Topic: The flaw of Bitcoin economic/security model. (Read 2528 times)

What if someone created a Bitcoin Exchange where in order to trade, you first place the order on the site. Let's say it's a sell order. Then the site gives you a Bitcoin address to send the funds to for the order. You send the BTC to the address, and when the order is filled the fiat currency is sent to Dwolla. It isn't imperative that the payment processor be Dwolla obviously, I just can't think of a better payment processor for this use-case ATM.

It might not be good for some uses because of the increased transaction fees compared to MtGox (bots and trading methods that use many transactions), but there would be less trust involved, as the site would not need to hold funds for long. One would only have to trust the exchange to not run away with one's order funds while the order is still in the book.

What are the reasons this would not work?

The bitcoin system makes no such assumptions. Bitcoin is just a tool. What you do with it, whom you choose to trust is up to you.

Saying that bitcoin security is flawed because people choose to give up control of their private keys is like saying that the security of a door lock is flawed because you gave the key to a caretaker who emptied your house while you were on holiday.

Of course, for the economy to function, a good trust management system is required as a layer on top of bitcoin.  But the two systems are independent of each other.

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So the flaw is that the incentive to steal emerge the moment a business finds it self in a situation where a theft would earn more money than any possible future profit...

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Bitcoin system assumes that a business with a good reputation has the integrity to deliver goods in exchange for received bitcoins and would not disappear with customers money because it had to spend a lot of time to build the reputation in the first place.

Every noticeable eWallet and Bitcoin Exchange falls under second category.

The problem solves itself over time. It's a process.

EDIT: TL;DR: The problem of integrity of certain business models is fundamental because of how Bitcoin works, and it's not going to go away with time on its own.

Again, when I write "profitable" I am not referring only to monetary value..
Money is a good servant but a terrible master.

If it is more profitable to build a company with long term strategy in mind and provide good service, then this is how the company would conduct its business. For example, the company may provide free training that is not directly related to work tasks, strangely enough, but it may result in better profit in the long term. In my original post I described that in Bitcoin environment a business owner that holds customers bitcoins have strong incentive to steal it, even if it means destroying his company, because it would earn more profit then any long term strategy.

Can you recall a situation when you were offered something for "free" and it was really free, so you could just take it and not give anything back?

There is no such thing as a "trustless" transaction.

When I use bitcoin I trust that 51% of the network hashing power is held by "honest" miners.

Every entrepreneur knows it's a lot more profitable to build value over time than to take the money and run which is a one-time gain.

Most entrepreneurs are not in it for the money.

The only purpose of a business is to make profits as big as possible. An overwhelming majority of examples prove that any other motivation, including personal moral values, doesn't matter in the long term.

Every noticeable eWallet and Bitcoin Exchange falls under second category.

If the business owners are know it shouldn't matter.  Company loses customer funds through employee theft, inside job, scam, hack.  It doesn't matter the company is liable.

One way to reduce the risk is to change the risk vs reward ratio.  You can raise the risk (for the scammer) by dealing with public companies.  You can lower the reward by dealing with companies which don't hold a huge amount of customer assets.  We bought 40,000 BTC this month however we never hold client's funds.  We payout the same day.  If Tangible Cryptography starting stealing customer funds how long do you think we could get away with it.  A day?  two days?  How quickly would sales slow to a tickle when dozens of users reported not getting paid?  The reward goes way down because we are never in a posistion to steal the full 40,000.  We might get away with a couple thousand BTC at most.   Even if the risk was 0% (and it isn't) honestly it is more profitable being legit.

TL/DR
1) Deal with public companies
2) Don't deal with companies which "hang on" to huge amounts of customer funds.

hmmm, nothing there that can't or doesn't happen with fiat money. Dodgy businesses are dodgy businesses no matter the payment system.
I guess you send your cash off to anonymous people and hope they send you goods? -unlikely, why would you send "digital cash" to anonymous people
Bitcoin is not responsible for the people that use it any more than the USD can be blamed for drug trafficking.

EDIT: TL;DR: The problem of integrity of certain business models is fundamental because of how Bitcoin works, and it's not going to go away with time on its own.

Bitcoin system assumes that a business with a good reputation has the integrity to deliver goods in exchange for received bitcoins and would not disappear with customers money because it had to spend a lot of time to build the reputation in the first place.

The only purpose of a business is to make profits as big as possible. An overwhelming majority of examples prove that any other motivation, including personal moral values, doesn't matter in the long term. Reputation is built by a business in order to gain profit, therefore trashing it is irrelevant if stealing would result in even bigger profit.

So the flaw is that the incentive to steal emerge the moment a business finds it self in a situation where a theft would earn more money than any possible future profit, and the level of anonymity provided by Bitcoin makes the theft probable because it is very hard to legally pursue those responsible. Scams happened over and over again, and with each iteration it's getting bigger. Reputation system works well when customer has the ability to recover funds in case of a fraud, but it doesn't work very well in Bitcoin environment. Escrow system can help with the problem but there is a business cases where it can't.

A business that holds customers bitcoins such as eWallet and Trading Platform has to have full control because it needs two features, instant transactions and scalability, for example, it is not possible for a Trading Platform to settle Bitcoin transactions between its users using blockchain, there is just too many of them and Bitcoin Network wouldn't be able to sustain it.

There is a technical solution, that's waiting to get implemented, it provides those two features without giving full control over bitcoins: Trustless, instant, off-the-chain Bitcoin payments . In short, the business would have control over only executed transactions and not full balance, if a customer doubts its integrity then he could just stop using the service and that will guarantee full recovery of his balance.

There is no difference between what you describe, and any other currency.

Zhou Tong for example was not anonymous -- he is liable for damages just the same as if he transacted only in dollars.

Long term profit generation is maximized by maintaining an ongoing business. Zhou Tong would have made much more by continuing to operate Bitcoinica or maintaining a significant share in the company.

/thread

Bitcoin is pseudonymous, yet this is not a requirement.

Simple answer, don't do business with the pseudonymous.