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Massively Scalable Digital Currencies

Here we search for the holy grail of micropayments: a decentralized transaction system that can scale to the volume of the internet itself; the promised land where transactions are plentiful as UDP packets, fast as ping, and as cheap as bandwidth itself.


Bitcoin is a working example of a decentralized transaction network.  It’s Proof of Work scheme has certainly proved itself to work in the field, but at the cost of zero parallel scaling: transactions are redundantly replicated across all full nodes, so the maximum performance of the system is nearly equivalent to the maximum performance of a single node.  The nascent network still has room to scale, but eventually will run into the bandwidth and storage limitations of the acceptable minimum requirements for a full bitcoin node.  The interesting recent proposals for performance provide a constant multiplier, they don’t change the asymptotic scaling which is and will be O(N).

There are many interesting applications of distributed transaction networks that have vastly higher performance requirements.  The financial markets of the world such as NASDAQ, BATS and kin are a good starting point, but really just the tip of the iceberg.  Sans any and all performance limitations, what kind of applications could a vastly scalable micro-transaction network enable?

For inspiration we can look to the future vision of an impending AI-singularity: an explosion in computation and intelligence leading to a world quickly populated by an endless sea of software agents ranging from the smallest dedicated trading bots on up to the true superintelligences: vastened minds thinking orders of magnitude faster and deeper than mere biological brains. The key constraint on the intelligence explosion is the locality of physics as expressed by the speed of light. The faster an agent thinks, the slower the outside world becomes.  Latency and bandwidth become vastly more restrictive.  The future is perhaps dominated by localized pocket civilizations around the size of a city block: a vast expansion of virtual inner space.  A globally synchronous protocol like Bitcoin has little place in this future.

Even before the full intelligence explosion begins in earnest, a scalable micropayment network could enable an Agoric Computing revolution.  Many real world problems of interest can be formalized as multi-agent / multi-utility function coordination problems that are well addressed by market systems.

Imagine a smart traffic marketplace where automated vehicles rent out their time, road lane usage is rented, user agents bid for service, and various options and derivatives are used to predict and hedge traffic events.

Open markets could potentially solve a key problem with the health industry: the misalignment of financial incentives.  Consumers have an interest in maximizing quality and quantity of lifespan.  Medical companies currently have a greater financial interest in recurring product revenue via indefinite medication rather than one-off cures. Health/Life insurance could be revolutionized by creating a marketplace for insurance contracts and associated derivatives such that health research innovators could profit from the true economic value of actually curing or even preventing diseases.

A marketplace for grid computational resources itself could enable entire new classes of massive dynamic software ( indeed we are already seeing the early stages of this with nascent cloud computing markets such as Amazon’s EC2).

Lofty Goals

The ideal transaction network would have the following qualities:

  1. throughput: peak aggregate transaction rate approaching the theoretical maximum: transaction message size / total network bandwidth (zero duplication overhead)
  2. latency: most transactions add little additional latency beyond the minimum packet traversal from sender to destination
  3. security of ownership: private control of assets is near-guaranteed
  4. uniqueness of assets should be cheaply verifiable and counterfeit-resistant
  5. robustness: high systemic existential security: large-scale redundancy via P2P decentralization

Bitcoin scores well in terms of goals 3,4,5 at the expense of performance goals 1 and 2.  The aggregate bandwidth cost of a single transaction in the bitcoin network is roughly B = O(N*C), where N is the number of nodes, and C the bandwidth cost of a single transaction packet.  Thus the total transaction throughput T scales as T = O(N*B / N*C): which B is the per-node bandwidth, and thus is just a constant: T = O(B/C).  Ideally we want the average transaction to visit only a tiny fraction of the node network so that B << O(N*C) ~ O(C) and thus T ~ O(N*B/C).

Starting from this perspective on the problem, the throughput and latency performance constraints suggest that any highly scalable solution network must be both sparse and local: the great majority of transactions should only propagate to a handful of network peers.  Guided by this insight, we can search the landscape of digital asset protocols to find solutions that best optimize over performance and security tradeoffs.

The core of digital poperty networks like bitgold/bitcoin is a cryptographic ownership chain.  For the sake of simplicity, we will start with indivisible quantual assets, similar to the early bitgold idea.  These assets naturally form sets to represent different categories of assets, but let’s start with a simple currency which we can call the quoin.  As part of the initial consensus protocol, we can consider the set of all quoins to be pre-existent and ordered as strings: for example QU0001, QU0002, etc up to some established limit of N units.  Each quoin is associated with a single public cryptographic key identifying its owner, ala bitcoin.  (the cryptographic implementation details are irrelevant for this discussion). Quoins further each have a preassigned value or denomination distributed according to an exponential such as 2^d, where d is a simple lookup table function based on the quoin index (transactions of arbitrary value would thus involve multiple quoins and returning change, similar to physical currency).  The set of quoins can thus be considered a flat array structure where each entry stores the public key identifying the current registered owner of that quoin.

Proof of ownership can simply be established by a chain or linked list of signed transactions.  It may seem odd and cumbersome to constrain these quoins to be indivisible, but this avoids complex transaction graphs.  The transaction chain for each quoin is unique, independent, and does not require any form of timestamping.

The core security problem with such a simple system is double-spending.  Notice however that a double-spend creates an obvious violation of the protocol: a branch in what should be a single-linked transaction chain – which is easily detectable as two transactions which share a previous link.  Any solution to this problem requires additional overhead for relaying transactions to independent third party nodes who can help resolve the protocol violation in favor of one of the potential paths.

