Archive for August, 2012

The Friction-Free Bitcoin Economy

Saturday, August 25th, 2012

As the barriers to competition evaporate, the world is becoming Bitcoin’s oyster.

Guess who it is you’re fighting now? Everybody.

In his old book, The Road Ahead, Bill Gates wrote of “friction-free capitalism,” a type of marketplace that he argued will be ushered in by the spread of a technology like Bitcoin. This is like heralding the Net as a harbinger of instantaneous transaction while dispensing with hard cash and the credit card. Forget the Banks — we already inhabit what has become a remarkably low-friction internet economy. That’s why today’s marketplace feels so competitive. And it’s why some businesses are prospering beyond all expectation while others are wondering who changed the rules of the game.

Economic friction is everything that keeps markets from working according to the textbook model of perfect competition: Distance. Cost. Restrictive regulations. Imperfect information. In high-friction markets, customers don’t have many suppliers to choose among, or are restricted to suppliers hampered by regulation. Owning a factory — or a store with a good location — counts for a lot. It’s hard for new competitors to get into the game. The marketplace moves slowly and predictably. Low-friction markets, as are found on the internet, are just the reverse. New competitors crop up all over, and customers are quick to respond. The marketplace is anything but predictable. Bitcoin exacerbates these effects exponentially, because it removes barriers to securely collecting money from customers.

The single most significant change in the economy over the past 36 years has been a wholesale reduction in friction, affecting nearly every industry. Some of the factors are obvious: increased air travel, overnight delivery, credit cards, cellphones, the internet. They put faraway companies on a competitive par with local ones; they enable Lands’ End, Amazon and a hundred other mail-order houses, for example, to match the convenience and price of a neighbourhood store. Other factors are less visible but no less important: Deregulation opened up many industries; local truckers, for instance, may face competitors from half a world away. The growth of high-risk, high-return capital markets has transformed other fields. Today a local Bitcoin entrepreneur must worry about the entrepreneur in Kiev showing up two clicks away in her browser.

Sure, the Internet will grease the market’s machinery still further. But friction is declining every day anyway. Banks face new competition not just from the occasional startup fiat money site (like Linden Dollars) but from distant competitors using Bitcoin technology. Entrepreneurs in Kansas or New York, according to the Wall Street Journal, must now compete with entrepreneurs from Bangalore and China, whose Bitcoin services are only a click away.

There’s little need to elaborate on the threat posed by a low-friction economy; it means more competition, often from unexpected parts. The opportunity is pretty plain as well. In principle, at least, the world is any small company’s oyster. Bitcoin services selling in Dallas can be offered in Dakar or Bangladesh with zero extra time and expense. The thing is, the rules of a low-friction marketplace are different. And if you’re not playing by the right rules, you’re out of the game before it starts.

Rule Number One is merely a caution: Don’t expand blindly. The fact that you can open up a plethora of locations or launch a public relations operation or even integrate into the mainstream banking system doesn’t mean that you should. After all, everybody else can do the same, or something new and disruptive that will outmanoeuvre you. You may be able to peddle your products or services in Minneapolis or Brooklyn, but nobody has to buy them. Having 100,000 outlets is meaningless when it comes to being outflanked by a more nimble competitor.

Rule Number Two: Offer a distinctive something to your customer. This seemingly trite piece of advice is more revolutionary than it sounds. Your job is to take care of the customer — to deliver good value. All the business gurus harp on that one theme, albeit in many variations: Quality. Service. A fair price. In a low-friction marketplace, however — particularly if you’re expanding — the old nostrums are nowhere near sufficient. You have to have something that sets you apart from all the other suppliers offering quality, simplicity, service and a fair price. What should the something be? In the internet age, the company that provides the best privacy and usability wins, especially with Bitcoin.

There’s a hidden secret of the low-friction marketplace, which I’ll call Rule Number Three: What you sell doesn’t need to be a unique product or service. It can simply be the ability to do something better than anybody else. If that puzzles you, think of Google. None of Google’s strategies — search, webmail, storage — is exactly a secret. Indeed, most of the big search engines have at one point or another tried to be Google, only to discover they can’t. They just don’t know how to do what Google does and still make money at it.

You can be a lot smaller than Google and still do things that leave most competitors baffled. New, agile Bitcoin Businesses, will learn how to guarantee, for example, the delivery of Bitcoin in 30 minutes, without fuss or privacy issues. You think people wouldn’t welcome that capability? There will be many market players entering the Bitcoin space who will offer friction free services that will be a no brainer when you compare them to the stifling complexity and Orwellian surveillance state features of other services.

