Why bitcoin is worse than money, a mathematical explanation

Why bitcoin is worse than money, a mathematical explanation
Generative Networks

In this post I’m going to show why bitcoin is yet worse than money by using mathematical theorems from papers of the field of economics. Then I show how bitcoin can become better than money and finally I show the challenges that would arise in an world with a decentralized global public record of all past actions.

Notice: I’m going to use the terms “blockchain” and “decentralized global public record” equivalently.

Why bitcoin is worse than money?

People often ask me why you would like to hold bitcoins. It is a perfectly reasonable question to ask. I don’t get any pleasure from holding bitcoins. But the same is also true for fiat money, this useless objects do not enter utility or production functions.

Like Narayana R. Kocherlakota points out in his paper Money is Memory “money allow societies to achieve allocations that would otherwise no be achievable” and more important he shows that:

“Any allocation that is achievable using money alone could be achieved instead by allowing agents costless access to a historical record of past actions”

Narayana goes even further and shows that:

“Any allocation that is incentive-feasible in an environment with money is also incentive feasible in the same environment with memory”

Stating that money is a primitive form of memory.

So if bitcoin is a decentralized global public database, i.e, a decentralized global public record of all past actions then why isn’t better than money?

The problem with bitcoin is that transactions are anonymous. This fact undermines the capacity of the decentralized global public database to be more trustable than money and also generates another complication, you need to “hold” them like fiat money by memorizing or storing a password.

By making transactions anonymous you can’t keep track of the transaction history of each individual, even worse, users of this system need to memorize or safely store passwords which have been proved in practice to be easy to stole, lose and make the technology hard to understand for the average user who can be easily scammed. All  this contributes to undermine the trustability of the transaction history.

In conclusion we are wasting blockchain technology and using it to do the same thing as Babylonians did with coins three thousands years ago.

How to make bitcoin better than money?

The answer is simple: the decentralized global public record of all past actions should be tied to each individual or company identification. This solves the two main problems mentioned before. Besides it will allow a more efficient economy. But it will also bring new problems to the table, mostly regarding to privacy.

Challenges in a world with a decentralized global public record of all past actions

This scenario where decentralized global public record of all past actions exists seems very possible with the blockchain technology, but it also brings new challenges. In the same way as public cast voting system which is the most trustable but it also suffers from other problems like privacy and coercion.

Privacy: a public record of all past actions means that any person can know all the transactions you have made, so you won’t have any privacy at all, if you buy a candy, marihuana or porn it will all be registered

Coercion: having access to the record of all past actions will facilitate the creation of better coercion and marketing techniques to make people spend money in favor of adversary utility

While people is highly averse to give up privacy, with social networks more and more information is being publicly available from each individual and centralized information of this data is generating an increasingly information asymmetry which gives advantage to the owners of these data, so making all data available for everyone seems something possible in the near future.

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