04 August 2015

If water was like bitcoin

It's a joke -- there are no physical bitcoins :)
I've been playing around with Bitcoin, a protocol for creating and exchanging bitcoin (BTC). BTC are a fully digital currency that similar to gold, i.e., as a store of value and means of exchange. BTC are far easier to transfer over long distances and cheaper than paypal. Transfers are slower than, say, sending an email, but not if you take Bitcoin security into account.

NB: The following description reflects my understanding. It's definitely oversimplified. Tell me if it's wrong.

Bitcoin security has two dimensions: the location and transfer of BTC. Both of these are recorded in the "blockchain" -- a register of transactions that records a BTC's "birth" location and all transfers that have brought it to its current location. The blockchain is actually the genius of Bitcoin because it ensures that BTC -- unlike digital files -- cannot be copied or spent again. The blockchain is protected from fraud and inaccuracy because it is distributed --- in thousands of copies --- among many computers.* Nobody can change the blockchain (e.g., to give themselves lots of BTC) without getting 51 percent of the other copies of the blockchain to make the same change.**

Why are people keeping copies of the blockchain around? They are "mining" bitcoins by updating the blockchain by "hashing," i.e., trying to solve a complex math problem that includes data on transfers.

Every 10 minutes, one of the miners is rewarded with 25 bitcoins (birth!) as a result of hashing more quickly than others. Thus, miners have an incentive (coins!) to maintain the blockchain that everyone needs for proving BTC ownership and trading BTC.***

One more thing: the supply of BTC is increasing at a rate (now 25 BTC/10 min) that is slowing, until the blockchain reaches its final supply of 21 million BTC in 2040. At that point, miners will have to be directly paid for maintaining the blockchain.

So that's a little description of Bitcoin, and I am surely hoping that more people use it as a means of saving money (looking at you, Argentina, Venezuela and Greece), transferring money (killing Paypal and Western Union), and spending money (bye bye MC and Visa). Read this for an excellent description of how software really CAN disrupt entire swathes of industry (the Uber example).

But how does this description apply to water? Let me count the ways.

If water was more like bitcoin, then:
  1. We would know where the water was
  2. Nobody could steal your water
  3. Supply would be known and reliable
  4. Transfers would be easy and harmless to others
  5. The government couldn't take your water for "its needs"
Now you may not agree with all of these "advantages," but you'd probably have to agree that water, in this world, would be subject to clear rules and incentives rather than the random disappearances, improper uses, and strange locations it ends up in today.**** Think about it.

Bottom Line: The key to good water management (like good money management) is good accounting with reliable units.

* Bitcoin is therefore robust and beyond government control in the same way that torrents and other peer-to-peer digital exchanges are.
** Many have been trying to hack Bitcoin. None have succeeded so far, so the only "real" threat to Bitcoin (as a protocol) seems to be this "51 percent attack." The funny thing is that this attack would not work. First, other miners would have a huge incentive to bring more processing power online to keep an attacker's power below 51 percent. Second, everyone would abandon Bitcoin if someone took over 51 percent (why trade BTC with someone who stole it), thereby sending the BTC value to zero.
*** ALL Bitcoin security breaches have been the result of sloppy wallet control, not of faults in the system. The hacking of Mt Gox (which could also have been an inside job) harmed lots of people who had trusted their BTC to Gox's (incompetent or corrupt) admins. Good wallet control means 0 percent chance of theft.
**** Chile's 100 percent private water rights system is farther along on these (2 and 5) but needs work on 4. #3 is pretty hard when you've got a hydrological cycle :)

Addendum: The rise of Bitcoin in Argentina, on the back of government incompetence and theft.

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