This section on the "costs" of mining bitcoin is well raised and relevant>Here is the passage:
<One thing I haven’t seen emphasized, however, is the extent to which the whole concept of having to “mine” Bitcoins by expending real resources amounts to a drastic retrogression — a retrogression that Adam Smith would have scorned.>
This he calls out as completely misplaced:
How much does the existing banking/payment infrastructure cost? One reasonable measure are the fees charged. Standard online payment fees are 2.5%, not including the added costs fraud (chargebacks plus transactions blocked out of fear of fraud).
And he's right. but The real cost of running a market is not, however a bid-ask spread. And he gets at the point, but its not clear, here:
Bitcoin payment fees are close to zero and fraud is impossible since Bitcoin is a bearer instrument.
The [true costs] of running a market are thos that instill [trust] in the market system. That is, what is commonly called "transaction costs" in economics. But these are not literal costs, which tend to be rent-extraction wherein the transaction is merely instrumental to effect a scaling biz model.[1] The true transaction cost of "effective honesty" are to be found in "governance costs", that is...the cost of lawyers. And thus more generally, and indirectly, the primary purpose of government (eg schooling, police, courts, national defense). So, it is worth putting in context the "cost" of mining bitcoins here. The "innovation" that is provided is provided also at this seperate level of abstraction, far away from the "overhead" style transaction costs in a literal definition. And to the authors point, these are both measurable and large; such an innovation thus actualy saves wated resources that would otherwise be deployed (think of all the energy spent on anti-spam and anti fraud by CCs...that 2.X is ~mostly profits tho).
In any event, interesting topic and interesting post. And I think he intuits the right answer, but the exact words put forth sort of murky the point abit, IMHO.
[1] eg 7% of an IPO to a Bank, X% to your real estate broker, 1/8 of a point in a pre-decimalized stock market, 2.x% on a credit or paypal transaction.).
Bitcoin payment fees may be close to zero at the moment but that's only because miners get paid with newly-minted bitcoins.
As I write this, there are 12,130,075 bitcoins in existence[1]. Over the coming year, approximately 1,314,000 bitcoins will be "minted" (25 new bitcoins every ten minutes). If Bitcoin were a real currency, that would equate to an inflation rate in excess of 10%. So, in effect, every bitcoin owner would be paying 10% of their Bitcoin wealth for "free" payments, whether or not they actually make/receive any payments or not.
1. Those 10% are per year, not per transaction.
2. This kind of inflation is one of many factors that is already incorporated into the market value of Bitcoins.
This is a fantastic conceptual point - that the true cost of a system needs to include the infrastructure that creates the trust, and we have a complex and expensive legal, enforcement and legislative system creating the trust in our normal fiat based economy.
However, to be useful, while bitcoin can replace some of parts of this, there is still the need to be able to enforce contracts made using bitcoin, so a bitcoin economy would need to reuse much of that infrastructure.
Besides, it's not particularly relevant, because for most people, escaping the costs of the infrastructure that creates trust in our fiat economy is not practical, while escaping the costs of the infrastructure that creates trust in bitcoin is trivial - just don't use it.
Yes, but the purpose is not to 'escape' the infrastructure costs, but rather to 'optimize' them...by keeping them low. So, in a general sense, self-regulating features of an economy (eg, transparency) create a "remedy" for otherwise more expensive-to-monitor arrangements. By increasing the opporunity set of remedies, your system optimizes to a lower-cost-base. That is to say, a 'remediable' inefficiency is different than one which there is no better option. The idea is that credit cards are a net-postive addition vs cash, because they create benefits to the consumer. These benefits are also the reason why the merchants pay (rents) to the CC companies. The "lost business" would be greater than if they did not exist. But again, here you are seeing the level of CC payments is a function of value added and costs avoided. It is not the case that they are really a measurement of the governance costs of the network (ie, those are at once a subset--anti-fraud--and on the other mostly external and borne by others)
<One thing I haven’t seen emphasized, however, is the extent to which the whole concept of having to “mine” Bitcoins by expending real resources amounts to a drastic retrogression — a retrogression that Adam Smith would have scorned.>
This he calls out as completely misplaced:
How much does the existing banking/payment infrastructure cost? One reasonable measure are the fees charged. Standard online payment fees are 2.5%, not including the added costs fraud (chargebacks plus transactions blocked out of fear of fraud).
And he's right. but The real cost of running a market is not, however a bid-ask spread. And he gets at the point, but its not clear, here:
Bitcoin payment fees are close to zero and fraud is impossible since Bitcoin is a bearer instrument.
The [true costs] of running a market are thos that instill [trust] in the market system. That is, what is commonly called "transaction costs" in economics. But these are not literal costs, which tend to be rent-extraction wherein the transaction is merely instrumental to effect a scaling biz model.[1] The true transaction cost of "effective honesty" are to be found in "governance costs", that is...the cost of lawyers. And thus more generally, and indirectly, the primary purpose of government (eg schooling, police, courts, national defense). So, it is worth putting in context the "cost" of mining bitcoins here. The "innovation" that is provided is provided also at this seperate level of abstraction, far away from the "overhead" style transaction costs in a literal definition. And to the authors point, these are both measurable and large; such an innovation thus actualy saves wated resources that would otherwise be deployed (think of all the energy spent on anti-spam and anti fraud by CCs...that 2.X is ~mostly profits tho).
In any event, interesting topic and interesting post. And I think he intuits the right answer, but the exact words put forth sort of murky the point abit, IMHO.
[1] eg 7% of an IPO to a Bank, X% to your real estate broker, 1/8 of a point in a pre-decimalized stock market, 2.x% on a credit or paypal transaction.).