We get dazzled these days by glossy visions of information superhighways and electronic bazaars fuelled by Bitcoin. No doubt we’ll all have to deal with the commerce of Bitcoin sooner or later. Meanwhile, the friction-free economy is already here. The entrepreneurs who recognise what it means are the entrepreneurs who are going to prosper.

http://www.inc.com/magazine/19960601/1690.html

Examining the new site ToS;DR ‘Terms of Service; Didn’t Read’

Tuesday, August 14th, 2012

There is a very exiting new service online called ToS;DR ‘Terms of Service; Didn’t Read’. With it, companies offering services over the web have their TOS pages parsed and line items rated.

Here is an example of some of their rated services:

GitHub Class B
↑ Changes can happen any time, even without notice
↓ Your personal information is used for limited purposes
→ GitHub requires cookies
→ Choice of law: California
↑ Your account can be suspended and your data deleted any time for any reason
↓ You don’t grant any copyright license to github
↑ You must provide your legal name
↑ You shall defend and indemnify GitHub
↓ GitHub will notifiy you before transfering your information in event of merger or acquisition
↓ Transparent security practices

Delicious Class D
↑ Only for personal and non-commercial use
x No Right to leave the service
↑ Your content can be exploited
↑ Non-transparent use of cookies and third party ads
↑ Your personal information are an asset for business transfers
↑ Third Parties

Twitpic Class E
↑ Reduction of legal period for cause of action
↑ Your content is for Twitpic and their partners
x Deleted images are not really deleted
→ Jurisdiction in Delaware
↑ You indemnify Twitpic from any claim related to your content
x Twitpic takes credit for your content

Those familiar with Libertarianism and BLOGDIAL can guess what we are going to say about this.

First of all, the people who run this service do not know what rights are. In the Delicious entry for example, they say that users have ‘No Right to leave the service’. There is no such thing as a ‘right to leave a service’; you may have have the power to leave a service and to stop using it, but not a ‘right’.

The promises made to you under contract on a website are a private matter of contract between you and the people or company that owns that site. If they give you the power to delete your account, that is a good thing, but you have no right to other people’s property, and no right to force them to offer you a service on any particular terms.

The difference between a right and a power is an extremely important one because (separate from mistaking a right for a power being entirely wrong) when you assert that someone has a right to something, the next step is that the violent State is called in to force people to do what they would rather not do, like force websites to offer an opt out on cookies.

Lets go through these bad entries one by one:

Github:

“Changes can happen at any time, even without notice”
Github is a privately owned website. The people who run it have the absolute right to change anything at any time. If you do not like it, do not use it and go and create your own web service based on Git.

GitHub is not lying to its users. It tells you in advance what it is going to do with the data you store there. They are completely free of evil in this respect. They are responding to the needs of their users at a very high standard. This is why they are hugely popular, and why they come to the attention of people who want to attack them.

You must provide your legal name
I absolutely loathe sites that require your legal name. I closed our account at Quora and deleted all of our thoughtful answers there because Quora admin demanded that we use real names and not the user name ‘Irdial’. Nevertheless, the position on this is clear; Quora owns their servers and service, and I have no right to demand anything from them. It is up to me to either change my user name or quit the service. The same goes for GitHub. If you do not like their ‘Real Names’ policy, do not use GitHub.

You shall defend and indemnify GitHub
Once again, if you do not want to defend and indemnify GitHub, do not use their service. Also, try and think about it from their point of view; if some user ‘steals’ source from somewhere and posts it on GitHub, this exposes the owners of the service to the possibility of an infringement lawsuit and crippling damages. In order to protect themselves from this, they need to add this language to protect themselves from stupid or malicious users. This is perfectly reasonable and logical, and is in no way an attack on GitHub users.

Conclusion
There is nothing in the GitHub TOS that is unreasonable. They are open about what they are doing, and provide an extremely useful service that you do not even have to own an account on to be able to pull some source. They, as the property owners of the service, can operate it under any terms that they like.

Delicious:

Only for personal and non-commercial use
Non commercial use restrictions make perfect sense; they have to find a way to monetize the service. If you don’t like it, store your bookmarks elsewhere, like in your browser.

No Right to leave the service
There is no such thing as a ‘right to leave the service’, and if you delete all of your entries, that is the same as leaving, and you can do that. Once again, use the word ‘rights’ correctly and understand property rights. Every item where this fallacious ‘Right to leave the service’ is listed as a defect in a TOS, ToS;DR is in grave error.

Your content can be exploited
What does ‘exploited’ mean? This service is out to make a profit. If you are socialist, and do not believe that people or companies should make a profit, that’s fine, but you cannot force other people to live by your standards or contract under terms that are not acceptable to them, and it is dishonest to condemn or vote a site’s TOS down due to this. And again, if they tell you in advance that they are going to use your bookmarks to make money, you can choose not to use their site and service. Some people take this bargain and accept it as the price of using the service. There is nothing inherently wrong in this.

