Feb 282014

Bitcoin only economies

There are so many articles in the media about how ‘Bitcoin is such a poor currency’ that I won’t bother linking to them all. In a one-line summary, they claim Bitcoin is too volatile to be a store of value and not universally accepted. In a one-line refutation, Bitcoin is an emerging technology that will obviously take time to stabilize and catch on. That, however, is just a small part of the story.

For those who are lost in the flurry of media attention about MtGox and Bitcoin’s doom, don’t get lost in the day-to-day details of one business dealing with one aspect (arguably one of the most important, though) of the Bitcoin ecosystem. Yes, Bitcoin can sometimes replace traditional commerce and banking system (tell me again how I send $10 to someone in Nigeria?) but that’s just the beginning. Like I previously mentioned in an older article, the real value of Bitcoin lies in economies that don’t yet exist.

What are Bitcoin-only Economies?

It’s true that Bitcoin can sometimes replace traditional payment systems. If I go to my local bar selling me beer for US Dollar cash, US Dollar credit or Bitcoin, I can choose to pay any way I want, and especially in the new, beginning phase as the ‘early’ adopters of Bitcoin are excited to be able to use Bitcoin to buy ‘real’ things, they’ll be quite inclined to pay with Bitcoin. In the longer term though, there is no reason to think that Bitcoin would replace the existing payment network or structure – it will probably be a strong alternative but not completely replace it. The world of credit cards and cash is too entrenched in our economy to be replaced overnight.

However, the real transformative power of Bitcoin lies in economies where traditional payment systems are either infeasible or impossible. It doesn’t matter whether you like Bitcoin or whether you think it’s the future – if you want to participate in these economies, you will need to get your hands on some Bitcoin. Lets start from the simpler and more obvious cases to the more ambitious ones. Here’s a brief description of the kinds of economies (I’ll write more detailed posts about each one individually in future updates to the blog).

Please note that when I use Bitcoin here, I mean any crypto-currency, not necessarily Bitcoin, although at this current state of things, it seems that Bitcoin would be the dominant chain.

  • Micro-Payments: Tipping, donations to artists, as a general ‘thank-you’ across the internet (Dogecoin seems very dominant in this area too). Chicago Sun Times tried this out, and BitWall, a Silicon Valley startup is actively working on this.
  • Cross-Platform Gaming/Competition Currency: Any game developer can use this as an in-game currency without trying to handle a whole payment system. In addition, it’s easy for in-game competitions and giving the ‘money’ to the winner in a competitive game. This is an evolving field, and there are a few good companies working on this.
  • Provably Fair Gambling: Most reputable Bitcoin gambling sites today have provably-fair gambling. There are other ideas of implementing gambling into the blockchain itself, so there’s absolutely no counterparty risk either from the other side of the bet or from the betting company itself.
  • Payments to Autonomous Corporations: This is another area of the future that only Bitcoin can tackle – autonomous corporations can never take fiat currencies. See Dawn of Autonomous Corporations part-1 and part-2.
  • Smart Property: Again something that should be implemented in the future, but the best way to get this going is through crypto-currencies due to a number of desirable features (weak versions can be created with traditional networks too).
  • Stock/Bond Markets: Within the next 5-10 years, I am sure there will be good implementations of moving securities to the blockchain. There are just so many advantages. Dividends or coupon payments can be made in a very simple and easy to implement manner without having to go through complex brokerage networks. International trading is a piece of cake. Bond-issue voting is easy to implement too.
  • Others: Electronic notarization, cheaper remittances, international payments, etc.

It would be good if Amazon starts accepting Bitcoin. And then Walmart. However, the real strength and value of Bitcoin shine through when these Bitcoin-only economies are developed.

Photo Credit: ViewMinder

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