Bitcoin for Dummies + The Byzantine Generals Problem

By Michael Krieger: Last week, I once again sat down with my friend Dan Ameduri of Future Money Trends to discuss, well, future money trends.
It should come as no surprise that Bitcoin was the focal point of discussion given the recent price rise, increased adoption, capital investment as well as media attention. I have to give Dan a lot of credit for having an open mind about BTC when many others in the hard assets world have not, and he is becoming a leading voice is spreading the word about what Bitcoin and crypto-currencies generally mean for future human freedom as well as economic advancement.
Enjoy!

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VisionVictory: Partial Transcript: FutureMoneyTrends.com: Greetings and thank you for joining us at FutureMoneyTrends.com. I'm here with a good friend and a great guest of our show, of past shows, Mike Krieger. He's an economist and he runs LibertyBlitzkrieg.com. He posts daily; his articles get posted all over the web, including the very popular site ZeroHedge. Mike, thank you so much for joining us.

Mike Krieger: Hey Dan, great to be back on with you, and excited to talk.

FutureMoneyTrends.com: Alright, so today I invited you on to talk about Bitcoin, the state of the U.S. Economy, and a little bit about housing, but mainly because we disagree on it, so hopefully that will be a nice fun conversation. And for people to hear some differing views on it, as far as housing asset protection kind of strategy or why it's a really bad idea. Okay, so let's start with Bitcoin though. I think what people are missing, and this is what I came away from this conference I just came back from the past two days, is the infrastructure (that exists). A lot of people from the outside are like "this is just bubble trading," but Mike, you've been on this way longer than I have and you certainly understand it more. Could you just share with people the kind of infrastructure there is. Are the businesses being built around Bitcoin? Is there big money involved in Bitcoin? Or is this just a bunch of speculators here in the States, on the blogs, and on YouTube.

Mike Krieger: Yeah, this is definitely one of the areas where I think people are misunderstanding about Bitcoin, and in particular that one criticism of "well, there's now 45 crypto-currencies, and so its going to be diluting the whole pool, and what's the difference between Bitcoin and all these others, and it's going to divert money from Bitcoin to them and it's all a speculative bubble. That's the key thing people are missing, is that the first mover advantage is huge for Bitcoin in a lot of ways. Not just for stores and companies deciding to adopt it, but also because of all the venture capital money, the human intelligence that is going in to building companies around Bitcoin and then building up the infrastructure. And that's the genius of Bitcoin. By being decentralized and open source, it allows is layers and layers of different companies and services to pop up around it so in reality it's actually really really good for the U.S. Economy. And we should be promoting it like crazy from a top-down perspective or just leaving it alone because it has such an unbelievable opportunity to create businesses that we can't even imagine, using Bitcoin technology and the infrastructure. I think that's huge and really important. And today a huge announcement came out, the biggest venture capital investment in the Bitcoin space to date, by a lot. It was 25 Million invested by Andreessen Horowitz, lead by them in to Coinbase. And Coinbase, for your listeners if they don't know, is a San Francisco based company that is a wallet provider, where you can buy and sell Bitcoin's, but it also integrates merchants in to the Bitcoin network. It helps them accept Bitcoin, so it's sort of like BitPay which has been the leader in that area, but now Coinbase is also putting its stake in the ground in processing payments for Bitcoin. The size of the capital that's being invested in BItcoin from very smart venture capitalists is only getting bigger and bigger. It's a huge part of the Bitcoin ecosystem. And it's real.

FutureMoneyTrends.com: Mike, before you started to buy your first Bitcoin's, what was your personal biggest concern about the currency and the payment system?

Mike Krieger: Yeah, so here's the thing, and it's interesting because I'm sure this is actually one of the concerns I've seen out there, and one of the concerns I think a lot of people have still, and that's that we don't know where it came from, and we also know that it's in the powers that be, the banking elites, it's in their best interest to have everything go digital and then be able to track everything and basically shut people off and shut people down if they want to. I mean we've heard all about this for a very long time. And so it's been a fear in the back of the mind of a lot of paranoid, cynical people, including myself. You know I'm a pretty cynical guy in a lot of ways, so I had those concerns. I first heard of Bitcoin's about two years before, I publicly endorsed it. And it's not like I spent those two years just studying Bitcoin, but what held me back from getting involved early on, unfortunately, is that I did have those concerns. I was like "well, is this just a ploy? You know, is this a CIA thing?

