probably the closest tangible asset that I can think of that would have so called “high-powered money” characteristics.


#4

You may be right. I’m just lazy, and I think that most people are lazy like me…lol. It is easier to pay 10 BTC for a home than it is to pay 100,000 NuBits. It’s not really easier, but psychologically it feels easier. The example that I often give is $1.00 bills version $100 bills. I could go into a music store and pay for a new Fender Stratocaster, and pay for it in singles, but nobody does, because it intuitively does not make sense to do so. That is what $100 dollar bills are for.

One thing that I forgot to mention is that I do think that Bitcoin’s price will eventually stabilize, and I think that it will stabilize largely due to the NuBits peg at $1.00. As the marketcap of NuBits becomes a much larger fraction of the Bitcoin marketcap, NuBits will become sort of a digital buoy that keeps the price of BTC stable. As the price of BTC tries to rise, owners of NuBits will sell some, releasing more BTC onto the market, and thus bringing the price back down. Conversely, a drop in BTC’s price will cause people to buy NuBits, and those BTC will disappear into the peg holding BTC pool.

So I think that NuBits will be stable at $1.00 and Bitcoin will eventually be stable at some value much higher than it is today, perhaps $10,000. The NuBit will act like a $1.00 bill does today, and a Bitcoin will act like a very large denomination used for very large transactions, just as the $100 dollar bill does today. Nothing is absolute. Some people will still use BTC for smaller transactions, and some will use NuBits for very large transactions. But 95% of the transactions of less than say $1,000 will be paid for using NuBits, and 95% of the transactions greater than $1,000,000 will be carried out using Bitcoin. I could be completely wrong, but this is what my gut is telling me will eventually happen.


#5

I don’t see how NBT will be the reason behind Bitcoin’s price stabilizing.


#6

I’ll try to explain. Imagine in the very distant future. The marketcap of Bitcoin is 50X what it is now: $250,000,000,000 dollars. Let us assume that a majority of Bitcoin have been mined, so the value of each Bitcoin is $250,000,000,000/ 21 million Bitcoins = $11904.761904762 per Bitcoin. Now, let us assume that in that same time, 25 billion NuBits have been produced, so the total marketcap of NuBits is $25 billion x $1/ Nubit = $25,000,000,000. So the total marketcap of NuBits is exactly 10% that of Bitcoin. This means that in a non-fractional reserve system (asssuming that all NuBits are sitting on an exchange, waiting to be bought), 10% of the Bitcoin are being used to hold the peg of NuBits at $1 (for now, let’s ignore any other currency used to peg).

The price of a Bitcoin tries to go up from $11,904.76 to $12,000. What happens?
The holders of Nubits see the price of Bitcoin going up, so they want to make a profit, and they sell some of their NuBits for Bitcoin. Some of these sellers will hold on to this Bitcoin and rebuy Nubits later on. However, other will cash out: they will use these more valuable bitcoins to buy that car that they have been looking to get, or to pay their mortgage. In other words, they will add to the supply of Bitcoin on the free market, which will tend to drive the price back down.

In a situation where the price of Bitcoin is trying to drop to $11,000, the system will work in reverse. As the price of Bitcoin drops, holders of Bitcoin will buy NuBits to try to preserve the value of their holdings. To keep NuBits pegged at $1, more NubIts will have to be released “into the wild” (increase supply). So as NuBits are sold for Bitcoin, more bitcoins will be used to hold a smaller number of NuBits at a $1 peg. If the supply of NuBits gets dangeroursly low, then we will just have to create more of them.

So what you see is an elastic system where NuBits and Bitcoin constantly keep each other in check, and stable in price. The only reason that you can’t see this effect now is because the marketcap of NuBits is so much smaller than that of Bitcoin. But you will see the effect more and more the marketcap of NuBits grow.

What I have described is already happening between Bitcoin and all of the other altcoins (taken as a group). If you look at the marketcap of Bitcoin versus all of the other altcoins over the last year, the ratio of the Bitcoin marketcap compared to all of the other altcoins has dropped dramatically. I remember when the marketcap of Bitcoin was around $10 billion, and the marketcap of all of the other altcoins combined was far less than $500 million. Today, the marketcap of Bitcoin is about $4.6 billion, while the marketcap of all other coins is about $0.9 billion. So a lot of money that could have gone to increase the price of Bitcoin actually went to increase the price of other coins (e.g. Ripple). So the altcoins tend to have a stablilizing effect on the price of Bitcoin.