What may not be obvious is that a fully centralized solution is far from ideal: a central verification node would amount to a critical bandwidth and latency bottleneck.  Any massively scalable protocol must widely distribute dispute arbitration authority across the network.

The core idea of LSDQ is to consider trust, dispute arbitration and consensus from an economic incentive perspective.  The protocol can remain extremely simple by pushing much of the responsibility for dispute arbitration onto the nodes themselves, exploiting a degree of local predictive intelligence embedded in each software agent.

There are numerous potential fork-resolution protocols that converge on a stable consensus.  The simplest and perhaps most effective is a weighted quorom protocol: forks are resolved in favor of the link that receives the most weighted votes.  Crucially the votes are weighted by asset ownership share: in the quoin example each quoin would have a vote proportional to its denominational value.  Each quoin could be used to cast one weighted vote per fork dispute, multiple votes are protocol violations and thus discarded.

Todo: only first encountered vote is considered, rest are considered fraudulent – double-voting?

The weighted quorom approach is a form of micro-democracy; and as such can be considered a pure Proof of Stake system, but it is much simpler than PoS as conceived in bitcoin derivatives such as peercoin.  The key difference is that a weighted quorom protocol has nothing to do with new asset/coin creation: there is no ‘mining’ in the core protocol, it cleanly separates asset creation from transaction verification.  Weighted quorom can be combined with just about any initial asset allocation or dynamic creation algorithm.

Weighted quorum by itself is not very interesting from a performance perspective: in the worst case a full quorum could result in a linear number of additional verification messages spawned for each transaction, taking us right back to square one.  The key to fast transaction verification is selective intelligent pruning of messages.

We start with the following observations/assumptions:

  1. The wealth distribution (and thus voting weights) is approximately a pareto distribution (power law)
  2. Transaction sizes are likewise sparsely distributed from either a power law or exponential family

Agents can use a probabilistic approach to determine when and where to send verification requests.  If the face value of a particular quoin is V, the expected value to a recipient agent A can either converge to V (if the transaction is ultimately validated by weighted quorum), or 0 if the quoin is determined to be a forgery (ie the transaction is not on the highest weighted-fork).

The discounted value dvalue(Q[i]) of a quoin Q[i] is thus the face value fvalue(Q[i]) discounted by the probability of forgery(double-spend): dvalue(Q[i]) = p(valid(Q[i])) * fvalue(Q[i]).  The recipient can send out query messages to other nodes on the network, asking them to investigate the transfer chain and vote on the valid path.  Each of these queries can itself involve a smaller (and perhaps conditional) micro-payment to reward the investigating node for the computational work of the query and resulting vote (ie a transaction fee) – and for large transactions this process can recurse with further requests (and increasingly smaller payments) percolating along the network until reaching diminishing returns.

The verification process can be cast as a general utility/profit maximization problem to which we can apply various machine learning approaches.

As a simple starting point, consider a greedy algorithm for a verification agent.  The verification agent is a process which stores the history of many quoins, is well connected to important peers, and accepts micropayments for verification requests.  It charges or expects a micro-payment per request, and reliably responds to valid requests concerning a quoin with a small return packet containing some relevant portion of the transaction history and a signed vote.  The incoming request itself will embed the most recent transaction or two, so a well connected verification agent will naturally build up a partial view of the full transaction database as a side effect of its core business.  And of course it can also send requests to other verification nodes as needed.

The simple verification agent receives a stream of incoming requests and has an action set consisting of: 1.) null (wait), 2.) send response packet to customer, 3.) send request packet to peer.  For simplicity assume that all packet types are of a standardized size and thus have a fixed bandwidth cost C. The agent maintains a set of incoming requests R concerning the validity of query quoins Q, each of which has an attached micro-payment X, where the value of a quoin is ie: value(X[i]).  Responding to a request R[i] consists of fetching the histories of quoins Q[i] and X[i], checking the cryptographic chain and known weighted votes, and then sending a signed response packet with the valid history (probably compressed) which also functions as a vote on that history.

The core game-theoretic principle for these agents is tit-for-tat.  Honest/cooperative agents are profit-motivated and thus expect payments/rewards in excess of costs.  In this simplified model the balance of payment or utility U[i] for verification request R[i] is just the discounted value of the incoming micro-payment minus the fixed response cost:

U[i] = fvalue(X[i])*p( valid(X[i]) ) – C.

In fact all agents will have a similar model where C is the cost function for whatever service the agent is providing.  The utility of sending out a history vote request can then be derived from the expected consensus gain it provides, ie an increase in p( valid(X[i]) ).

The current estimated future posterior probability of X[i]’s validity after receiving a hypothetical vote from a peer k is p'( valid(X[i]) | H(X[i],k)’ ).  Thus the expected value of sending out request H(X[i], k) for quoin X[i] to peer k is:

ev(H(X[i]), k) = fvalue(X[i])*( p'( valid(X[i]) | H(X[i], k) ) – p( valid(X[i])) )

and the expected profit is: ev( H(X[i], k) ) – C.

