BEYOND BITCOIN. The Future of Digital Currency. Part III The problem with Bitcoin

The problem with Bitcoin

The future that digital currency promises is grand, but there are big problems in the road to reaching the best possible future.
But first, what is a blockchain?
Blockchain defined
A blockchain is a database that is duplicated thousands of times across thousands of servers as it tracks transactions.
These transactions usually involve a specific cryptocurrency, although blockchains can also be used to track and secure other types of information.
Digital currencies like Bitcoin use blockchain technologies to provide what computer scientists call physical integrity - the manner in which data is physically stored.
This means the currency is secure, and won’t disappear. And even governments can’t touch it.
Or can they?
How safe is Bitcoin?
Supercomputers - known as quantum computers - are now being developed. These computers are just like your desktop computer, except they have 10 to the 8th power more processing capability. This means they are 100 million times more powerful. In theory, a quantum computer could break a blockchain’s 128-bit encryption in under two minutes. Quantum computers are just coming onto the market - but it’s safe to assume that governments around the world already have them in secret. This means they can already secretly track cryptocurrencies.
But that's not the only problem. Cryptocurrencies use a system of proof-of-work and consensus.
Proof-of-work (PoW) is a way of verifying a Bitcoin (or other crypto) transaction. Consensus is a broad agreement among the people managing a cryptocurrency blockchain for the rules that PoW will follow.
In theory, the Chinese government could put up 6,000 servers and use their combined computing power to take over the Bitcoin blockchain. Significantly fewer servers would be needed if they were using quantum computers.
The blockchain uses pseudo-anonymity - an apparency of anonymity but not true anonymity - to track every transaction that occurs. If your name is linked to your public ledger address, anyone can find out everything you have ever bought or sold through that blockchain.
It can take days to set up an account on a blockchain, because the exchanges (sites where you can buy and sell cryptocurrencies) are very intent these days on verifying your identity before they’ll let you set up an account. You may have tried to buy Bitcoin and given up; it's just too danged difficult.
But this isn’t the end of the problems inherent with a cryptocurrency like Bitcoin.
How Bitcoin is “minted”
The entire Bitcoin blockchain is funded by “counterfeiters” who are euphemistically called miners.
When Bitcoins were first created, there were a finite number of coins. Miners are people who “solve” the mathematical problems (PoW) used to keep transactions secure, using powerful computers and specialized software. When a problem is solved, new coins are created and given to the first miner who solved the problem, but he doesn’t receive it until a number of other miners have come up with the same answer.
It takes huge amounts of costly electricity and tens of thousands of high-powered servers to run this Bitcoin blockchain. Bitcoin mining alone consumes as much electricity as an entire midsize state, like Nebraska or New Mexico. Due to these costs, the system is becoming much more centralized. One missile to a single mining site in Iceland (where massive Bitcoin mining is done because of the low cost of power) could stop the whole transaction process.
Bitcoin Mining 'Wastes Vast Amounts of Energy, Harms Environment.
Why Bitcoin transactions are slow
But the worst aspect of Bitcoin is that it takes minutes or hours to confirm a purchase, and soon it will take days. Imagine waiting days to buy a soda. Bitcoin is simply impossible for retail use.
The blockchain isn’t scalable. This means that the more people who use it, the slower it gets. The algorithm is doomed by its own success.
And now, companies are charging transaction fees, and the exchanges are becoming extensions of our governments.
Countries like Japan, Bahrain, and India are even setting up official government-run blockchain digital currencies.
Bitcoins are like the 1st stone money found on the island of Yap. In Yap they have a village square where all the big stone coins are kept in a physical public ledger for everyone to see. There is a raised platform for each family. If your platform is empty, you are broke. The blockchain is a digital version of this public ledger system.
And yes, there is a better way.
Centralization
