The Underground Economist
Replacing Bitcoin

Edward Z. Yang claims Bitcoin is not decentralized because the only non-disruptive plan he can think of to replace it is centralized. I say, so what?

He says it’s inevitable that Bitcoin will need to be replaced in the future, and that the decentralized means of replacing it, letting the market handle it, will lead to chaos as Bitcoin inflates to worthlessness. This happened to me with my Exodus Communications stock, and the stock did *nothing* for me in the meantime, whereas at least Bitcoin will provide the world with far more value than people will lose if this scenario comes to pass.

If losing the value of whatever Bitcoin you’re holding will cause you serious problems, either hold less of it or insure it. You’d insure Bitcoin by buying put options on it. This of course presupposes a liquid market for Bitcoin options, but all successful currencies have liquid options markets so this is hardly an onerous requirement.

In my opinion, treating Bitcoin as cash and insuring it if necessary negates any need for a replacement plan, but it’s by no means obvious that a replacement plan can’t succeed. All that has to happen is that enough of the participants in the Bitcoin network agree to the plan and then put it into practice.

It’s also unlikely that any such replacement will need to be a sudden thing. For example, to replace the sha2 hash with sha3, the network can start accepting both for a while, perhaps requiring less work for sha3 than sha2 to encourage switching over, and then people can agree on a date after which no new sha2 blocks will be accepted. Likewise, if account keys need to be strengthened or ECDSA deprecated, support can be added for new key types, and a date can be agreed to after which ECDSA keys will no longer be allowed to spend Bitcoin. Anyone holding Bitcoin had better pay attention to Bitcoin news, but you’d better do that if you want to hold a foreign fiat currency as well.

It’s a straw man argument to say that Bitcoin isn’t decentralized just because someone will eventually have to propose updates to the protocol and get everyone to accept them. Sure, it’s not as decentralized as a system based entirely on two- or three-party agreements, but this is an intentional design choice: we trade the ability to have no coordination whatsoever for the network effect advantages of a single digital currency. If people consider this trade-off better than the trade-offs of a fiat currency, they’ll use Bitcoin. If not, we’ll have to wait until there’s a fully decentralized implementation of Ripple or a bunch of rogue banks start issuing electronic bank notes based on blind signatures.

  1. undergroundeconomist posted this
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