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The Byzantine Generals Problem

What’s black and white and red all over?  The one and only Waldo.  (photo: Wikipedia)
By Trade with Dave: It didn’t take long for the Bitcoin conversation to move from the mundane monetary implications to the philosophical aspects  and real world implications of the blockchain as an app.  Chris Dixon has done a great service via twitter by drawing attention to the Byzantine Fault Tolerance and how the Bitcoin protocol is an expression of resolving the Two General’s Problem in a distributed system.
If you’ve ever been involved in even the simplest form of database administration you know how challenging it can be to maintain accurate records.  Even if you have a Christmas card list or a recipe box, it doesn’t take long to end up with more than one record and if they’re not properly time stamped it can be difficult to know which one is the most current.  In business, I am always careful to highlight anywhere in the organizations information flow where we have concurrent databases.  Sometimes it’s necessary because you may be running your accounts receivable say in Quickbooks but running your marketing automation in Constant Contact.  Sure, you’d like to have an Oracle Netledger, SAP or Salesforce.com deployment to resolve the issue, but it’s not always possible or practical.
At big accounting and consulting firms they often refer to this as a “single source of truth.”  It’s the kind of issue that they are running into with the Affordable Care Act and it’s why Mark Benioff CEO of Salesforce.com offered to fix the Obamacare website for the government but that would be too easy.  Once you have two data records and the absence of a clear time stamp you’ve ruined the integrity of an integrated system.  You can successfully operate concurrent systems with human intervention (Sally the bookkeeping clerk knows that she posted the payroll data before lunch and she can upload the spreadsheet after lunch and in the meantime there’s a discrepancy and that’s why she put a “gone to lunch” sticky note on her computer screen) or by configuring APIs or even using Excel worksheets to link systems together, but that requires hands on management, not something that necessarily applies to a project like the world’s largest distributed computer network such as Bitcoin.
Chris Dixon sent out a tweet yesterday regarding the Byzantine Generals’ Problem and posted the following article:

Bitcoin and the Byzantine Generals Problem

Before the Bitcoin protocol was invented, most computer scientists thought a system like Bitcoin was impossible because of a famous problem in computer science called the Byzantine Generals Problem.
The problem, in a nutshell, is how to coordinate among distributed nodes to come up with a consensus that is resistant to attackers who are trying to undermine that consensus. A significant component of the solution is the proof-of-work algorithm, which is the main purpose of so-called Bitcoin miners.
The mainstream press has completely ignored the importance of this computer science breakthrough. When the NYTimes writes about mining, it either ridicules it:

Bitcoin is digitally “mined” by computers running an algorithm. (If you just rolled your eyes, you’re not alone.)

Or calls it wasteful:

One thing I haven’t seen emphasized, however, is the extent to which the whole concept of having to “mine” Bitcoins by expending real resources amounts to a drastic retrogression — a retrogression that Adam Smith would have scorned.

How much does the existing banking/payment infrastructure cost? One reasonable measure are the fees charged. Standard online payment fees are 2.5%, not including the added costs fraud (chargebacks plus transactions blocked out of fear of fraud). Bitcoin payment fees are close to zero and fraud is impossible since Bitcoin is a bearer instrument.
The NYTimes has now written hundreds of articles about Bitcoin, but the phrase “Byzantine General’s problem” (or any discussion of Bitcoin’s scientific significance) has yet to occur in any of the articles.s

http://nonchalantrepreneur.com/post/70130104170/bitcoin-and-the-byzantine-generals-problem
To Dave this type of insight, especially from someone with a large following like Chris Dixon, draws attention to the significance of triple entry accounting systems like the blockchain and both the opportunity for complete accountability (think Hank Paulson threatening you with Chinese speaking grandchildren if you don’t allow Lloyd to do “God’s work”) and the threat that removing human intervention from any system brings (think HAL 9000 and trying to open the pod bay doors on your own).

“THERE IS NO FORGIVENESS IN THE BLOCKCHAIN”

If you’re a merchant you might call it a “chargeback.”  If you’re a payment systems expert you may refer to it as “the irreversability of transactions.”  If you’re a Marxist Pope, or at least if you don’t mind if they call you a Marxist Pope, then you could call it unforgiveness.  Dave’s written quite a bit about forgiveness and its impact on time, but I’m not going there this morning because someone already went there for me.  If you want to understand more about the importance of time when it comes to time stamping fault tolerant payroll databases while the bookkeeper is enjoying her tuna fish sandwich for lunch, here’s a fascinating article on the subject.

