The phrase “waiting for the other shoe to drop” comes from a story about an old apartment house. One of the dwellers on an upper floor comes home late and, in preparing for bed, drops his shoe. Realizing this would wake his downstairs neighbors, he carefully and quietly places his other shoe on the floor. After a long interval, a neighbor who has been lying awake yells up, “For God’s sake, drop the other shoe!”
Widespread agreement about the merits of bitcoin among our panel inclines me to lay awake wondering which of two shoes will drop. Will it be a flaw in the technical structure that results in calamitously skewed incentives? Or will it be the opposition of governments, who see the threats in unfettered value transfer and seek to censor it?
The bitcoin protocol anticipates much in the world of money and payments, but it doesn’t appear to anticipate a quirk of its own creation, the possibility that one miner will do more than 51% of the “mining.” As Dan Kaminsky points out, if one person or entity is positioned to do most of the processing that maintains the public ledger that Jerry Brito extols so well, he, she, or it can affect what makes it into the ledger. That power is subject to exploitation.
Likewise, as Chuck Moulton points out, the bitcoin protocol may not be well tuned to the monetary needs that actually result from the use of digital currency. The amount of bitcoin is not responsive to the demand for money — it even insulates against attempts to create bitcoin ahead of schedule — so it could serve less well than a currency whose supply is responsive.
I believe problems like these and others are headed off in the near term by the prospect that bitcoin will increase in value. Given potentially huge growth in value, anyone with the ability to undermine the bitcoin ecosystem should realize that doing so will make him- or herself worse off. Witness the reticence of the BTC Guild to mine more than 50%. The bitcoin protocol can probably be amended to fix problems, even dealing some parties short-term losses, because all stand to see longer-term gains.
There’s some hand-waving in that, and there may be dynamics that are not susceptible to these self-correcting incentives. Perhaps when bitcoin nears an equilbrium price based on perceptions that it has reached its largest scale, exploiters of technically based incentive errors will emerge. But that will be a while.
The other shoe — the first most likely to drop — is government interference with bitcoin adoption and use. The governments who now supply money, enjoying the benefits of seigniorage and surveillance for doing so, have the opposite incentives. The greater the value of bitcoin (especially as driven by common use), the greater the incentive of governments to take steps against it.
In my main essay, I noted the ham-handed issuance of “cease and desist” letters by the California Department of Financial Institutions. Since then, the Bitcoin Foundation has gently chided the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) for insinuating that anonymous transactions and irreversible transactions are inherently questionable. If they are, then cash money is inherently questionable.
These are bellwethers of future antagonism to bitcoin from the actors who stand to lose the most, governments and traditional financial services providers. And you shouldn’t need to be told that they’re a team.
Simplifying quite dramatically, the outcome for bitcoin is dictated by a sort of perceptual-political-economic calculus: Are the apparent benefits of bitcoin (B) available to enough people (P) who are capable of defending (D) it? Or are the apparent costs (C) of bitcoin to governments (G) and financial services providers (F) greater?
Is (B)(P)(D) greater than (C)(G+F)?
Over the long-term, the benefits of bitcoin to people who can defend it in the public square will win out, but between now and then, the combined efforts of politically adept government regulators and the financial services industry will be significant.