Why Charles Stross Doesn’t Know a Thing about Bitcoin
Science fiction writers excel at predicting the future. Jules Verne imagined rocket ships long before rockets were blasting into space. William Gibson foresaw the rise of the internet in Neuromancer. Arthur C Clark wrote about satellites decades before one ever shuttled a call to a cell phone.
At its core, sci-fi writing is about imagination, about openness to new ideas and change. To do that, sci-fi authors must transcend internal biases and limitations. If you can only see what's right in front of you, you can't see what's coming. Sci-fi authors not only predict the future, they help create it. Their ideas act as catalysts that spur later innovation. As a young author I read the greats, and they inspired my own fiction. Old sci-fi inspires new.
One of the speculative authors who influenced me was Charles Stross. Accelerando and Glasshouse are two of the best sci-fi books of all time. His mind-bending worlds push the limits of what's possible in fiction. Unfortunately, when it comes to Bitcoin he seems to have very little imagination. He wrote an article called "Why I want Bitcoin to Die in a Fire" that got picked up by Slashdot and Reddit and other news outlets. Even Paul Krugman got in on it, quoting the article directly for a post in the NY Times blog. The only problem is that the article is poorly researched and based on an incredibly shaky foundation. Like many others Stross is completely missing the point on why Bitcoin is a revolutionary concept and system of commerce, all while repeating wild nonsense as if it is fact. It's hard to believe that an author who wrote about algorithmically run 2.0 economies and trading exchanges for personal reputations can fail to see the precursors of that tech in the real world.
Stross makes some typical arguments against Bitcoin: it wastes electricity; bad money will push out good because it will be more profitable for botnets than legitimate miners; it’s deflationary; it is semi-anonymous so it enables crime; it’s a conspiracy by Libertarians to take over the world. But do any of them stand up to scrutiny?
The first point he makes is that it has a "carbon footprint from hell." In other words, it wastes electricity. This is the only argument I partially agree with. Stross' actual calculations are based on fantasy numbers from blockchain.info, but there is no denying that Bitcoin and other currencies have a large electricity footprint. Yet so do Visa and Amex and all of the big payment processing companies that we rely on to process transactions today. If we are going to do business online then we will use electricity. Unless we go back to using the Pony Express, that's a fact of life. Bitcoin simply shifts the electricity used to a distributed cluster of people working together as opposed to a data center at a big company.
It's also arguable we can’t calculate the impact of miners based simply on electrical usage alone. They serve a dual purpose in the economy. They process transactions and act as a distributed web of trust. They power an entire economic system by preventing people from cheating the system. When you consider how much time and how many resources payment processors currently use to make a complete mess of the same thing, that starts to look like a lot of money saved indeed. Total ROI for their efforts can't be understood just by counting the amount of kilowatts burned.
In another point Stross argues that Bitcoin violates Gresham's Law meaning that it would be more profitable to steal electricity with a giant botnet rather than mine legitimately. He cites this paper, that says botnets will come to dominate Bitcoin mining. The math in it is good. There’s just one problem. The paper was written in 2011, before the rise of ASICs (Application Specific Integrated Circuits), chips specially created for mining that are 100s of times more energy efficient and powerful. You can't mine much with the CPUs or even the GPU's in people's computers these days. It's not profitable with one CPU or a million CPUs. The botnets will fail and sleazy cybercriminals will just go back to trying to get old ladies to cash fake checks.
Actually, the opposite of what the paper theorizes seems to be happening. The competition among miners is already working to reduce that carbon footprint, unlike our current economy where the big payment processors have little to no incentive to get much more efficient. There are only a few of them and they own the market. A little more energy efficiency saves them a chunk on their bottom line, but not by much. By contrast, the Bitcoin economy has already seen a number of incredible increases in efficiency. We went from CPUs to GPUs to ASICs in the five years that the Bitcoin economy has been churning. ASICs are much more energy efficient than giant banks of GPUs running at 99% constantly. ASICs represents real businesses accreting around the crypto economy and delivering more processing power to handle additional load, while reducing energy consumption on a per unit basis. This is an open market driving new efficiencies. When big firms are putting real money into the Bitcoin economy every day, this will only drive more and more efficiencies and reduce the overall carbon footprint, even as the economy grows.
Stross also attacks the currency on the basis of it being "deflationary," because it mimics a limited money supply that increases in value over time while reducing prices of goods and services. He also notes that the Bitcoin system seems to come with a Libertarian agenda. Algorithmically defined economic systems mirror the real economic systems they model. Bitcoin picked one that is largely deflationary. Nobody has the final say on what economic system is the best. Economists can't even agree on basic assumptions, which is why they argue endlessly. Economic systems work if they work for the people who use them. Whether Bitcoin works in the long run will be up to the people buying and selling goods and services in that system. There are a huge number of cryptocurrencies already, each with different designs and monetary policies. Nearly every economic system that we have ever come up with is now modeled by one cryptocurrency or another. They are currently battling it out for mind share and utility. Some can verify transactions faster. Some increase the monetary supply quicker or have a larger output of coins. These alternative coins share one thing in common: almost all of them are based on the original Bitcoin open source code. Some of them, like Worldcoin, are built right on top of Bitcoin protocol. In other words, Bitcoin is already enabling different economic systems with different rules. May the best economic system win.