Non-transparent use of cookies and third party ads
The browser running on your computer can be set to refuse cookies. It is up to you to make this setting, and to refuse to accept cookies from sites. You do not need the State or anyone to hold your hand like a child, and if you do, that is your problem, not the problem of Delicious. Caution must be the default on the web.

Your personal information are an asset for business transfers
Once again, business as a practice is not in and of itself unethical, and if you believe so, that is a personal prejudice that you should keep to yourself, if you want to remain objective. Business is not harmful!

Third Parties
With tea and cake presumably.

Twitpic:

Reduction of legal period for cause of action
Twitpic needs to do this to protect themselves from Ambulance Chasers and hostile collectivist users who like Class Action Lawsuits. If they do not have this clause, the service will be attacked for sure. There is no standard legal period for a cause of action, and in jurisdictions where there is, there should not be. Its up to you to either accept or reject these terms.

Your content is for Twitpic and their partners
They need to find a way to monetize the content on their service, otherwise it will cease to exist. This is entirely reasonable, and you have advance warning that they are going to do this.

Deleted images are not really deleted
Once you upload your pics to their service, they can do with them what they like under the terms of service. It they are lying about deleting photos, this is fraud, and they should not do that. This is a correctly flagged item, of the kind this site should focus on.

You indemnify Twitpic from any claim related to your content
Same as for Delicious. Content in a copyright world can be a hostile trojan horse, and they need to protect themselves. If you really want to make these clauses redundant, advocate for the end of the State.

Twitpic takes credit for your content
If you give your content to Twitpic under terms that say they will own your pics after you upload them, this is an explicit contract. IF they do so without telling you explicitly they are going to do this, once again, this is fraud, or ‘passing off’; its illegal and immoral. Once again, this is a true example of a correctly flagged flaw.

This is a great idea for a service clarifying and distilling TOSes for the masses, but there are some problems with the thinking behind the categorisations and descriptions of the problems described in each TOS where a fault is found.

Some faults are not faults at all, but simply terms of service designed to protect the service owners, and others are actual flaws. A clear set of ethical standards needs to be applied to each TOS, one that is free of bias.

It would be interesting to write a plugin that flags up TOS flaws or changes on every site you visit, so that as you surf the web, you are alerted to potential offences against your sensibilities.

On sites where you already have an account, where the TOS has changed, you could be alerted that this has happened for you to review. Im sure someone has already though about this.

If these people want to really help both users and the sites they visit, they need to think hard about their assumptions on the basic parts of this idea; who owns websites, what are rights, what obligations do sites have to users of their services? All of the answers to this can be found in ‘For a New Liberty‘ which spells out very clearly in simple language, everything you need to know when writing your TOS.

Sit down and shut up!

Monday, August 13th, 2012

Jon Matonis has another great article up at Forbes which replies to Fred Wilson the venture capitalist and principal of Union Square Ventures question about Bitcoin.

Below is the text of our comment on this post, spurred on by a man asking people to essentially “sit down and shut up with the Anarchism jive”.

Before I copypasta, something interesting related to this has just happened. Australian-based trading firm @SpendBitcoins has decided to pull out of the U.S. market, citing “regulatory obstacles”:

https://spendbitcoins.zendesk.com/entries/21806042-spend-bitcoins-out-of-the-us-market

Just what those obstacles are are not specified; in fact, there are no regulations or laws covering Bitcoin buying selling or transferring anywhere in the world. Bitcoin is unregulated, free of legal constraints and its up to the people who use it to do what they want with it on whatever terms they see fit.

That being said, if there were regulations controlling Bitcoin, we can see by this abandonment of the US market exactly what the effect of regulation would be.

Entrepreneurs would not be able to enter the market and compete, thanks to artificial barriers to entry. This is great for early entrants, who also happen to be the advocates for regulation. This is called ‘Crony Capitalism‘; where businessmen use the violence of the State to keep competition out and entrench their positions so that they are unassailable.

Bitcoin is going to be a different case when it comes to the Crony Capitalists and their plans to dominate the market by the force of the State. Because it lives on the internet, and is essentially a new hybrid between pure information, money and a certificate of ownership, the dynamics of the internet and telecoms, specifically Warez (MP3s Torrents), Instant Messaging, SMS and email are going to come into play.

