Bitcoins

Here’s Russ and Gavin Andresen, the technical leader on the Bitcoin project.

The Bitcoin project is a supranational currency. There are precedents for this kind of thing in, for instance, the Sims Online game. Trick is, though, the entire Sims Online economy was wiped out because of a bug in the software. It was literally years before they could engineer a replacement system and hard reset of the economy. Bitter remedy, indeed.

I’m also reminded of this book about startup founders. In it, Max Levchin (Paypal) talks about how commercial bankers told him he was “going to get killed by fraud”. He brushed it off at first, but sure enough:

2000 was basically the year of fraud, where we were just losing more and more money every month. At one point we were losing over $10 million per month in fraud. It was crazy.

Luckily for Paypal (and us!), the scale of this disaster, relative to the scale of the dollar economy, is tiny. A disaster to Bitcoin could permanently destroy the trust people have in it. From the interview, it appears that Gavin is underestimating the one-way nature of such an economic disaster. Not to say people won’t be intrigued at first; after all, there was a time before monetary authorities had monopolies on issuing currency.

But our collective memories of free banking are gone and modern societies are very intolerant of risk. Ultimately, there’s only one final insurer of risk: the government. Only it can inflate away economic problems and nuke away physical ones.

The Bitcoin economy, of course, will never have the protection of the monopolist it threatens.