Remember that monetary systems are information systems. So when we talk about centralization, we could be talking about data centralization, or system administration centralization.
First, we’ll look at data centralization.
In monetary systems, money is data. There are two major approaches to money as data - ledger (centralized), or physical tokens (decentralized).
Gold, silver, and paper money are all physical, token-based forms of money.
The electronic data used in CloudCoin also takes up storage space (as all stored data does), so CloudCoin uses the physical token model. With physical tokens, including CloudCoin, the money is dispersed across its users, and is extremely decentralized.
Bitcoin, PayPal, and the stone money of Yap use the ledger approach, and the data is centralized. Bitcoin and Yap use a public ledger to stop unauthorized transactions. PayPal has a private ledger, but still maintains a centralized record.
In the case of Yap’s stone currency, the money is all located in the village square. How many servers are required to run Bitcoin? In theory, just one. And everyone must have access to it, just like with the village square.
The fact that Bitcoin copies its public ledger to many servers has no real effect on the centralization of the data, but instead affects the centralization of its administration.
When we get to centralized system administration, things get a little more controversial.
Monetary systems need system administrators. That is why I say that the monetary systems of the future will be run by system administrators. In distributed - token systems like dollars or CloudCoin, the main administrative effort goes toward fighting counterfeits.
In public ledgers, there is less concern about counterfeits and more about entity integrity (knowing who owns what). On the island of Yap, they must move the stones from one place to another to show ownership, and they make sure no one moves stones without authorization. With Bitcoin, numbers must move from one account to the next to show ownership and prevent unauthorized moves.
The Federal Reserve System requires a significant amount of administration, primarily due to threat of counterfeits. Page after page of laws and international agreements have been drawn up to administer the fiat currency of any land.
Try to make a photocopy of any paper money in the world and you will see your copy machine do an odd thing. It has a little brain in it that recognizes when you are trying to copy money, and it willon behalf of the Federal Reserve - stop making copies. This gives you a stark window into what you can expect if governments make their own digital currencies.
How can governments reach as far as controlling how copy machines and scanners work? Clearly, the Federal Reserve System is centrally administered—and they are doing a lot of it.
Centralization is dangerous, and we must fight against it.
In CloudCoin, we are also primarily concerned with detecting counterfeits. Sean H. Worthington's invention, the patent-pending RAIDA technology, is the novel idea that makes this digital currency possible. RAIDA stands for Redundant Array of Independent Detection Agents.
Bitcoin does not have a central administrator, but it has a design flaw that results in the administration becoming more centralized as the value of Bitcoin goes up. The Bitcoin miners are the administrators, and as more people have access to Bitcoins, and more coins are generated, it takes more power to administrate the blockchain.
And so the number of administrators for Bitcoin is falling.
To be a Bitcoin administrator (or miner), you need to know how to run servers. You need to keep them running with the right software. Because of the economics of Bitcoin mining, we are seeing it become more expensive to mine (counterfeit) Bitcoins, and so the only miners are people who have an economic advantage.
There are now warehouses full of servers in Iceland. Iceland has a cold climate and cheap electricity, which makes it one of the best places on earth for mining. The truth is that there is only one "most efficient" Bitcoin administrator in the world. That is why Bitcoin's administration will naturally become more centralized as this currency becomes more popular.
And the more centralized it becomes, the more vulnerable it is to attacks, both physical and digital.
The second mover advantage
A second mover advantage is the advantage a company has when it’s not first to market.
Unlike Satoshi Nakamoto, who had no precedent, we could look at all the Bitcoin blockchain mistakes and find ways to avoid them.
With the wisdom of hindsight, we was able to determine those things that do not work and remedy them.