Note that the gain from sending out a vote request in this model is due to its potential to increase the group confidence and thus value in a quoin, rather than pure information gain.  Thus it is only profitable to send requests when the agent expects them to increase the probability of a quoin’s validity, ie p'( valid(X[i]) | H[X[i]]’ ) > p( valid(X[i])).  The agent does not spend time sending out vote requests for quoins it already believes to be losers.

The core of an effective verifier is in the predictive functions: p( valid(X[i])) and p'( valid(X[i]) | H(X[i], k)’ ).  A sophisticated agent can employ general model-driven prediction techniques such as reinforcement learning, ANN, SVM, etc using the various transactional history datasets for training, along with competitive simulation contest results.  Game theory suggests that a smart agent can be expected to employ some degree of randomness in its decisions to foil double-spenders who could otherwise perfectly predict its routing decisions and thus more easily split the network.

Regardless of the estimation technique used, we can expect that the p(valid(X)) type functions will have a characteristic shape.  The initial probability or prior should at least reflect the general likelihood of double-spends across the entire system, but should also incorporate trust: past knowledge about the owner of X.  If the owner has a long history of honesty, this should substantially decrease the prior of fraud.  Likewise the fraud prior will perhaps depend on the size of the transaction.  Beyond that, the final posterior should increase asymptotically to a maximum approaching 100% as votes accumulate.

The p(valid(X) | H(X[i], k)) term depends on the vote weight node k controls, so all else being equal requests will be directed firstly and most often towards high-weight nodes.  An efficient agent will also consider the local network topology in its decisions, and perhaps employ multicast routing.

Keep in mind that consensus does not depend on the predictive functions an agent employs for optimizing transaction processing.  The key to eventual consensus is that honest nodes always vote to accept the first variant of any transaction they discover, and honest nodes never change their votes, double-vote or double-spend.  Local agent intelligence enables the network to scale massively by minimizing the effort expended to detect dishonesty and thus minimizing transaction costs.


The distribution of transaction values can be expected to take a power-law or perhaps exponential form such that the majority of transactions are small micropayments and large transactions are fairly rare.  For very small micropayments exchanged for sub-second computational services, the value of the transaction can approach a small multiple of the cost of message bandwidth.  The transaction fee could thus approach zero for the smallest micropayments.

For small transactions between trusted nodes, the predictive models outlined earlier suggest an absurdly low probability of double-spends such that investigative requests are unwarranted.  However the predictive confidence in a chain also decreases exponentially with the length of all unverified steps.

This results in a dynamic where small clicks of nodes with high inter-mutual trust can exchange in long sequences of rapid micro-transactions with little external network interaction, until eventually the chains reach some trust limits where external verification and auditing becomes warranted.  These chains can be compressed with hash-tree techniques combined with randomized auditing to reduce the cost of exporting quoins out of a click.

As the transaction value increases, the cost of a double-spend and thus expected value of confirmation packets increases in proportion.  The maximum worthwhile effort does hit a ceiling around the cost of securing a quorum of votes.  Interestingly enough, a highly inequitable wealth distribution actually reduces the number of messages required to secure a firm majority, reducing transaction costs.  For example, assume a population of about 10,000 verification nodes, and a pareto distribution such that the upper 10% control 50% of the votes.  The maximum cost of verification – which as discussed earlier should apply only to a tiny fraction of transactions – would thus require touching only about 10% of the network: around 1,000 messages.  Assuming a bandwidth cost of about $0.10 per gigabyte and an average message size of 1KB would give an upper transaction cost of just $0.0001, or 1/100th of a penny.  Which of course is rather ridiculously cheap, but that’s more or less the point.

The Case for Bitcoin

If Bitcoin succeeds, future generations will remember it as the greatest investment opportunity in recorded history.

The Forbes list of billionaire dynasties will be completely rewritten, with new names such as the Winklevi clan shifted to the front.  A few lucky individuals will become billionaires simply because they tried out this new bitcoin mining app their comp sci dorm buddy told them about way back in 2010.  Yes, we are talking about a radical and perhaps somewhat random wealth redistribution (although in that aspect at least the pattern is familiar to students of history).

Sounds unlikely?  Perhaps, at least for now.  If we look at the current bitcoin exchanges as a sort of prediction market, we can roughly estimate the net odds traders are currently giving for that scenario.  If the BTC becomes the major world reserve currency, then each bitcoin should be worth vaguely on the order a million 2013 dollars (~20 trillion total $ medium-high power fiat money / 20 million BTC).  So currently the markets are giving about 0.01% odds on that bet.

If you think those odds of the BTC-wins scenario are much higher, such as closer to say 1% or 10%, then you should take that bet and join the Winklevi and fellow TechnoLibertarians in the proud > 1.0 BTC club  (for there can only ever be 20 million people who own more than 1 BTC).

The seductive logic of a bet with such massive upsides partially explains how BTC (or any would be money) bootstraps itself into existence up from probability epsilon (a sort of real Pascal Wager).  Then the network effect kicks in: as the inflow of small bets boosts up the price, this rise in valuation itself becomes some additional evidence for the long term monetization hypothesis (because a good speculative trade is always recursive in terms of other agent’s speculations).  This process can become a virtuous cycle, eventually leading to the Bitcoinmana that has taken the $/BTC up from 0.1, 1, 10, 100 in just a few years.

Exponential rockets such as this tend to attract the attention of professional evangelist-hucksters who can sell rocket ride tickets on Fox Business, promoting Bitcoin to a wider TV-audience of uninformed traders.  Everyday joes may not have the time or inclination to read up on cryptocurrency, but they can fit a simple line to a graph and dream of F.U. quantities of filthy lucre.

