Ben Dyson from Positive Money has recently wrote a critical piece on Bitcoin’s “3 Fatal Design Flaws” for a panel debate at the O2 in London.
In brief, the appeal of Bitcoin’s promising technology cannot be overstated. First, it takes advantage of some sophisticated, state-of-the-art cryptographic coding to put a cap on the amount that could be created. Think of if like gold, which is a finite resource on this planet.
In fact, only 21 million bitcoins could be ever created and Dyson emphasized that there is “no human decision maker who can influence that.” This is the crux of the concept behind Bitcoin as this prevents any central authority or otherwise who can abuse, control or co-opt this money creation mechanism.
Why is this important? Well, given the recent waves of money printing, which has been euphemistically given the acronym of QE (quantative easing) to prevent any immediate questions from the general public, this becomes clear.
Simply put, the availability of this “cheap money” for big banks creates prosperity at the top as it applies a “hidden tax” through inflation to the bottom 99%. This type of monetary policy has been replicated by other central banks around the world such as in the UK and Japan, where it has been going on since the 1990s.
The ramification and damage to society i.e. unemployment, underemployment, increased prices and tuition fees, bailouts, bail-ins, budget cuts for social programs, education, and healthcare etc. can be seen all around the world such as in Greece and Spain. Hence, the appeal of a frictionless, decentralized medium of exchange is seen as appealing to the wider public who has become disillusioned with the financial and economic status quo.
The three flaws
Dyson, however, views Bitcoin’s design specifically with justifiable skepticism as it is a prototype. Here are Bitcoin’s inherent design flaws that Dyson mentions in his critique:
1. The rate of money creation
2. Bitcoin rewards the adopters and money speculators
3. Bitcoin is less secure than national currencies
The first apparent design flaw is the rate of money creation. Since only 21 million Bitcoin can be made, the money resource in this case is finite. Moreover, most of this money will be created between now and 2025, after which the mining difficulty will be severe and the rate of creation will be significantly slower producing only negligible amounts. Hence, the money supply will be essentially fixed by 2025.
This is important, as Dyson argues, because the value of a finite resource will increase over time since no more will be produced. He states:
“This means that Bitcoin users don’t want to pay using Bitcoin. In other words, they want to use Bitcoin as a speculative investment, rather than as a means of payment.”
The second flaw emphasizes that early adopters of the currency, specifically miners, who got into the game early, will have the easiest time creating this form of money. This, in turn, will allow them to “sit on currency” as a speculative investment since its value is guaranteed to increase over time.
Dyson argues that he would like to see people who use it as a means of payment rewarded instead of those who create it.
And finally, Bitcoin’s security is in question. Anyone who can access your ‘private key’ can gain access to all of your funds. Essentially, you are your own bank and anyone who can get hold of your hard drive by physical means or through an insecure internet connection could potentially hack their way into your e-wallet.
Also, an honorable mention should go to Bitcoin’s current price volatility, which undermines its real function as a currency since it discourages people from buying everyday things since they don’t really know what that same amount could buy the next day.
Work in progress
While Dyson’s claims are certainly understandable, they are nothing new and many commentators have already made him backtrack on some of his statements. Yes, Bitcoin is essentially a prototype based on the Nakomoto paper, however, the design could be tweaked and improved over time. Dyson conceded:
“It’s been pointed out that the code and design of Bitcoin is being continually updated by the Bitcoin community. It might be that Bitcoin can deal with these initial problems and morph into the standard crypto-currency. Time will tell.”
While other altcoins can certainly improve a particular aspect of Bitcoin and run with it, this does not mean that Bitcoin’s own design code is “written in stone.” Dyson adds:
“A few people have commented that the Bitcoin source code has already been changed significantly, and further design changes can be made, which is exactly what should happen with a prototype. It’ll be interesting to see whether Bitcoin can be changed enough to deal with the flaws and make it a functioning currency.”