When we look at all of these unregulated services, it is clear that Bitcoin will be absolutely unstoppable, and the Crony Capitalists will not be able to dominate because each computer and mobile phone on Earth will act as an input and output point, circumnavigating them. They will be as Apple’s iTunes DRM files are to the pirate music scene; large in number and market penetration, but dwarfed by the total amount of transacting going on world-wide. For certain, this State sanctioned walled garden Bitcoin world is a goal of such massive proportions that any business man would kill to be the owner of it. What I am saying is that it is not ethical to use the State to get to that position of domination.

Bitcoin will see regulation as damage and it will route around it.

In the end, only the inured 5% will move their Bitcoin in systems that are expensive and regulated, whilst the rest of the world will live and profit in a Bitcoin ecosystem that is pro-human, unregulated, open and free.

That is the scenario where the pro-regulation camp ‘wins’.

And now, on to the reply:

*******

First of all, Bitcoin is not money. If you receive it in exchange for goods and services, it is more like an intangible barter instrument rather than money. Since it is intangible, you can argue successfully that you have received nothing in exchange for your work. It is therefore not possible to be taxed on income when you have taken Bitcoin (nothing) in exchange for your work, any more than you can be taxed for receiving the telling of a story or a concert of music, or a soft whisper in your ear in exchange for your labor.

This is obviously different to receiving physical precious metals issued by the State in exchange for your work, and yet, we can look to a recent case that went to court on this very act for insights in to how Bitcoin might be treated if people were to be paid in it.

In the Kahre tax case, a company paid its workers in US Government issued gold and silver coins. Since the face value of these coins is one thousand times less than the Federal Reserve Note value (in the case of gold), all the wages of the workers at that company fell beneath the reporting and taxation thresholds. They were taken to court by the State on multiple counts of tax evasion and other ‘financial crimes’, and won:

http://portland.indymedia.org/en/2007/10/366287.shtml

In the light of this, it would be hard to argue that wages paid in Bitcoin were more taxable than silver and gold dollars issued by the United States Mint, when the State does not even recognise Bitcoin as money in the first place.

While we are at it, it might be possible to bring a case for tax evasion on gold and silver coins paid as wages by valuing them at the spot price on the day the wages were paid, but this is not how Federal money works; the face value of the money paid in wages is the value for reporting. That is why they won.

Do you see what they did there?

Then there is the matter of who owns Bitcoin as a system and the perception of it. The developers of services that run on Bitcoin do not own the Bitcoin system and are not responsible for what other people say about it or do with it. There is no pecking order that puts developers and their opinions above the opinions of the users of Bitcoin.

Some people believe in tight integration with the state, through licensing, registration, ‘compliance’ and other forms of disgusting, degrading destructive, irrational and anti-human regulation. Others believe that Bitcoin users and service owners would be better served by the ecosystem growing as the internet did; organically and exponentially, without regulation or interference from the computer illiterate luddites of the State poking their noses into other people’s private business.

To say that linking Bitcoin with tax evasion is, “not helpful”, implies that there is a central aim to Bitcoin that everyone must be on board with. Helpful to whom exactly? If someone’s aim in developing Bitcoin and promoting it is to defund the State, then promoting Bitcoin as a way to prevent having your money stolen by the State is an extremely helpful thing. Everyone should promote Bitcoin to their constituencies and not concern themselves with what other people are thinking or are doing. Of course, the flaw in this logic is abundantly clear when you consider that the State will not let people who do not conform to its ideas live in peace. But that is another story.

Jon’s pieces in Forbes, are the best pieces of writing on Bitcoin to date. They are compact, crystal clear, factual and informative, without being bombastic or overtly skewed to a political philosophy. Reading between the lines, I sense a pure Rothbardian hatred of the State, but that is probably just me projecting my own philosophy on his words.

Bitcoin changes everything. All of your assumptions about money, how it is moved, what it is and is not are blown to pieces by it. Rather than trying to squeeze Bitcoin into a Procrustean Bed, it is better to embrace it on its own terms and build services that work on those terms, and not on the assumptions and qualities of physical money or the demands of the State. Its analogous to designing a surf board to surf waves, or an aircraft to fly. What you would prefer these things to look like is of secondary importance to aero and hydrodynamics. The aim of a surfboard is to allow you to shoot the tube at Teahupoo and live. The aim of Concorde is to get you to London from New York in three hours instead of six. Bitcoin is designed to destroy the State. It is designed to destroy Western Union. It is designed to wipe out the banks. This mission is implicit in its architecture and design.

Accepting Bitcoin for what it is, on its terms, will enable you to build better, revolutionary and disruptive services that better serve people. You wil be able to identify these services by how close they bring you to the core of the service. The most innovative services will balance and blur the distance to the ‘raw network’ and the user experience. This is the sort of Bitcoin entrepreneurialism that we are going to eventually see, and it will not come from people who are trying to build a new kind of Bank.

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