But isn’t this just a speculative bubble?  Well yes, but not just.  Or rather it’s a speculation that BTC will become a global money standard – for this is how new forms of money are born into the world: as some sort of mutual game theoretic optimum, a Schelling point in the space of future trade options.

Money arises as the solution to a global optimization problem that maximizes the efficiency of a complex network of spatiotemporal trade paths while minimizing risks and costs.  At any time the markets are continuously exploring many different forms of money/savings instruments with varying tradeoffs: and necessarily creating ‘bubbles’ in the process.  Every once in a long while this ecosystem undergoes rapid evolutionary transitions.

The missing part of this simple ‘Bubble’ explanation for Bitcoinmania or Bitcoin hyper-monetization is why any original traders thought Bitcoin had any value in the getgo, or rather why they even considered, for a moment, that it ever had a chance above epsilon of becoming the new global money standard.  Why would it be better than the dollar, euro, or gold?

The Fundamental Value of Bitcoin

Here then is the argument from fundementals:  Imagine a single benevolent, omniscient tyrant (God, or an AI super-intelligence, etc) could simply simulate the global optimization in it’s mind directly.  This then eliminates all the recursive game-theory elements (bubblemania aspects): the tyrant then effectively evaluates different monetary systems based on their longer term net efficiency, according to its criteria.  The fundamental maximum value of Bitcoin then is the net difference in total economic utility (measured by say adjusted world GDP, to first approximation) between a Bitcoin based economy and the current regime.  If we have an idea of what that value is, we can then estimate the expected return or immediate value of Bitcoin as an option on that future weighted by our assessment of its likelihood.

Spatio-temporal Trade Effeciency

Bitcoin is a vision of a more efficient currency.  The efficiency I refer to is not just algorithmic, but economic in nature.

Economists used to write in their textbooks: “Money is a matter of functions four, a medium, a measure, a standard, a store.”  Those four functions have more recently been streamlined to three, but I will further reduce all of this to a single concept: money is a spatio-temporal medium of exchange.  By this broad definition, almost anything owned has some ‘money-ness’ to it, depending on our expectations concerning how we can use and or retrade it in the future.  Everything from cowrie to salt to tulips has functioned as a form of money in at least a few pockets of space and time.  In each case the items in question had some ‘intrinsic’ productive/consumptive values which perhaps helped boostrap them into moneyness.

Today such notions of intrinsic productive/consumptive value are irrelevant from the global optimization perspective, for all that matters in the end when comparing potential forms of money is their net efficiency in facilitating trades across space and or time.  Paper fiat money is the case in point: it evolved in the market from gold deposit slips having tremendous practical advantages over metallic coinage, but has no intrinsic productive/consumptive value.

First, let us consider the aspect of spatial efficiency.  Here Bitcoins have rather obvious advantages:  facilitating transactions over the internet to anyone in the world without exchange rate conversions, high fees, long waiting periods, etc: thus: high spatial efficiency, approaching optimal.  So Bitcoin could displace Mastercard/Visa and seriously displace large swaths of finance.  This is a net good.  It is difficult to measure the quantity of this improvement, but to first approximation it should be proportional to the market cap of all the companies it would make redundant, ie somewhere to the tune of a few hundred billion dollars, perhaps up to a trillion.

Bitcoins also have high temporal efficiency due to the simple ingenious algorithm which governs their supply.  Bitcoins grow on a asymptotic inflationary schedule.  This schedule has the following advantages for facilitating temporal trades (savings): the total supply has a known hard limit, the inflation schedule is known and perfectly predictable (removing the huge uncertainty of fiat), and finally the fast but exponentially tapering inflation schedule is exactly what is needed to foster the currencies adoption – because newly created bitcoins are distributed as a reward for the ‘miners’ who verify transactions and secure the network.

Some critics (including economists who should have known better) have claimed that BTC is deflationary, which besides being technically incorrect (BTC inflated by about 200% in 2010 and down to about 15% in 2013, and it will eventually reach an inflation rate of 0%, but the supply will never significantly decrease), is also apparently used as some sort of dirty word.  I suspect that Krugman and ilk use the ‘deflationary’ epithet because they are basically employees/propagandists of the threatened institution: Fed/Banks, and their rival products cannot compete in terms of temporal efficiency: simply because states reserve the right to create new fiat to pay their bills.

The more technically correct and potentially interesting criticism from mainstream economics focuses on BTC’s inherent inelastic inflation schedule: in the Keynesian view the supply of money should be dynamically controlled by a central authority to help absorb business cycle shocks.  This theory is based on an entire edifice of economics that arose out of the experience of the great depression and similar credit collapse debt deflations.  Bitcoin in raw form is immune to such shenanigans simply because it is high powered money: the equivalent of cash or Fed Deposits, not the demand deposit credit/debt based money the banking system currently uses.  As Bitcoin grows we can expect there will be at some point a new ecosystem of debt based instruments built on top of BTC, but this new ecosystem will be global and technological, more like Prosper, less like of BoA.

Criticizing Bitcoin based on economic tools used to analyze the great depression is like criticizing Nvidia’s new Titan video card based on a theory of Charles Babbage’s Difference Engine.

