On Sunday, Business Insider's Joe Weisenthal admitted he was rethinking his former view that Bitcoin was a "currency for clowns." But Matt Yglesias still isn't convinced that Bitcoin is anything special:
Bitcoins are more portable than either suitcases full of $100 bills or diamonds. So there's some use there. And even though I think inflation paranoia is dumb, it's certainly a real phenomenon. And anything gold can do Bitcoin can do better. In essence you've combined the smuggling utility of pieces of paper with pictures of Ben Franklin on them with the inflation hedging properties of gold. That's a decent achievement. But it's not going to set the world on fire.
I don't know if Bitcoin is going to set the world on fire, but I think this analysis overlooks the characteristics that give the financial network the potential to do so. To see what Matt is missing, it's helpful to go back to an analogy I made a couple of weeks ago: the early Internet. The Internet of the 1980s was a small, strange and inhospitable place. Reading Bart Gellman's dispatch from the Internet circa 1988, it's easy to imagine sober-minded people wondering why millions of dollars of taxpayer money are being spent so a few thousand nerds can argue about their favorite science fiction franchises and send each other glorified telegrams.
And indeed, if you'd asked a nerd from the early 1990s what the Internet was good for, they would have struggled to give a compelling answer. Many nerds had half-baked ideas for revolutionary Internet applications. Others were pushing crazy theories about the Internet becoming a global free speech zone unencumbered by governments.
Most of those specific ideas turned out to be wrong, as we discovered when the dot-com bubble collapsed. And the anti-government ideology of some early Internet users didn't have very much to do with its success. But obviously that didn't mean the Internet as a whole was a fad. What made the Internet special wasn't any specific application, but the fact that it provided general-purpose infrastructure for moving information around the world that was open for anyone to use. Crucially, it was designed in a way that made it easy for others, like World Wide Web inventor Tim Berners-Lee, to extend the network's functionality.
The open-ended character of the Internet is especially powerful because innovation can happen at multiple "layers." After Tim Berners-Lee extended the basic capabilities of the Internet protocols by inventing the Web, others such as Larry Page and Mark Zuckerberg used the web as the foundation for still more sophisticated services. More recently Zuckerberg's Facebook has itself has become a platform in its own right on which thousands of others have built online services.
The reason so many nerds are excited about Bitcoin is that they see the potential for Bitcoin to do for financial services what the Internet did for information: provide a general-purpose platform anyone can use to conduct complex financial transactions. The network's open architecture not only means that anyone can use the network, it also means that one person's improvements can become the foundation for another's tinkering. Optimists predict that competition among Bitcoin entrepreneurs will lead to a steady improvement in the technical capabilities of the Bitcoin network, just as competition on the Internet produced the World Wide Web and then Google and Facebook.
So far I've been pretty abstract. What kind of specific applications might Bitcoin enable? Answering that question is hard for the same reason it was hard to explain why the Internet was exciting in 1988: the applications that exist aren't that impressive, and it's hard to speculate about the future without either getting really technical or sounding a little crazy. But here are a few examples to illustrate what's possible.
Start with companies like Bitpay, which allow merchants to accept Bitcoins without having to know anything about the cryptocurrency. When users make a Bitcoin payment, Bitpay automatically converts the payments to the equivalent price in the merchant's local currency and deposits the cash in the merchant's conventional bank account.
This 2012 presentation by Mike Hearn and this related article describes a broad class of Bitcoin applications that could prove important in the future. Bitcoin doesn't just enable cash to be transferred from one person to another, it also has a sophisticated system of multi-signature transactions that allow the creation of complex electronic contracts.
For example, suppose Alice wants to buy a product from Bob but isn't sure Bob is trustworthy. Bitcoin allows her to create a transaction that pays Bob but makes payment contingent on Charlie's approval. Even better, the transaction can be structured so that Charlie can't take the money himself. His only options are to send the money on to Bob or send it back to Alice. In his talk, Hearn also describes how to create kickstarter-style fundraising campaigns and practical micropayments—all without needing to trust intermediaries.
Last week my former graduate advisor Ed Felten wrote about plans to build a decentralized prediction market using Bitcoin. The Sunlight Foundation's Eric Mill recently tweeted that "decentralized, immutable records of activity guaranteed by network consensus are revolutionary, and only Bitcoin is doing it."
As for longer-term applications, I've long predicted that international money transfers are a market that's likely to be disrupted by Bitcoin. Nobody has built a turnkey Western Union alternative, but the emergence of Bitcoin ATMs is a first step toward low-cost international money transfers.
It's hard to predict whether any particular application will prove to be important. Undoubtedly, when people look back at this post from 2023, some, and maybe even all, of the predictions will seem silly. But I've become convinced that Bitcoin is what Jonathan Zittrain calls a generative technology: like the PC and the Internet, it provides general-purpose infrastructure that anyone can use to build powerful applications. There's no way to know how important those applications will be. But judging Bitcoin by its current applications is making the same mistake as dismissing the early Internet because Usenet and FTP were clunky.