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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“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.”

Ben Horowitz regards the lack of a central authority as a positive, but I’d argue that in many circumstances it’s a negative. What about protection of a user against fraud or theft? As for a “fee free” stock exchange, our regulatory system is built around the idea that securities transactions need to be regulated to protect the unwary from fraud. I don’t see how an IT protocol has any impact on that basic framework.

Beyond that, a “transfer” of “property” is quite often a taxable event, so undoubtedly regulators and tax agencies will want to get involved in tracking these transactions. (As examples – see current laws requiring reporting of large cash transactions, or the existence of government registries to track the titles of real estate, autos, aircraft, etc.)

Felix, I would be surprised if you really do want to see David beat Goliath in this instance. I think that the downsides of such a shift outweigh the upside, and I’m generally more laissez-faire than you.

Posted by realist50 | Report as abusive

David and Goliath – what happened in the end? Please jog my memory. Virtual currencies are now a force in the world. In the early days of the internet vs. bricks and mortar it was ‘David and Goliath’ too – ditto for any new tech, cars, planes and printing press too.

Posted by BidnisMan | Report as abusive

As I understand it, the ten-minute delay between being receiving a bitcoin and being able to spend it is really quite important to the protocol; it’s the period during which the transaction is distributed to the whole network and in which the block is found.

So, given that stock exchanges now operate on a basis where milliseconds matter, it seems to me that the laws of physics pretty much rule out a Bitcoin-protocol stock exchange; in a world where people are paying up for colocation, it doesn’t seem like they’re going to be going for a system which relies on global broadcasts and solution of computation problems for every transaction.

Posted by dsquared | Report as abusive

If bitcoin becomes large enough to be co-opted by Goliath, the most optimistic scenario I foresee, does that count as a draw?

Posted by MyLord | Report as abusive

Ben, don’t bogart that joint, my friend, pass it over to me.
How do I transfer my common shares of a publicly traded U.S. company via Bitcoin without going through DTCC?
How do I transfer my NYC co-op apartment shares via Bitcoin without going through the board, or my condo or house without going through the county clerk? And can I pay my flip tax and recording fees with Bitcoin?

Posted by StuartG | Report as abusive

great article, 2 counter points…

First.. keep in mind most retail traders require a 1 day holding period before the proceeds from a stock can be cleared and thus used for another trade. Large brokerages don’t have to wait because they have huge margin accounts. Thus it is the reputation of the traders that enable ‘instant trades’ not the underlying technology. So, while the transactions on the blockchain taking ~10 mins to clear seems slow, they post instantaneously which is not much different to what happens on any modern exchange.

Second… since the birth of bitcoin over 5 years ago, modern decentralized p2p networks have continued to evolve(take ethereum as an example). Thus your concern of the network being too ‘exclusive and rivalrous’, while partially true with bitcoin, will be addressed by newer implementations that will allow the exclusivity be dictated by fees and will all but eliminate ‘rivals’ as the base currency will be abstracted, and all ‘colored coins’ will share a common denominator. In other words users will have the choice to pay to use ‘exclusive’ services but all forms of payment will be accepted by all services. All automatically managed by the networked without the risk of corruption by a centralized authority.

I’ll bet you another pair of alpaca socks David wins this one. ;-)

Posted by rushramia | Report as abusive

In most applications, having a central authority to clear transactions is a feature, not a bug. That makes it possible to deal with fraud, either by blocking the transaction or unwinding it afterwards.

An acquaintance told me about a Bitcoin entrepreneur who was sure that there was a huge latent market for anonymous irrevocable transactions. Really? How often do you buy stuff with an envelope full of cash? The whole thing is a crock for people who don’t understand that they’re gold bugs, except that they don’t have the backup options of jewelry, circuit boards, and dental work.

Posted by spamvikktim | Report as abusive

Sort of like Napster, Bitcoin will disrupt without triumphing or displacing.

The current payments system charges a pre-Internet vig.

Bitcoin is an existence proof that it can be done very cheaply.

Ultimately, payments is just moving bits around, with a more regulation, security, nonrepudiation, audit trail, etc.

The Fed etc. have a mandate to supervise a safe and efficient payments system. As Target as amply shown, the current system is both ludicrously expensive and unsafe.

Then there is the matter of overusing the payments system for political purposes, to the point you can’t pay people in certain countries or for certain activities, and HSBC won’t give you your cash unless you tell them what you plan to do with it.

Just the threat of Bitcoin is disruptive, like Napster and Gnutella and Bittorrent, it tells people, unless you move into the 21st century and give up some monopoly rents and exorbitant privilege, you’re going to be made a whole lot less relevant and have to resort to increasingly heavy-handed tactics to maintain an increasingly weak position..

Posted by druce | Report as abusive

I’ve been reading way to much about bitcoin in my retirement, and I keep coming back to one primary issue. For it to succeed in the way in which its advocates seem to be hoping for, it’s going to have to become a medium of exchange, and maybe a unit of account, with a reasonably stable value relative to other media or exchange and units of account. If that does not happen, then bitcoin will be no more viable a transactions tool than any other highly volatile currency.

Posted by DonaldCoffin | Report as abusive


Posted by GCGriswold | Report as abusive

Bitcoins stolen from Silk Road. Site manager is “really, really sorry”.

There are good reasons why most people use cash only for trivial transactions that are too small to be worth the bookkeeping required for other forms of payment.

Posted by TFF | Report as abusive