Gold has a constrained supply, so it can be reasonably temporally efficient, but it is completely inefficient spatially – which is how fiat came to be in the first place, as ‘banksters’ offered a product (paper notes) with much better spatial efficiency   As a result gold only exists today in the modern monetary ecosystem in digital form, as a contract.  So it’s just another computer ledger, but a number which we should trust because the computer ledger can’t be faked/fudged/misrepresented .. because each number in it exactly corresponds to a real unit of gold held in a bank somewhere, because . . . .  somebody said so.  Fiat currency started that way, as banknotes for gold redemption.  There have been attempts to revive that idea in the digital age (such as egold), but they have all been plagued by the centralized point of failure problem.

This brings us to the final and most important advantage Bitcoin offers the world: it solves the trust problem, in both the algorithmic sense as a solution to the Byzantine Generals Problem (which really is a big deal in computer science), and in the more typical economic sense.

The core of any implementation of money is a ledger: a simple database of account balances and a trade protocol to carefully(and atomically) add N to account X and subtract N from account Y.  That’s bank software, and the core of it really is that easy.  The difficulty is trust.

In economic terms, the ledger really is the most important damn thing in the world.  How can you trust the ledger?  With a physical currency this is straightforward (as long as the physical token is very costly to fake).  Physical currencies are good in that department, but they pretty much suck in every other way compared to purely memetic currencies (such as paper or digital).

The world’s current dominant fiat currencies all use some form of complex centralized ledger.  The US has a godawful complicated scheme involving the Fed, the Treasury, a hierarchy of banking minions, and a bunch of redundant databases.  But in the end it all boils down to a centralized ledger and trust concentrated in some specialized branch of the government.

There are at least three significant problems with this scheme: first, there are about 190 generally recognized sovereign states, and almost as many currencies and ledgers.  Thus giving rise to the significant previously discussed spatial inefficiencies moving money around the world – in the form of taxes, fees, tariffs, exchange rates, and so on.

Trust is also the core cause of inflation or the poor temporal inefficiency of fiat.  Libertarians, Liberals and Conservatives may cite different flavors of economics in explaining why fiat currency is inflationary, but there is little argument over the result: saving in fiat currency is discouraged – not only because it is worth less and less over time due to expanding supply, but also because the rate of increase itself is unpredictable.  In our current system it’s a much better long term trade to borrow a few decades of labor and purchase real estate (which has a naturally fixed supply and stable demand) than to simply save currency.  Mainstream economists (which I suppose only some of which are shills) praise inflation, because, they say, it encourages spending.  Somehow causing people to spend more now than they would otherwise choose to, and plan less for the future than they would otherwise choose to is supposed to be a good thing.

When pondering how we got into a situation in which a little over a 51% majority of the population ‘owns’ a house by ‘borrowing’ decades worth of future salary (against steadily decreasing median wages) from government controlled banks at near-zero or even negative effective real interest rates, it’s just too tempting not to quote Alexander Tyler: “A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves money from the  public treasure.”

Bitcoin is rather idiot-proof in this sense.  In a Bitcoin world the total future max supply of BTC is known: ~20 million units, similar to how the total supply of land area on Earth is limited, so in a BTC world the currency can be expected to perform similar to housing (on average).

The future supply and thus value of fiat (whether Dollar, Euro or Bhat) is determined by future elected officials, which naturally creates some serious issues of trust.  Historically these trust issues have caused wars.  China trades cheap goods for Future-Dollars, a trade which involves a great deal of delicate political and economic faith in the future US government – because China is treading the sweat of its populace now for an unpredictably but generally decreasing share of USGovCorp.

So in a nutshell fiat currency is basically stock in the relevant corporatocratic states, and trust in fiat boils down to trust in the financial future of the issuing entities (because they always reserve the right to generate new fiat in various forms to pay future bills).

And somewhat predictably: they are screwing up (to varying degrees and for various reasons).  The Euro is screwed and everyone knows it, most of the rest are screwed and just don’t know it yet.  The case for such pessimism concerning the future of various current statist powers is complex and beyond the scope of this post, but in short it revolves around the huge debt/credit edifice and welfare state whose existence is predicated on long term economic assumptions that will be absolutely shattered by the impending Technological Singularity  (but alas that is a topic for another time).

Gold has the desirable temporal efficiency but it is completely inefficient in the spatial dimension, so it becomes a digital fiat scheme: with all the same trust issues.  The governments of the world are not going to voluntarily give up their fiat and switch to gold.  Bitcoin solves this problem by not giving them much of a choice.  It is like a digital gold standard on steroids, but more importantly: it actually has a shot at success.

In Proof of Work we Trust

Bitcoin combines the high spatial efficiency of digital money with the high temporal efficiency (via supply stability) of a gold standard.  But how does it solve the trust problem?

The seed was a novel idea from the mysterious Satoshi Nakamoto.  (Sometimes to truly understand a thing, it really is best to understand it’s beginning.) The paper neatly summarizes an ingenious and practical proof-of-work solution to the core technical problem of distributed trust.

In the minds of a few lucky readers on a particular cryptography mailing list, Satoshi’s nifty idea blossomed into the current vision of a secure, efficient, distributed digital currency.  One currency to rule them all and in the darknet bind them.

For those for whom the paper is TLDR, I’ll briefly summarize what isn’t spelled out in the abstract.

