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Posted June 18, 2011
There are two classes of criticisms of bitcoin (see this Quora question, for instance): 1) The bitcoin protocol is flawed, is probably flawed, or might be flawed. 2) Some of the properties of the bitcoin system are economically poor choices. I am not a cryptographer, so I have nothing meaningful to add to the discussion of the technical merits of bitcoin. However, I can say with confidence that the second criticism of bitcoin, that, for instance, the fact that it is a deflationary currency renders it useless, is a problem that can be solved by merely creating a market of different bitcoin currencies that all use the same protocol but have different economic properties.
For instance, there may be value in having a bitcoin currency that is like bitcoin in every way, except that is not limited to 21 million coins. Let’s call this new currency infinitycoin. New infinitycoins would be generated at a rate of 50 per 10 minutes, just like regular bitcoins. The only difference would be that the production would never taper off; there would never be a time when the production of infinitycoins cuts in half, or cuts in half again. Instead, the rate will be held at a constant 50 new infinitycoins per 10 minutes forever. Bitcoins would probably always be more valuable, because they are deflationary. But infinitycoins might have a more steady value with time. Thus, infinitycoins could be used in cases where they are appropriate but bitcoins are not.
Another coin, let’s call it Fedcoin, could be run by the Federal Reserve Bank of the United States. Like infinitycoin, it would use the same cryptographic and communications protocols as bitcoin. However, unlike infinitycoin or bitcoin, the rate of creation of coins would not be controlled directly by an algorithm. Instead, the software will communicate with centralized servers controlled by the Fed in order to determine the rate of production of new Fedcoins, thus controlling the rate of inflation. The Fed would be able to control the rate of inflation of Fedcoins in a manner similar to the way the Fed controls the rate of inflation of US dollars.
These three currencies, and many more that I am not creative enough to imagine, could exist simulaneously in a market of currencies. It may be the case that one of them becomes by far the dominant currency, or it may be the case that they all exist simultaneously, and people will use all of them at different times depending on which currency they deem is appropriate. Like with biological evolution, the currencies would exist in a competition. Just like how many different species, or many different ways of life can exist simultaneously, these currencies could exist simultaneously. And again, just like with biological species, some of the currencies may die out if they are not fit enough.
Thus we see that any argument that bitcoin is flawed becuse it is a deflationary currency is itself flawed. The reason is because the economic choices of bitcoin are only one possibility; there is no technical reason why other species of bitcoins could not exist simultaneously. If any such currencies came into existence where there was in fact a market for them, they would thrive, and thus come to compete with standard bitcoin. Indeed, one would expect that such alternative bitcoins probably already exist. Some Googling reveals that they do, or at least they do at an early state of development (1,2,3).
If the bitcoin protocol is flawed, then bitcoin and all alternative species of bitcoin will fail. But if the protocol is not flawed, then different species of bitcoin will certainly emerge and be useful exactly to the extent that their economic nature makes them useful.