The first alleged design flaw of the rate of money creation is likewise dubious. First, one has to ask whether this mechanism is better or worse than the current money creation method a la printing of money that is not backed by gold or anything else for that matter.
In fact, Bitcoin’s money creation mechanism has been created to mimic gold. Thus, if the demand for gold increases relative to the cost of digging it out of the ground, people spend more to mine it and the supply also increases.
The money supply partially depends on mining technology (which will be made more efficient through industrial-scale mining), which is unhelpfully arbitrary, but also on the demand for the currency, which, in turn, drives spending to mine it. So while gold as a “technology” of value exchange can now be considered outdated, it nevertheless was used for thousands of years with much success.
This nascent technology is frictionless and allows anybody from any point on earth to send money like you would an email in the blink of an eye with little to no fees. I think that is in itself is reward and incentive enough for people as they can freely exchange value and trade goods and services with greater ease than before.
The second alleged design flaw that favors adopters and speculators can also be countered by saying that those adopting Bitcoin first take the highest risk and, thus, deserve the greater reward.
Those who take the risk will attempt to give it a monetary incentive for businesses to build infrastructures around it and to start adopting it as well. Nothing will come out of nowhere without a lot of work and risks behind the scene.
What’s more is that the big banks in the current debt-based currency monetary system can be dubbed as “adopters and speculators” as well since they get special access to the Fed’s” discount window.” The “cheap money” can be compared to the early Bitcoin’s that are easier to mine, which in turn can be speculated, hoarded, or as it is the case right now, loaned to the Federal government at interest.
The third reason is probably the easiest to disprove. Bitcoin is a protocol that is arguably more secure than a bank. With physical paper money or gold a robber could break into your house and steal your money or rob a bank.
With virtual currency, it is solely up to the user to provide the necessary security and add as many number of verification steps as needed to prevent hacking. Hence, some personal responsibility is required. Which I believe is, ultimately, a good thing for all.
Coin Telegraph would love to hear your opinions. What do you think about Ben Dyson’s arguments? Is Bitcoin’s design inherently flawed? Can it be improved or will it be supplanted by other alternative currencies?
Commentary from the Bitcoin community
Thomas J. Ackermann (CTO, Bitcoin Brothers): “His first "Design Flaw" of a limited number of coins, widely regarded as a factor of stability and against inflation by creating more and more money (history has many examples where that went horribly wrong), he concludes it is a speculative object - as if fiat currencies could not be used for that (with fewer riches in the short term).
As far as volatility goes, he might follow the ruble in Russia these days - simple political decisions can influence fiat currencies dramatically.
His design flaw #2 – indicates disappointment to me that someone regrets not getting into it early enough (himself). He could have added about the injustice of the world that 1% of the global population owns more than 30% of the bottom portion.
His view on national currencies [and their security] shows he has not really understood the concept of crypto-currencies, and why they are NOT dependent on national fiat systems.
Bitcoin is a means to counter such dependencies – BECAUSE they do not depend on single national currencies and single country politics. They are truly global currencies, and depend on mathematical (predictable) difficulties, and thus provide on the long run a lot more stability than the every-balancing system of fiat currencies.”
Rik Willard (Co-Founder and CEO of MintCombine): “I agreed that Bitcoin is more prototype than final product - in fact, many of us in the space refer to it as "digital money 0.9" as opposed to version 1.0. As to the question of speculation, I believe that in it's current incarnation, Bitcoin and Altcoins certainly do reward in this way.
However, this is not necessarily bad. Early speculation creates a certain value that can be leveraged for the benefit of the overarching movement. It may be that we see Bitcoin - as a brand - move to a primarily speculative place, which legitimizes digital currencies in general, paving the way for an 'altcoin' revolution which will support a multiplicity of specific use cases. In this way it rewards the virtual currency ecosystem on the whole.
Since the vast majority of people don't mine Bitcoin, much less or speculate, they will see rewards in the form of increased opportunities for financial inclusion through branded altcoins which are made buoyant through a firm belief in digital currencies at all.”