Felix salmon bitcoin betting
What you see with those kinds of projects, Ben says, is developers - you know, coders - they just start solving one problem after another. So the projects just get better and better. I mean, he said that's the way the Internet itself developed. It started out with no security, but, you know, like, we got security. It started out with no naming, but we got that. There was no way to distribute addresses. We got that. So, like, it just kept evolving along because it just met the needs of the user community.
He thought the code that powers bitcoin would just get better and better and, very quickly, it would obviously be this safer, faster, more private, cheaper way for people to buy stuff online. That did not happen. Bitcoins just became so valuable that the people who worked on the system didn't want to make it any better. They just wanted to lock everything down and keep it the way it was. The thing that he thought was going to happen happened.
The fact that bitcoins became so valuable meant that people didn't really want to use them to buy stuff. They'd rather just hang onto them. But even Felix is surprised by the way things actually turned out. I mean, there were two things which I expected would happen which didn't happen.
One is I expected the price would probably go to zero, and it didn't. It went way up and to the right. And the other is that I expected that there would actually be use cases over the following five years that, even if people weren't using it to buy stuff in stores, and that was my side of the bet, I imagined it would be used for remittances, or, somewhere along the line, it would have evolved.
Especially if it had grown to be worth thousands of dollars per bitcoin, then it would be used for something. I have a theory about that. So in the real world, his firm invested tons of money in bitcoin companies.
And they seem to have done great on those investments. They seem to have made a tremendous amount of money. We don't know exactly how they've done, but one thing we do know is they were an early investor in this company Coinbase, which we mentioned. Yes, I'm ahead, I think. I definitely do.
I mean But seriously? You are willing to take the same bet all over again? I think there will be a bear ph instrument on the Internet. Can we just rinse and repeat the exact same bet for another five years? So this time, for this bet, he wanted to make it about cryptocurrency more generally. And then there was one other change he wanted to make to the bet, and that was he wanted to move it outside of the U.
But let's be honest. Credit cards work really well here, so there's not that much of an incentive for people to switch to some cryptocurrency. GOLDSTEIN: So he wanted to do it in some country where credit cards were not so widespread and where, if there were some new, simple app on your phone, you didn't have to apply for a credit card, you could just pay instantly and easily like that, you know, it might really take off. Ben, what are the stakes this time around?
We'll do it for a hundred-year-old bottle of Madeira. And it gets better with age. And if you buy it, you can drink it, and that's - and you're a very happy person because it's delicious. And if you don't drink it, you can keep it in your cellar, and it retains its value. And it's got - it's a much better store of value than any cryptocurrency will ever be. So I will bet you a year-old bottle of Madeira that you will not be able to find 10 percent of Mexicans using cryptocurrency to buy anything in five years' time.
Like, I don't know. I just like the pairing. They decided, in addition to the bottle of Madeira, to bet something called an ether, which is one of the big cryptocurrencies that's popped up in the last few years. One bottle of Madeira and one ether. Madeira - probably not.
But still, people are betting like crazy with ether, and it's worth a ton of money, in which case, he gets the best of both. Or he could lose. Can I say that's what's kind of frustrating about this bet for me? It's very gentlemanly. I want somebody to, like - to admit total and utter complete failure, you know? Well, it's tough when the guy who lost the bet made millions of dollars. Nemo writes that a central ingredient in the system is the use of one-way functions.
A one-way function is a function that is easy to compute but hard to invert. The key ingredient is actually a trapdoor one-way function, which is a function that is easy to compute but hard to invert… for everybody except the person who created it. The idea is that you create your own personal function g x that has a secret called a private key , such that inverting g is easy if and only if you know the secret.
You share the function — but not the secret — with the whole world. So now the whole world can compute the function, but only you can invert it. Nemo gives a simple example illustrating how these functions can be used. Suppose you and I want to bet on a coin toss over the phone.
Is it possible for two untrustworthy people, like you and me, to play this game fairly? By the power of the one-way function, it is! Here is how. First, we agree on a one-way function f. Then I flip a coin. Call that number x. Then, finally, I reveal x. Since you cannot invert f x , you have no idea whether x is even or odd at the time you make your guess.
Thus we have flipped a coin over the phone fairly, even if both of us would rather cheat. Izabella Kaminska writes on her personal blog that miners effectively make money from seigniorage in its very basic form. Nemo explains how mining works. Miners are clients that attempt to create new valid blocks. A block is a record of some or all of the most recent Bitcoin transactions that have not yet been recorded in any prior blocks. They do this by putting some transactions in a candidate block, picking a nonsense word called a nonce, computing the hash of the resulting block, and repeating with different nonces until they find a block whose hash does not exceed a certain threshold called a target.
The current target for the block chain is defined by a calculation, so any two clients looking at the block chain will calculate the same target. This calculation aims to adjust the target such that one block will be mined every ten minutes, no matter how much total computing power is devoted to mining. Then they broadcast that block to the network, thus appending it to the block chain that every client sees.
The Bitcoin software's Prime Directive is: When faced with conflicting versions of the block chain, the one with the greatest total sum of work is the Truth. Paul Bohm writes that to rig the vote an attacker would need to control more computational power than the honest nodes. To ensure it's more expensive for an attacker to purchase the computational power needed to attack the system, Bitcoin adds an incentive scheme.
Users who contribute computational power get rewarded for their work. This computational process "mining" is not wasteful at all, but an incredibly efficient way to make attacks economically unprofitable. Nemo explains the structure of the financial incentive for miners: They can embed one coinbase transaction in each block they mine.
The economics of Bitcoins James Surowiecki writes that the problem with Bitcoins is that instead of being used as a currency, bitcoins are today mostly seen as and traded as an investment. The problem with having the Bitcoin economy dominated by speculators is that it gives people an incentive to hoard their bitcoins rather than spend them, which is the opposite of what you need people to do in order to make a currency successful.
Paul Krugman writes that Bitcoin has created its own private gold standard world, in which the money supply is fixed rather than subject to increase via the printing press. Bitcoin, rather than fixing the value of the virtual currency in terms of those green pieces of paper, fixes the total quantity of cybercurrency instead, and lets its dollar value float.
