Economics Beyond Financial Intermediation

Feb 16th, 2016 by adminadam in articles

A concise and accessible exploration of Bitcoin’s internals and potential impact.

Main topics include:

  1. Technology: How Bitcoin allows for the secure transfer of unforgeable assets over the internet.
  2. Economics: Distinct advantages Bitcoin has as a deflationary currency (through a ceiling on the number of mine-able bitcoins) in a world full of inflationary fiat currencies being actively manipulated by central bankers and politicians.
  3. Potential Benefits to the Poor: How Bitcoin-based remittances, peer-to-peer/micro-finance, and development aid can help the poor route around corrupt financial institutions and inept governments in order to improve their lives.
  4. Additional Use Cases: Blockchain smart contracts as distributed, uncensorable, self-enforcing contracts; other programmatic aspects of Bitcoin to be exploited.

The Journal of Private Enterprise 30(3), 2015, 19–50

Economics beyond Financial Intermediation: Digital Currencies’ Possibilities for Growth, Poverty Alleviation, and International Development — [Download PDF]

By Saifedean Ammous
Lebanese American University


Abstract

Bitcoin is the first technology for the final transfer of digital goods online, facilitating instant global payments without intermediation. Bitcoin’s operation is based on a distributed, decentralized, and transparent asset ledger that acts as an ongoing chain record of all transactions. The system issues coins to reward those who contribute processing power to the network’s operation. The possibilities created by this innovation are significant for the world’s poor, who could skip traditional political and financial institutions and move to digital currencies in the same way they have gone straight to using mobile phones and skipped landline telephones.


Highlights

  • “Through the use of cryptography, Bitcoin brings the scarcity, rivalry, finality, and irreversibility of physical transactions to the digital realm. A digital song can now be treated just like a physical cassette or CD, a rival good that cannot be played on two machines at the same time. This is not just true for music files, but for all kinds of digital data, goods, programs, and, most significantly, currency.”
  • “Instead of utilizing a trusted third-party intermediary, Bitcoin is based on cryptographic proof verified by the central processing unit (CPU) power of the total network. As such, Bitcoin can be understood as being to currency what email is to paper mail: an infinitely faster and cheaper digital shortcut for a physical-world activity that has been carried out for millennia.”
  • As the network grows and currency adoption increases, bitcoin’s real-world purchasing power also increases, thus ensuring that the block-mining reward, while decreasing in terms of bitcoin and costing more in terms of CPU, is worth more in terms of real goods and services. This is the most strikingly ingenious facet of Bitcoin’s design: if the network grows, the rise in the currency’s purchasing power ensures that the reward to the computers that run the network increases, thus incentivizing ever-more processing power to be dedicated to verifying the network. The programmed decreasing rate of increase of coin issuance, combined with the fast growth of the network, ensures that miners who operate the network continue to be rewarded for running it as it grows.”
  • “The Bitcoin network grows as fast as bitcoin adoption rises, or, in other words, as fast as the bitcoin economy grows. The money supply, however, only rises at a predetermined rate, which is roughly halving every four years, as the block reward declines. Though the supply of the currency is increasing, and will continue to do so indefinitely, the currency’s real purchasing power has increased drastically in the six years it has been circulating. The increase in adoption explains the rise in bitcoin’s purchasing power since circulation started in 2009. The first recorded exchange rate of bitcoins for fiat currency was 1,309.30 BTC for 1.00 USD, offered in October 2009 (Wallace 2011). By July 2015, the exchange rate had risen to fluctuate around 0.004 BTC for 1.00 USD, reflecting roughly a 330,000-fold (or 33 million percent) increase in the price of a bitcoin in US dollars in six years.”
  • “Bitcoin exists as a real-world experiment in this inflation-deflation debate. Whereas traditional currencies are continuously increasing in supply and decreasing in purchasing power, bitcoin has so far witnessed a large increase in real purchasing power despite a moderate (but decreasing, controlled, and capped) increase in its supply. If bitcoin’s depreciation rate is measured with respect to the US dollar, it is highly negative, as table 2 shows, averaging a negative 24.5 percent depreciation rate in the four years for which data are available.”
  • “While still a technology in its infancy, Bitcoin offers a blueprint for how billions of the world’s poor can partake in international, modern capitalism without having to reside in countries with supportive modern institutions. Bitcoin could be life-changing to those individuals and could also offer credible competition to national monopolies in financial services, currency issuance, judicial systems, and credit provision.”

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Economics beyond Financial Intermediation: Digital Currencies’ Possibilities for Growth, Poverty Alleviation, and International Development — by Saifedean Ammous

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