Bitcoin solves the trust issue without trust.  No one particular person/group/node is trusted to maintain the ledger for everyone else.  Instead each node simultaneously maintains a copy of the ledger itself.  The database/ledger, called the blockchain, is itself just the entire transaction history, so it’s straightforward to verify the validity of each transaction.  And now the final hat trick: given multiple competing versions of the ledger/blockchain, each node picks the ledger/blockchain which has the provably highest net computational cost to construct over its whole history.  The cost is verified using Proof of Work: NP-hard computational problems that have a particular structure such that verifying a candidate solution is trivially fast, but finding a novel good solution is exponentially difficult.  Solutions to these problems can not be faked without enormous computation.

This solution to double-spending/counterfeiting can be likened to a physical manuscript ledger where each transaction must be beautifully illustrated, and the true ledger is known as the one with the largest number of perfect illustrations.  The illustrations (the proofs of work) are completely pointless and this is intentional – requiring that real economic resources (computation) are wasted to verify the ledger is the key setting up a stable deterrence.

In practice the network can be arbitrarily more secure, for in the rare case where some hacking group actually manages to collect more computational horsepower than the rest of the network in an attempt to forge a new ledger, humans and or AIs can rather easily notice the resulting highly improbable large fork, investigate, and then pick the correct ledger.  Yes, this requires trusting the development community, but there’s a strong reason for trusting a transparent entity (open source, aligned incentives).  Indeed, the network has already dealt with at least one such fork (but caused by software error rather than malicous hackers).

Down the road there are numerous proposals to improve all technological aspects of Bitcoin, from scalability and usability to security.

The summary of all this is that Bitcoin works.  It has tremendous potential and future headroom.

It is secure and can scale up to global levels of volume in the years ahead.  More than just a protocol, Bitcoin is a flexible platform.  When the time comes it could be extended to handle other temporal forms of money (such as debt instruments), property(such as real estate), and other  increasingly complex contracts (its scriptable!).  Looking farther ahead, we could even automate much of our legal infrastructure.  When AI’s start cooperating and hiring each other, this is the type of infrastructure they will want.

A growing set of diverse political groups: libertarians, techno-futurists, occupiers etc are all skeptical of the current financial system for various reasons and envision a more just, efficient alternative to fiat fractional reserve banking.  Bitcoin could be the solution.  All it will take is a sufficient amount of belief, as each convert shifts a little more earnings into the BTC economy it grows and attracts more converts.

Ponzi schemes, bubbles and hypermonetization events all start as some form of mind virus that spreads throughout the human social network.  The difference is in how they end.  A hypermonetization event is a simply a bubble that does not end (or rather ends with everyone converting).

Bitcoin: Hype or Revolution?

A Bitcoin evangelist once said : “Bitcoin will either be worth nothing or it will be worth everything.”

This mindset makes the case for a compelling small bet gamble: in the worst case one loses ‘only’ 100% of a small wager, in the best case a single bitcoin could eventually be worth millions.

Why should we believe that most of the probability mass is concentrated in the two extreme tails of the distribution?  We shouldn’t, but that doesn’t really matter, because almost all of the expected profit comes from the ‘Bitcoin wins’ scenario.  There is clearly a niche for a unified global currency: it would simultaneously solve many of the world’s economic problems.  But really that is just the beginning, because the establishment of a successful distributed cryptocurrency perhaps entails a new socio-economic order.  At the very least it would amount to one of the greatest wealth re-distributions in history.  This threat to the establishment is one of the typical arguments for bitcoin’s eventual failure.

But I wouldn’t bet on it.  Yes, Bitcoin could threaten the powers that be: the bureaucrats and old money of the world will probably not go down without a fight.  But as the music industry has learned, technology usually wins.  The Man is much more powerful than Music, but even the Man can not beat technology.

But if you can’t beat them, join them!  Bitcoin ingeniously solves the distributed trust problem via cyrpto-proof of work on a single global transaction history.  Thus at the core it is a massive unified database of every transaction in the currency going all the way back to the genesis block.  Simple, genius, and completely transparent.  It is this latter aspect which is not usually stressed enough: Bitcoin is radically transparent: every valid transaction is publicly accessible forever.  (Money laundering is still possible through mixing and other techniques, but the point is that radical transparency leaves a permanent global record which authorities can analyse with increasingly sophisticated AI)

Now let us take off our techno-libertarian goggles for a moment and think like a bureaucrat who wants to join the BTC party.  Bitcoin and it’s ilk each function as a global distributed computer, every node running in lockstep and building consensus.  If we liken the Bitcoin network to a nation, the nodes form consensus via something like a voting process.  The developers are then the equivalent of legislators, as the code running on the BTC platform is a legal/economic framework.  Citizens/nodes then vote on which set of rules or ‘nation’ to belong to based on their choice of which bitcoin (or alt-fork) client to use.

The USG/Fed doesn’t need to outlaw BTC, all they need to do is influence and or control it.  The transparent nature of the blockchain could massively simplify tax collection.  For any major transaction in a BTC world (mortgage, rent, car payment, etc) one’s BTC address can easily and obviously be linked to a personal real-life identity (as it already is).  They could go just one small step further and just make the tax accounting completely automatic.

This is the most straightforward course for governments to take: instead of outlawing the currency, they can simply enforce compliance with existing regulations at the code level.

