Why bitcoin won’t disrupt digital transactions

By Felix Salmon
February 7, 2014

I like to keep my feet warm, and so I’m very glad that in five years’ time, Ben Horowitz, the co-founder of Andreessen Horowitz, is going to be sending me a pair of luxurious alpaca socks. The bet, which originated on RapGenius, is now a reality, thanks to Planet Money. And while NPR has written the broadcast up as a story, it falls to RapGenius, again, to annotate it. And it’s in the RapGenius annotations where things start getting interesting.

Horowitz expands on his statement that bitcoin is a “computer science breakthrough” by saying this:

Bitcoin is the first scaled network where you can transfer (not copy, transfer) a piece of digital property from one person to another with no central authority. This paves the way for a dizzying number of super high value applications such as a fee free stock exchanges, smart contracts that can programmatically be executed and enforced, and many other awesome things.

Horowitz, here, is looking forward to a world where bitcoin provides the rails upon which all manner of commercial transactions can run: potentially, it’s much larger than payments alone. In recent columns, both Dan Primack and John Gapper have also made this point.

There’s something else that the Primack and Gapper columns have in common: they’re both behind a paywall. Essentially, they’re digital goods which are non-rivalrous (if you read Gapper’s column, that doesn’t prevent me from reading it too), but also excludable (the FT can prevent certain people from reading the column, on the grounds that they haven’t paid enough money).

The incredible growth of the internet can be attributed in large part to the fact that most of the content on the web is both non-rivalrous and non-excludable: this blog post, for instance, can be read by any number of people, and is freely accessible to all. But now Horowitz is looking forward to expanding the web to include what he calls “digital property”: essentially, digital goods which are not only excludable but are rivalrous as well.

A good example might be shares of a company’s stock: such things haven’t existed in physical form for many years, but they’re still highly rivalrous. After all, the entire basis of the stock market would fall apart if I could somehow give you a copy of my stock while holding onto that same stock myself. A large part of the technology underpinning stock exchanges is the way in which they have to ensure that once you sell a share, you no longer own it, and you can’t sell it a second time. That’s also the technology which underpins bitcoin, except bitcoin transactions take many orders of magnitude more time to clear than stock transactions do.

In theory, there are all manner of clever things which can be traded in a distributed manner, using the open-source bitcoin protocol; most of them involve “coloring” coins in some manner, so that a bitcoin serves as a token of ownership of something else. There is a lot of valuable rivalrous digital property out there, and a lot of companies, including Thomson Reuters, make a lot of money by helping to manage it. The technology involved tends to be tried and tested (to the point at which any failures are very big news), and the players involved tend to be extremely conservative. On top of that, the costs are often extremely low: the simple transaction costs involved in trading stocks, or large quantities of foreign exchange, are very close to zero these days.

So while in theory there is the possibility of disruption in this space, I’m not holding my breath. The Race to Topple Bloomberg, as the headline of Aaron Timms’s recent Institutional Investor article puts it, has been going on for the best part of 20 years now, with no visible success. (I first asked Mike Bloomberg whether he was worried about competition from the open internet for an article I wrote back in 1996.) I’m happy that Satoshi Nakamoto managed to solve the Byzantine Generals Problem — but while that might be a necessary condition for these particular walls to start falling, it’s far from a sufficient one.

The internet has been an amazing and revolutionary force, which has brought entire industries to their knees, and which has created a huge amount of wealth for Silicon Valley venture capitalists. But what Horowitz and Primack and Gapper are talking about here is the hope that a whole new protocol — bitcoin — will essentially do for digital transactions what the internet did for communications, just by dint of being cheap and open-source. I wish it luck, but it’s going to need it. Because it’s up against formidable incumbents, in the form of both huge corporations and entrenched government interests. My bet is on Goliath, not David.

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