Frictionless tokens create friction

We’re gonna need another intermediary…

In 2013-15 it was trendy for online merchants to pretend to accept bitcoin as payment. It was a very cheap way to get positive media mentions and seem innovative. Overstock, Dell, Tiger direct… they were all at it after they realised it was all media upside. Even Virgin Galactic accepted bitcoin as payment for trips to space at some point (Note: I think paying for a trip to space with bitcoins is actually quite cool).

Of course, the vast majority of merchants didn’t really accept bitcoins and hold them on their balance sheet – they didn’t even touch bitcoin. They used third party intermediary processors such as Bitpay and Bitgo to give the illusion of accepting bitcoins (or other cryptocurrencies), while receiving dollars (or other fiat) into their third party intermediary bank account, facilitated by third party intermediary messaging networks such as SWIFT.

Here’s how it works:

  1. The merchant prices things in dollars (of course it does – its costs are in dollars, its accounting is in dollars, and the value of a dollar is relatively stable and predictable).
  2. The customer chooses to “Pay with bitcoin”
  3. The payment processor checks the price of bitcoin vs dollar on a bunch of cryptocurrency exchanges and uses a proprietary algorithm to determine its own view of the exchange rate.
  4. The payment processor displays the derived amount of bitcoins the customer should pay, for a short period on the screen – sometimes as short as 30 seconds before repricing (30 seconds! Not a good unit of account!).
  5. The customer chooses to accept the price and makes a bitcoin payment to the payment processor.
  6. The payment processor tells the merchant that the payment is made, and later wires the dollars to the merchant the old fashioned way.
  7. The payment processor is now long bitcoins and short dollars, and decides how and when to hedge this risk.

Fast forward to today. There is a proliferation of token-based businesses. With some notable exceptions when tokens are actually useful, such as to make permissionless blockchains ‘go’, the ICOs are selling basically securities, then trying to make the securities appear useful for something other than speculation – usually by saying “the tokens will be used to pay for an unquantified amount of my product or service at some unspecified point in time”. This, for the time being, seems to keep the regulators happy.

Think about this. You’re going to need a token for each of these things. The tokens are volatile. You earn fiat currency, you spend fiat currency, you account in fiat currency. Why on earth would you hold a bunch of volatile tokens in your wallet just in case you want to use some online service at some point in the future? Tokens that tie up your wealth and can only be used for one thing? It’s like having a bunch of book vouchers, air miles, and half stamped loyalty cards – they are a modern scourge (and ironically, some blockchain companies are trying to make it easier to turn your loyalty points back into something useful, like money!).

You would prefer to have money than air miles.
You would prefer to have money than loyalty points.
You would prefer to have money than casino chips.
You would prefer to have money than fairground tokens.
You would prefer to have money than jukebox credits.

The convenient thing about money is that it can be used for more than exactly one thing.

So, here’s how it’s going to work: Normal people who aren’t token speculators will hold fiat, and they will exchange them for tokens at the very last minute via a new third party intermediary payment processor whose job will be to turn whatever stable currency you have into tokens for the purpose of paying for that service. Like the cashier at a casino.

But isn’t that a cryptocurrency exchange?… Yes but to buy cloud storage you probably don’t want to set up an account with an exchange, send in an id-selfie, wire in dollars, wait a few days, buy the token, request a withdrawal, then make the token payment. You probably just want to click a button. So it has to be as seamless as possible.

So, despite the much adored “frictionless” narrative, we’re actually adding more intermediaries, who have to be paid and who cause more friction.

Ideas on solutions are welcome in the comments!

Bitcoin price, gold, and nonsense – how not to value bitcoins

Important note: If you own more than $1,000 worth of cryptocurrency then you should definitely be using a hardware wallet instead of keeping coins on exchanges.  I recommend a Trezor which you can buy for €89 directly from their website.


Every few days I hear the argument “If x% of the money in gold (or other asset class) moved into bitcoin, a single bitcoin should be worth $y”.  This article explains why this argument is utter nonsense.

The (flawed) reasoning is as follows: the total value of gold in circulation is estimated at US$8 trillion.  If some small fraction of the people holding gold (say, 5%) sold their gold for US Dollars (releasing $400 bn), and the USD proceeds were used to buy bitcoins, the total value of bitcoins (commonly referred to as “market capitalisation”) would increase by that amount of dollars ($400bn), and because we know the total number of bitcoins in circulation, we can derive a price per bitcoin.  Continue reading

A gentle introduction to money

This post aims to explain the various common forms of money that exist today, and the words we use to describe them.

types_of_money

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In a nutshell: Ian Grigg’s Ricardian contracts and digital assets prehistory

In a nutshell: Ian Grigg’s Ricardian contracts and digital assets prehistory

I enjoyed listening to Episode 151 of the podcast “Epicenter” (previously “Epicenter Bitcoin”) featuring Ian Grigg, inventor of Ricardian Contracts and blogger at Financial Cryptography. Here are my notes – part transcription, with some edits. This one is a goldmine and covers many topics: bonds, contracts, cash, Chaumian e-cash, DigiCash, financial cryptography, Ricardian contracts, digital signatures, smart contracts, dispute resolution, Ethereum, triple entry book-keeping, oh my!

Misunderstandings and paraphrasing errors are entirely mine.

This gets fairly technical; if this is hard to follow, it may be helpful to read my introduction to smart contracts first.  Hmm, if it’s still hard to follow, also read about blockchains and bitcoin and Ethereum, and digital tokens.

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The emergence of blockchains as Activity Registers

This post tries to describe two very different uses for blockchain technology: Digital Token Ledgers that record ownership changes of digital tokens, and Activity Registers that record timestamped proofs of existence of data or agreements about data.  Bitcoin is used for both.

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No, “Blockchain” is not a solution looking for a problem

I have heard this comment many times:

“Blockchain” is a solution looking for a problem.

 

That is incorrect – here’s the problem statement, originally articulated in 2008:
Bitcoin whitepaper

The problem statement, to paraphrase, is

“How do people pay each other electronically without being at the behest of Financial Institutions?”

The proposed solution is:

“Bitcoin”

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Interview on Brett King’s Breaking Banks

I was honoured to be invited to Brett King’s Breaking Banks podcast to talk about Bitcoins and blockchains with an Asia angle in the “BITCOIN & BLOCKCHAIN IN ASEAN” episode.

Rob Findlay, CEO and founder of Next Money (formerly Next Bank) hosted the conversation, and Marcus Swanepoel, CEO of BitX also shared his insights.

The full audio episode is here and I recommend subscribing to the podcast if you are in to FinTech.  A transcript of the relevant section is below, edited for clarity:

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