Re: [tlug] [OT] Mt.Gox Debacle. Please Comment.

[Edmund Edgar <lists@example.com>]

On 26 February 2014 22:02, Stephen J. Turnbull <stephen@example.com> wrote:

Finally, Bitcoin is crippled as a major currency candidate in the long
run because the bigger it gets, the less useful it is as a medium of
exchange IIUC.  That is, each coin is an atom, indivisible.  Suppose
that the Bitcoin market takes over a large part of the world economy,
becoming worth as much as a tenth of the US money stock.  That's one
trillion dollars, give or take the odd CMU[1].  The maximum number of
Bitcoins is 20 *million* (same "give or take").  Ie, each Bitcoin
would be worth $50 million.  You'd need to be a billionaire (in
*today's* money) before you could afford to actually own one Bitcoin.

So in practice people using Bitcoin for payment would have to use a
derivative (probably depository) currency.  And ya know what?  Chase
and MUFJ are one fsck (and that's an e2fsck, not a reiserfsck) of a
lot safer than Mt.Gox or Silk Road as depository institutions.

You're right that there's an indivisible unit in Bitcoin - the protocol doesn't do decimals - but you're not right about how big it is. The protocol doesn't know anything about bitcoins, and instead deals in "satoshi", of which there are 100,000,000 (1億) to the Bitcoin. So even at a trillion dollar bitcoin valuation, you'd still be able to transact in units of 50 cents. In practice if that happened I'd have thought we'd do a protocol upgrade to accommodate more division.

What is true is that there are all kinds of potential scaling limitations in bitcoin, and economic trade-offs like the "orphan cost", that could create competitive pressure on the shared public ledger and raise the fee that you need to pay to get a transaction processed. That could lead to the place you suggest, where you end up doing transactions using a bunch of depository institutions that settle with each other and keep most of the transactions out of the shared public ledger. (At the levels you talk about I'd have thought the traditional institutions like MUFJ would want a piece of the action.) But that wouldn't be the only way to work around high transactions fees. Another option would be to use another crypto-currency that scaled better, either in parallel with bitcoin (expensively-secured bitcoin network with high orphan costs for large sums, cheaper parallel currency for micro-payments) or instead (bitcoin fees are too expensive -> everybody moves to a cheaper, more scalable thing -> the scalable thing has better network effects -> bitcoin transaction fees come back down, but nobody wants to hold it any more).

-- 

Edmund Edgar

Founder, Social Minds Inc (KK)
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