Basically, what I am saying, in effect, is that NuBits will one day become the dominant altcoin, and it will do what all of the other altcoins are doing today. However, the price rise in Ripple is actually becoming pretty scary. A few months ago, I would have said that it will be impossible for Ripple to ever surpass the marketcap of Bitcoin, but it is looking increasingly possible that it could. In my opinion, this would be disastrous because we would then just shift to another bank-controlled system, and we’d be back at square one.

This is where NuShares come in. At some point, the masses of crypto-currency investors will realize that minting/buying NuShares is a better long term investment than buying Ripple. At the same time, some huge announcement will stop the bleeding of money from Bitcoin to Ripple (for example, Google is building an online marketplace to compete with Amazon. A few months from now would be the perfect time for Google to announce that this new marketplace will accept Bitcoin as payment. Accepting NuBits will come later).

So in summary, I believe that Bitcoin and NuBits will peacefully co-exist. NuBits will eventually be used for small to medium sized transactions. Bitcoin will be used for very large transactions. NuShares will be the investment for people who just want their investments to grow in value over time. NuShares will eventually replace putting your money in bank savings accounts, buying bonds etc etc. Bitcoin mining will become an occupation of only large organizations: mining pools and large multimillion dollar hardware establishments. “Common people” will mint NuShares instead because that will be the only option for solo minting/mining once all of the other altcoins have been displaced by NuBits/NuShares. So I believe that the future for NuBits/NuShares/Bitcoin will be extremely bright. I think that the price of Ripple will crash at some point in the future, but I’m not sure what the cause will be (full disclosure: I don’t own any Ripple, and I don’t plan on buying any, for the philosophical reasons stated above).

By the way, I probably don’t need to state the obvious, but I think that the price of Ripple is going up so fast because the banks (and/or their aligned interest groups) are secretly pumping money into it to destroy Bitcoin (which they are deathly afraid of). But what may happen is that one of the people/groups in their ranks might get greedy and dump early, as you typically see in the classic pump and dump scenario. I believe that Ripple is in a bubble phase, but once that bubble pops, it will be extremely difficult to get it to inflate again. I just hope it pops before too many people get hurt.


#7

I’m not quite sure I follow your logic here. NuBits are not backed with anything in its design. Currently, shareholders have elected custodians who are providing buy-side support in the form of various digital assets (BTC, PPC). A draft motion is also under consideration to increase the USD value of these buy-side reserves to 95% of the total value of active NBT. If successful, this draft motion would strengthen the confidence in our $1.00 US peg by ensuring a permanent level of robust buy-side support. In the near future however only NBT/USD trading pairs will have liquidity provider custodian support.

Bitcoin does not formally back NuBits in any way, and should be considered an asset whose long-term valuation is independent of NuBits. I think your line of reasoning is somewhat similar to @Benjamin, who is in the beginning stages of proposing a system where NuShares back the value of NuBits in a way that is similar to Jordan’s NBT-for-NSR burning proposal.


#8

Hi @tomjoad!

I agree that NuBits are not designed to be backed by Bitcoin, but I think that de facto, they are currently backed by Bitcoin, as is the case with every altcoin. If you add up all of the volumes (last 24 hrs) here http://coinmarketcap.com/currencies/nubits/#markets, you come up with $49,462. Of that $35,290 is in the form of BTC/NBT pairs. This means that about 71.3% of the trades for NuBits happen between NuBits and Bitcoin. This also means that about 71.3% real dollar value of the currency used to peg NuBits is probably Bitcoin. This will probably remain the case unless PPC eventually grows in value much faster than Bitcoin. However, given the current rate of adoption of Bitcoin by large companies (e.g. Microsoft), I find this unlikely in the short term. However, the Proof-of-Stake mechanism may eventually make PPC much more attractive than BTC, it is too early to tell. All I am saying is that right now BTC has a massive headstart, and it has a lot of monentum pushing it forward.

