Tuesday, April 24, 2012

CoinLab and Bitcoin

A friend sent me a link to a GeekWire article about Seattle Bitcoin startup CoinLab raising half a million dollars and asked "is that a good or bad thing?"

It's a good thing!

The long-term vision for the Bitcoin economy is a closed loop-- people earn and spend bitcoins, instead of exchanging bitcoins for some other currency.

Since most people get most of the earnings in the form of a salary, and since I think it will take a very long time (if ever!) before a typical company considers paying employees in Bitcoin, the 'earning' side of the equation worries me most.

That's why I created the Bitcoin Faucet, and that's why I like to see projects like ForBitcoin or FeedZeBirds that give people all of the world ways to earn a little coin. They give anybody with an internet connection and some extra time, anywhere in the world, a way to put their time to productive use.  That's a very good thing.

CoinLab's idea is to let game companies "earn profit from idle users with a custom-branded coin client." The users run a little program and are awarded with in-game items or power-ups. The game companies get dollars.  And CoinLab makes it all work by doing a bunch of behind-the-scenes infrastructure, exchanging the bitcoins that the users create for dollars.

I think CoinLab is being smart by not asking the game companies or users to deal with bitcoins, but instead having them deal with what they're already comfortable with (dollars and in-game commodities).

But eliminating the exchange and paying the gamers and/or the game developers directly in bitcoin would be more efficient, and is an obvious, easy-to-implement feature. Bit-Pay is doing something similar for merchants, depositing dollars or bitcoins or both in their accounts when they receive bitcoin payments.

I think the biggest market for a service like CoinLab will be younger gamers. If you're 15 years old and don't pay rent or electricity then leaving your computer running overnight to earn some in-game currency will be pretty darn appealing. If a whole generation of video-game-playing kids grows up with Bitcoin then the future for Bitcoin will be very bright.

Theoretically it even makes sense if you are paying for the electricity, because CoinLab is essentially outsourcing all of the billing and payment and collection infrastructure to the local electric company. And utility companies are pretty darn good at getting their customers to pay their bills; that translates into a more efficient payment system and lower costs for users.

But... but... what about the environment? What about all those gamers using all that extra electricity to create bitcoins?  THINK ABOUT THE POLAR BEARS!

Big-picture economics lesson: more efficient == better.  Better for people, better for the environment.

Think about the unseen-- if people are (indirectly) using electricity to pay for in-game items instead of using their credit-cards or buying 'game cards' in stores, where does the cost-savings coming from?

That's easy to think about for physical game cards-- there will be fewer produced, which means less plastic manufactured, fewer trucks shipping them from some factory to stores, and fewer car trips to the mall so teenagers can spend a little cash to get their Farmville fix.

It's harder to think about for credit cards, because the costs are really well-hidden. A lot of effort is put into collecting bad debts. I'm sure credit card companies and debt collection agencies spend a lot of money on electricity for their call centers, but most of the cost savings will be fewer people trying to get deadbeats to pay their bills.

That would be a good thing, too! Collecting debts doesn't make the world a better place, and the out-of-work debt collectors will find something more productive to do. Maybe they'll go work for the game company who has a little extra cash and can afford to pay for another customer support person. Maybe they'll go work in a Sierra Club call center, convincing gamers who have a little extra cash (because they paid $10 on their electricity bill for some game stuff instead of paying $10.05 to a credit card company) to contribute to programs that help polar bears...


Peter said...

Thanks for the thoughts, Gavin. We're excited, too.

It would be really great to have an end-to-end bitcoin denominated system for gaming commerce.

At CoinLab, we have an idea of a safe window of time for a 'regular' company to hold bitcoins if they eventually need to transact in dollars.

As things currently stand, that window is very short, too short for lots of business activities you might wish to do with them. We think that's part of our value-added service, just taming unexpected bitcoin volatility.

I think a natural next step for game companies is to allow Bitcoins as a payment mechanism, again clearing into dollars. There are some good services out there that do this now, but perhaps not at the level of sophistication around customer service, AML and FinCEN requirements that large companies need. So, we'll see how this step goes, and then work on the next one.

Peter said...

p.s. My first coins were from the faucet, and I heartily appreciated them. :)

Charlie said...

I read about how bitcoin works, and I'm having trouble understanding how it is supposed to scale.

Just to jump straight to the very biggest scale, suppose:

Everyone on Earth (7+ billion people) has a computer and an internet connection and uses it to hold bitcoins. 1 in 100 people also gets into mining.

Does bitcoin as it exists today scale to a network like that? If not, what changes might help it to scale?

Gavin Andresen said...


See https://en.bitcoin.it/wiki/Scalability for a discussion of Bitcoin scalability.

I don't spend much time worrying about it; if Bitcoin is that wildly successful then there will be plenty of people smarter than me figuring out how to make it scale. Spending a lot of time implementing or planning technical infrastructure for when you're wildly successful is almost always a bad idea. Google/Facebook/Twitter/PayPal all successfully followed the build-scaling-infrastructure-when-you-need-it approach.

Charlie said...

Fair enough. Thanks for the link, I'll have to give that a good read.

I asked because typically a scaling strategy is some version of, "all nodes are equal, but some nodes are more equal than others".

When it comes to systems informed by a peer-to-peer worldview, where individuals are autonomous and authorities are distrusted, that's exactly what we want to avoid :)

Sean William said...

“But eliminating the exchange and paying the gamers and/or the game developers directly in bitcoin would be more efficient, and is an obvious, easy-to-implement feature.” - I totally agree with you on this. Bitcoin is the only currency that would make the gambling world risk free and legitimate.