The Story of King O’Keefe
In the 1800s, an Irish-American captain sailed his ship to an island in the middle of the Pacific Ocean in search of copra.
What he found on the island of Yap was a form of money made of huge carved stones. The stones came from a nearby island, and had to be transported back to Yap. The islanders had no metal tools, so once they transported them, carving a single stone into the shape that represented money required massive amounts of the islanders’ time.
But Captain O’Keefe had an idea. He sailed to the island that had the right type of stones, then using his iron tools, he carved the stones to mimic those of Yap. He took the stones back to Yap and asked if he could purchase one of the smaller islands with his stones. The islanders happily agreed to the trade.
Soon the captain was back for food, labor, shelter and more. The islanders saw this as a boon, so they quit farming and dedicated their time to building the sailor’s home and furniture. They could always buy food later with the new stones they would earn.
But things did not work out well. With no farmers, the food ran out. With more money than products, their monetary system collapsed.
The villagers were dismayed at how the price of food skyrocketed. The children were hungry. The women complained to their husbands.
To be continued..........
Sean H. Worthington PhD ABD for CloudCoin Consortium.

BEYOND BITCOIN. The Future of Digital Currency. Part II Blockchain vs. RAIDA



The theory of a perfect money by Sean H. Worthington
Monetary systems have a job, and money has a specific role within monetary systems. The job of the monetary system is to track what value an individual adds to the economy and ensure that more value is received than is put in.
If a monetary system does not do this, then it is unjust and people will “defect” from using it .They may use it if forced to, but they will avoid it if they are able.
With the invention of digital currencies such as CloudCoin, many more people will be able to enjoy high-integrity monetary systems as they defect from the fiat currencies that governments and banking cartels offer.
What a perfect money would offer
The perfect monetary system would be run by system administrators, not bankers, governments or even computer scientists. This is because monetary systems are information systems, and have little to do with banking, government or computers.
The perfect money has perfect integrity. This integrity can be classified under three headings:
  • Physical integrity
  • Logical integrity
  • Preferential integrity
Integrity
In practice, physical integrity means:
  • No counterfeits
  • No loss
  • No theft
  • No possibility of system-wide failure
Logical integrity addresses:
  • Users must know who the money belongs to (entity integrity).
  • The money must all be of the same stuff (domain integrity).
  • The money must refer to something that is actually there (referential integrity)
With preferential integrity, the system must:
  • Be private
  • Be scalable
  • Be fast to transact
  • Use whole numbers (or at least fractions that are easy to understand)
  • Have high availability (no downtime)
Physical integrity
A monetary system must allow people to prove to others that they added value to the monetary system, and that they deserve to get some back. If a person gets money through counterfeiting or theft, or by taxing, they are able to prove something that is not true.
Data and money must be true. That is what integrity is about.
And if the system becomes unavailable (fails), then no one can know the truth. That must not happen in a monetary system.
Money has to be there to do the job. If the money just disappeared, we would not have a monetary system. If some of the money disappeared, then it may still be usable but flawed. The money must not disappear, must not be able to be destroyed, lost or unreadable, and must not appear out of nowhere to be perfect.
Loss
As of this writing, over 17 million Bitcoins have been mined, and over 4 million of them have been permanently lost.
What happens when the losses exceed the coins mined? The monetary system dies.
The major problem with loss is that it fails to accurately reward people who created value. You may not think of this as a big problem until it happens to you.
Anyone can lose money, but it is unfair when it happens. In a perfect monetary system, it is impossible to lose money.
Theft
Some currencies are more susceptible to theft than others. The cryptocurrencies are probably the most susceptible because of their private keys that control the money in the accounts. We can dramatically reduce theft of most currencies by simply not putting all our eggs in one basket - by reducing the systematic risk. We could go into great detail about this, but now we are in the process of making CloudCoin unstealable even with quantum computers. In a perfect monetary system, there should be no theft.
Shutdowns
In the 1990s, people in California put their gold together in one vault, then issued digital currency against it. They did billions of dollars worth of trade using this e-Gold. But then some state government bureaucracy decided to kick down the doors and take the vault and all the gold. The system did not have physical integrity.
If your currency can be shut down, then it does not have physical integrity and it will not last. Bitcoin was the first digital currency to achieve this physical integrity, but it will not last for long. Quantum computers will put an end to this and other cryptocurrencies.
The cloud can be made quantum-safe. A perfect monetary system is always available, and works right every time.
System risk
There are two types of risk: systemic (the risk of collapse of an entire financial system or market) and unsystematic (risk contained within a single company or industry). Digital currencies must be able to eliminate all systemic risk. CloudCoin has done this.
Logical integrity
There are many parts to logical integrity. The first is entity integrity. 