Microsoft was only the beginning. Now, other companies who were on the fence are going to start saying “if Microsoft, one of the largest companies in the world, is willing to take a gamble on Bitcoin, maybe it is time for us to do so as well”. I would not be surprised at all to hear a Google announcement in the next few weeks/months. I don’t believe that any of this is an existential threat to NuShares/NuBits/Peercoin in any way because POS has some serious advantages over POW (I’m currently minting NuShares on a 8 year old Dell OptiPlex, and I was able to mint several blocks today on a dual Pentium 4 processor).

NuShares make all of those lots of cheap Dell computers that businesses are selling off on Ebay very valuable. If I were considering buying an ASIC mining rig to mine bitcoins, I would instead take that money and buy NuShares. Then, I’d buy a $150 Dell PC on Ebay, and start minting.

My investments are currently about 80% NuShares, 20% NuBits, <1% Peercoin. I have abandoned all other coins in favor of NuBits/NuShares because I think that this combination has the brightest future.

That being said, I still also strongly believe in the future of Bitcoin as well. I just think that Bitcoin is a worse investment than NuShares if your primary goal is to accumulate wealth. NuShares pays dividends AND you can mint them pretty easily. Bitcoin pays no dividends, and its price has been stagnant because most of the new money flowing into the crypto market is currently going into Ripple.

So here is what’s going to happen that will eventually lead to the next Bitcoin bubble. The Winklevoss ETF will get the approval of the SEC. This will cause a rapid 10X increase in the price of BTC. As Wall Street money flows into Bitcoin, we could easily see it go to $10,000. However, such a rapid increase will make it an extremely poor choice as a currency for small to medium transaction (who wants to pay $200 for a computer monitor with Bitcoin when that $200 will be worth $2,000 in a few weeks). So the rise is the price of Bitcoin will be what actually makes NuBits more popular as a payment method for day-to-day items.

This is why I keep harping on my opinion that Bitcoin and NuBits will have a symbiotic relationship in the future. As the price of Bitcoin starts to rise out of control after Wall Street starts dumping their money into it, something is going to have to arrest that irrational growth in price. NuBits and NuShares will be ready to do just that. As NuBits become a more attractive means of paying for day-to-day items, we will see motions to create a lot more NuBits to meet the demand. As the price of Bitcoin goes up, fewer Bitcoin per NuBit will be needed to maintain the $1 peg. Eventually, a state of equilibrium will be reached where the price of Bitcoin stabilizes at a value much higher than it is today, and the number of NuBits will be much higher than they are today. Money that would have gone into the continued rise in the price of Bitcoin will instead be flowing into investments in NuShares. So we will have a stable system where the 3 coins complement each other. Obviously, Peercoin will also be part of the mix, but I am not quite ready to predict its future yet because I am not yet well versed on Peercoin. However, I suspect that the demand created for Peercoin, as custodians buy it to issue as dividends, will drive up its price over time. I think that a large percentage of people who receive Peercoin dividends will keep them, and use them for Peercoin minting. For example, I received my Peercoin dividend, and I have no plans to spend them anytime soon.


#9

This have too many futuristic variables that we cannot predict:

  • OT can solve all Bitcoin scalability problems.

  • Nubits may never succeed with the 0.01Nbt transaction fee, so may be then you will have to pay extra 1000 NBT to transact 1,000,000 NBT while Bitcoin over OT will cost you nothing.
    ( this bring the question: what if Nubits was used on OT out of our control, how would we sustain the profit from the transaction destroyed fees?)

  • Would Bitcoin ever be stable or at least much less volatile ?

  • would Bitcoin have this much time in the first place? how secure would it be with the current centralization trend?

The sure things are : Nubits are here, now, and it is stable, while Bitcoin is not, and we sure have a plenty of time before it become stable enough if it would ever be.


#10

I’m confident that the shareholders would address this concern before it became a significant problem due to cost mismatching.


#11

@Raythma, very nice post. Very informative. What is OT?


#12

“OT” == Open-Transactions


#13

@Ben Thank you!


#14

There is an attempt to pay Bitcoin for payment in ordinary life.


#15

A post was split to a new topic: Is there a working Nubits download link?