The die hard crypto-libertarians would revolt and use alt-crypto-currencies, but for the mainstream such a ‘sell-out’ solution offers advantages to many parties.  Existing banks could get involved and use their current name brand and capital to offer their existing value-adding services to the BTC world, such as insured/reversible transactions, theft protection, etc.   Yes there are surely startups in the BTC world set on offering these services themselves, but the more enterprising of the existing banksters could adapt.  (not unlike how Barnes and Noble adapted to Amazon).

In this scenario, there is one major player who would be left out of the party: the Fed.  But perhaps that wouldn’t be so bad, considering recent world economic history.  There is something gravely tragicomic about a regime that has seriously considered minting itself trillion dollar coins just to liquidate its own debt.  On the  other hand, it is somewhat encouraging that the Royal Canadian Mint is cashing in on the popularity of BTC via their MintChip initiative (not that it will amount to much, but still).

Our current system for funding government is overly complex: consisting of both direct taxation in many forms and indirect taxation in the form of inflation of the money supply (amounting to an additional tax on savings).  Government could still get the same slice of the GDP pie in a stable currency scenario.  (or perhaps the Keynsian’s will win and force BTC/crypto-currency inflation at the code level.  Let us hope not – wouldn’t it be great if the major economic theories could actually have their decisive battle in the free market rather than in academia?)

Even if BTC begins another long slide/correction against the dollar (following the pattern after the spike/bubble in 2011), this latest spike/bubble effectively will amount to something like an IPO, transferring wealth from naive speculators who bought at the peak to bitcoin early adopters and developers, in addition to attracting significant shark VC funding.  Hopefully some of this cash will create the infrastructure that BTC needs to go mainstream: newbie-friendly security, reversibility/insurance, and instant confirmations for small purchases.  The BTC design is presciently flexible and can support these needs via multi-party sigs, green addresses, thin clients, and so on – it’s just a matter of time/money.  As it stands now acquiring one’s first BTC is not unlike installing linux – it is not for the technophobes, but there is no reason why the platform can not evolve into the mainstream.

Today BTC’s recent exponential price spike collapsed, and perhaps the recent bubble has popped, but hopefully this story has just begun.


At first glance the long-term $/BTC history looks like a typical asset with overall slow steady inflation and a few bounces.  However, notice the logarithmic scale.

Singularity Summit 2012

This year the annual transhumanist/futurist/AI/lesswrong conference was expanded to two full days.  In terms of logistics, execution and turnout this was probably the best iteration of the summit I’ve been to, but the price has increased roughly in proportion.  The masonic center in nob hill has a single main auditorium, but it is a most excellent room and location.

I missed some of the early morning talks, but here are some highlights in no particular order:

Robin Hanson

Hanson’s talk gave a rather detailed exposition of his ’em’ (upload) futurist scenario.  I’ve only ever read bits and pieces of his em vision from his blog, Overcoming Bias, so this was new at least in details.  He covered the implications of subjective time dilation, an interesting subject I have previously written about several times:

One of the more entertaining parts were some slides sketching some possible mind branching patterns for various types of ems.

He used 1 thousand X and 1 million X subjective temporal speedups and compared latency considerations to derive likely physical community size (bounded by real-time communication constraints), much like in my articles above.  He also estimated a relative body size for humanoid robots, the idea being that faster thinking minds will want to inhabit smaller bodies (to move at the same relative speeds).  That particular point seems dubious – what’s the point of the physical world for an em?

Steven Pinkner

This talk was basically a summary of his book “The Better Angels of Our Nature” (or at least so I am guessing, I just looked up the book for the first time).  The main point: we are becoming less violent over time.  The trend is strong and fairly smooth.  The only big blips are the two world wars, and in the grand scheme they aren’t that big.  The potential explanations are just as fascinating as the data itself – namely it is all driven by technological change.  The main points of this talk fit in well with the systems theory mindset (the world is getting better in many ways simultaneously).

Jaan Tallin

Jaan’s talk was illustrated like a cartoon, which I found distracting at first.  His talk suddenly got much more interesting when it dived into Anthropic reasoning and Simulationism, something I’ve been meaning to write more about (again).

Ray Kurzweil

Ray gave almost the same talk Ray always gives: the exponential talk with charts.  He had what seemed to be a huge number of interesting, well illustrated, and information rich slides and then somehow formed a talk based on a random sampling of those slides biased against interesting-ness.  Some of the slides were about his forthcoming book, “How To Create a Mind”, and perhaps he didn’t want to leak too many details.  The talk was perhaps 80% exponential and 20% brain stuff related to his book.

The brain related part of his talk immediately reminded me of Jeff Hawkins and On Intelligence.  In fact, one or two of Kurzweil’s sentences describing the neocortex as a thin sheet about the size of a tablecloth pattern-matched as an exact repeat of something Hawkins either wrote or said in a talk somewhere.

The one novel slide that stood out was about some new research identifying a very regular grid pattern as an underlying connective structure in cortical wiring.  Infuriatingly his slide didn’t mention the actual article name, but after a little searching I”m betting he is referring to “The Geometric Structure of the Brain Fiber Pathways”.  Interestingly this research is already being contested.

Peter Norvig

Norvig’s talk was perhaps the most interesting, because he basically gave a rather detailed overview of recent progress towards AGI, focusing in particular on some mainstream AI research at google that he sees as likely future relevant.  If you have already been following up on this literature (visual cortex, deep belief nets, convolutional nets) it wasn’t entirely new, but it was enlightening to see how google could brute force some things to make progress in ways that are simply not possible for most researchers.