The Birth Of Time In Cyberspace: http://tubecoin.com/cryptoportfolio/index.php/8-the-birth-of-time-in-cyberspace

The article claims that systems such as Bitcoin and Twitter “produce time.”  Although Dave would disagree with that claim, it’s essentially the same fractal “halving of the halving of the halving” as we dig through the obtuse and never ending Shawshank tunnel towards the zero lower bound.  As long as you keep cutting the distance in half, it may appear that you’re making time, but you’re never going to get there but it doesn’t stop the ground hog day from revolving to infinity like the interest rate on a payday loan.

The author attempts to explain…

Time is not a dimension (this is this authors finding). It is a result of the interaction between particles. These interactions happen because energies are not distributed so as to avoid them (a photon travels, an electron flows, an molecule vibrates) and the always result in less complexity, or entropy in the system as a whole. Time means an increase in entropy. Entropy and it’s increase is juse (sic) another way to say time and it’s progression. Entropy can not decrease, and time can not reverse. For the real abstract thinkers there’s this riddle : If time moved backwards, how would we know? Like the CPU we can’t truely (sic) observe time, we can’t step out of our reality, and like a CPU we would not know if it run forward or backward. But we digress…

Dave would disagree with the author’s time reversal claim also (see: forgiveness), but rather than describe this discussion as “we digress” Dave would suggest that this discussion in particular is one of great progress, but not in a Sunstein “progressive nudge” sense of the word.  You see once you delve into the philosophical aspects of the blockchain, the all-seeing-eye or the triangulated pyramid of Yuji Ijiri’s 3D momentum, then there’s no accounting for good taste.  Everything is objective.  It’s the end of the investment banking narrative and you may as well rent the Death of a Salesman marathon from Netflix because Jeremy Rifkin’s empathic civilization has not only delivered The End Of Work, it has brought the end of free will along as a bonus.

Whether you are talking about Chris Dixon’s Byzantine General Tso’s chickening out or the Rand’s (the Corp, not the plagarist toupee) Prisoner’s Dilemma, you’re talking about Karl Popper and the synthetic solution of falsifiability.  When I consider this in the context of a Where’s Waldo when you need him to help you find the real Satoshi Nakamoto, it leads me right back to the biggest proponent of the Popper particle/wave palindrome, namely George Soros.  Where is George Soros on Bitcoin anyway?  He loves breaking the bank.

Dave’s been jumping up and down lately attempting to draw attention away from false dichotomy of “security vs liberty” and “Coke vs Pepsi” and drawing attention towards the Hegelian triangulation of the “dependability of democracy approach” balanced against the “safety and security approach” and how these are both trumped (technologically speaking) by the so-called “secure real time systems approach” such as those expressed in the Bitcoin’s blockchain protocol.

With the mass deployment of “smart phones” serving as Twitter data collection devices nearly capable of foretelling future actions and their ability to serve as prediction markets for behavioral economists, the business case for measuring intrinsic value (if you can call eternal unforgiveness “value”) for “buying time and selling distance” in a “the map is the territory” framework is uhh… well, let’s call it notable… in an apocalyptic kind of way – apocalyptic notability for short.
When you consider that Karl Popper’s demarcation line of falsifiability is the line in the sand that separates much of the basis for the astronomical scientific method from inductive reasoning as opposed to, let’s say, Nancy Reagen’s trust but verificationism astrological pseudoscience.  Dave would suggest that there is little room (make that no room) for Thomas Kuhn’s more subjective human qualities of scientific revolutions brought on by a scientist’s relative experience with paradigm shifts within the constraints of the blockchain.  When there’s a “single source of truth” as long as the chain doesn’t fork and the power doesn’t go out… we’re all good… right?  Hello?  Who turned off the lights… anybody here?
Few people would doubt that Bitcoin fails the Kuhn requirements for a paradigm shift at least when it comes to a means of exchange even if the overly volatile jury is still out on the store of wealth question.  If you ask Dave,  when you go searching for a “single source of truth” are you looking for a white guy in a red striped turtleneck and toboggan, the pseudonymic author of a white paper on peer to peer electronic cash systems (http://bitcoin.org/bitcoin.pdf), a Pope who says you can call me Marx or the man who called himself the Way, the Truth and the Life and for whom the proof-of-work, unlike your holiday decorations, has no electricity requirement?
Merry Christmas!

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