Bitcoin is more of a hybrid system than a true deflationary system. The gold standard is considered deflationary and Bitcoin is often seen as the digital equivalent of gold. Gold has a limited supply, so it is scarce, just like a digital currency. But real gold can only be subdivided so far. It can only be chopped up so far before it’s nothing but dust. Bitcoin has no such limitations. Theoretically, it can be subdivided into fractions of a coin almost indefinitely, growing as needed with people’s demands. Its current limitation is eight decimal places. Even with only 21 million Bitcoins, that’s still 2000 trillion of the smallest unit. The protocol is designed to be upgradeable, so if we ever need to divide it further we can.
It's shouldn’t be hard to see that cryptocurrencies can actually lead to better economic understanding and better transparency. Imagine a money map that shows all the world's transactions in real time, similar to Google's gorgeous wind map. Think of big data analytics running nonstop, studying the impact of money on people's lives with real data, not estimations and surveys and guesswork. You can easily visualize all of the world's money as it moves by studying the Bitcoin blockchain, a central transaction ledger of all the transactions in Bitcoin history. Imagine if economists could study the flow of all global commerce in real time? What would they learn from it? What would we?
Stross also argues that Bitcoin is only good for criminals and scumbags buying drugs and illegal weapons. This is perhaps the lamest of all arguments against Bitcoin. Can Bitcoin be used to buy illegal drugs? Of course. But so can dollars, pounds, or yuan. These currencies can be and are used for that every single day. Yet nobody talks as if this invalidates the usefulness of these currencies, only Bitcoin. Everything that exists in this world can be used for both good and ill. A humble kitchen knife can still be used to stab someone but few people would argue we should ditch kitchen knives. Just because something can be used for ill purposes doesn’t make it evil. Nothing really changes here. People have been using money to do bad things since the dawn of money.
The second half of the "Bitcoin is only for criminals" argument is that its pseudo-anonymous nature will make it harder for criminals to be hunted down and put in jail. That didn't work out well for the Silk Road. If the Silk Road saga taught us anything, it's that if you openly set up a big, in-your-face, stick-it-to-the-man illegal enterprise you will get caught. You'll get caught the way all criminals get caught: through good old-fashioned police work. The police didn't need any special tools to get the folks from Silk Road. They needed some digital forensics people – par for the course these days – as well as some detectives willing to follow all the leads. They got their man. People will always try to beat the law, and there will always be police and investigators to track them down, Bitcoin or not.
Lastly, Stross points to a random blog post by a cloud engineer from the UK about how Bitcoin is a nuclear weapon designed to take out the global banking system. This is something that Krugman picks up on in his "Bitcoin is Evil" post. Of course, as good as sci-fi authors are at predicting things, the truth is that none of us can see all the permutations of what's to come. While sci-fi authors are good at predicting individual technologies, they can't always see how a future society will really function. Like that blogger, we often imagine a total dystopia or utopia. Life usually ends up somewhere in between. Big banks will adapt and change as cryptocurrencies and the systems that support them evolve. Chris Dixon, one of the venture capitalists behind Coinbase, reminds us that “almost every significant computing movement had early proponents who were ideologically motivated. The developers of the first personal computers were closely aligned with the 60s counterculture movement. Open source software was originally created by people who believed that all software should be available for free…This isn’t coincidental: broad-based technology movements have depended on non-economic participants early on since it often took years for commercial participants to get involved.” If Bitcoin only worked for Libertarians it wouldn't be much of an economic system at all. Economic systems work because lots of people of differing backgrounds and opinions find them useful. People will vote with their wallets on Bitcoin, and that's the way it should work.
I don't know what Bitcoin will become, but whatever it is it looks like a profound technological innovation. It doesn’t “sound” impressive, Mr. Krugman, it is impressive. Bitcoin challenges some basic assumptions about what's possible. While Bitcoin specifically might not achieve the gestalt needed to support a mature economy, it seems almost certain that another cryptocurrency will. What exactly that will look like we can't predict, but you don't have to wait for the future. Economics 2.0 is online now and you can play with the beta version. For a sci-fi author like Stross that potential should prove intoxicating.Being a sci-fi author is about being open to possibilities. When a writer loses that ability to see what might be, maybe it's time for him to step aside and make way for a new generation of authors who still can.