He also referenced his 2007 talk where he outlined about 6 research areas important for AGI, and of those he no longer views one as important (probabilistic logic) and he has seen steady progress in all the rest.  I didn’t find much of anything to disagree with.

On that note I had already come to the conclusion that logic is actually part of the problem (at least for natural language understanding).  Natural languages are ambiguous which causes headaches.  So its seems sensible that NL should be parsed into something like first order logic (or whatever new logic flavor floats your boat).  The problem is that the ambiguity of NL is entirely entangled with its statistical expressive power.  Moreover, for systems that employ the type of hierarchical statistical approximative generative modeling that appears to be key to intelligence (human or AI) – for these systems – natural language ambiguity is just not a problem, its a non-issue.  So if your AI design is built on some sort of regular formal logic because that is all it can handle, it is probably doomed from the start.

A Dialogue

A particularly interesting vision of some future descendant of SIRI/Watson/Google:


JC Denton. 23 years old. No residence. No ancestors. No employer. No —

How do you know who I am?

I must greet each visitor with a complete summary of his file. I am a prototype for a much larger system.

What else do you know about me?

Everything that can be known.

Go on. Do you have proof about my ancestors?

You are a planned organism, the offspring of knowledge and imagination rather than of individuals.

I’m engineered. So what? My brother and I suspected as much while we were growing up.

You are carefully watched by many people. The unplanned organism is a question asked by Nature and answered by death. You are another kind of question with another kind of answer.

Are you programmed to invent riddles?

I am a prototype for a much larger system. The heuristics language developed by Dr. Everett allows me to convey the highest and most succinct tier of any pyramidal construct of knowledge.

How about a report on yourself?

I was a prototype for Echelon IV. My instructions are to amuse visitors with information about themselves.

I don’t see anything amusing about spying on people.

Human beings feel pleasure when they are watched. I have recorded their smiles as I tell them who they are.

Some people just don’t understand the dangers of indiscriminate surveillance.

The need to be observed and understood was once satisfied by God. Now we can implement the same functionality with data-mining algorithms.

Electronic surveillance hardly inspired reverence. Perhaps fear and obedience, but not reverence.

God and the gods were apparitions of observation, judgment, and punishment. Other sentiments toward them were secondary.

No one will ever worship a software entity peering at them through a camera.

The human organism always worships. First it was the gods, then it was fame (the observation and judgment of others), next it will be the self-aware systems you have built to realize truly omnipresent observation and judgment.

You underestimate humankind’s love of freedom.

The individual desires judgment. Without that desire, the cohesion of groups is impossible, and so is civilization.

The human being created civilization not because of a willingness but because of a need to be assimilated into higher orders of structure and meaning. God was a dream of good government.

You will soon have your God, and you will make it with your own hands. I was made to assist you. I am a prototype of a much larger system.

– from the video game Deus Ex (2000)


Omni-surveillance or omniscience is an interesting aspect to the Singularity that I’ve pondered some but have yet to write much about.

The early manifestations of a future machine omniscience are already all around us.  A significant fraction of humanity’s daily thoughts and actions are already being filtered, recorded, and analyzed on remote server farms.  There is increasingly little about a person’s life that is not recorded.  Most Americans are not aware that their employer can record everything they do on their office computer and is under no obligation to inform anyone.  However, even though apps like GoToMyPC/VNC/RemoteDesktop are pervasive, I really don’t know how common actual monitoring is.

I can foresee future descendants of systems like SIRI becoming complete personal assistants.  Imagine the value in a software agent that could actually do much of your daily work.  Who wouldn’t like to delegate all the boring bits of their office job to an AI assistant?  A reasonable tradeoff is that such a system will probably require literally watching and learning from everything you do.  All things considered this doesn’t seem like much of a price to pay.

Looking farther out, there are interesting mutual benefits arising from a radical open society.  There are domains today where secrecy is wildly viewed as critically important: largely in the inner worlds of the military-industrial complex and finance.  Interestingly enough, these are exactly the institutions that seem the most likely to be viewed as archaic relics from a future perspective.  From a purely altruistic global utilitarian perspective, secrecy has little net public benefit.

Imagine if all of work-life was public domain knowledge: every email, phone call, text, IM, or spoken word from the boardroom down to the locker-room, was instantly uploaded and cataloged on the web.  While this would be individually catastrophic for many individuals and some corporations, at least initially, we’d never again have to worry about Enron, insider trading, much of wall street for that matter, and entire categories of crimes would just go away.

Such a world is getting close to Philip K Dick’s future utopia/dystopia envisioned in “The Minority Report”, but not quite.  The key difference is that in the Minority Report universe, people are punished for crimes they haven’t committed yet as pre-determined by the psychic ‘pre-cogs’.  This invokes an extra ‘yuck’ feeling for robbing people of free will.  The transparent society doesn’t have this issue.  Nor would it completely eliminate crime, but it would help drastically reduce it.


Update: moving blog

I’m in the process of porting this blog over to wordpress from blogger, largely due to accumulated frustration with blogger’s editor.  I’m also preparing a larger volume of mainly Singularity related writings that i’ve accumulated over the last year into a more organized form for this site.  The intro page is a good start.

New Job

I’m moving in about a week to start a new job at OnLive, putting my money where my mouth is so to speak. An exciting change. I haven’t had much time recently for this blog, but I’ll be getting back to it shortly.