Entity integrity means that each money must belong to an entity.
This also assumes that an entity must be able to prove that ownership. Money without an owner is lost, and loss is not allowed in a perfect monetary system. Entity integrity is only an issue when it comes to transferring ownership. In a perfect monetary system, ownership is clear.
Another part is domain integrity. This means that all the money must fall within the same “domain.” Systems based on silver, copper, gold and nickel coins do not have domain integrity. They are all made of different stuff (domains), and this stuff does not have the same value.
Even systems that mix paper money and coins lack domain integrity.
It is possible that the metal in the coins could be worth more than the numbers printed on them and much more than the numbers printed on the paper.
Digital currencies generally do not suffer from lack of domain integrity. In a perfect monetary system, the money is all cut from the same material - it belongs to the same domain.
Regarding referential integrity: Often with money, the data is written on something with physical properties that reflect the value.
For example, a dollar was originally defined as the modern-day equivalent of 24.057 grams of less-than-pure silver, so with a silver coin that’s labeled as a dollar, you would expect that coin to contain 24.057 grams of silver.
However, you can write the word “dollar” on anything, including pieces of toilet paper. If we accept the original definition of a dollar, then put the word “dollar” on paper and that money loses all referential integrity.
If we change the meaning of “dollar” to a monetary unit used by the Federal Reserve Bank, then we get the referential integrity back.
We have seen referential money like the U.S. silver certificates, which are no longer in circulation. These pieces of paper referred to an ounce of silver that was supposed to be safely vaulted away. The problem was that it was not true - the silver certificates did not possess referential integrity.
There are now many digital currencies, such as Tether (Tether is a blockchain cryptocurrency that is backed one-to-one, by fiat currencies), that claim referential integrity by binding to a currency such as the U.S. dollar. But, as history has shown, monetary systems that work on referential integrity always fail sooner or later. In other words, if you invest long in referential money, you will lose your ass.
Perfect money has 100% referential integrity. This means that it says what it is and there is no doubt as to what it is. A CloudCoin is 100% a CloudCoin. Bitcoin also enjoys 100% referential integrity. 
Preferential integrity
It may be possible for a monetary system to keep all of its data straight, and to track who added what and who should get what out. But there are other important things that must be addressed.
What people prefer might not fall under the strict science of data, but these are also important. One aspect of this is privacy.
Imagine that when you went to buy something it was posted on Facebook so that everyone could see everything you bought and where you bought it.
Imagine getting lectured by your boss, coworkers, family members and even your kids on what to buy and what not to buy, where to shop and where not to shop.
The better the privacy, the better decisions we make, the more we economize, the more civilized we become. If you have to sign up for an account to use your money, it’s not private.
You can obtain a pseudo privacy with cryptocurrencies, but if someone finds your private key, they can prove how much money you have and all the trades you have made.
Real 100% privacy means no accounts, no logins, no passwords, no private keys and none of the other things that publicly attaches you to the money you own.
Scalability means that a system does not slow down when more people use it. Think of cars on a bridge. The bridge is not scalable - the more traffic it gets, the slower the traffic moves.
The world is looking for a global currency that can handle the entire world’s trades. It would be a crushing blow to get invested in a currency that stops working because everyone else wants to use it too. But that is what happened to Bitcoin and Etherium.
Blockchains in general are just not scalable. We would even suggest that if you are using a currency that claims to be blockchainbased and scalable, it is either not really blockchain or not really scalable, because the two don’t match.
Perfect money is scalable.
Speed of transactions is also very relevant. During the height of the Bitcoin bubble, it took an average of 20 hours for a transaction to complete. That is not going to work for someone who wants to buy a soda at the corner store. People don’t care if it is 500 milliseconds or 250 milliseconds, but the slower you get, the more people will complain. We assume that anything over 20 seconds is dead when it comes to retail.
Perfect money trades fast.
The fractions a coin can break down to is also a vital point.
The most important part of a monetary system is the human mind. We need to be able to think about what the numbers mean to us. We have to know how much we have, how much we need, and how to plan our spending. Thinking in whole numbers may be easier than mixing whole numbers and fractions. It is easer to think of 5 CloudCoins than 5.6789958443 Bitcoins.
What level of precision (number of decimals) does a monetary system need to be accurate? That, I admit, I do not know. But I am putting my money (CloudCoins) on whole numbers.
In terms of preference, a perfect money should be easy to use. It should always be available, transact at any time, and have high portability.
A perfect money must meet the preferences of its users.

Blockchain vs. RAIDA
The table below will give you a better idea of how to measure their fundamental values
Comparing integrity in different money systems
The next table shows how CloudCoin stands up against other familiar monies:

To be continued..........
Sean H. Worthington PhD ABD for CloudCoin Consortium.