Bitcoin has been getting a lot of press over the last few years. I love the idea behind bitcoin, and the goals that it tries to achieve. I don’t, however, think that is our “final answer” on the digital currency front. I’ll quickly run through the pros and cons of bitcoin from my perspective.
What’s good about bitcoin can be expressed in one phrase: “no central control.” Imagine a pure barter economy. No money – just people exchanging things. Barter is what got the whole concept of “an economy” kicked off in the first place. Each exchange of goods between a pair of individuals reflects the value the parties attach to each of the commodities being exchanged. And knowledge held by the parties about the value of those commodities community-wide leads to a structure of values for all commodities that reflects the opinions of every member of the community. That’s natural and easy to understand.
The only problem with barter is that it’s inconvenient. Exchanges can only occur between parties both of whom happen to have what the other one wants. There’s a lot of “friction” in the system. That’s where money comes in. Money seems “different” from other commodities, but it’s really not. It’s just one more commodity that takes on its own value in the overall economy, and when everyone recognizes that value it provides a way for any parties to deal with one another. It removes the friction.
So why do we need bitcoin, when we already have dollars, and pounds sterling, and so on? That’s where bitcoin’s lack of central control comes in. No one can play games with the bitocoin supply. No “man behind the curtain” can make unexpected changes in the quantity of money that’s going to be around at any given time, so bitcoin can truly have a stable, trustworthy value within a free trade economy. That’s the bitcoin win.
Now, what’s bad about bitcoin? Once again it can be summed up in a single phrase: “bitcoin doesn’t scale.” In order to become a “fully protected” member of the bitcoin ecosystem, a person has to obtain and validate a copy of a data structure called the blockchain. The blockchain contains a full history of every bitcoin transaction that has ever occurred, since day one. And therein lies the problem. The blockchain is big, and it’s getting bigger every day. If you imagine a world in which bitcoin becomes the dominant currency, you’re imagining a world in which every member of the population has his or her own copy of this enormous data structure. Over time the storage resources required to store all of these identical copies would exceed all other uses of data storage combined.
This scaling problem arises from the need to store every transaction, economy-wide, in every copy of the blockchain. But this is a central feature of the bitcoin architecture, and that’s why I don’t think it’s the ultimate answer to the digital currency problem.
There are ways to use bitcoin without having to maintain your own copy of the blockchain, but all of them involve trusting third parties to do that for you. This deprives you of the full security that bitcoin’s quite well thought out design offers.
I’m still waiting for the ultimate digital currency. When it arrives, it will offer us a medium of exchange that is immune to central control, easy to use online, and can scale to nation-wide (or planet-wide) use without creating excessive storage and processing burdens.
Bitcon only checks two of those three boxes.